UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal
year ended December 31, 2010
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file number
001-33599
ORBITZ WORLDWIDE,
INC.
(Exact name of registrant as
specified in its charter)
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Delaware
(State or other jurisdiction
of
incorporation or organization)
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20-5337455
(I.R.S. Employer
Identification No.)
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500 W. Madison Street
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Suite 1000
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60661
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Chicago, Illinois
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(Zip Code)
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(Address of principal executive
offices)
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(312) 894-5000
(Registrants telephone
number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock, $0.01 par value
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New York Stock Exchange
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Securities
registered pursuant to section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§ 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such
files). Yes o No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
(§ 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrants
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large
accelerated
filer o
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Accelerated
filer þ
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Non-accelerated
filer o
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Smaller
reporting
company o
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(Do not check if a smaller
reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes o No þ
The aggregate market value of the registrants common stock
held by non-affiliates as of June 30, 2010 was
approximately $168.9 million based on the closing price of
the registrants common stock as reported on the New York
Stock Exchange for such date.
As of February 22, 2011, 102,360,074 shares of Common
Stock, par value $0.01 per share, of Orbitz Worldwide, Inc. were
outstanding.
DOCUMENTS INCORPORATED BY
REFERENCE
Part III of this Annual Report on
Form 10-K
incorporates by reference certain information from the
definitive proxy statement for the registrants Annual
Meeting of Shareholders to be held on or about June 1, 2011
(the 2011 Proxy Statement). The registrant intends
to file the proxy statement with the Securities and Exchange
Commission within 120 days of December 31, 2010.
Forward-Looking
Statements
This Annual Report on
Form 10-K
and its exhibits contain forward-looking statements that are
subject to risks, uncertainties and other factors that may cause
our actual results, performance or achievements to be materially
different than the results, performance or achievements
expressed or implied by the forward-looking statements.
Forward-looking statements include statements about our
expectations, beliefs, plans, objectives, intentions,
assumptions and other statements that are not historical facts.
Forward-looking statements can generally be identified by
phrases such as believes, expects,
potential, continues, may,
should, seeks, predicts,
anticipates, intends,
projects, estimates, plans,
could, designed, should be
and other similar expressions that denote expectations of future
or conditional events rather than statements of fact.
Forward-looking statements contained in this report include, but
are not limited to, statements relating to: the potential impact
of improvements in the general economy and the travel industry
on our business; our ability to distribute American Airlines
tickets in the future; our ability to gain market share in
international markets, including the global hotel marketplace;
our ability to increase our brand awareness; our expectations of
future air capacity and fares; our expectations for future
average daily rates for hotel and car bookings; and our
expectation for international growth rates for online travel
sales.
Our actual results could differ materially from those
anticipated in forward-looking statements for many reasons,
including, but not limited to, changes in airline distribution
policies and our ability to negotiate alternative ticket
distribution arrangements with the airlines pursuant to such
policy changes, competition in the travel industry, our level of
indebtedness, economic conditions, consolidation among our major
suppliers, regulatory changes, factors affecting the level of
travel activity, particularly air travel volume, maintenance and
protection of our information technology and intellectual
property, the outcome of pending litigation, risks associated
with doing business in multiple currencies, trends in the travel
industry, and general economic and business conditions, as well
as the factors described in Item 1A, Risk
Factors, and in Item 7, Managements
Discussion and Analysis of Financial Condition and Results of
Operations, in this Annual Report on
Form 10-K.
Accordingly, you should not unduly rely on these forward-looking
statements, which speak only as of the date on which they were
made. We undertake no obligation to update any forward-looking
statements in this Annual Report on
Form 10-K.
The use of the words we, us,
our and the Company in this Annual
Report on
Form 10-K
refers to Orbitz Worldwide, Inc. and its subsidiaries, except
where the context otherwise requires or indicates.
3
PART I
General
Description of Our Business
We are a leading global online travel company (OTC)
that uses innovative technology to enable leisure and business
travelers to search for and book a broad range of travel
products and services. Our brand portfolio includes Orbitz,
CheapTickets, The Away Network and Orbitz for Business in the
United States; ebookers in Europe; and HotelClub and RatesToGo
(collectively referred to as HotelClub) based in
Australia, which have operations globally. We provide customers
with the ability to book a wide array of travel products and
services from suppliers worldwide, including air travel, hotels,
vacation packages, car rentals, cruises, travel insurance and
destination services such as ground transportation, event
tickets and tours.
History
Orbitz, Inc. (Orbitz) was formed in early 2000 by
American Airlines, Inc., Continental Airlines, Inc., Delta Air
Lines, Inc., Northwest Airlines, Inc. and United Air Lines, Inc.
(the Founding Airlines). In November 2004, Orbitz
was acquired by Cendant Corporation (Cendant), whose
online travel distribution businesses included the HotelClub and
CheapTickets brands. In February 2005, Cendant acquired ebookers
Limited, an international online travel brand which currently
has operations in 12 countries throughout Europe
(ebookers).
On August 23, 2006, Travelport Limited
(Travelport), which consisted of Cendants
travel distribution services businesses, including the
businesses that currently comprise Orbitz Worldwide, Inc., was
acquired by affiliates of The Blackstone Group
(Blackstone) and Technology Crossover Ventures
(TCV). We refer to this acquisition as the
Blackstone Acquisition.
Orbitz Worldwide, Inc. was incorporated in Delaware on
June 18, 2007 and was formed to be the parent company of
the
business-to-consumer
travel businesses of Travelport, including Orbitz, ebookers and
HotelClub and the related subsidiaries and affiliates of those
businesses. We are the registrant as a result of the completion
of the initial public offering (IPO) of
34,000,000 shares of our common stock on July 25,
2007. Our common stock trades on the New York Stock Exchange
(NYSE) under the symbol OWW.
At December 31, 2010 and December 31, 2009, there were
102,342,860 and 83,831,561 shares of our common stock
outstanding, respectively, of which approximately 56% and 57%
were beneficially owned by Travelport and investment funds that
own and/or
control Travelports ultimate parent company, respectively.
Brand
Portfolio
Our brand portfolio is comprised of Orbitz, CheapTickets, The
Away Network, Orbitz for Business, ebookers and HotelClub.
Orbitz
Orbitz (www.orbitz.com) is one of the leading
U.S. online travel websites. Orbitz is a full-service
online travel company that offers customers the ability to
search for and book a broad range of travel products and
services, including air travel, hotels, car rentals, cruises,
travel insurance and destination services, from suppliers
worldwide. These travel products and services can be booked on a
stand-alone basis or as part of a vacation package, which
includes different combinations of travel products. Customers
can also book travel products on Orbitz from their mobile
devices as a result of our launch of native applications for the
iPhone and Android and a mobile website (m.orbitz.com).
Orbitz delivers a compelling value proposition to its customers
with Orbitz Price
Assurancesm.
Through Orbitz Price
Assurancesm,
if the price drops for an airline ticket or hotel stay booked on
Orbitz and another customer subsequently books the same airline
ticket or hotel stay on Orbitz for a lower price, we will
automatically send the customer a cash refund for the difference
up to $250 for airline tickets and up to
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$500 for hotel stays. Additionally, in 2009, Orbitz
eliminated booking fees on most flights, significantly reduced
booking fees on hotels and removed its hotel change and
cancellation fees. Orbitz also features Total Price hotel search
results, making it the only major online travel company that
shows base rate, taxes and fees, and total price per night
upfront on the initial search results page, improving the price
transparency for consumers searching for hotels. Orbitz also has
an innovative customer care platform known as OrbitzTLC, which
offers an array of proactive care services to travelers.
CheapTickets
CheapTickets (www.cheaptickets.com) is a leading
U.S. travel website that focuses on value-conscious
customers. CheapTickets offers customers the ability to search
for and book a broad range of travel products and services,
including air travel, hotels, car rentals, cruises, travel
insurance and destination services, from suppliers worldwide on
a stand-alone basis or as part of a vacation package.
CheapTickets also offers value-oriented promotions such as Cheap
of the
Week®,
which provides customers with special travel offers on a weekly
basis.
The Away
Network
The Away Network is a series of travel content websites that
include Away.com (www.away.com), Trip.com
(www.trip.com), AdventureFinder
(www.adventurefinder.com), GORP.com (www.gorp.com)
and Lodging.com (www.lodging.com). The Away Network helps
travelers choose their next vacation destination and plan their
trip by offering ideas and recommendations customized to their
specific travel interests, such as adventure, family or romance
trips. Supported by advertising sales and sponsorships, The Away
Network provides a blend of professionally-edited articles,
features, micro-sites and consumer-driven reviews. These
websites also provide search capabilities for users who want to
find travel choices online as well as contact information for a
number of leading tour operators.
Orbitz
for Business
Orbitz for Business (www.orbitzforbusiness.com) offers a
complete portfolio of travel products and services that help
corporate customers plan, search and book business travel.
Orbitz for Business leverages and customizes our technology
platform for corporate travelers. In addition to its leading
technology, Orbitz for Business delivers full service, cost
effective travel products and travel management solutions,
including
24/7/365
customer support and expense reporting and policy management
tools.
ebookers
ebookers (www.ebookers.com) is a leading pan-European
online travel agency that offers customers the ability to search
for and book a broad range of travel products and services
through websites in Austria, Belgium, Denmark, Finland, France,
Germany, Ireland, the Netherlands, Norway, Sweden, Switzerland
and the U.K. Customers can book travel products and services,
including airline tickets, hotel rooms, car rentals and travel
insurance, on a stand-alone basis or as part of a vacation
package. ebookers also offers customers the ability to book a
full range of travel products over the telephone through our
call centers and from their mobile phones through a mobile
website (m.ebookers.com).
HotelClub
HotelClub (www.hotelclub.com) is a hotel-only website
that offers customers the opportunity to book hotel stays in 140
countries. Customers can book hotel stays in over 90 countries
through our Asia Hotels website (www.asiahotels.com).
RatesToGo (www.ratestogo.com) offers customers the
opportunity to book hotel stays at last-minute discounts up to
four weeks in advance. On this website, customers can book hotel
stays in nearly 100 countries. HotelClub and RatesToGo offer
services on their websites in fifteen languages, including
Simplified Chinese, Traditional Chinese, Dutch, English, French,
German, Italian, Japanese, Korean, Polish, Portuguese, Russian,
Spanish, Swedish and Thai.
5
Private
Label
We offer third parties, such as airlines and hotel partners, a
full range of private label solutions. We license our technology
and business services to these partners, and using our
technology, these partners are able to provide a wide range of
travel products on their websites under their own brands. We pay
commissions to our third party partners based on the revenue
generated by their websites.
Other
Businesses
Hosting
Business
We host and manage websites on behalf of third parties. We earn
revenue from our hosting business through license or fee
arrangements.
Partner
Marketing
Through our partner marketing programs, we generate advertising
revenue by providing our partners access to our customer base
through a combination of display advertising, performance-based
advertising and other marketing programs. Travel companies,
convention and visitor bureaus, credit card partners, media,
packaged goods and other non-travel advertisers all advertise on
our websites.
Merchant
and Retail Models
We generate revenue primarily from the booking of travel
products and services on our websites. We provide customers the
ability to book travel products and services on both a
stand-alone basis and as part of a vacation package, primarily
through our merchant and retail business models.
Merchant
Model
Our merchant model provides customers the ability to book air
travel, hotels, car rentals, destination services and vacation
packages. Hotel transactions comprise the majority of our
merchant bookings. We generate revenue for our services based on
the difference between the total amount the customer pays for
the travel product and the negotiated net rate plus estimated
taxes that the supplier charges us for that product. We may,
depending upon the brand and the product, earn revenue by
charging our customers a service fee for booking their travel
reservation. Generally, our net revenue per transaction is
higher under the merchant model compared with the retail model
due to our ability to negotiate net rates with suppliers.
Customers generally pay us for reservations at the time of
booking, and we pay our suppliers at a later date, which is
generally when the customer uses the reservation, except in the
case of merchant air which may occur prior to the consumption
date. Initially, we record these customer receipts as accrued
merchant payables and either deferred income or net revenue,
depending on the travel product. The timing difference between
when the cash is collected from our customers and when payments
are made to our suppliers improves our operating cash flow and
represents a source of liquidity for us.
We recognize net revenue under the merchant model when we have
no further obligations to the customer. For merchant air
transactions, this is at the time of booking. For merchant hotel
transactions and merchant car transactions, net revenue is
recognized at the time of check-in or customer
pick-up,
respectively. The timing of revenue recognition is different for
merchant air travel because our primary service to the customer
is fulfilled at the time of booking. In the merchant model, we
do not take on credit risk with the customer, however we are
subject to charge-backs and fraud risk which we monitor closely;
we have the ability to determine the price; we are not
responsible for the actual delivery of the flight, hotel room or
car rental; we take no inventory risk; we have no ability to
determine or change the products or services delivered; and the
customer chooses the supplier.
When customers assemble vacation packages, we may offer the
customer the ability to book a combination of travel products
that use both the merchant model and the retail model. Vacation
packages allow us to make products available to our customers at
prices that are generally lower than booking each
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travel product separately. Our net revenue per transaction is
generally higher for vacation packages than for travel products
booked separately.
Retail
Model
Our retail model provides customers the ability to book air
travel, hotels, car rentals and cruises. Air transactions
comprise the majority of our retail bookings. Under the retail
model, we earn commissions from suppliers for airline tickets,
hotel rooms, car rentals and other travel products and services
booked on our websites. We generally receive these commissions
from suppliers after the customer uses the travel reservation.
We may, depending upon the brand and the product, earn revenue
by charging customers a service fee for booking their travel
reservation. Generally, our net revenue per transaction is lower
under the retail model compared with the merchant model.
However, airline tickets booked under the retail model
contribute substantially to our overall gross bookings and net
revenue due to the high volume of airline tickets booked on our
websites. We recognize net revenue under the retail model when
the reservation is made, secured by a customer with a credit
card and we have no further obligations to the customer. For air
transactions, this is at the time of booking. For hotel
transactions and car transactions, net revenue is recognized at
the time of check-in or customer
pick-up,
respectively, net of an allowance for cancelled reservations. In
the retail model, we do not take on credit risk with the
customer; we are not the primary obligor with the customer; we
have no latitude in determining pricing; we take no inventory
risk; we have no ability to determine or change the products or
services delivered; and the customer chooses the supplier.
Supplier
Relationships and Global Distribution Systems
Supplier
Relationships
We have teams that manage relationships and negotiate agreements
with our suppliers. These agreements generally cover access to
the suppliers travel inventory as well as payment for our
services. Our teams cover air, hotel, car rental, cruise, travel
insurance and destination services suppliers. Our teams focus on
managing relationships, obtaining supplier-sponsored promotions
and negotiating contracts.
Our global hotel services team is responsible for negotiating
agreements that provide us access to the inventory of
independent hotels, chains and hotel management companies. As
part of our efforts to drive global hotel transaction growth, we
have increased the number of hotel market managers on our global
hotel services team, particularly in Asia Pacific and Europe.
With this additional staff in place, we have signed a
substantial number of new direct hotel contracts, which provide
us with higher margins, better hotel content and increased
promotional opportunities.
For additional information on our supplier relationships, refer
to the Company Strategy Supply section
below.
Global
Distribution Systems
Global distribution systems (GDSs) provide us access
to a comprehensive set of supplier content through a single
source. Suppliers, such as airlines and hotels, utilize GDSs to
connect their product and service offerings with travel
providers, who in turn make these products and services
available to travelers for booking. Certain of our businesses
utilize GDS services provided by Galileo, Worldspan and Amadeus
IT Group (Amadeus). Under our GDS service
agreements, we receive revenue in the form of an incentive
payment for air, car and hotel segments that are processed
through a GDS.
Galileo and Worldspan are subsidiaries of Travelport, and we
have an agreement with Travelport that covers the GDS services
provided by both Galileo and Worldspan. This agreement contains
volume requirements for the number of segments that we must
process through Galileo and Worldspan and requires us to make
shortfall payments if we do not process the required minimum
number of segments for a given year. As a result, a significant
portion of our GDS services are provided by Travelport GDSs. For
the year ended December 31, 2010, we recognized
$113.3 million of incentive revenue for segments processed
through Galileo and Worldspan, which accounted for more than 10%
of our total net revenue.
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Operations
and Technology
Systems
Infrastructure and Web and Database Servers
We use SAVVIS co-location services in the United States to host
our systems infrastructure and web and database servers for
Orbitz, CheapTickets, The Away Network, Orbitz for Business and
ebookers. The majority of our hardware and other equipment is
located at the SAVVIS facility. SAVVIS provides data center
management services as well as emergency hands-on support. In
addition, we have our own dedicated staff
on-site at
the facility. If SAVVIS was unable, for any reason, to support
our primary web hosting facility, we have a secondary facility
through Verizon Business, which is also located in the United
States.
We use Global Switch services in the United Kingdom to host our
systems infrastructure and web and database servers for ebookers
legacy systems and for HotelClub. The arrangement with Global
Switch is similar to the arrangement described above with SAVVIS.
Systems
Platform
Our systems platform enables us to deconstruct the segment feeds
from our GDS partners for air flight searches and then
reassemble these segments for cost-effective and flexible
multi-leg itineraries. We also have the ability to connect to
and book air travel directly on certain airlines internal
reservation systems through our supplier link technology. Our
easy-to-use Matrix display allows customers to simultaneously
view these various travel options so that they can select the
price and supplier that best meet their travel needs. In
addition, our vacation packaging technology enables travelers to
view multiple combinations of airlines, hotels and other travel
products and allows them to assemble a customized vacation
package that is generally less expensive than booking each
travel product separately.
We have technology operations teams dedicated to ensuring that
our websites operate efficiently. These teams monitor our
websites as well as the performance and availability of our
third party service providers and coordinate major releases of
new functionality on our websites. We have product development
teams focused on creating new and improving existing website
functionality. These teams also developed and implemented our
technology platform that currently supports our ebookers
websites and the hotel booking path of our domestic leisure
websites. We are in the process of migrating the rest of our
domestic leisure booking paths and HotelClub onto this platform.
Customer
Support
Our customer support platform includes OrbitzTLC, a proactive
customer care service for our travelers. Our OrbitzTLC team is
based in Chicago, Illinois, and monitors Federal Aviation
Administration, National Weather Service and other data to send
customers real-time updates on information that may affect their
travel plans. Our customer support platform also includes
customer self service, chat, email and call center services to
provide our customers with multiple options to enhance the
travel experience. We utilize intelligent voice routing and
intelligent call management technology to connect customers with
the appropriate agent who can best assist them with their
particular needs. We utilize third party vendors domestically
and internationally to manage these call centers and customer
service centers.
Fraud
Prevention System
We have an internally-developed fraud prevention system that we
believe enables us to detect fraudulent bookings efficiently.
The system automates many functions and prioritizes suspicious
transactions for review by fraud analysts within our fraud
prevention team.
Marketing
We utilize a combination of online and traditional offline
marketing. Our sales and marketing efforts primarily focus on
increasing brand awareness and driving visitors to our websites.
Our long-term success will depend on our ability to continue to
increase the overall number of booked transactions in a
cost-effective manner.
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We use various forms of online marketing to drive traffic to our
websites, including search engine marketing (SEM),
display advertising, affiliate programs and email marketing. We
also generate traffic and transactions from certain travel
research websites and meta-search travel websites. We continue
to pursue strategies to improve our online marketing efficiency.
These strategies include increasing the amount of traffic coming
to our websites through search engine optimization
(SEO) and customer relationship management
(CRM) and improving the efficiency of our SEM and
travel research spending. We also use traditional broadcast
advertising to focus on brand differentiation and to emphasize
distinct features of our businesses that we believe are valuable
to our customers.
We have a dedicated marketing team that focuses on generating
leads and building relationships with corporate travel managers.
Our Orbitz for Business sales team includes experienced
corporate travel managers who are qualified to assist
organizations in choosing between the variety of corporate
booking products that we offer.
Intellectual
Property
We regard our technology and other intellectual property,
including our brands, as a critical part of our business. We
protect our intellectual property rights through a combination
of copyright, trademark and patent laws and trade secret and
confidentiality procedures. We have a number of trademarks,
service marks and trade names that are registered or for which
we have pending registration applications or common law rights.
These include Orbitz, Orbitz Matrix, Flex Search, OrbitzTLC,
OrbitzTLC Mobile Access, the Orbitz design and the stylized
O. We have eight issued U.S. patents. Four
patents relate to a system and method for receiving and loading
fare and schedule data that allows us to search for air fares.
These patents are scheduled to expire on December 11, 2021,
April 1, 2022, November 10, 2024 and May 9, 2022,
respectively. One patent relates to a method of searching for
travel products from multiple suppliers and creating vacation
packages. This patent is scheduled to expire on April 18,
2020. One patent relates to a system and method for gathering
and analyzing data related to travel conditions and generating
and sending a message explaining the travel conditions to one or
more travelers. This patent is scheduled to expire on
May 10, 2023. One patent relates to a system and method of
creating a matrix display having neighborhood categories with
interactive maps displayed. This patent is scheduled to expire
on January 23, 2026. One patent relates to an air travel
booking system which provides the ability to book itineraries
directly with the air carriers and having the ability to book
itineraries through a GDS. This patent is scheduled to expire on
May 12, 2025. At December 31, 2010, we had nine
pending patent applications in the United States. Through these
patent applications, we are seeking patent rights in several
areas of our online travel services technology. These areas
include technology related to our system for searching using
multiple data providers, our system for synchronizing passenger
name and record data, our supplier link and related booking
technology, our system for searching for itineraries based on
flexible travel dates, our system for enabling a user to book
travel via a guest registration, our system for replicating data
and changes between databases and our system for automatically
determining travel product price rebates.
Despite these efforts and precautions, we cannot be certain that
any of these patent applications will result in issued patents,
or that we will receive any effective protection from
competition from any trademarks and issued patents. It may be
possible for a third party to copy or otherwise obtain and use
our trade secrets or our intellectual property without
authorization. In that case, legal remedies may not adequately
compensate us for the damages caused by unauthorized use.
Further, others may independently and lawfully develop
substantially similar properties.
From time to time, we may be subject to legal proceedings and
claims in the ordinary course of our business, including claims
of alleged infringement by us of the trademarks, copyrights,
patents and other intellectual property rights of third parties.
In addition, we may have to initiate lawsuits in the future to
enforce our intellectual property rights, protect our trade
secrets or determine the validity and scope of proprietary
rights claimed by others. Any such litigation, regardless of
outcome or merit, could consume a significant amount of
financial resources or management time. It could also invalidate
or impair our intellectual rights, or result in significant
damages or onerous license terms and restrictions for us. We may
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even lose our right to use certain intellectual property or
business processes. These outcomes could materially harm our
business. See Item 3, Legal Proceedings.
At the time of the IPO, we entered into a Master License
Agreement with Travelport, which grants Travelport licenses to
use certain of our intellectual property going forward,
including:
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our supplier link technology;
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portions of ebookers booking, search and vacation
packaging technologies;
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certain of our products and online booking tools for corporate
travel;
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portions of our private label vacation packaging
technology; and
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our extranet supplier connectivity functionality.
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The Master License Agreement granted us the right to use a
corporate online booking product developed by Travelport. We
have entered into a value added reseller license with Travelport
for this product.
The Master License Agreement generally includes the right to
create derivative works and other improvements. Other than the
unrestricted use of our supplier link technology, Travelport is
generally prohibited from sublicensing these technologies to any
third party for competitive use. However, Travelport and its
affiliates are not restricted from using the technologies to
compete directly with us.
Information
about Segments and Geographic Areas
We operate and manage our business as a single operating
segment. For geographic related information, see
Note 19 Segment Information of the Notes to
Consolidated Financial Statements.
Industry
Conditions
General
The worldwide travel industry is a large and dynamic industry
that has been characterized by rapid and significant change. The
global economy experienced a prolonged recession during late
2008 and throughout 2009 that significantly impacted the travel
industry. Although the economy appears to have stabilized or
slightly improved, there is still uncertainty surrounding the
timing and sustainability of a recovery. As a result, we have
limited visibility into when travel industry fundamentals will
fully recover.
We compete in various geographic markets, with our primary
markets being the United States, Europe and Asia Pacific. Within
the United States, the most mature of the global travel markets,
the growth rate of online travel bookings has slowed due to both
the maturity of the market and the weak economy. According to
PhoCusWright, an independent travel, tourism and hospitality
research firm, the online travel booking penetration rate in the
United States reached 54% in 2010. We are one of the market
leaders within the United States due to the strength of our air
business, which we are leveraging to gain market share in the
global hotel marketplace. Internationally, the European and Asia
Pacific markets are characterized by their high level of
fragmentation, particularly in the hotel industry. Both the
European and Asia Pacific markets continue to benefit from
increases in internet usage rates and growing acceptance of
online booking, which has partially offset the negative effects
of the weak economy. In Europe, we had historically lacked scale
relative to our competitors. Since that time, we have improved
our scale and are now positioned to aggressively compete in the
European market. Growth in the Asia Pacific market is a primary
focus for us, as it represents a region with significant growth
opportunity where our competition is not as entrenched.
According to PhoCusWright, the online travel booking penetration
rates for Europe and Asia Pacific were 37% and 21%, respectively
for 2010.
Competition
The general market for travel products and services is highly
competitive. The online travel industry generally has low
barriers to entry and competitors can launch new websites at a
relatively low cost. Our
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current competitors include online travel companies, traditional
offline travel companies, suppliers, travel research companies,
search engines and meta-search companies. In addition, we
compete internationally with smaller regional operators. The
companies that we compete with include the following:
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Among online travel companies, our major competitors primarily
include expedia.com, hotels.com, hotwire.com and venere.com,
which are owned by Expedia, Inc.; travelocity.com and
lastminute.com, which are owned by Sabre Holdings Corporation;
priceline.com, booking.com and agoda.com, which are owned by
priceline.com Incorporated; opodo.com, which is owned by
Amadeus; rakuten.com, which is owned by Rakuten, Inc.; and
wotif.com and asiawebdirect.com, which are owned by Wotif.com
Holdings Limited.
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In the offline travel company category, our largest competitors
include companies such as Liberty Travel, Inc., American Express
Travel Related Services Company, Inc., Thomas Cook Group PLC and
TUI Travel PLC.
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We compete with suppliers, such as airlines, hotel and rental
car companies, many of which have their own branded websites and
toll-free numbers through which they generate business.
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We compete with travel research companies such as TripAdvisor
LLC and Travelzoo Inc., through which consumers can access
content such as user-generated travel reviews. Travel research
companies also send customers to the websites of suppliers and
our direct competitors.
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We compete with search engines including Google, Bing, Yahoo!
and AOL and meta-search companies such as Kayak. Search and
meta-search websites are capable of sending consumers to the
websites of suppliers and our direct competitors.
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Suppliers have increasingly focused on distributing their
products through their own websites in lieu of using third
parties. Suppliers who sell on their own websites offer
advantages such as their own bonus miles or loyalty points,
which may make their offerings more attractive than our
offerings to some consumers.
Factors affecting our competitive success include price,
availability of travel products, ability to package travel
products across multiple suppliers, brand recognition, customer
service and customer care, fees charged to customers, ease of
use, accessibility, reliability and innovation.
Seasonality
Our businesses experience seasonal fluctuations in the demand
for the products and services we offer. The majority of our
customers book leisure travel rather than business travel. Gross
bookings for leisure travel are generally highest in the first
half of the year as customers plan and book their spring and
summer vacations. However, net revenue generated under the
merchant model is generally recognized when the travel takes
place and typically lags bookings by several weeks or longer. As
a result, our cash receipts are generally highest in the first
half of the year and our net revenue is typically highest in the
second and third calendar quarters. Our seasonality may also be
affected by fluctuations in the travel products our suppliers
make available to us for booking, the growth of our
international operations or a change in our product mix.
Company
Strategy
Our mission is to become one of the worlds three primary
hotel distribution platforms. Specifically, we organize our
activities into three functional areas: demand, supply and
retail.
Demand
We seek to generate demand through both
business-to-consumer
and
business-to-business
channels. Our goal is to further increase brand awareness and
loyalty so that consumers come directly to our websites to book
their travel. For example, in July 2010, we launched a new
offline marketing campaign for Orbitz.com to reinforce our hotel
value proposition. Our new brand message, When You Orbitz,
You Know, highlights the information, tools and resources
that we make available to help customers make informed decisions
when it comes to booking a hotel, as well as the benefits of
Orbitz Hotel Price Assurance. In addition, in January
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2011, ebookers launched a new advertising campaign across all of
its 12 country websites to reinforce its Book easier,
travel happier value proposition.
We are also focused on further optimizing SEM spending to drive
consumers to our websites in a cost effective manner. We are
actively pursuing strategies to increase the amount of traffic
coming to our websites through SEO, CRM, our private label
channel and Orbitz for Business.
Supply
We work with our suppliers to provide our customers with a broad
and deep range of highly competitive travel products and
services on our websites. For hotels, we are focused on offering
our customers the ability to book the most relevant hotels at
the most competitive prices. To do this, we are focused on
improving our infrastructure to ensure we have appropriate
connectivity with our suppliers, sophisticated sort order
algorithms and robust promotional capabilities. We have a global
hotel services team that works closely with chains and
independent hotels to increase the number of properties that
participate on our websites and works with hotels to ensure that
our customers have access to their best available prices.
For airlines, we have long-standing and, we believe, generally
good relationships with our suppliers. However, globally,
airlines continue to look for ways to decrease their overall
costs, including the cost of distributing airline tickets
through OTCs and GDSs, and to increase their control over
distribution by taking actions such as pursuing direct connect
strategies, limiting forward distribution of their fares to
meta-search providers, such as Kayak, and limiting the extent to
which certain fare classes may be used in the construction of
multi-carrier itineraries. For example, in November 2010,
American Airlines (AA) terminated its participation
on our Orbitz.com and Orbitz for Business websites effective
December 2010 in pursuit of a direct connect relationship. For
the year ended December 31, 2010, the net revenue
associated with AA tickets booked on our Orbitz.com and Orbitz
for Business sites, including ancillary revenue from associated
hotels, car rentals, travel insurance and destination services
revenue, represented approximately 5 percent of our total
net revenue. We have access to hundreds of airlines globally,
and in the near term we believe that a portion of the AA ticket
volume should be replaced by other airline suppliers offered on
our websites, and that we should still continue to earn a
portion of the associated ancillary revenue. We continue to seek
a long-term arrangement with AA to distribute its tickets on our
Orbitz.com and Orbitz for Business sites. In the long term, to
the extent we are unable to reach an acceptable commercial
arrangement with AA and AA does not participate on our websites
for a sustained period of time, our business, financial
condition and results of operations will be negatively impacted,
although it is uncertain to what extent. If other airlines
pursue such strategies, the net revenue we earn from air travel
and other ancillary travel products could reduce significantly.
We will continue to work with our suppliers, including AA, to
provide our customers with a highly competitive product offering.
Retail
We are focused on ways to improve our ability to convert website
visitors into customers. We are enhancing the customer shopping
experience on our websites by developing new tools and
technologies to help users research options, by improving the
quality of the hotel content we make available (such as
editorial descriptions, photographs, virtual tours and
user-generated reviews) and by developing systems and
technologies that will allow us to provide customers with more
personalized and relevant search results. For example, in the
third quarter 2010, we completed the migration of the hotel
booking path for our domestic leisure websites to our global
technology platform, and we are in the process of migrating the
rest of our domestic leisure booking paths and HotelClub to this
platform. We believe this technology platform, which is already
being used by our ebookers websites, provides meaningful
improvements to both the speed and customer shopping experience
on our websites and enables us to deliver innovation to our
customers more quickly. We are also focused on our mobile
offerings, both in terms of enhancing our existing offerings and
launching new mobile applications. For example, in 2010, Orbitz
launched native applications for the
iPhone®
and
Androidtm
mobile devices and a mobile website (m.orbitz.com), and ebookers
launched a mobile website (m.ebookers.com).
12
Employees
As of February 22, 2011, we had approximately 1,400
full-time employees, more than half of whom were based in the
United States and the remaining were based primarily in
Australia and the United Kingdom. We believe we have a good
relationship with our employees. We outsource some of our
technology support, development and customer service functions
to third parties. Additionally, we utilize independent
contractors to supplement our workforce.
Company
Website and Public Filings
We maintain a corporate website at corp.orbitz.com. The
content of our website is not incorporated by reference into
this Annual Report on
Form 10-K
or other reports we file with or furnish to the Securities and
Exchange Commission (SEC). Our filings with the SEC
are provided to the public on our Investor Relations website,
free of charge, as soon as reasonably practicable after they are
electronically filed with, or furnished to, the SEC. Other
information regarding our corporate governance, such as our code
of conduct, governance guidelines and charters for our board
committees, is also available on our Investor Relations website
(www.orbitz-ir.com). In addition, the SEC maintains an
Internet website that contains reports, proxy and information
statements, and other information regarding issuers, including
us, that file electronically with the SEC at www.sec.gov.
We also use our Investor Relations website
(www.orbitz-ir.com) to make information available to our
investors and the public. Investors and other interested persons
can sign up to receive email alerts whenever we post new
information to the website.
Executive
Officers of the Registrant
Barney Harford, age 39, has served as our
Chief Executive Officer and also as a director and a member of
the executive committee of our board of directors since January
2009. Prior to joining the Company in January 2009,
Mr. Harford served in a variety of roles at Expedia, Inc.
from 1999 to 2006. From 2004 to 2006, he served as President of
Expedia Asia Pacific. Prior to 2004, Mr. Harford served as
Senior Vice President of Air, Car & Private Label and
led Expedias corporate development, strategic planning and
investor relations functions. He joined Expedia in 1999 as a
product planner. Mr. Harford currently serves on the board
of directors of GlobalEnglish Corporation, LiquidPlanner, Inc.
and Orange Hotel Group. He previously served on the board of
directors of eLong, Inc., an online travel company, from 2004 to
2008 and served as chairman of the board of directors from July
2006 to March 2007. He holds an MBA from INSEAD and an MA degree
in Natural Sciences from Clare College, Cambridge University.
Samuel M. Fulton, age 40, has served as
Senior Vice President, Retail, responsible for the onsite
consumer experience for our Orbitz and CheapTickets websites
since April 2010. Mr. Fulton also has responsibility for
information architecture, design and the Away Network. Prior to
his current role, Mr. Fulton held several key positions
within the Company including Group Vice President of Product
Management and Vice President and General Manager of
Transportation, which was comprised of air, car, cruise and
travel insurance for Orbitz and CheapTickets. Mr. Fulton
has also held positions in business strategy, product
management, supplier services and business development since
joining the Company in late 2002. Prior to joining the Company,
Mr. Fulton worked for Budget Rent A Car as the Director of
Travel Industry Sales focusing on preferred travel agency
relationships. Mr. Fulton has a BS degree in Finance and
Marketing from the University of Denver.
Russell C. Hammer, age 54, has served as
Senior Vice President, Chief Financial Officer, since joining
the Company in January 2011. From January 2008 to December 2010,
Mr. Hammer served as Chief Financial Officer, Senior Vice
President Finance and Treasurer of Crocs, Inc. Prior
to joining Crocs, Mr. Hammer worked for Motorola, Inc. from
August 1998 to August 2007, serving in a variety of senior
executive positions including: Chief Financial Officer and
Corporate Vice President of the Connected Home Solutions
Business; Chief Audit Officer; Chief Financial Officer of the
Asia Cellular Subscriber Business; and Chief Financial Officer
of the Global Subscriber Paging Business. Mr. Hammer has an
MBA from DePaul University and a BS degree in Finance from
the University of Illinois at Urbana-Champaign.
13
Roger Liew, age 38, has served as Senior Vice
President, Chief Technology Officer, since November 2010.
Mr. Liew was Vice President of Technology of the Company
and Group Manager of the Intelligent Marketplace Group from July
2009 to November 2010 and previously served as Vice President of
Technology of Orbitz, LLC from May 2000 to May 2004. Prior to
his return to the Company in July 2009, Mr. Liew served as
Chief Technology Officer of Milestro, a leisure, travel and
tourism company, from May 2008 to December 2008 and Chief
Technology Officer of G2 Switchworks, a startup in the travel
technology space, from May 2004 to April 2008, when it was
acquired by Travelport. Prior to joining Orbitz, LLC,
Mr. Liew worked as a lead developer for Neoglyphics Media
Corporation and as a software engineer for Motorolas
Cellular Subscriber Group. Mr. Liew studied Mathematics and
Computer Science at the University of Chicago.
Michael J. Nelson, age 44, has served as
President, Partner Services Group, responsible for partner
services and customer operations on a global basis since July
2009. Prior to his current role, Mr. Nelson served as our
Chief Operating Officer, and prior to becoming Chief Operating
Officer in 2007, Mr. Nelson had been responsible for
managing our international operations, which at the time
included ebookers, Flairview (now known as HotelClub) and
Travelbag, an offline travel subsidiary. Mr. Nelson joined
the Company in 2001, and his diverse operating experience within
the Company includes supplier relations, revenue management,
finance, product management and project management. Prior to
joining the Company, Mr. Nelson spent 10 years in
finance and marketing at: Deluxe Corporation from 1998 to 2001,
Diageo/Pillsbury from 1993 to 1998 and Arthur Andersen from 1989
to 1992. Mr. Nelson has an MBA from the University of
Minnesota and a BS degree in Accounting from the University of
Minnesota.
Christopher K. Orton, age 37, has served as
Senior Vice President, Chief Marketing Officer, since July 2010.
Mr. Ortons responsibilities include management of all
online and offline marketing, CRM and email activities. Prior to
joining the Company, Mr. Orton worked for eBay, Inc. from
June 2003 to June 2010 and held various positions in data
warehousing and internet marketing. Most recently,
Mr. Orton was Senior Director of Internet Marketing at
eBay, responsible for its paid search, shopping comparison,
search engine optimization, affiliates and display marketing
channels. Prior to joining eBay, he spent eight years doing CRM
and ERP consulting at Kana Software, PricewaterhouseCoopers and
Andersen Consulting (Accenture). Mr. Orton has an MBA from
the University of California, Berkeley and a BA degree in
Economics and International Relations from the University of
California, Davis.
James P. Shaughnessy, age 56, has served as
Senior Vice President, Chief Administrative Officer and General
Counsel, responsible for managing the Companys legal and
government affairs departments as well as the Companys
shared services, including corporate communications, human
resources and security and compliance since joining the Company
in June 2007. Prior to joining the Company, Mr. Shaughnessy
was Senior Vice President & General Counsel of Lenovo
Group Ltd., which he joined in July 2005.
Mr. Shaughnessys prior experience includes service as
Senior Vice President, General Counsel and Secretary of
PeopleSoft, Inc. and in senior legal positions with
Hewlett-Packard, Compaq and Digital Equipment Corporation. Prior
to joining Digital, Mr. Shaughnessy worked with the
Congloeum group of companies and was in private practice in
Washington, D.C. Mr. Shaughnessy received a BS degree
from Northern Michigan University and a JD and an MPP from the
University of Michigan.
Tamer Tamar, age 36, has served as President
of ebookers since July 2009. Previously, Mr. Tamar served
as Vice President of Europe and Middle East (EMEA) distribution
for Expedia from February 2008 to July 2009. From 2004 to 2008,
Mr. Tamar served in a variety of roles at Expedia,
including managing Expedias EMEA car businesses, leading
the strategy and corporate development function for the EMEA
region, and heading up the Expedia UK business. Prior to joining
Expedia, Mr. Tamar worked as a Management Consultant for
A.T. Kearney in Chicago and London. Mr. Tamar holds an MBA
from MIT and a BA in Mathematics and Economics from
Franklin & Marshall College.
14
Travelports
controlling holders control us and may have strategic interests
that differ from ours or our other shareholders.
Currently, Travelport and investment funds that own
and/or
control Travelports ultimate parent company beneficially
own approximately 56% of our outstanding common stock and
therefore, indirectly control us. As a result of this ownership,
Travelports controlling holders are entitled to nominate
and elect all of our directors and own sufficient shares to
determine the outcome of any actions requiring the approval of
our stockholders, including adopting most amendments to our
certificate of incorporation and approving or rejecting proposed
mergers, significant new investments or divestments or sales of
all or substantially all of our assets.
The interests of Travelports controlling holders may
differ from those of our public shareholders in material
respects. Travelports controlling holders and their
affiliates are in the business of making investments in
companies and maximizing the return on those investments. They
currently have, and may from time to time in the future acquire,
interests in businesses that directly or indirectly compete with
certain portions of our business or our suppliers or customers
or businesses on which we are substantially dependent, such as
the Travelport GDSs. In an effort to increase its revenues and
improve its overall profitability, Travelport could seek to
change the terms of its commercial relationships with its GDS
customers, including us. Because we are limited in our ability
to pursue alternative GDS options or direct connections with
suppliers during the term of our GDS agreement with Travelport,
any such actions by Travelport could make us a less attractive
distribution channel to our suppliers, who could attempt to
terminate or renegotiate their agreements with us, and could
place us at a competitive disadvantage relative to other online
travel companies. See We are dependent on Travelport for
our GDS services below. In addition, Travelports
customers, many of which are also major suppliers to us, have
previously sought and may in the future seek to exert commercial
leverage over us in an effort to obtain concessions from
Travelport, which could negatively affect our access to travel
offerings and adversely affect our business and results of
operations.
As long as Travelports controlling holders continue to
indirectly own a significant amount of our outstanding voting
stock, even if that amount is less than 50%, they will continue
to be able to strongly influence or effectively control us. The
interests of these holders may differ from our other
shareholders interests in material respects.
Actual
or potential conflicts of interest may develop between our
management and directors as well as the management and directors
of Travelport.
Jeff Clarke serves as Chairman of our Board of Directors, while
retaining his role as President, Chief Executive Officer and
Director of Travelport. The fact that Mr. Clarke holds
positions with both Travelport and us could create, or appear to
create, potential conflicts of interest for him when he faces
decisions that may affect both Travelport and us. In addition,
Mr. Paul C. Schorr IV, who is a senior advisor to The
Blackstone Group, Mr. Martin J. Brand, who is a managing
director at The Blackstone Group and Mr. William J.G.
Griffith, who is a general partner of TCV, currently serve on
the board of directors of Travelport and serve on our board of
directors. The fact that Mr. Schorr, Mr. Brand and
Mr. Griffith hold positions with their respective entities,
Travelport and us, could create, or appear to create, potential
conflicts of interest when they face decisions that may affect
two or more of these entities. In addition, Ms. Jill A.
Greenthal, who is a senior advisor in the Private Equity Group
of The Blackstone Group, currently serves on our board of
directors. Affiliates of The Blackstone Group exercise control
over Travelports ultimate parent company and therefore,
the fact that Ms. Greenthal holds a position with The
Blackstone Group could create, or appear to create, a potential
conflict of interest when she faces decisions that affect both
Travelport and us.
Further, our certificate of incorporation provides that no
officer or director of Travelport who is also an officer or
director of ours may be liable to us or our stockholders for a
breach of any fiduciary duty by reason of the fact that any such
individual directs a corporate opportunity to Travelport instead
of us or does not communicate information regarding a corporate
opportunity to us because the officer or director has directed
the corporate opportunity to Travelport. These provisions may
have the effect of exacerbating the risk of
15
conflicts of interest between Travelport and us because the
provisions effectively shield an overlapping director/executive.
Potential conflicts of interest could arise in connection with
the resolution of any dispute between Travelport and us
regarding the terms of commercial agreements between the parties
or their affiliates. Potential conflicts of interest could also
arise if we enter into any other commercial arrangements with
Travelport in the future.
Our
certificate of incorporation limits our ability to engage in
many transactions without the consent of
Travelport.
Our certificate of incorporation provides Travelport with a
greater degree of control and influence in the operation of our
business and the management of our affairs than is typically
available to a stockholder of a publicly-traded company. Until
Travelport ceases to beneficially own shares entitled to 33% or
more of the votes entitled to be cast by the holders of our then
outstanding common stock, the prior consent of Travelport is
required for:
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any consolidation or merger of us or any of our subsidiaries
with any person, other than a subsidiary;
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any sale, lease, exchange or other disposition or any
acquisition or investment, other than certain permitted
investments, by us, other than transactions between us and our
subsidiaries, or any series of related dispositions or
acquisitions, except for those for which we give Travelport at
least 15 days prior written notice and which involve
consideration not in excess of $15.0 million in fair market
value, except (1) any disposition of cash equivalents or
investment grade securities or obsolete or worn out equipment
and (2) the lease, assignment or sublease of any real or
personal property, in each case, in the ordinary course of
business;
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any change in our authorized capital stock or our creation of
any class or series of capital stock;
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the issuance or sale by us or one of our subsidiaries of any
equity securities or equity derivative securities or the
adoption of any equity incentive plan, except for (1) the
issuance of equity securities by us or one of our subsidiaries
to Travelport or to another restricted subsidiary of Travelport
and (2) the issuance by us of equity securities under our
equity incentive plans in an amount not to exceed
$15.0 million per year in fair market value annually;
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the amendment of various provisions of our certificate of
incorporation and bylaws;
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the declaration of dividends on any class of our capital stock;
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the authorization of any series of preferred stock;
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the creation, incurrence, assumption or guaranty by us or any of
our subsidiaries of any indebtedness for borrowed money, except
for (1) up to $675.0 million of indebtedness at any
one time outstanding under our credit agreement and (2) up
to $25.0 million of other indebtedness so long as we give
Travelport at least 15 days prior written notice of the
incurrence thereof;
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the creation, existence or effectiveness of any consensual
encumbrance or consensual restriction by us or any of our
subsidiaries on (1) payment of dividends or other
distributions, (2) payment of indebtedness, (3) the
making of loans or advances and (4) the sale, lease or
transfer of any properties or assets, in each case, to
Travelport or any of its restricted subsidiaries;
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any change in the number of directors on our board of directors,
the establishment of any committee of the board, the
determination of the members of the board or any committee of
the board, and the filling of newly created memberships and
vacancies on the board or any committee of the board; and
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any transactions with affiliates of Travelport involving
aggregate payments or consideration in excess of
$10.0 million, except (1) transactions between or
among Travelport or any of its restricted subsidiaries,
including us; (2) the payment of reasonable and customary
fees paid to, and indemnities provided for the benefit of,
officers, directors, employees or consultants of Travelport, any
of its direct or indirect parent companies or any of its
restricted subsidiaries, including us; (3) any agreement as
in effect on the date of the consummation of this offering; and
(4) investments by The Blackstone Group and certain of its
affiliates in our or our subsidiaries securities so long
as (i) the investment is being offered
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generally to other investors on the same or more favorable terms
and (ii) the investment constitutes less than 5% of the
proposed or outstanding issue amount of such class of securities.
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These restrictions could prevent us from being able to pursue
transactions or relationships that would otherwise be in the
best interests of our stockholders. These restrictions could
also limit stockholder value by preventing a change of control
that our stockholders might consider favorable.
We are
dependent on Travelport for our GDS services.
To varying extents, suppliers use GDSs to connect their products
and services with travel companies, who in turn make these
products and services available to travelers for booking. Under
our GDS service agreement with Travelport, we are required,
subject to certain exceptions, to utilize Galileo and Worldspan,
which are subsidiaries of Travelport, for a significant portion
of our GDS services, and our contractual obligations to
Travelport for GDS services may limit our ability to pursue
alternative GDS options. As a result, if Travelport became
unwilling or was unable to provide these services to us, we may
not be able to obtain alternative providers on a commercially
reasonable basis, in a timely manner or at all, and our business
would be materially and adversely affected.
Furthermore, our GDS service agreement with Travelport permits
us to pursue direct connect relationships with new or existing
suppliers during the term of the agreement, which expires on
December 31, 2014, if the Travelport GDSs do not have
material content or if there is a material economic difference
between the cost of obtaining supplier content from the
Travelport GDSs relative to a direct connect relationship. If we
pursue a direct connect relationship and Travelport disputes our
ability to do so under our GDS service agreement, we may become
involved in a potentially costly and uncertain litigation
dispute with Travelport. These contractual obligations may
reduce our flexibility to implement changes to our business in
response to changing economic conditions, industry trends, or
technological developments. As a result, the limitations imposed
by the GDS service agreement could place us at a competitive
disadvantage and negatively impact our business and results of
operations, particularly in the current economic environment
where our suppliers are under increased pressure to reduce their
overall distribution costs.
We
rely on Travelport to issue letters of credit on our behalf
under its credit facility.
As of December 31, 2010, there were $72.3 million of
outstanding letters of credit issued by Travelport on our
behalf. Under the Separation Agreement, as amended, Travelport
has agreed to issue U.S. dollar denominated letters of
credit on our behalf in an aggregate amount not to exceed
$75.0 million so long as Travelport and its affiliates (as
defined therein) own at least 50% of our voting stock. If we do
not have a separate letter of credit facility in place in the
event Travelport is no longer obligated to issue letters of
credit on our behalf, or if we exceed the $75.0 million
limitation or if we require letters of credit denominated in
foreign currencies, we would be required to issue letters of
credit under our revolving credit facility or to establish cash
reserves, which could significantly reduce our liquidity and
cash available to grow our business. As of December 31,
2010, we had the equivalent of $12.4 million of outstanding
letters of credit issued under our revolving credit facility,
which were denominated in Pounds Sterling.
We
have granted Travelport perpetual licenses to use certain of our
intellectual property, which could facilitate Travelports
ability to compete with us.
We are party to a Master License Agreement with Travelport that
governs each of our and Travelports rights to use certain
of the others intellectual property. The master license
agreement permits Travelport and its affiliates to use and, in
some cases, to sublicense to third parties certain of our
intellectual property, including:
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our supplier link technology;
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portions of ebookers booking, search and vacation package
technologies;
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certain of our products and online booking tools for corporate
travel;
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portions of our private label vacation package
technology; and
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our extranet supplier connectivity functionality.
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Travelport and its affiliates may use these technologies as part
of, or in support of, their own products or services, including
in some cases to directly compete with us.
The Master License Agreement permits Travelport to sublicense
our intellectual property (other than our supplier link
technology) to a party that is not an affiliate of Travelport,
except that Travelport may not sublicense our intellectual
property to a third party for a use that competes with our
business, unless Travelport incorporates or uses our
intellectual property with Travelport products or services to
enhance or improve Travelport products or services (other than
to provide our intellectual property to third parties on a
stand-alone basis). Travelport and its affiliates are permitted
to use our intellectual property to provide their own products
and services to third parties that compete with us. With respect
to our supplier link technology, Travelport has an unrestricted
license. These Travelport rights could facilitate
Travelports, its affiliates and third parties
ability to compete with us, which could have a material adverse
effect on our business, financial condition and results of
operations.
We
depend on our supplier and partner relationships and adverse
changes in these relationships or our inability to enter into
new relationships could negatively affect our access to travel
offerings and reduce our revenue.
We rely significantly on our relationships with hotels, airlines
and other suppliers and travel partners. Adverse changes in any
of these relationships, or the inability to enter into new
relationships, could negatively impact the availability and
competitiveness of travel products offered on our websites. Our
arrangements with suppliers and other travel partners may not
remain in effect on current or similar terms, and the net impact
of future pricing or revenue sharing options may adversely
impact our revenue. For example, our suppliers and other travel
partners could attempt to terminate or renegotiate their
agreements with us on more favorable terms to them, which could
reduce the revenue we generate from those agreements. The
significant reduction by any of our major suppliers or travel
partners in their business with our companies for a sustained
period of time or their complete withdrawal of doing business
with us could have a material adverse effect on our business,
financial condition and results of operations.
Certain airlines may terminate their agreements with us for any
reason or no reason prior to the scheduled expiration date upon
thirty days prior notice. Globally, airlines continue to
look for ways to decrease their overall costs, including the
cost of distributing airline tickets through OTCs and GDSs, and
to increase their control over distribution by taking actions
such as pursuing direct connect strategies, limiting forward
distribution of their fares to meta-search providers, such as
Kayak, and limiting the extent to which certain fare classes may
be used in the construction of multi-carrier itineraries. For
example, in November 2010, American Airlines (AA)
terminated its participation on our Orbitz.com and Orbitz for
Business websites effective December 2010 in pursuit of a direct
connect relationship. In 2010, the net revenue associated with
AA tickets booked on our Orbitz.com and Orbitz for Business
sites, including ancillary revenue from associated hotels, car
rentals, travel insurance and destination services revenue,
represented approximately 5 percent of our total net
revenue. In January 2011, Expedia stopped selling AA tickets on
its Expedia.com and Hotwire.com websites, Sabre Holding Corp.
terminated its distribution contract with AA, and Priceline and
AA announced a direct connect agreement. These recent
developments have disrupted the travel industry and may have
significant implications for both airlines and OTCs, including
potentially forcing us and our competitors to change our
business models.
Our GDS service agreement with Travelport permits us to pursue
direct connect relationships with new or existing suppliers
during the term of the agreement, which expires on
December 31, 2014, if the Travelport GDSs do not have
material content or if there is a material economic difference
between the cost of obtaining supplier content from the
Travelport GDSs relative to a direct connect relationship. If we
pursue a direct connect relationship and Travelport disputes our
ability to do so under our GDS service agreement, we may become
involved in a potentially costly and uncertain litigation
dispute with Travelport. Any restrictions under our GDS service
agreement may place us at a competitive disadvantage relative to
our other online travel companies who are establishing such
relationships with airlines. If we cannot reach a new agreement
with AA or if other airlines pursue a similar distribution
strategy, it could reduce our access to air inventory; reduce
our compensation; create additional operating expenses related
to the development, implementation and
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maintenance of the necessary technology systems to direct
connect; increase the frequency or duration of system problems;
and/or delay
other projects.
We are also subject to minimum segment volume thresholds and may
be subject to shortfall payments to Travelport if we fail to
process a certain percentage of segments through the GDSs.
However, we are not subject to these minimum volume thresholds
to the extent that we process all eligible segments through the
Travelport GDS, including segments processed through a permitted
direct connect relationship under certain circumstances
discussed above.
Our
liquidity has been, and may continue to be, negatively
impacted.
The weak and volatile conditions in the global financial markets
and financial sector caused a substantial deterioration in the
capital markets in late 2008 and early 2009. We experienced the
negative effects of this instability when Lehman Commercial
Paper Inc. (LCPI) filed for bankruptcy in October
2008. LCPI held a $12.5 million commitment under our
revolving credit facility, and its bankruptcy effectively
reduced the total availability under our revolving credit
facility from $85.0 million to $72.5 million. In the
last half of 2009, the capital markets improved and in January
2010, PAR Investment Partners, L.P. (PAR) exchanged
$49.6 million aggregate principal amount of term loans
outstanding under our senior secured credit agreement for
8,141,402 shares of our common stock, and Travelport
concurrently purchased 9,025,271 shares of our common stock
for $50.0 million in cash, which has improved our overall
liquidity. However, in the future, our liquidity could be
reduced as a result of the termination of any major
suppliers participation on our websites, such as AA,
changes in our business model, changes to payment terms or other
requirements imposed by suppliers or regulatory agencies, such
as requiring us to provide letters of credit or other forms of
financial security or increases in such requirements, lower than
anticipated operating cash flows, or other unanticipated events,
such as unfavorable outcomes in legal proceedings, including in
the case of hotel occupancy proceedings, certain
jurisdictions requirements that we provide financial
security or pay an assessment to the municipality in order to
challenge the assessment in court, or our inability to recover
defense costs. The liquidity provided by cash flows from our
merchant model gross bookings could be negatively impacted if
our merchant model gross bookings decline as a result of
economic conditions or other factors.
If in the future, we require more liquidity than is available to
us under our revolving credit facility, or we are unable to
refinance or extend our revolving credit facility by its
maturity date in July 2013, or we are unable to refinance or
repay our term loan by its July 2014 maturity date, we cannot be
certain that funding would be available to us or be available on
attractive or acceptable terms. If funding is not available when
needed, or is available only on unfavorable terms, we may be
unable to take advantage of potential business opportunities or
respond to competitive pressures, which in turn could have a
material adverse impact on our results of operations and
liquidity.
We
have a significant amount of indebtedness, which could limit the
manner in which we operate our business.
As of December 31, 2010, we had approximately
$492.0 million of outstanding borrowings under our senior
secured credit agreement. Our substantial level of indebtedness
could result in the following:
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it may impair our ability to obtain additional financing for
working capital, capital expenditures, acquisitions or general
corporate purposes;
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it may reduce the funds available to us for purposes such as
potential acquisitions and capital expenditures because we are
required to use a portion of our cash flows from operations to
make debt service payments;
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it may put us at a competitive disadvantage because we have a
higher level of indebtedness than some of our competitors and
may reduce our flexibility in planning for, or responding to,
changing conditions in the economy or our industry, including
increased competition; and
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it may make us more vulnerable to general economic downturns and
adverse developments in our business.
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The credit agreement requires us to maintain a minimum fixed
charge coverage ratio and not to exceed a maximum total leverage
ratio, which declines through March 31, 2011. If we fail to
comply with these covenants and we are unable to obtain a waiver
or amendment, our lenders could accelerate the maturity of all
amounts outstanding under our term loan and revolving credit
facility and could proceed against the collateral securing this
indebtedness. If this were to occur, there is no assurance that
alternative financing would be available to us or at favorable
terms.
In addition, restrictive covenants in our credit agreement
specifically limit our ability to, among other things:
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incur additional indebtedness or enter into guarantees;
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enter into sale or leaseback transactions;
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make new investments, loans or acquisitions;
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grant or incur liens on our assets;
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sell our assets;
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engage in mergers, consolidations, liquidations or dissolutions;
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engage in transactions with affiliates; and
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make restricted payments.
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As a result, we may operate our business differently than if we
were not subject to these covenants and restrictions.
Our
revenue is derived from the travel industry and a prolonged
substantial decrease in travel volume, particularly air travel,
as well as other industry trends, have historically and may in
the future adversely affect our business, financial condition
and results of operations.
Our revenue is derived from the worldwide travel industry. As a
result, our revenue is directly related to the overall level of
travel activity, particularly air travel volume, and is
therefore significantly impacted by declines in or disruptions
to travel in the United States, Europe and the Asia Pacific
region due to factors entirely outside of our control. For
example, the deterioration of the capital markets and related
financial crisis in the second half of 2008 negatively impacted
consumer spending patterns, including spending on travel,
thereby reducing demand for our products and decreasing our
revenue. While we have recently seen improvements in the
economy, the timing and sustainability of a recovery is
uncertain. If economic conditions do not continue to improve, or
worsen, our results of operations and financial condition could
be materially adversely impacted. Additional factors that affect
our revenue include:
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general economic conditions;
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global security issues, political instability, acts or threats
of terrorism, hostilities or war and other political issues that
could adversely affect travel volume in our key regions;
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epidemics or pandemics;
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natural disasters, such as hurricanes, volcanic eruptions and
earthquakes;
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the financial condition of suppliers, including the airline and
hotel industry, and the impact of their financial condition on
the cost and availability of air travel and hotel rooms;
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changes in airline distribution policies;
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changes to regulations governing the airline and travel industry;
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fuel prices;
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work stoppages or labor unrest at any of the major airlines or
airports;
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increased airport security that could reduce the convenience of
air travel;
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travelers perceptions of the occurrence of travel related
accidents or the scope, severity and timing of the other factors
described above; and
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changes in occupancy and room rates achieved by hotels.
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If there is a prolonged substantial decrease in travel volumes,
particularly for air travel and hotel stays, for these or any
other reasons, it would have an adverse impact on our business,
financial condition and results of operations.
Our
business and results of operations could be adversely affected
if the financial condition of one or more of our major
suppliers, including airlines and car rental companies,
deteriorates or restructures its operations.
In the past several years, several major airlines have filed for
bankruptcy protection, recently exited bankruptcy, discussed
publicly the risks of bankruptcy or have merged with other
airlines. In addition, the economic downturn severely impacted
the automobile industry, including car rental companies. We
depend on a relatively small number of airlines for a
significant portion of our net revenue. Our car net revenue is
also generated from a relatively small number of car rental
companies. As a result of this dependence, our business and
results of operations could be adversely affected if the
financial condition of one or more of the major airlines or car
rental companies were to deteriorate or in the event of supplier
consolidation in either of these industries. For example, a
consolidation of one or more of the major airlines, such as the
merger of United Air Lines, Inc. and Continental Airlines, Inc.
and the pending merger of Southwest Airlines Co.
(Southwest) and AirTran Airways, could result in
capacity reductions, a reduction in the number of airline
tickets available for booking on our website and increased air
fares, which may have a negative impact on demand for travel
products.
The
travel industry is highly competitive, and we may not be able to
effectively compete in the future.
We operate in the highly competitive travel industry. Our
success depends, in large part, upon our ability to compete
effectively against numerous competitors, including other online
travel companies, traditional offline travel companies,
suppliers, travel research companies, search engines and
meta-search companies, several of which have significantly
greater financial, marketing, personnel and other resources than
we have. Factors affecting our competitive success include
price, availability of travel products, ability to package
travel products across multiple suppliers, brand recognition,
customer service and customer care, fees charged to customers,
ease of use, accessibility, reliability and innovation. If we
are not able to compete effectively against our competitors, our
business and results of operations may be adversely affected.
Suppliers have increasingly focused on distributing their
products through their own websites. Some airlines, such as
Southwest, have historically only distributed their tickets
through their own websites and do not use third-party
distributors. Delta Air Lines, Inc. recently eliminated sales of
airline tickets through several third-party distributors,
limited forward distribution of their fares to meta-search
providers, such as Kayak, and limited the extent to which
certain fare classes may be used in the construction of
multi-carrier itineraries, all in an attempt to drive customers
to book directly on its website. Suppliers may offer advantages
for customers to book directly, such as member-only fares, bonus
miles or loyalty points, which could make their offerings more
attractive to customers. Certain online travel companies,
including us, reduced or eliminated domestic booking fees on
retail airline tickets and hotel stays and removed certain
change and cancellation fees. Our results of operations could be
negatively affected if competitive dynamics in the industry
caused us to further reduce or eliminate the service fees we
charge our customers. If we are unable to implement changes to
our business in an effort to absorb the impact of the reduction
or elimination of these fees or are unable to increase revenue
from other sources, our business, financial condition and
results of operations would suffer.
Search and meta-search sites have also grown in popularity and
may drive more traffic directly to the websites of suppliers or
competitors. Google appears to have increased its focus on
appealing to travel customers through its launch of Google
Places and its pending acquisition of ITA Software. If one or
more
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large search engines, such as Google, pursues a meta-search
model, customers could visit search sites instead of ours, and
we may be required to pay for traffic that otherwise would have
been free. In addition, Googles efforts around Google
Places could lead to it favoring Google Places or a favored
partner over and above our pages, which could undermine our
ability to obtain prominent placement in paid or unpaid search
results at a reasonable cost, or at all.
In addition, we currently license our search functionality, QPX
Software, from ITA Software, Inc. The pending acquisition of ITA
Software, Inc. by Google, if completed, could result in ITA
developing new software or other products in the future that it
may not make available to us, which could put us at a
competitive disadvantage.
Certain
of our international subsidiaries have a history of significant
operating losses, and our inability to improve their scale and
profitability could adversely affect our business and results of
operations.
We have historically incurred significant operating losses at
our international subsidiaries and may continue to experience
operating losses in the future, particularly since we expect to
continue to incur high levels of marketing and other expenses in
order to expand our international operations. As a result, we
have made, and may continue to make, significant investments in
our international operations by using a portion of the cash flow
generated from our domestic operations or making borrowings
under our revolving credit facility. There can be no assurance
that our international subsidiaries will be profitable in the
future or that any profits generated by them will be sufficient
to recover our investments in them.
The profitability of our international subsidiaries depends to a
large extent on the scale of their operations. If we fail to
achieve the desired scale, we may not be able to effectively
compete in the global marketplace and our business and results
of operations may be adversely affected.
Our
international operations are subject to additional risks not
encountered when doing business in the United States, including
foreign exchange risk, and our exposure to these risks will
increase as we expand our international
operations.
With employees in over 25 countries outside the United States,
we generated 24% of our net revenue for the year ended
December 31, 2010 from our international operations. We are
subject to certain risks as a result of having international
operations and from having operations in multiple countries
generally, including:
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difficulties in staffing and managing operations due to
distance, time zones, language and cultural differences,
including issues associated with establishing management
infrastructure in various countries;
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differences and unexpected changes in regulatory requirements
and exposure to local economic conditions;
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limits on our ability to enforce our intellectual property
rights and increased risk of piracy;
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preference of local populations for local providers;
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restrictions on the repatriation of
non-U.S. investments
and earnings back to the United States, including withholding
taxes imposed by certain foreign jurisdictions;
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diminished ability to legally enforce our contractual
rights; and
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currency exchange rate fluctuations.
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To the extent we are not able to effectively mitigate or
eliminate these risks, our results of operations could be
adversely affected.
Further, our international operations require us to comply with
a number of U.S. and international regulations, including,
among others, the Foreign Corrupt Practices Act
(FCPA). Any failure by us to adopt appropriate
compliance procedures to ensure that our employees and agents
comply with the FCPA and
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applicable laws and regulations in foreign jurisdictions could
result in substantial penalties or restrictions on our ability
to conduct business in certain foreign jurisdictions.
We are
dependent upon third-party systems and service providers, and
any disruption or adverse change in their businesses could have
a material adverse effect on our business.
We currently rely on certain third-party computer systems,
service providers and software companies, including the
electronic central reservation systems and GDSs of the airline,
hotel and car rental industries. In particular, our businesses
rely on third parties to:
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conduct searches for airfares;
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process hotel room transactions;
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process credit card payments; and
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provide computer infrastructure critical to our business.
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In addition, we rely on a group of business process outsourcing
companies located in various countries to provide us with call
center and telesales services, back office administrative
services such as ticketing fulfillment, hotel rate loading and
quality control and information technology services, as well as
financial services. Any interruption in these third-party
services could have a material adverse effect on us.
Further, we currently utilize GDSs, including Worldspan, Galileo
and Amadeus, to process a significant portion of our bookings,
and any interruption or deterioration in our GDS partners
products or services could prevent us from searching and booking
airline and car rental reservations, which would have a material
adverse effect on our business.
Our success is dependent on our ability to maintain
relationships with our technology partners. In the event our
arrangements with any of these third parties are impaired or
terminated, we may not be able to find an alternative source of
systems support on a timely basis or on commercially reasonable
terms, which could result in significant additional costs or
disruptions to our business. In addition, some of our agreements
with third-party service providers can be terminated by those
parties on short notice and, in many cases, provide no recourse
for service interruptions. A termination of these services could
have a material adverse effect on our business, financial
condition and results of operations.
We
rely on information technology to operate our businesses and
maintain our competitiveness, and any failure to adapt to
technological developments or industry trends could harm our
business.
We depend upon the use of sophisticated information technologies
and systems, including technologies and systems utilized for
reservations, communications, procurement and administrative
systems. Certain of our businesses also utilize third-party fare
search solutions and GDSs or other technologies. As our
operations grow in both size and scope, we must continuously
improve and upgrade our systems and infrastructure to offer our
customers enhanced products, services, features and
functionality, while maintaining the reliability and integrity
of our systems and infrastructure. Our future success also
depends on our ability to adapt our services and infrastructure
to meet rapidly evolving industry standards while continuing to
improve the performance, features and reliability of our service
in response to competitive service and product offerings and the
changing demands of the marketplace. In particular, expanding
our systems and infrastructure to meet any potential increases
in business volume will require us to commit additional
financial, operational and technical resources before those
increases materialize, with no assurance that they actually
will. Furthermore, our use of this technology could be
challenged by claims that we have infringed upon the patents,
copyrights or other intellectual property rights of others.
In addition, we may not be able to maintain our existing
systems, obtain new technologies and systems, or replace or
introduce new technologies and systems as quickly as our
competitors or in a cost-effective manner. Also, we may fail to
achieve the benefits anticipated or required from any new
technology or system, or we may be unable to devote financial
resources to new technologies and systems in the future. If any
of these events occur, our business could suffer.
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System
interruptions and the lack of redundancy may cause us to lose
customers or business opportunities.
Our inability to maintain and improve our information technology
systems and infrastructure may result in system interruptions.
System interruptions and slow delivery times, unreliable service
levels, prolonged or frequent service outages, or insufficient
capacity may prevent us from efficiently providing services to
our customers, which could result in our losing customers and
revenue or incurring liabilities. In addition to the risks
associated with inadequate maintenance or upgrading, our
information technologies and systems are vulnerable to damage or
interruption from various causes, including:
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natural disasters, war and acts of terrorism;
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power losses, computer systems failure, Internet and
telecommunications or data network failures, operator error,
losses and corruption of data, and similar events;
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computer viruses, penetration by individuals seeking to disrupt
operations or misappropriate information and other physical or
electronic breaches of security; and
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the failure of third-party systems or services that we rely upon
to maintain our own operations.
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We do not have backup systems for certain critical aspects of
our operations. For example, if we were unable to connect to
certain third-party systems, such as GDSs, due to failure of our
systems, our ability to process bookings could be significantly
or completely impaired. Many other systems are not fully
redundant, and our disaster recovery planning may not be
sufficient. In addition, we may have inadequate insurance
coverage or insurance limits to compensate for losses from a
major interruption, and remediation may be costly and have a
material adverse effect on our operating results and financial
condition. Any extended interruption in our technologies or
systems could significantly curtail our ability to conduct our
businesses and generate revenue.
We are
involved in various legal proceedings and may experience
unfavorable outcomes, which could harm us.
We are involved in various legal proceedings, including, but not
limited to, actions relating to intellectual property, in
particular patent infringement claims against us, tax matters,
employment law and other negligence, breach of contract and
fraud claims, that involve claims for substantial amounts of
money or for other relief or that might necessitate changes to
our business or operations. The defense of these actions may be
both time consuming and expensive. If any of these legal
proceedings were to result in an unfavorable outcome, it could
have a material adverse effect on our business, financial
position and results of operations. In addition, historically,
our insurers have reimbursed us for a significant portion of
costs we incurred to defend the hotel occupancy tax cases. If in
the future these costs are reimbursed at a lower rate, or not at
all, our results of operations could be adversely impacted.
We may
not be effectively protecting our intellectual property, which
would allow competitors to duplicate our products and services.
This could make it more difficult for us to compete with
them.
Our success and ability to compete depend, in part, upon our
technology and other intellectual property, including our
brands. Among our significant assets are our software and other
proprietary information and intellectual property rights. We
rely on a combination of copyright, trademark and patent laws,
trade secrets, confidentiality procedures and contractual
provisions to protect these assets. However, we have a limited
number of patents, and our software and related documentation
are protected principally under trade secret and copyright laws,
which afford only limited protection, and the laws of some
jurisdictions provide less protection for our proprietary rights
than the laws of the United States. We have granted Travelport
an exclusive license to our supplier link technology, including
our patents related to that technology. Under the exclusive
license, Travelport has the first right to enforce those
patents, and so we will only be able to bring actions to enforce
those patents if Travelport declines to do so. Unauthorized use
and misuse of our intellectual property could have a material
adverse effect on our business, financial condition and results
of operations, and the legal remedies available to us may not
adequately compensate us for the damages caused by unauthorized
use.
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Further, intellectual property challenges have been increasingly
brought against members of the travel industry. These legal
actions have in the past and might in the future result in
substantial costs and diversion of resources and management
attention. In addition, we may need to take legal action in the
future to enforce our intellectual property rights, to protect
our trade secrets or to determine the validity and scope of the
proprietary rights of others, and these enforcement actions
could result in the invalidation or other impairment of
intellectual property rights we assert.
Our
business and financial performance could be negatively impacted
by adverse tax events.
New sales, use, occupancy or other tax laws, statutes, rules,
regulations or ordinances could be enacted at any time. Such
enactments could adversely affect our domestic and international
business operations and our business and financial performance.
Further, existing tax laws, statutes, rules, regulations or
ordinances could be interpreted, changed, modified or applied
adversely to us. These events could require us to pay additional
tax amounts on a prospective or retroactive basis, as well as
require us to pay fees, penalties
and/or
interest for past amounts deemed to be due. In addition, our
revenue may decline because we may have to charge more for our
products and services.
New, changed, modified or newly interpreted or applied tax laws
could also increase our compliance, operating and other costs,
as well as the costs of our products or services. Further, these
events could decrease the capital we have available to operate
our business. Any or all of these events could adversely impact
our business and financial performance.
At December 31, 2010 and December 31, 2009, we also
had a $37.0 million long-term asset included in our
consolidated balance sheets related to amounts due to us from
Cendant (now Avis Budget Group, Inc.) for a portion of the tax
sharing liability with the Founding Airlines. Cendant is
obligated to pay us this amount when it receives the tax
benefit. If we were, in the future, to determine that all or a
portion of this amount is not collectable, the portion of the
asset that was no longer deemed collectable would be charged to
expense in our consolidated statements of operations.
We and others in the online travel industry are currently
subject to various lawsuits related to hotel occupancy tax in
numerous jurisdictions in the United States, and other
jurisdictions may be considering similar lawsuits. An adverse
ruling in the existing hotel occupancy tax cases could require
us to pay tax retroactively and prospectively, and possibly
penalties, interest
and/or fees.
We have also been contacted by several municipalities or other
taxing bodies concerning our possible obligation with respect to
local hotel occupancy or related taxes, and certain
municipalities have begun audit proceedings and some have issued
assessments against us. If we are found to be subject to the
hotel occupancy tax ordinance by a taxing authority and we
appeal the decision in court, certain jurisdictions may attempt
to require us to provide financial security or pay the
assessment to the municipality in order to challenge the tax
assessment in court. The proliferation of new hotel occupancy
tax cases or audit proceedings could result in substantial
additional defense costs. These events could also adversely
impact our business and financial performance. See Item 3,
Legal Proceedings.
Our
businesses are highly regulated, and any failure to comply with
such regulations or any changes in such regulations could
adversely affect us.
We operate in a highly regulated industry both in the United
States and internationally. Our business, financial condition
and results of operations could be adversely affected by
unfavorable changes in or the enactment of new laws, rules and
regulations applicable to us, which could decrease demand for
our products and services, increase costs or subject us to
additional liabilities. Moreover, regulatory authorities have
relatively broad discretion to grant, renew and revoke licenses
and approvals and to implement regulations. Accordingly, these
regulatory authorities could prevent or temporarily suspend us
from carrying on some or all of our activities or otherwise
penalize us if our practices were found not to comply with the
then current regulatory or licensing requirements or any
interpretation of such requirements by the regulatory authority.
Our failure to comply with any of these requirements or
interpretations could have a material adverse effect on our
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operations. In addition, the various regulatory regimes to which
we are subject may conflict so that compliance with the
regulatory requirements in one jurisdiction may create
regulatory issues in another.
Our business is subject to laws and regulations relating to our
revenue generating and marketing activities, including those
prohibiting unfair and deceptive advertising or practices. Our
travel services are subject to regulation and laws governing the
offer of travel products and services, including laws requiring
us to register as a seller of travel in various
jurisdictions and to comply with certain disclosure
requirements. As an OTC that offers customers the ability
to book air travel in the United States, we are also subject to
regulation by the Department of Transportation, which has
authority to enforce economic regulations and may assess civil
penalties or challenge our operating authority.
Our failure to comply with these laws and regulations may
subject us to fines, penalties and potential criminal
violations. Any changes to these laws or regulations or any new
laws or regulations may make it more difficult for us to operate
our businesses and may have a material adverse effect on our
operations.
We are
exposed to risks associated with online commerce security and
credit card fraud.
The secure transmission of confidential information over the
Internet is essential in maintaining customer and supplier
confidence in our services. Substantial or ongoing security
breaches, whether instigated internally or externally on our
system or other Internet-based systems, could significantly harm
our business. We currently require customers to guarantee their
transactions with their credit cards online. We rely on licensed
encryption and authentication technology to effect secure
transmission of confidential customer information, including
credit card numbers. It is possible that advances in computer
capabilities, new discoveries or other developments could result
in a compromise or breach of the technology that we use to
protect customer transaction data.
We incur substantial expense to protect against and remedy
security breaches and their consequences. However, our security
measures may not prevent security breaches. We may be
unsuccessful in implementing our remediation plan to address
these potential exposures. A party (whether internal, external,
an affiliate or unrelated third party) that is able to
circumvent our security systems could steal proprietary
information or cause significant interruptions in our
operations. Security breaches could damage our reputation and
expose us to a risk of loss or litigation and possible
liability. Security breaches could also cause customers and
potential customers to lose confidence in our security, which
would have a negative effect on the demand for our products and
services.
Moreover, public perception concerning security and privacy on
the Internet could adversely affect customers willingness
to use our websites. A publicized breach of security, even if it
only affects other companies conducting business over the
Internet, could inhibit the growth of the Internet and,
therefore, our services as a means of conducting commercial
transactions.
Our
processing, storage, use and disclosure of personal data could
give rise to liabilities as a result of governmental regulation,
conflicting legal requirements, differing views of personal
privacy rights or security breaches.
In the processing of customer transactions, we receive and store
a large volume of personally identifiable information. This
information is increasingly subject to legislation and
regulations in numerous jurisdictions around the world. This
legislation and regulation is generally intended to protect the
privacy and security of personal information, including credit
card information, that is collected, processed and transmitted
in or from the governing jurisdiction. We could be adversely
affected if domestic or international legislation or regulations
are expanded to require changes in our business practices, or if
governing jurisdictions interpret or implement their legislation
or regulations in ways that negatively affect our business.
Travel companies have also been subjected to investigations,
lawsuits and adverse publicity due to allegedly improper
disclosure of passenger information. As privacy and data
protection have become more sensitive issues, we may also become
exposed to potential liabilities as a result of differing views
on the
26
privacy of travel data. These and other privacy concerns,
including security breaches, could adversely impact our
business, financial condition and results of operations.
Our
ability to attract, train and retain executives and other
qualified employees is critical to our results of operations and
future growth.
We depend substantially on the continued services and
performance of our key executives, senior management and skilled
personnel, particularly our professionals with experience in our
industry and our information technology and systems. Any of
these individuals may chose to terminate their employment with
us at any time. The specialized skills we require can be
difficult and time-consuming to acquire and, as a result, these
skills are often in short supply. A significant period of time
and expense may be required to hire and train replacement
personnel when skilled personnel depart the Company. Our
inability to hire, train and retain a sufficient number of
qualified employees could materially hinder our business by, for
example, delaying our ability to bring new products and services
to market or impairing the success of our operations or
prospects for future growth.
|
|
Item 1B.
|
Unresolved
Staff Comments.
|
None.
Our corporate headquarters are located in leased office space in
Chicago, Illinois. We also lease office space for our ebookers
brand portfolio in various countries, including the United
Kingdom, Finland, France, Germany, Ireland, the Netherlands,
Sweden and Switzerland. In addition, we lease office space for
our HotelClub brand portfolio, primarily in Sydney, Australia.
We believe that our existing facilities are adequate to meet our
current requirements and that additional space will be available
as needed to accommodate any further expansion of our business.
|
|
Item 3.
|
Legal
Proceedings.
|
We are involved in various claims, legal proceedings and
governmental inquiries related to contract disputes, business
practices, intellectual property and other commercial,
employment and tax matters. The costs of defense and amounts
that may be recovered in certain matters may be partially
covered by insurance. The following list identifies all
litigation matters for which we believe that an adverse outcome
could be material to our financial position or results of
operations, as well as other matters that may be of particular
interest to our stockholders.
Litigation
Relating to Hotel Occupancy Taxes
Orbitz Worldwide, Inc. and certain of its subsidiaries and
affiliates, including Orbitz, Inc., Orbitz, LLC, Trip Network,
Inc. (d/b/a Cheaptickets.com), Travelport Inc. (f/k/a Cendant
Travel Distribution Services Group, Inc.), and Internetwork
Publishing Corp. (d/b/a Lodging.com), are parties to various
cases brought by consumers and municipalities and other
U.S. governmental entities involving hotel occupancy taxes
and our merchant hotel business model. Some of the cases are
purported class actions, and most of the cases were brought
simultaneously against other online travel companies, including
Expedia, Travelocity and Priceline. The cases allege, among
other things, that we violated the jurisdictions hotel
occupancy tax ordinance. While not identical in their
allegations, the cases generally assert similar claims,
including violations of local or state occupancy tax ordinances,
violations of consumer protection ordinances, conversion, unjust
enrichment, imposition of a constructive trust, demand for a
legal or equitable accounting, injunctive relief, declaratory
judgment, and in some cases, civil conspiracy. The plaintiffs
seek relief in a variety of forms, including: declaratory
judgment, full accounting of monies owed, imposition of a
constructive trust, compensatory and punitive damages,
disgorgement, restitution, interest, penalties and costs,
attorneys fees, and where a class action has been claimed,
an order certifying the action as a class action. An adverse
ruling in one or more of
27
these cases could require us to pay tax retroactively and
prospectively and possibly pay penalties, interest and fines.
The proliferation of additional cases could result in
substantial additional defense costs.
|
|
|
|
|
City or County Filing
|
|
Date Litigation
|
|
|
Litigation
|
|
Instituted
|
|
Court Where Litigation is Pending
|
|
City of Los Angeles, California*
|
|
December 30, 2004
|
|
Superior Court for the State of California, County of Los Angeles
|
City of Findlay, Ohio
|
|
October 25, 2005
|
|
United States Court of Appeals for the Sixth Circuit
|
City of Chicago, Illinois
|
|
November 1, 2005
|
|
Circuit Court of Cook County, Illinois
|
City of Rome, Georgia*
|
|
November 18, 2005
|
|
United States District Court for the Northern District of Georgia
|
City of San Diego, California
|
|
February 9, 2006
|
|
Superior Court for the State of California, County of Los Angeles
|
|
|
|
|
Case was coordinated with the City of Los Angeles case (above)
on July 12, 2006
|
Orange County, Florida
|
|
March 13, 2006
|
|
Ninth Judicial Circuit in and for Orange County, Florida
|
City of Atlanta, Georgia
|
|
March 29, 2006
|
|
Supreme Court of Georgia
|
City of San Antonio, Texas**
|
|
May 8, 2006
|
|
United States District Court for the Western District of Texas
|
Cities of Columbus and Dayton, Ohio
|
|
August 8, 2006
|
|
United States Court of Appeals for the Sixth Circuit
|
|
|
|
|
Case was consolidated with the City of Findlay case (above) on
November 6, 2007
|
County of Nassau, New York*
|
|
October 24, 2006
|
|
United States District Court for the Eastern District of New York
|
Wake County, North Carolina
|
|
November 3, 2006
|
|
General Court of Justice, Superior Court Division, Wake County,
North Carolina
|
City of Branson, Missouri
|
|
December 18, 2006
|
|
Circuit Court of Greene County, Missouri
|
Dare County, North Carolina
|
|
January 26, 2007
|
|
General Court of Justice, Superior Court Division, Dare County,
North Carolina
|
|
|
|
|
Case was coordinated with the Wake County case (above) on April
4, 2007
|
Buncombe County, North Carolina
|
|
February 1, 2007
|
|
General Court of Justice, Superior Court Division, Buncombe
County, North Carolina Case was coordinated with the Wake County
case (above) on April 4, 2007
|
Horry County, South Carolina
|
|
February 2, 2007
|
|
Court of Common Pleas, Horry County, South Carolina
|
City of Myrtle Beach, South Carolina
|
|
February 2, 2007
|
|
Court of Common Pleas, Horry County, South Carolina
|
City of Houston, Texas
|
|
March 5, 2007
|
|
Court of Appeals for the Fourteenth District of Texas-Houston
|
City of Gallup, New Mexico**
|
|
July 6, 2007
|
|
United States District Court for the District of New Mexico
|
Mecklenburg County, North Carolina
|
|
January 10, 2008
|
|
General Court of Justice, Superior Court Division, Mecklenburg
County, North Carolina
|
28
|
|
|
|
|
City or County Filing
|
|
Date Litigation
|
|
|
Litigation
|
|
Instituted
|
|
Court Where Litigation is Pending
|
|
|
|
|
|
Case was coordinated with the Wake County case (above) on
February 19, 2008
|
City of Goodlettsville, Tennessee*
|
|
June 2, 2008
|
|
United States District Court for the Middle District of Tennessee
|
Township of Lyndhurst, New Jersey*
|
|
June 18, 2008
|
|
United States Court of Appeals for the Third Circuit
|
City of Jacksonville, Florida*
|
|
July 1, 2008
|
|
Fourth Judicial Circuit for Duval County, Florida
|
City of Baltimore, Maryland
|
|
December 10, 2008
|
|
United States District Court for the District of Maryland
|
City of Bowling Green, Kentucky
|
|
March 10, 2009
|
|
Commonwealth of Kentucky, Court of Appeals
|
County of Genesee, Michigan
|
|
April 16, 2009
|
|
Circuit Court for the County of Ingham, Michigan
|
St. Louis County, Missouri
|
|
July 6, 2009
|
|
Supreme Court of Missouri
|
Village of Rosemont, Illinois
|
|
July 24, 2009
|
|
Circuit Court of Cook County, Illinois
|
Palm Beach, Florida
|
|
July 30, 2009
|
|
Circuit Court of the Fifteenth Judicial Circuit in and for Palm
Beach County, Florida
|
Jefferson County, Arkansas
|
|
September 25, 2009
|
|
Circuit Court of Jefferson County, Arkansas
|
Leon County, Florida
|
|
November 5, 2009
|
|
Circuit Court of the Second Judicial Circuit in and for Leon
County, Florida
|
Birmingham, Alabama
|
|
December 11, 2009
|
|
Circuit Court of Jefferson County, Alabama
|
Leon County, Florida
|
|
December 14, 2009
|
|
Circuit Court of the Second Judicial Circuit in and for Leon
County, Florida
|
County of Lawrence, Pennsylvania*
|
|
January 14, 2010
|
|
Commonwealth Court of Pennsylvania
|
Town of Hilton Head, South Carolina
|
|
April 2, 2010
|
|
Court of Common Pleas, Fourteenth Judicial Circuit
|
Baltimore County, Maryland
|
|
May 3, 2010
|
|
United States District Court for the District of Maryland
|
Santa Monica, California
|
|
June 25, 2010
|
|
Superior Court for the State of California, County of Los Angeles
|
Hamilton County, Ohio
|
|
August 23, 2010
|
|
United States District Court for the Northern District of Ohio
|
State of Oklahoma
|
|
November 2, 2010
|
|
District Court of Oklahoma County
|
Montana Department of Revenue
|
|
November 8, 2010
|
|
Montana First Judicial District, Louis and Clark County
|
Montgomery County, Maryland
|
|
December 21, 2010
|
|
United States District Court for the District of Maryland
|
|
|
|
* |
|
Indicates purported class action filed on behalf of named City
or County and other (unnamed) cities, counties, governments or
other taxing authorities with similar tax ordinances. |
|
** |
|
Indicates court certified class action on behalf of named City
or County and other (unnamed) cities, counties, governments or
other taxing authorities with similar tax ordinances. |
29
The following legal proceedings relating to hotel occupancy
taxes previously reported by us were dismissed since
October 1, 2010:
On October 21, 2010, the South Carolina Cities of
Charleston, Mt. Pleasant, and N. Myrtle Beach executed a
settlement agreement in which they agreed to dismiss their
pending lawsuits against the defendant Internet travel companies.
On October 25, 2010, the Court of Common Pleas of Lawrence
County, Pennsylvania sustained the preliminary objections of
defendant Internet travel companies and dismissed the Lawrence
County, Pennsylvanias amended complaint without prejudice.
On November 18, 2010, the District Court for the Northern
District of Ohio granted defendant Internet travel
companies motion for summary judgment on the Cities of
Findlay, Columbus and Dayton, Ohios complaints.
On December 16, 2010, the Superior Court of California for
Los Angeles County issued a peremptory writ of mandamus
remanding the proceedings and directing the City of Anaheim,
Californias hearing officer to withdraw his
February 6, 2009 decision ruling that the OTCs are the
operators of hotels, and thus, liable for transient
occupancy tax on the amount each received as payment for its
online travel related services.
On January 6, 2011, the United States District Court for
the Southern District of Florida approved the settlement
agreement in the Monroe County, Florida case.
On January 12, 2011, the United States District Court for
the Middle District of Florida following notice of the parties
settlement of the case, dismissed the Brevard County,
Floridas complaint.
In addition, the following other material developments in the
legal proceedings relating to hotel occupancy taxes occurred
during the quarter ended December 31, 2010:
On October 7, 2010, the District Court for the District of
New Mexico denied the City of Gallup, New Mexicos
motion for reconsideration of denial of the Citys amended
motion for partial summary judgment.
On November 2, 2010, the State of Oklahoma filed a
Complaint in the District Court of Oklahoma County against
Travelport, Inc. (f/k/a Cendant Travel Distribution Services
Group, Inc.), Cheaptickets, Inc., Trip Network, Inc., Orbitz,
Inc., and Orbitz, LLC seeking declaratory judgment, right of
action for sales tax owed, and injunctive relief.
On November 8, 2010, the Montana Department of Revenue
filed a Complaint in Montana First Judicial District Court,
Lewis and Clark County against Travelport, Inc. (f/k/a Cendant
Travel Distribution Services Group, Inc.), Cheaptickets, Inc.,
Trip Network, Inc., Orbitz, Inc., and Orbitz, LLC seeking
declaratory relief, injunctive relief, violation of the Lodging
Facility Use Tax Statute, the Lodging Facility Sales and Use Tax
Statute, and the Rental Vehicle Sales and Use Tax, conversion,
unjust enrichment, imposition of a constructive trust and
damages.
On November 22, 2010, Lawrence County, Pennsylvania filed
its notice of appeal of the Court of Common Pleas
October 25, 2010 Order dismissing the Countys
Complaint.
On December 1, 2010, the Cities of Findlay, Columbus and
Dayton, Ohio filed their notice of appeal to the U.S. Court
of Appeal for the Sixth Circuit from the final judgments entered
by the District Court for the Northern District of Ohio on
November 18, 2010.
On December 21, 2010, Montgomery County, Maryland filed a
Complaint in U.S. District Court for the District of
Maryland against Travelport, Inc. (f/k/a Cendant Travel
Distribution Services Group, Inc.), Cheaptickets, Inc., Trip
Network, Inc., Orbitz, Inc., and Orbitz, LLC seeking declaratory
relief, injunctive relief, violation of the Montgomery
Countys Transient Occupancy Tax Code, conversion, unjust
enrichment, assumpsit, imposition of a constructive trust and
damages.
We have also been contacted by several municipalities or other
taxing bodies concerning our possible obligations with respect
to state or local hotel occupancy or related taxes. The
following taxing bodies have
30
issued notices to the Company: the Louisiana Department of
Revenue; the New Mexico Taxation and Revenue Department; the
Wyoming Department of Revenue; the Colorado Department of
Revenue; the Montana Department of Revenue; an entity
representing 84 cities and 14 counties in Alabama;
43 cities in California; the cities of Phoenix, Arizona;
North Little Rock and Pine Bluff, Arkansas; Colorado Springs and
Steamboat Springs, Colorado; St. Louis, Missouri; and the
counties of Jefferson, Arkansas; Brunswick and Stanly, North
Carolina; Duval, Florida; and Davis, Summit, Salt Lake and
Weber, Utah. These taxing authorities have not issued
assessments, but have requested information to conduct an audit
and/or have
requested that the Company register to pay local hotel occupancy
taxes. Additional taxing authorities have begun audit
proceedings and some have issued assessments against the
Company, individually ranging from $0 to approximately
$40.9 million, and totaling approximately
$68.3 million.
Certain assessments made in these audit proceedings are
administratively final and subject to judicial review. The
following is a list of lawsuits brought by the Company
challenging such final assessments:
In Re Transient Occupancy Tax Cases, Coordination Proceeding
No. 4472 (Superior Court of the State of California for the
County of Los Angeles).
City of
Anaheim
On February 1, 2010, the Superior Court for the County of
Los Angeles, California granted Defendants writ of mandate
finding the Citys ordinance does not impose a transient
occupancy tax based on the retail price of hotel rooms rented by
or through the Defendants and setting aside the Hearing
Officers decision to the contrary. On April 7, 2010,
the Superior Court for the County of Los Angeles, California
denied Plaintiffs motion for reconsideration of the
Courts February 1, 2010 Order. On August 30,
2010, the Superior Court for the County of Los Angeles,
California granted the OTCs Consolidated Demurrer to the
City of Anaheims First Amended Cross-Complaint. On
December 16, 2010, the Superior Court for the County of Los
Angeles, California issued a peremptory writ of mandamus
remanding the proceedings to the Citys hearing officer
directing him to withdraw his February 6, 2009 decision
ruling that the OTCs are operators of hotels, and
thus, liable for transient occupancy tax on the amount each
received as payment for its online travel related services. The
Superior Court also dismissed with prejudice the Citys
causes of action for preliminary and permanent injunction,
conversion, violation of California Civil Code § 2223,
violation of California Civil Code § 2224, imposition
of a constructive trust, breach of fiduciary duty, fraudulent
concealment, money had and received, and unjust enrichment.
City of
San Francisco
On May 14, 2010, Orbitz, LLC, Trip Network, Inc. and
Internetwork Publishing Corp. filed a Complaint for Tax Refund
and Declaratory Relief against the City and County of
San Francisco seeking a tax refund and declaratory relief.
City of
San Diego
On August 4, 2010, Orbitz, LLC, Trip Network, Inc. and
Internetwork Publishing Corp. filed a verified petition for writ
of mandate against the City of San Diego seeking a tax
refund and abetment of the assessments.
Orbitz, LLC v. Broward County, Florida, Case No. 2009 CA
000126 (Circuit Court of the Second Judicial Circuit, in and for
Leon County, Florida). On February 24, 2010, the District
Court for the Middle District of Florida granted in part and
denied in part the OTCs motion to dismiss the
Countys cross complaint. The Court dismissed Count II
(unjust enrichment), Count III (conversion), and
Count IV (permanent injunction).
Orbitz, LLC v. Indiana Department of Revenue, Cause
No. 49T10-0903-TA-00010
(Indiana Tax Court)
Orbitz, LLC v. Miami-Dade, Florida, Case No. 2009 CA 4977
(Circuit Court of the Second Judicial Circuit, in and for Leon
County, Florida)
31
Orbitz, LLC v. Osceola, Florida, (Circuit Court of the Second
Judicial Circuit, in and for Leon County, Florida). On
January 24, 2011, Orbitz, Inc., Orbitz, LLC, Trip Network,
Inc. and Internetwork Publishing Corp. filed a Complaint for Tax
Refund against the County of Osceola, Florida seeking a tax
refund and abetment of the assessments.
The Company disputes that any hotel occupancy or related tax is
owed under these ordinances and is challenging the assessments
made against the Company. If the Company is found to be subject
to the hotel occupancy tax ordinance by a taxing authority and
appeals the decision in court, certain jurisdictions may attempt
to require us to provide financial security or pay the
assessment to the municipality in order to challenge the tax
assessment in court.
Consumer
Class Actions
Peluso v. Orbitz.com, Orbitz, LLC (d/b/a Orbitz.com),
Orbitz Worldwide, Inc., Orbitz Worldwide Development, LLC,
Orbitz Worldwide International, Inc., Orbitz Worldwide, LLC, et
al. On October 1, 2010, a putative consumer class
action complaint was filed in the United States District Court
for the Southern District of New York. In the complaint, the
plaintiff alleges that the defendants overbilled customers for
hotel occupancy taxes and sales taxes imposed by the City and
State of New York and asserts claims for violation of New
Yorks deceptive business practices statute, declaratory
and injunctive relief, conversion, breach of fiduciary duty,
breach of contract and unjust enrichment. On October 7,
2010, the case was consolidated with similar cases that were
previously filed against other OTCs.
Litigation
related to Intellectual Property
DDR Holdings, LLC v. Hotels.com, L.P., et
al. On January 31, 2006, DDR Holdings, LLC
(DDR) filed an action in the United States District
Court for the Eastern District of Texas (Marshall Division)
against a number of Internet companies, including Cendant
Corporation, for alleged infringement of U.S. Patents Nos.
6,629,135 (entitled Affiliate Commerce System and
Method), and 6,993,572 (entitled System and Method
for Facilitating Internet Commerce with Outsourced
Websites), which DDR claims full right and title to. The
plaintiff asserts only patent infringement claims. The plaintiff
seeks unspecified damages, injunctive relief, a declaratory
judgment and attorneys fees. On April 12, 2006, the
plaintiff amended its complaint to add Internetwork Publishing
Corporation (d/b/a Lodging.com) as a defendant. On
April 12, 2006, the plaintiff voluntarily dismissed Cendant
Corporation and named Cendant Travel Distribution Services
Group, Inc. as a defendant. On July 14, 2006, certain
defendants filed a motion for summary judgment alleging that
both patents are invalid (Cendant Travel Distribution Services
Group, Inc. and Internetwork Publishing Corporation joined on
July 19, 2006). On September 22, 2006, the plaintiff
filed a second amended complaint adding Neat Group Corporation
as a defendant and not including Cendant Travel Distribution
Services Group, Inc. as a defendant. On September 26, 2006,
DDR filed a request of reexamination in the United States Patent
and Trademark Office, of the
patents-in-suit.
DDR moved to stay the lawsuit pending the outcome of any
reexamination. On December 19, 2006, the court
administratively closed the case pending reexamination. The
court ruled that actions by defendants during the reexamination
may not be used to argue willful infringement, but the court
reserved judgment on whether damages are tolled. On
February 2, 2007, the Patent and Trademark Office granted
DDRs requests for reexamination of the two
patents-in-suit.
On July 20, 2010, the United States Patent and Trademark
Office issued Reissue certificates with respect to the two
patents at issue in the case. On October 6, 2010, the
United States District Court for the Eastern District of Texas
(Marshall Division) granted the plaintiffs motion to
reopen the case.
We intend to defend vigorously against the claims described
above. Litigation is inherently unpredictable and, although we
believe we have valid defenses in these matters, unfavorable
resolutions could occur. We cannot estimate our range of loss,
except to the extent taxing authorities have issued assessments
against us. Although we believe it is unlikely that an adverse
outcome will result from these proceedings, an adverse outcome
could be material to us with respect to earnings or cash flows
in any given reporting period.
32
PART II
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities.
|
Market
Information
Our common stock trades on the New York Stock Exchange
(NYSE) under the symbol OWW. The
following table sets forth the high and low sales prices for our
common stock for each of the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
Fourth Quarter
|
|
$
|
7.01
|
|
|
$
|
4.87
|
|
|
$
|
8.11
|
|
|
$
|
4.66
|
|
Third Quarter
|
|
$
|
6.66
|
|
|
$
|
3.56
|
|
|
$
|
6.76
|
|
|
$
|
1.74
|
|
Second Quarter
|
|
$
|
7.59
|
|
|
$
|
3.77
|
|
|
$
|
2.75
|
|
|
$
|
1.25
|
|
First Quarter
|
|
$
|
7.86
|
|
|
$
|
5.73
|
|
|
$
|
4.39
|
|
|
$
|
1.10
|
|
Holders
As of February 22, 2011, there were approximately 51
holders of record of our common stock. Several brokerage firms,
banks and other institutions (nominees) are listed
once on the stockholders of record listing. However, in most
cases, the nominees holdings represent blocks of our
common stock held in brokerage accounts for a number of
individual stockholders. As such, our actual number of
stockholders is higher than the number of registered
stockholders of record.
Dividends
We did not declare or pay any cash dividends on our common stock
during the years ended December 31, 2010 or
December 31, 2009, and we do not intend to in the
foreseeable future. Any future determination to pay dividends
will be at the discretion of our board of directors, may require
the consent of Travelport and will depend on several factors,
including our financial condition, results of operations,
capital requirements, restrictions contained in existing and
future financing instruments and other factors that our board of
directors may deem relevant.
Securities
Authorized for Issuance under Equity Compensation
Plans
The following table provides information as of December 31,
2010 with respect to shares of our common stock that may be
issued under our equity compensation plans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Securities
|
|
|
|
|
|
|
|
|
|
Remaining Available for
|
|
|
|
|
|
|
|
|
|
Future Issuance Under
|
|
|
|
Number of Securities to be
|
|
|
Weighted-Average
|
|
|
Equity Compensation Plans
|
|
|
|
Issued Upon Exercise of
|
|
|
Exercise Price of
|
|
|
(Excluding Securities
|
|
Plan Category
|
|
Outstanding Options
|
|
|
Outstanding Options
|
|
|
Reflected in First Column)
|
|
|
Equity compensation plans approved by security holders
|
|
|
3,738,833
|
|
|
$
|
5.28
|
|
|
|
6,131,563
|
|
Equity compensation plans not approved by security holders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
3,738,833
|
|
|
$
|
5.28
|
|
|
|
6,131,563
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33
Performance
Graph
The following graph shows the total shareholder return through
December 31, 2010 of an investment of $100 in cash on
July 20, 2007 (which is the first date that our common
stock began trading on the NYSE) for our common stock and an
investment of $100 in cash on July 20, 2007 for
(i) the S&P MidCap 400 Index and (ii) the
Research Data Group (RDG) Internet Composite Index.
The RDG Internet Composite Index is an index of stocks
representing the Internet industry, including Internet software
and services companies and
e-commerce
companies. Historic stock performance is not necessarily
indicative of future stock price performance. All values assume
reinvestment of the full amount of all dividends and are
calculated as of the last day of each month.
COMPARISON
OF 42 MONTH CUMULATIVE TOTAL RETURN
Among
Orbitz Worldwide, Inc., the S&P Midcap 400 Index
and the RDG Internet Composite Index
|
|
Item 6.
|
Selected
Financial Data.
|
The selected financial data presented in the table below is
derived from our audited consolidated financial statements. This
data should be read in conjunction with Item 7,
Managements Discussion and Analysis of Financial
Condition and Results of Operations, and our consolidated
financial statements and notes thereto included in Item 8,
Financial Statements and Supplementary Data, of this
Annual Report on
Form 10-K.
Prior to the completion of the initial public offering
(IPO) of shares of our common stock in July 2007, we
had not operated as an independent stand-alone company. As a
result, our consolidated financial statements have been carved
out of the historical financial statements of Cendant for the
period prior to the Blackstone Acquisition and out of the
historical financial statements of Travelport for the period
subsequent to the Blackstone Acquisition. In connection with the
Blackstone Acquisition, the carrying values of our assets and
liabilities were revised to reflect their fair values as of
August 23, 2006, based upon an allocation of the overall
purchase price of Travelport to the underlying net assets of the
various Travelport affiliates acquired. Selected financial data
is presented below on a Successor basis (reflecting
Travelports ownership of us) and Predecessor
basis (reflecting Cendants ownership of us) and has been
separated by a vertical line to identify these different bases
of accounting.
Our historical consolidated financial statements do not reflect
what our financial position, results of operations and cash
flows would have been had we operated as a separate, stand-alone
company without the shared resources of Cendant in the
Predecessor periods and Travelport in the Successor periods.
34
SELECTED
FINANCIAL DATA
(in millions, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 23,
|
|
|
|
January 1,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 to
|
|
|
|
2006 to
|
|
|
Year Ended
|
|
|
|
Years Ended December 31,
|
|
|
December 31,
|
|
|
|
August 22,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
2006
|
|
|
2006 (a)
|
|
|
|
Successor
|
|
|
Successor
|
|
|
Successor
|
|
|
Successor
|
|
|
Successor
|
|
|
|
Predecessor
|
|
|
Combined
|
|
Statements of operations data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
757
|
|
|
$
|
738
|
|
|
$
|
870
|
|
|
$
|
859
|
|
|
$
|
242
|
|
|
|
$
|
510
|
|
|
$
|
752
|
|
Cost and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
154
|
|
|
|
138
|
|
|
|
163
|
|
|
|
157
|
|
|
|
38
|
|
|
|
|
75
|
|
|
|
113
|
|
Selling, general and administrative
|
|
|
244
|
|
|
|
257
|
|
|
|
272
|
|
|
|
301
|
|
|
|
112
|
|
|
|
|
191
|
|
|
|
303
|
|
Marketing
|
|
|
217
|
|
|
|
215
|
|
|
|
310
|
|
|
|
302
|
|
|
|
89
|
|
|
|
|
188
|
|
|
|
277
|
|
Depreciation and amortization
|
|
|
73
|
|
|
|
69
|
|
|
|
66
|
|
|
|
57
|
|
|
|
18
|
|
|
|
|
37
|
|
|
|
55
|
|
Impairment of goodwill and intangible assets
|
|
|
70
|
|
|
|
332
|
|
|
|
297
|
|
|
|
|
|
|
|
|
|
|
|
|
122
|
|
|
|
122
|
|
Impairment of property and equipment and other assets
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
769
|
|
|
|
1,011
|
|
|
|
1,108
|
|
|
|
817
|
|
|
|
257
|
|
|
|
|
613
|
|
|
|
870
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
|
(12
|
)
|
|
|
(273
|
)
|
|
|
(238
|
)
|
|
|
42
|
|
|
|
(15
|
)
|
|
|
|
(103
|
)
|
|
|
(118
|
)
|
Other (expense) income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest expense
|
|
|
(44
|
)
|
|
|
(57
|
)
|
|
|
(63
|
)
|
|
|
(83
|
)
|
|
|
(9
|
)
|
|
|
|
(18
|
)
|
|
|
(27
|
)
|
Other income
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense
|
|
|
(44
|
)
|
|
|
(55
|
)
|
|
|
(63
|
)
|
|
|
(83
|
)
|
|
|
(9
|
)
|
|
|
|
(17
|
)
|
|
|
(26
|
)
|
Loss before income taxes
|
|
|
(56
|
)
|
|
|
(328
|
)
|
|
|
(301
|
)
|
|
|
(41
|
)
|
|
|
(24
|
)
|
|
|
|
(120
|
)
|
|
|
(144
|
)
|
Provision (benefit) for income taxes
|
|
|
2
|
|
|
|
9
|
|
|
|
(2
|
)
|
|
|
43
|
|
|
|
1
|
|
|
|
|
1
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(58
|
)
|
|
|
(337
|
)
|
|
|
(299
|
)
|
|
|
(84
|
)
|
|
|
(25
|
)
|
|
|
|
(121
|
)
|
|
|
(146
|
)
|
Less: Net income attributable to noncontrolling interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Orbitz Worldwide, Inc.
|
|
$
|
(58
|
)
|
|
$
|
(337
|
)
|
|
$
|
(299
|
)
|
|
$
|
(85
|
)
|
|
$
|
(25
|
)
|
|
|
$
|
(121
|
)
|
|
$
|
(146
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
July 18, 2007 to
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Orbitz Worldwide, Inc. common
shareholders
|
|
$
|
(58
|
)
|
|
$
|
(337
|
)
|
|
$
|
(299
|
)
|
|
$
|
(42
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share attributable to Orbitz Worldwide, Inc.
common shareholders
basic and diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share attributable to Orbitz Worldwide, Inc. common
shareholders(b)
|
|
$
|
(0.58
|
)
|
|
$
|
(4.01
|
)
|
|
$
|
(3.58
|
)
|
|
$
|
(0.51
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding
|
|
|
101,269,274
|
|
|
|
84,073,593
|
|
|
|
83,342,333
|
|
|
|
81,600,478
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared per common share
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
Successor
|
|
|
Successor
|
|
|
Successor
|
|
|
Successor
|
|
|
Successor
|
|
|
Balance sheet data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
97
|
|
|
$
|
89
|
|
|
$
|
31
|
|
|
$
|
25
|
|
|
$
|
18
|
|
Working capital (deficit)(c)
|
|
|
(234
|
)
|
|
|
(250
|
)
|
|
|
(258
|
)
|
|
|
(301
|
)
|
|
|
(283
|
)
|
Total assets
|
|
|
1,217
|
|
|
|
1,294
|
|
|
|
1,590
|
|
|
|
1,925
|
|
|
|
2,061
|
|
Total long-term debt
|
|
|
472
|
|
|
|
598
|
|
|
|
608
|
|
|
|
594
|
|
|
|
|
|
Total shareholders equity/invested equity
|
|
|
190
|
|
|
|
130
|
|
|
|
438
|
|
|
|
738
|
|
|
|
1,267
|
|
|
|
|
(a) |
|
The combined results of the Successor and the Predecessor for
the periods in 2006 are not necessarily comparable due to the
change in basis of accounting resulting from the Blackstone
Acquisition and the associated change in capital structure. The
presentation of the results for the year ended December 31,
2006 on this combined basis does not comply with generally
accepted accounting principles in the United States
(GAAP); however, we believe that this provides
useful information to assess the relative performance of our
businesses in the periods presented in the financial statements
on an ongoing basis. The captions included within our
consolidated statements of operations that are materially
impacted by the change in basis of accounting primarily include
net revenue, depreciation and amortization and impairment of
goodwill and intangible assets. |
|
(b) |
|
Net loss per share may not recalculate due to rounding. |
|
(c) |
|
Defined as current assets less current liabilities. |
36
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations.
|
EXECUTIVE
OVERVIEW
General
We are a leading global online travel company (OTC)
that uses innovative technology to enable leisure and business
travelers to search for and book a broad range of travel
products and services. Our brand portfolio includes Orbitz,
CheapTickets, The Away Network and Orbitz for Business in the
United States; ebookers in Europe; and HotelClub and RatesToGo
(collectively referred to as HotelClub) based in
Australia, which have operations globally. We provide customers
with the ability to book a wide array of travel products and
services from suppliers worldwide, including air travel, hotels,
vacation packages, car rentals, cruises, travel insurance and
destination services such as ground transportation, event
tickets and tours. Our mission is to become one of the
worlds three primary hotel distribution platforms. See
Item 1, Business Company Strategy
for a discussion of our strategic initiatives.
We generate revenue primarily from the booking of travel
products and services on our websites. We provide customers the
ability to book travel products and services on both a
stand-alone basis and as part of a vacation package, primarily
through our merchant and retail business models. Under the
merchant model, we generate revenue for our services based on
the difference between the total amount the customer pays for
the travel product and the negotiated net rate plus estimated
taxes that the supplier charges us for that product. Under the
retail model, we earn commissions from suppliers for airline
tickets, hotel rooms, car rentals and other travel products and
services booked on our websites. Under both the merchant and
retail models, we may, depending upon the brand and the product,
earn revenue by charging our customers a service fee for booking
their travel reservation. We also earn revenue in the form of an
incentive payment for air, car and hotel segments that are
processed through a global distribution system (GDS).
We generate revenue through display advertising,
performance-based advertising and other marketing programs
available on our websites. In addition, we generate revenue
through our private label channel for the travel booked on
third-party websites. We in turn pay commissions to our private
label partners based on the revenue generated by their websites.
We also have an airline hosting business which earns revenue
through licensing or fee arrangements.
Industry
Trends
The recession significantly impacted the travel industry during
late 2008 and throughout 2009. Although the economy appeared to
have stabilized or slightly improved during 2010, there is still
uncertainty surrounding the timing and sustainability of a
recovery. As a result, we have limited visibility into when
travel industry fundamentals will fully recover.
In late 2008 and throughout 2009, occupancy rates and average
daily rates for hotel rooms (ADRs) declined globally
in response to lower demand for hotel rooms. Fundamentals in the
U.S. hotel industry have since begun to improve. In 2010,
we saw a
year-over-year
increase in ADRs for hotel rooms booked on our domestic
websites. And, in December 2010, we saw ADRs for hotel rooms
surpass 2008 levels for the first time since the recession
began. Hotel occupancy rates have also begun to improve.
Although higher ADRs increase the net revenue that OTCs earn on
hotel bookings, leisure travel demand could be lower as a
result. In addition, hotels are less likely to make promotional
inventory available for booking on OTCs websites in periods of
higher occupancy. Based on recent trends, we expect domestic
ADRs and occupancy rates will further increase in 2011. We have
also seen fundamentals improve in the European and Asia Pacific
hotel markets, with both occupancy levels and hotel ADRs rising
in 2010.
In 2009, in response to lower demand for air travel, certain
domestic and international airlines reduced ticket prices to
drive volume and significantly reduced their capacity. In 2010,
airlines added only limited amounts of capacity back into their
fleets. There are early signs that airlines will continue to add
some capacity in 2011, albeit at disciplined rates. Further
consolidation in the airline industry could put additional
pressure on capacity and on the number of airline tickets
available for booking on OTCs websites.
37
In 2010, air fares increased significantly over 2009 levels in
response to improved demand, particularly for corporate travel.
While air fares moderated in late 2010, we expect upward
pressure on air fares in 2011 as a result of rising fuel costs
and continued capacity constraints. In general, OTCs benefit
from low air fares because lower fares encourage leisure travel,
which represents the majority of our bookings. Our air net
revenue is primarily driven by the number of tickets we sell
rather than ticket prices.
In 2009, we, along with other OTCs, removed domestic booking
fees on most, if not all, flights and reduced booking fees on
hotels. The removal of air booking fees significantly reduced
the net revenue that OTCs generate from airline tickets.
However, these fee cuts resulted in a significant increase in
airline tickets sold through OTCs during the last three quarters
of 2009 and the first quarter of 2010. As a result of the
anniversary in early April 2010 of the air booking fee removals
on our domestic websites, our air transaction growth rate has
slowed. The higher air fare environment also contributed to this
slowdown.
Globally, airlines continue to look for ways to decrease their
overall costs, including the cost of distributing airline
tickets through OTCs and GDSs, and to increase their control
over distribution by taking actions such as pursuing direct
connect strategies, limiting forward distribution of their fares
to meta-search providers, such as Kayak, and limiting the extent
to which certain fare classes may be used in the construction of
multi-carrier itineraries. For example, in November 2010,
American Airlines (AA) terminated its participation
on our Orbitz.com and Orbitz for Business websites effective
December 2010 in pursuit of a direct connect relationship. In
January 2011, Expedia stopped selling AA tickets on its
Expedia.com and Hotwire.com websites, Sabre Holding Corp.
terminated its distribution contract with AA, and Priceline and
AA announced a direct connect agreement. The net revenue
associated with AA tickets booked on our Orbitz.com and Orbitz
for Business sites, including ancillary revenue from hotels, car
rentals, travel insurance and destination services, represented
approximately 5 percent of our total net revenue in 2010.
If other airlines pursue such strategies, the net revenue we
earn from air travel and other ancillary travel products could
reduce significantly. In addition, as certain supply agreements
renew and as airlines and GDSs renegotiate their agreements in
2011, the net revenue we earn from GDSs in the form of incentive
payments or from airlines in the form of commissions may be
negatively impacted.
In 2009, car rental companies had limited access to financing,
which caused them to reduce their rental car fleets. This
reduction in rental car fleets resulted in a significant
increase in ADRs for domestic car rentals in 2009. In 2010,
fleet sizes remained fairly constant, while ADRs declined year
over year. There is uncertainty surrounding rental car fleet
sizes and the corresponding trends in ADRs for car rentals for
2011.
We believe the domestic online travel market has matured.
However, internationally, the online travel industry continues
to benefit from increasing internet usage rates and growing
acceptance of online booking. As a result, we expect that
international growth rates for the online travel industry will
continue to outpace growth rates for online travel domestically.
OTCs make significant investments in marketing through both
online and traditional offline channels. Key areas of online
marketing include search engine marketing (SEM),
travel research, display advertising, affiliate programs and
customer relationship management (CRM). In 2010,
competition for search-engine key words intensified as economic
conditions improved and certain OTCs and travel suppliers
increased their marketing spending. The pending acquisition of
ITA Software, Inc. by Google could further intensify competition
and increase costs to acquire traffic. We are actively pursuing
strategies to enhance the effectiveness of our SEM and travel
research spending and to increase the amount of non-paid traffic
coming to our websites through SEO and CRM.
Other
Events
In April 2010, volcanic ash from an eruption in Iceland
significantly disrupted air travel to and from European
destinations. As a result of the volcanic ash, a significant
portion of European airspace was closed and several airports
halted flights. While we do not believe this travel disruption
materially impacted our financial results for the year ended
December 31, 2010, it did result in lost revenue due to
flight and hotel cancellations, higher customer service costs
and higher customer refunds.
38
RESULTS
OF OPERATIONS
This Managements Discussion and Analysis of Financial
Condition and Results of Operations should be read in
conjunction with our accompanying consolidated financial
statements and related notes.
Key
Operating Metrics
Our operating results are driven by certain key metrics, which
include transaction growth, hotel room night growth, gross
bookings and net revenue. Transaction growth is defined as the
year-over-year
change in transactions booked on our websites. Hotel room night
growth represents the
year-over-year
change in stayed hotel room nights and includes both stand-alone
hotel room nights and hotel room nights booked as part of a
vacation package. Gross bookings are defined as the total amount
paid by consumers for travel products booked on our websites.
Net revenue includes: commissions earned from suppliers under
our retail model; the difference between the total amount the
consumer pays us for travel and the negotiated net rate plus
estimated taxes that the supplier charges us for that travel
under our merchant model; service fees earned from consumers
under both our merchant and retail models; advertising revenue
and certain other fees and commissions, such as incentive
revenue earned for air, car and hotel segments processed through
GDSs.
Transactions, hotel room nights and gross bookings provide
insight into changes in overall travel demand, both
industry-wide and on our websites. We track net revenue trends
for our various brands, geographies and products to gain insight
into the performance of our business across these categories.
The table below shows our gross bookings, net revenue,
transaction growth and hotel room night growth for the years
ended December 31, 2010, December 31, 2009 and
December 31, 2008. Air gross bookings are comprised of
stand-alone air gross bookings, while non-air gross bookings
include gross bookings from hotels, car rentals, vacation
packages, cruises, destination services and travel insurance.
Air net revenue is comprised of net revenue from stand-alone air
bookings, while non-air net revenue includes net revenue from
hotel bookings, vacation packages, advertising and media and
other sources.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
$
|
|
|
%
|
|
|
December 31,
|
|
|
$
|
|
|
%
|
|
|
|
2010
|
|
|
2009
|
|
|
Change
|
|
|
Change
|
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
|
Change
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
Gross bookings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Air
|
|
$
|
7,297,431
|
|
|
$
|
6,359,267
|
|
|
$
|
938,164
|
|
|
|
15
|
%
|
|
$
|
6,359,267
|
|
|
$
|
6,724,634
|
|
|
$
|
(365,367
|
)
|
|
|
(5
|
)%
|
Non-air
|
|
|
2,266,324
|
|
|
|
2,143,912
|
|
|
|
122,412
|
|
|
|
6
|
%
|
|
|
2,143,912
|
|
|
|
2,155,262
|
|
|
|
(11,350
|
)
|
|
|
(1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total domestic gross bookings
|
|
|
9,563,755
|
|
|
|
8,503,179
|
|
|
|
1,060,576
|
|
|
|
12
|
%
|
|
|
8,503,179
|
|
|
|
8,879,896
|
|
|
|
(376,717
|
)
|
|
|
(4
|
)%
|
International
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Air
|
|
|
1,139,632
|
|
|
|
895,685
|
|
|
|
243,947
|
|
|
|
27
|
%
|
|
|
895,685
|
|
|
|
1,113,548
|
|
|
|
(217,863
|
)
|
|
|
(20
|
)%
|
Non-air
|
|
|
666,790
|
|
|
|
543,580
|
|
|
|
123,210
|
|
|
|
23
|
%
|
|
|
543,580
|
|
|
|
621,750
|
|
|
|
(78,170
|
)
|
|
|
(13
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total international gross bookings
|
|
|
1,806,422
|
|
|
|
1,439,265
|
|
|
|
367,157
|
|
|
|
26
|
%
|
|
|
1,439,265
|
|
|
|
1,735,298
|
|
|
|
(296,033
|
)
|
|
|
(17
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross bookings (a)
|
|
$
|
11,370,177
|
|
|
$
|
9,942,444
|
|
|
$
|
1,427,733
|
|
|
|
14
|
%
|
|
$
|
9,942,444
|
|
|
$
|
10,615,194
|
|
|
$
|
(672,750
|
)
|
|
|
(6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Air
|
|
$
|
204,750
|
|
|
$
|
213,993
|
|
|
$
|
(9,243
|
)
|
|
|
(4
|
)%
|
|
$
|
213,993
|
|
|
$
|
277,261
|
|
|
$
|
(63,268
|
)
|
|
|
(23
|
)%
|
Non-air
|
|
|
374,835
|
|
|
|
370,958
|
|
|
|
3,877
|
|
|
|
1
|
%
|
|
|
370,958
|
|
|
|
409,109
|
|
|
|
(38,151
|
)
|
|
|
(9
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total domestic net revenue
|
|
|
579,585
|
|
|
|
584,951
|
|
|
|
(5,366
|
)
|
|
|
(1
|
)%
|
|
|
584,951
|
|
|
|
686,370
|
|
|
|
(101,419
|
)
|
|
|
(15
|
)%
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
$
|
|
|
%
|
|
|
December 31,
|
|
|
$
|
|
|
%
|
|
|
|
2010
|
|
|
2009
|
|
|
Change
|
|
|
Change
|
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
|
Change
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
International
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Air
|
|
|
69,818
|
|
|
|
55,650
|
|
|
|
14,168
|
|
|
|
25
|
%
|
|
|
55,650
|
|
|
|
62,108
|
|
|
|
(6,458
|
)
|
|
|
(10
|
)%
|
Non-air
|
|
|
108,084
|
|
|
|
97,047
|
|
|
|
11,037
|
|
|
|
11
|
%
|
|
|
97,047
|
|
|
|
121,798
|
|
|
|
(24,751
|
)
|
|
|
(20
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total international net revenue
|
|
|
177,902
|
|
|
|
152,697
|
|
|
|
25,205
|
|
|
|
17
|
%
|
|
|
152,697
|
|
|
|
183,906
|
|
|
|
(31,209
|
)
|
|
|
(17
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue (b)
|
|
$
|
757,487
|
|
|
$
|
737,648
|
|
|
$
|
19,839
|
|
|
|
3
|
%
|
|
$
|
737,648
|
|
|
$
|
870,276
|
|
|
$
|
(132,628
|
)
|
|
|
(15
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction and hotel room night growth
|
Transaction growth (a)
|
|
|
7
|
%
|
|
|
4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hotel room night growth
|
|
|
8
|
%
|
|
|
4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
In the second quarter of 2010, we revised our methodology for
calculating global gross bookings and transactions to reduce
these amounts for all cancellations made through our websites.
Historically, we reported these amounts net of
same-day
cancellations only. As a result, the prior period amounts in the
table above have been updated to reflect this new methodology,
which more closely corresponds with the way we report net
revenue and is consistent with how management now reviews global
gross bookings and transactions. |
|
(b) |
|
For the years ended December 31, 2010, December 31,
2009 and December 31, 2008, $127.2 million,
$117.2 million and $117.1 million of our total net
revenue, respectively, was from incentive payments earned for
air, car and hotel segments processed through GDSs. |
Comparison
of the year ended December 31, 2010 to the year ended
December 31, 2009
Gross
Bookings
For our domestic business, which is comprised principally of
Orbitz and CheapTickets (collectively referred to as our
domestic leisure brands) and Orbitz for Business, total gross
bookings increased $1.1 billion, or 12%, for the year ended
December 31, 2010 compared with the year ended
December 31, 2009. Of the $1.1 billion increase,
$938.2 million was due to an increase in air gross
bookings, which was driven by higher air fares and higher
transaction volume. Transaction volume increased primarily due
to the removal of most air booking fees on our domestic leisure
websites in April 2009. Non-air gross bookings increased
$122.4 million, or 6%, for the year ended December 31,
2010 compared with the year ended December 31, 2009. This
increase was primarily driven by higher gross bookings for
hotels and car rentals, partially offset by lower gross bookings
for vacation packages. Gross bookings for hotels increased due
to higher transaction volume and, to a lesser extent, higher
ADRs. Gross bookings for car rentals increased due to higher
transaction volume, partially offset by lower ADRs. Vacation
package gross bookings declined primarily due to lower
transaction volume, partially offset by a higher average price
per transaction as a result of higher average air fares and
higher hotel ADRs.
For our international business, which is comprised principally
of ebookers and HotelClub, total gross bookings increased
$367.2 million, or 26%, for the year ended
December 31, 2010 compared with the year ended
December 31, 2009. Foreign currency fluctuations increased
gross bookings by $27.6 million. Excluding the impact of
foreign currency fluctuations, international gross bookings
increased $339.6 million due to a $256.8 million
increase in air gross bookings and an $82.8 million
increase in non-air gross bookings. The increase in air gross
bookings was primarily due to higher transaction volume,
partially offset by a lower average price per airline ticket as
a result of a shift towards short-haul flights and markets where
average booking values are lower. Higher gross bookings for both
vacation packages and hotels for ebookers drove the increase in
non-air gross bookings, which was partially offset by lower
hotel gross bookings for HotelClub. For ebookers, vacation
package gross bookings increased due to higher transaction
volume and, to a lesser extent, a higher average price per
transaction as a result of higher average air fares, and hotel
gross bookings increased due to higher transaction volume. Hotel
gross bookings for HotelClub declined due to lower transaction
volume and, to
40
a lesser extent, lower average price per transaction as a result
of a shift in the geographic mix of its bookings towards markets
where booking values are lower and where we earn lower margins.
Net
Revenue
See
discussion of net revenue in Results of Operations section below.
Transaction
and Hotel Room Night Growth
Our transactions grew by 7%
year-over-year
and stayed hotel room nights grew by 8%
year-over-year
in the year ended December 31, 2010. The
year-over-year
growth in transactions and hotel room nights was largely the
result of improvements we made to our customer value proposition
and our continued focus on global hotels. For our domestic
leisure brands, transactions and hotel room nights increased
primarily due to the removal of most air booking fees and a
significant reduction of hotel booking fees in April 2009 as
well as the growth of our private label channel. As a result of
the anniversary in early April 2010 of the fee removals and the
higher air fare environment, our transaction growth slowed
beginning in the second quarter of 2010. The transaction and
hotel room night growth for our domestic leisure brands was
offset in part by a significant decline in the second half of
2010 of the quality of traffic we received from a travel
research marketing partner and a reduction in the share we
received of the transactions generated by Kayak, a meta-search
marketing partner. We are actively working with our marketing
partners to address these issues. The migration of our hotel
booking path for our domestic leisure websites to the global
technology platform also partially offset the growth, as we are
still in the process of optimizing and fine tuning the platform.
For ebookers, the strength of our technology platform,
improvements in our European supply and higher online marketing
spending helped drive growth in transactions and stayed hotel
room nights. Orbitz for Business also had strong growth.
However, transactions and stayed hotel room nights for HotelClub
declined, particularly due to weakness in European destinations
and, to a lesser extent, in the Pacific, partially offset by
strength in Asia.
Comparison
of the year ended December 31, 2009 to the year ended
December 31, 2008
Gross
Bookings
For our domestic business, total gross bookings decreased
$376.7 million, or 4%, during the year ended
December 31, 2009 from the year ended December 31,
2008. Of the $376.7 million decrease, $365.4 million
was due to a decrease in air gross bookings, which was driven by
a lower average price per airline ticket, partially offset by
higher transaction volume. Transaction volume increased
primarily due to the removal of most air booking fees on our
domestic leisure websites in April 2009 and lower air fares. The
lower average price per airline ticket was primarily due to
lower fuel prices, weaker demand for air travel and our fee
removals.
Non-air gross bookings decreased $11.3 million during the
year ended December 31, 2009 from the year ended
December 31, 2008. This decrease was primarily driven by
lower gross bookings for hotels and car rentals, partially
offset by higher gross bookings for vacation packages. Gross
bookings for hotels decreased due to a significant decline in
ADRs for hotel rooms and a significant reduction in hotel
booking fees charged on our domestic leisure websites, which was
partially offset by higher transaction volume. In 2009, in
response to weak travel demand, most hotel suppliers tried to
stimulate occupancy by reducing ADRs. Gross bookings for car
rentals decreased due to lower transaction volume, partially
offset by a higher average price per transaction due primarily
to smaller fleets, which resulted from limited access to
financing by car rental companies. Volume for vacation packaging
increased due to a general shift in traveler preference towards
packaging from stand-alone travel products, because of the value
offered through packaging. Higher vacation packaging volume was
partially offset by a lower average price per transaction due
mainly to a decline in hotel ADRs and a decline in airline
ticket prices.
For our international business, total gross bookings decreased
$296.0 million, or 17%, during the year ended
December 31, 2009 from the year ended December 31,
2008. Of this decrease, $174.0 million was due to foreign
currency fluctuations. The remaining $122.0 million
decrease was due to a $100.8 million decrease in air gross
bookings and a $21.2 million decrease in non-air gross
bookings. The decrease in air gross bookings was primarily due
to a lower average price per airline ticket driven by lower
demand for air travel and a shift in customer preference towards
low cost carriers and short-haul flights. The decrease in
non-air gross bookings was primarily due to a significant
decline in hotel gross bookings for HotelClub. Lower
41
transaction volume for European destinations and a lower average
price per transaction, due to lower hotel ADRs and lower average
length of stay, drove the decrease in hotel gross bookings for
HotelClub. This decrease was partially offset by higher gross
bookings for both vacation packages and hotels for ebookers,
partially offset by a decrease in gross bookings for car rentals.
Net
Revenue
See
discussion of net revenue in Results of Operations section below.
Transaction
and Hotel Room Night Growth
Our transactions and stayed hotel room nights both grew by 4%
year-over-year
in the year ended December 31, 2009. The
year-over-year
growth in transactions and hotel room nights was largely the
result of improvements we made to our customer value
proposition. For our domestic leisure brands, in April 2009, we
removed most air booking fees and significantly reduced hotel
booking fees on our Orbitz.com and CheapTickets.com websites,
and in September 2009 we eliminated our hotel change and
cancellation fees on these same websites. In addition, we
launched two industry-leading, hotel-focused innovations, Orbitz
Hotel Price Assurance and Total Price hotel search results. For
ebookers, the strength of our technology platform and
improvements in our European supply helped drive growth in
transactions and stayed hotel room nights. Orbitz for Business
also had strong growth. Transactions and hotel room nights for
HotelClub decreased
year-over-year
due to weakness in European destinations.
Results
of Operations
Comparison
of the year ended December 31, 2010 to the year ended
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
$
|
|
|
%
|
|
|
|
2010
|
|
|
2009
|
|
|
Change
|
|
|
Change
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
Net revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Air
|
|
$
|
274,568
|
|
|
$
|
269,643
|
|
|
$
|
4,925
|
|
|
|
2
|
%
|
Hotel
|
|
|
203,821
|
|
|
|
183,658
|
|
|
|
20,163
|
|
|
|
11
|
%
|
Vacation package
|
|
|
115,161
|
|
|
|
117,026
|
|
|
|
(1,865
|
)
|
|
|
(2
|
)%
|
Advertising and media
|
|
|
49,353
|
|
|
|
59,534
|
|
|
|
(10,181
|
)
|
|
|
(17
|
)%
|
Other
|
|
|
114,584
|
|
|
|
107,787
|
|
|
|
6,797
|
|
|
|
6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
|
757,487
|
|
|
|
737,648
|
|
|
|
19,839
|
|
|
|
3
|
%
|
Cost and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
153,516
|
|
|
|
138,376
|
|
|
|
15,140
|
|
|
|
11
|
%
|
Selling, general and administrative
|
|
|
244,114
|
|
|
|
256,659
|
|
|
|
(12,545
|
)
|
|
|
(5
|
)%
|
Marketing
|
|
|
217,520
|
|
|
|
214,445
|
|
|
|
3,075
|
|
|
|
1
|
%
|
Depreciation and amortization
|
|
|
72,891
|
|
|
|
69,156
|
|
|
|
3,735
|
|
|
|
5
|
%
|
Impairment of goodwill and intangible assets
|
|
|
70,151
|
|
|
|
331,527
|
|
|
|
(261,376
|
)
|
|
|
(79
|
)%
|
Impairment of property and equipment and other assets
|
|
|
11,099
|
|
|
|
|
|
|
|
11,099
|
|
|
|
**
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
769,291
|
|
|
|
1,010,163
|
|
|
|
(240,872
|
)
|
|
|
(24
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(11,804
|
)
|
|
|
(272,515
|
)
|
|
|
260,711
|
|
|
|
(96
|
)%
|
Other (expense) income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest expense
|
|
|
(44,070
|
)
|
|
|
(57,322
|
)
|
|
|
13,252
|
|
|
|
(23
|
)%
|
Other income
|
|
|
18
|
|
|
|
2,115
|
|
|
|
(2,097
|
)
|
|
|
(99
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense
|
|
|
(44,052
|
)
|
|
|
(55,207
|
)
|
|
|
11,155
|
|
|
|
(20
|
)%
|
Loss before income taxes
|
|
|
(55,856
|
)
|
|
|
(327,722
|
)
|
|
|
271,866
|
|
|
|
(83
|
)%
|
Provision for income taxes
|
|
|
2,381
|
|
|
|
9,233
|
|
|
|
(6,852
|
)
|
|
|
(74
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(58,237
|
)
|
|
$
|
(336,955
|
)
|
|
$
|
278,718
|
|
|
|
(83
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percent of net revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
20
|
%
|
|
|
19
|
%
|
|
|
|
|
|
|
|
|
Selling, general and administrative expense
|
|
|
32
|
%
|
|
|
35
|
%
|
|
|
|
|
|
|
|
|
Marketing expense
|
|
|
29
|
%
|
|
|
29
|
%
|
|
|
|
|
|
|
|
|
42
Net
Revenue
Net revenue increased $19.8 million, or 3%, for the year
ended December 31, 2010 compared with the year ended
December 31, 2009.
Air. Net revenue from air bookings increased
$4.9 million, or 2%, for the year ended December 31,
2010 compared with the year ended December 31, 2009.
Foreign currency fluctuations had a nominal impact on the
increase in air net revenue.
Domestic air net revenue decreased $17.3 million due to
lower average net revenue per airline ticket, which was
partially offset by an $8.1 million increase in domestic
air net revenue due to higher transaction volume. The lower
average net revenue per airline ticket was primarily driven by
the elimination of most air booking fees on our domestic leisure
websites in April 2009. Higher net revenue per airline ticket
from merchant air transactions and higher commissions from those
airlines with variable commission structures, both of which were
the result of higher average air fares, and the reduction to the
unfavorable contract liability as a result of the termination of
the Charter Associate Agreement between American Airlines and us
effective December 2010 (see Note 9 Unfavorable
Contracts of the Notes to Consolidated Financial Statements)
partially offset the lower net revenue per airline ticket. The
higher transaction volume primarily resulted from the removal of
most booking fees.
International air net revenue increased $14.1 million
(excluding the impact of foreign currency fluctuations)
primarily due to higher transaction volume, partially offset by
lower average net revenue per airline ticket. The lower average
net revenue per airline ticket was primarily driven by lower air
override revenue, which represents incentive-based commissions
received from certain suppliers when volume thresholds are met,
and a shift in air bookings towards markets where average
booking values are lower and where we earn lower margins,
partially offset by higher credit card fee revenue.
Hotel. Net revenue from hotel bookings
increased $20.2 million, or 11%, for the year ended
December 31, 2010 compared with the year ended
December 31, 2009. Foreign currency fluctuations drove
$6.8 million of this increase. The increase in net revenue
from hotel bookings, excluding the impact of foreign currency
fluctuations, was $13.4 million.
Domestic hotel net revenue increased $14.0 million due to
higher transaction volume and $1.3 million due to higher
average net revenue per transaction. The higher average net
revenue per hotel transaction was driven by higher hotel ADRs,
fewer promotional coupons issued by us, more timely receipt of
customer refund reimbursements from hotels and higher payment
vendor rebates, partially offset by a significant reduction in
hotel booking fees charged on our domestic leisure websites and
a lower average length of stay.
International hotel net revenue declined $1.9 million
(excluding the impact of foreign currency fluctuations)
primarily due to a decline in hotel net revenue for HotelClub
driven by lower average net revenue per transaction and lower
transaction volume for European destinations and, to a lesser
extent, in the Pacific. The lower average net revenue per
transaction was primarily driven by a shift in the geographic
mix of HotelClubs bookings away from European destinations
and towards markets where average booking values are lower and
where we earn lower margins. A change in our estimate of the
redemption rate for points earned under the loyalty program at
HotelClub also contributed to the lower net revenue per
transaction. The decline at HotelClub was partially offset by an
increase in hotel net revenue at ebookers primarily due to
higher transaction volume due to improved functionality of our
technology platform and improvements to our European hotel
supply.
Vacation package. Net revenue from vacation
package bookings decreased $1.9 million, or 2%, for the
year ended December 31, 2010 compared with the year ended
December 31, 2009. Vacation package net revenue decreased
by $0.2 million due to foreign currency fluctuations. The
decrease in net revenue from vacation package bookings,
excluding the impact of foreign currency fluctuations, was
$1.7 million.
Lower transaction volume due in part to higher average package
prices drove an $8.1 million decrease in domestic vacation
package net revenue. This decline was partially offset by a
$1.2 million increase in domestic vacation package net
revenue due to higher average net revenue per transaction, as a
result of higher average
43
air fares, higher ADRs and fewer promotional coupons issued by
us, partially offset by lower hotel breakage revenue.
International net revenue from vacation packages (excluding the
impact of foreign currency fluctuations) increased
$5.2 million primarily due to higher transaction volume.
Advertising and media. Advertising and media
net revenue decreased $10.2 million, or 17%, for the year
ended December 31, 2010 compared with the year ended
December 31, 2009. This decrease is primarily due to a
$13.1 million decline in net revenue from membership
discount programs which we discontinued on our domestic leisure
websites effective March 31, 2010. We do not expect to
generate any material net revenue from third party membership
discount programs on our websites in the future. This decrease
was offset in part by additional advertising and media revenue
driven by our ongoing efforts to monetize our websites globally.
Other. Other net revenue is comprised
primarily of net revenue from car bookings, cruise bookings,
destination services, travel insurance and our hosting business.
Other net revenue increased $6.8 million, or 6%, for the
year ended December 31, 2010 compared with the year ended
December 31, 2009.
The increase in other net revenue was primarily driven by higher
global travel insurance revenue and higher car net revenue for
our domestic leisure brands. Travel insurance revenue increased
primarily due to a change in estimate related to the timing of
our recognition of this revenue. Historically, we recorded
travel insurance revenue one month in arrears, upon receipt of
payment, as we did not have sufficient reporting from our travel
insurance supplier to conclude that the price was fixed or
determinable prior to that time. However, in the first quarter
of 2010, our travel insurance supplier implemented more timely
reporting, and as a result, we are now able to recognize travel
insurance revenue on an accrual basis rather than one month in
arrears. Travel insurance revenue further increased due to a
higher attachment rate, higher average air fares and higher air
transaction volume. Car net revenue for our domestic leisure
brands increased primarily due to higher transaction volume,
partially offset by lower average daily rates for car rentals.
These increases were partially offset by a $6.3 million
decline in hosting revenue due primarily to the termination of
one of our airline hosting agreements in 2010.
Cost of
Revenue
Our cost of revenue is primarily comprised of costs to operate
our customer service call centers, credit card processing fees,
customer refunds and charge-backs, commissions to private label
partners (affiliate commissions) and connectivity
and other processing costs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
$
|
|
|
%
|
|
|
|
2010
|
|
|
2009
|
|
|
Change
|
|
|
Change
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer service costs
|
|
$
|
56,102
|
|
|
$
|
53,179
|
|
|
$
|
2,923
|
|
|
|
5
|
%
|
Credit card processing fees
|
|
|
44,163
|
|
|
|
39,562
|
|
|
|
4,601
|
|
|
|
12
|
%
|
Other
|
|
|
53,251
|
|
|
|
45,635
|
|
|
|
7,616
|
|
|
|
17
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
$
|
153,516
|
|
|
$
|
138,376
|
|
|
$
|
15,140
|
|
|
|
11
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in cost of revenue was primarily driven by a
$2.9 million increase in customer service costs, a
$4.6 million increase in credit card processing costs, a
$5.7 million increase in customer refunds and charge-backs
and a $4.6 million increase in affiliate commissions,
partially offset by a $1.7 million decrease in costs
related to our airline hosting business and a $0.3 million
decrease in connectivity and processing costs.
Customer service costs increased primarily due to higher
customer service staffing levels required to support the higher
volume of air transactions we experienced following our
elimination of most air booking fees on our domestic leisure
websites in April 2009. Our customer service staffing levels
relative to volume were lower in 2009 compared with 2010, as it
took us several months to increase staffing levels at our call
centers to support the sharply higher transaction volumes we
experienced following the fee removals.
44
Customer service costs also increased due to higher call volumes
as a result of the travel disruptions caused by the volcano
eruption in Iceland in April 2010. The increase in credit card
processing costs and customer refunds and charge-backs was
primarily due to growth in our merchant hotel and merchant air
gross bookings in 2010. Customer refunds also increased as a
result of the volcano eruption. Affiliate commissions increased
due to the growth of our private label channel. The decrease in
costs related to our airline hosting business resulted from the
termination of one of our hosting agreements in 2010.
Connectivity and processing costs decreased primarily due to
more favorable pricing terms with one of our GDS providers at
ebookers, partially offset by an increase in search fees and
retail hotel commission processing fees for our domestic leisure
brands due to higher transaction volume.
Selling,
General and Administrative
Our selling, general and administrative expense is primarily
comprised of wages and benefits, contract labor costs and
network communications, systems maintenance and equipment costs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
$
|
|
|
%
|
|
|
|
2010
|
|
|
2009
|
|
|
Change
|
|
|
Change
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wages and benefits(a)
|
|
$
|
146,754
|
|
|
$
|
160,014
|
|
|
$
|
(13,260
|
)
|
|
|
(8
|
)%
|
Contract labor(a)
|
|
|
20,245
|
|
|
|
20,736
|
|
|
|
(491
|
)
|
|
|
(2
|
)%
|
Network communications, systems maintenance and equipment
|
|
|
25,051
|
|
|
|
26,657
|
|
|
|
(1,606
|
)
|
|
|
(6
|
)%
|
Other
|
|
|
52,064
|
|
|
|
49,252
|
|
|
|
2,812
|
|
|
|
6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total selling, general, and administrative
|
|
$
|
244,114
|
|
|
$
|
256,659
|
|
|
$
|
(12,545
|
)
|
|
|
(5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
The amounts presented above for wages and benefits and contract
labor are net of amounts capitalized. |
The decrease in selling, general and administrative expense was
primarily driven by a $13.3 million decrease in wages and
benefits expense, a $1.6 million decrease in network
communications, systems maintenance and equipment costs and a
$1.2 million decrease in facilities costs, partially offset
by a $2.0 million increase in travel expenses and a
$1.6 million increase in foreign currency losses and
hedging costs.
Wages and benefits decreased due to lower severance and lower
employee incentive compensation expense. Network communications,
systems maintenance and equipment costs declined due to cost
cutting efforts. Facilities costs declined primarily due to the
renegotiation of more favorable lease terms for certain office
space leased by ebookers.
Marketing
Our marketing expense is primarily comprised of online marketing
costs, such as search and banner advertising, and offline
marketing costs, such as television, radio and print
advertising. Our investment in online marketing is significantly
greater than our investment in offline marketing. Marketing
expense increased $3.1 million, or 1%, for the year ended
December 31, 2010 compared with the year ended
December 31, 2009. The increase was primarily due to higher
online marketing spending driven by higher transaction volume
for ebookers and a higher cost per transaction for HotelClub.
Lower global offline marketing costs and lower online marketing
costs for our domestic leisure brands, as a result of our
ongoing efforts to improve the efficiency of our SEM and travel
research spending, partially offset the increase.
Depreciation
and Amortization
Depreciation and amortization increased $3.7 million, or
5%, for the year ended December 31, 2010 compared with the
year ended December 31, 2009. The increase in depreciation
and amortization was due in part to additional assets placed in
service and the acceleration of depreciation on certain assets
whose useful
45
lives were shortened during the year ended December 31,
2010. This increase was partially offset by lower amortization
due to the expiration of the useful lives of certain customer
relationship intangible assets during the third quarter of 2010
(see Note 5 - Goodwill and Intangible Assets of the Notes
to Consolidated Financial Statements).
Impairment
of Goodwill and Intangible Assets
During the year ended December 31, 2010, in connection with
our annual impairment test for goodwill and intangible assets
and as a result of lower than expected performance and future
cash flows for HotelClub and CheapTickets, we recorded a
non-cash impairment charge of $70.2 million, of which
$41.8 million was to impair the goodwill of HotelClub and
$28.4 million was to impair the trademarks and trade names
associated with HotelClub and CheapTickets.
During the three months ended March 31, 2009, we
experienced a significant decline in our stock price, and
economic and industry conditions continued to weaken. These
factors, coupled with an increase in competitive pressures,
indicated potential impairment of our goodwill and trademarks
and trade names. As a result, in connection with the preparation
of our financial statements for the first quarter of 2009, we
recorded a non-cash impairment charge of $331.5 million, of
which $249.4 million related to goodwill and
$82.1 million related to trademarks and trade names.
Impairment
of Property and Equipment and Other Assets
During the year ended December 31, 2010, as a result of our
decision in the fourth quarter of 2010 to migrate HotelClub to
the global technology platform, we recorded a non-cash charge of
$4.5 million to impair capitalized software assets for
HotelClub (see Note 3 Impairment of Goodwill
and Intangible Assets of the Notes to Consolidated Financial
Statements). We also recorded non-cash charges totaling
$6.6 million to impair assets related to in-kind marketing
and promotional support we expected to receive under our Charter
Associate Agreements (see Note 9 Unfavorable
Contracts of the Notes to Consolidated Financial Statements).
There were no similar impairment charges recorded during the
year ended December 31, 2009.
Net
Interest Expense
Net interest expense decreased by $13.3 million, or 23%,
for the year ended December 31, 2010 compared with the year
ended December 31, 2009. The decrease in net interest
expense was primarily due to a lower effective interest rate on
the term loan as a result of a floating to fixed interest rate
swap maturing on December 31, 2009 and to a lesser extent,
lower amounts outstanding on both the term loan and the
revolving credit facility. During the year ended
December 31, 2010 and December 31, 2009, non-cash
interest expense totaled $15.8 million and
$15.5 million, respectively.
Other
Income
Other income decreased by $2.1 million for the year ended
December 31, 2010 compared with the year ended
December 31, 2009. During the year ended December 31,
2009, we recorded a $2.2 million gain on extinguishment of
a portion of the term loan (see Note 7 Term
Loan and Revolving Credit Facility of the Notes to Consolidated
Financial Statements).
Provision
for Income Taxes
We recorded a tax provision of $2.4 million and
$9.2 million for the years ended December 31, 2010 and
December 31, 2009, respectively. The provision for income
taxes for the year ended December 31, 2010 was primarily
due to taxes on the net income of certain European-based
subsidiaries that had not established a valuation allowance and
U.S., state and local income taxes. The provision for income
taxes for the year ended December 31, 2009 was primarily
due to a full valuation allowance established against the
deferred tax assets of HotelClub.
The tax provisions recorded for the years ended
December 31, 2010 and December 31, 2009 were
disproportionate to the amount of pre-tax net loss incurred
during each respective period primarily because we
46
were not able to realize any tax benefits on the goodwill and
trademark and trade names impairment charges. The provision for
income taxes for the years ended December 31, 2010 and
December 31, 2009 only includes the tax effect of the net
income or net loss of certain foreign subsidiaries that had not
established a valuation allowance and U.S., state and local
income taxes. The provision for income taxes for the year ended
December 31, 2009 also includes the tax provision related
to the valuation allowance established against the deferred tax
assets of our Australia-based business.
Comparison
of the year ended December 31, 2009 to the year ended
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
$
|
|
|
%
|
|
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
|
Change
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
Net revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Air
|
|
$
|
269,643
|
|
|
$
|
339,369
|
|
|
$
|
(69,726
|
)
|
|
|
(21
|
)%
|
Hotel
|
|
|
183,658
|
|
|
|
239,267
|
|
|
|
(55,609
|
)
|
|
|
(23
|
)%
|
Vacation package
|
|
|
117,026
|
|
|
|
114,077
|
|
|
|
2,949
|
|
|
|
3
|
%
|
Advertising and media
|
|
|
59,534
|
|
|
|
59,532
|
|
|
|
2
|
|
|
|
|
|
Other
|
|
|
107,787
|
|
|
|
118,031
|
|
|
|
(10,244
|
)
|
|
|
(9
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
|
737,648
|
|
|
|
870,276
|
|
|
|
(132,628
|
)
|
|
|
(15
|
)%
|
Cost and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
138,376
|
|
|
|
163,335
|
|
|
|
(24,959
|
)
|
|
|
(15
|
)%
|
Selling, general and administrative
|
|
|
256,659
|
|
|
|
271,562
|
|
|
|
(14,903
|
)
|
|
|
(5
|
)%
|
Marketing
|
|
|
214,445
|
|
|
|
309,980
|
|
|
|
(95,535
|
)
|
|
|
(31
|
)%
|
Depreciation and amortization
|
|
|
69,156
|
|
|
|
66,480
|
|
|
|
2,676
|
|
|
|
4
|
%
|
Impairment of goodwill and intangible assets
|
|
|
331,527
|
|
|
|
296,989
|
|
|
|
34,538
|
|
|
|
12
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
1,010,163
|
|
|
|
1,108,346
|
|
|
|
(98,183
|
)
|
|
|
(9
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(272,515
|
)
|
|
|
(238,070
|
)
|
|
|
(34,445
|
)
|
|
|
14
|
%
|
Other (expense) income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest expense
|
|
|
(57,322
|
)
|
|
|
(62,467
|
)
|
|
|
5,145
|
|
|
|
(8
|
)%
|
Other income
|
|
|
2,115
|
|
|
|
20
|
|
|
|
2,095
|
|
|
|
**
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense
|
|
|
(55,207
|
)
|
|
|
(62,447
|
)
|
|
|
7,240
|
|
|
|
(12
|
)%
|
Loss before income taxes
|
|
|
(327,722
|
)
|
|
|
(300,517
|
)
|
|
|
(27,205
|
)
|
|
|
9
|
%
|
Provision (benefit) for income taxes
|
|
|
9,233
|
|
|
|
(1,955
|
)
|
|
|
11,188
|
|
|
|
**
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(336,955
|
)
|
|
$
|
(298,562
|
)
|
|
$
|
(38,393
|
)
|
|
|
13
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percent of net revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
19
|
%
|
|
|
19
|
%
|
|
|
|
|
|
|
|
|
Selling, general and administrative expense
|
|
|
35
|
%
|
|
|
31
|
%
|
|
|
|
|
|
|
|
|
Marketing expense
|
|
|
29
|
%
|
|
|
36
|
%
|
|
|
|
|
|
|
|
|
Net
Revenue
Net revenue decreased $132.6 million, or 15%, for the year
ended December 31, 2009 compared with the year ended
December 31, 2008.
Air. Net revenue from air bookings decreased
$69.7 million, or 21%, for the year ended December 31,
2009 compared with the year ended December 31, 2008.
Foreign currency fluctuations drove $6.1 million of this
decrease. The decrease in net revenue from air bookings,
excluding the impact of foreign currency fluctuations, was
$63.6 million.
47
Domestic air net revenue decreased $80.4 million due to
lower average net revenue per airline ticket, partially offset
by a $17.2 million increase in domestic air net revenue due
to higher transaction volume. Net revenue per airline ticket
declined primarily due to the elimination of most air booking
fees on our domestic leisure websites in April 2009 and, to a
much lesser extent, due to a reduction in paper tickets and an
increase in refunds issued for Orbitz Price
Assurancesm
due to the full year impact of the program, which we launched in
June 2008. The higher transaction volume resulted primarily from
the removal of booking fees and lower air fares.
International air net revenue decreased $0.4 million
(excluding the impact of foreign currency fluctuations)
primarily due to lower net revenue per airline ticket, partially
offset by higher transaction volume. The decrease in net revenue
per airline ticket is primarily due to lower average air fares
and a shift in customer preference towards low cost carriers and
short-haul flights.
Hotel. Net revenue from hotel bookings
decreased $55.6 million, or 23%, for the year ended
December 31, 2009 compared with the year ended
December 31, 2008. Foreign currency fluctuations drove
$8.8 million of this decrease. The decrease in net revenue
from hotel bookings, excluding the impact of foreign currency
fluctuations, was $46.8 million.
A decrease in average net revenue per transaction resulted in a
$31.6 million decrease in domestic hotel net revenue.
Average net revenue per transaction decreased primarily due to
lower ADRs, a significant reduction in hotel booking fees
charged on our websites and a reduction in hotel breakage
revenue. This decrease was partially offset by a
$1.9 million increase in hotel net revenue due to higher
transaction volume, which resulted primarily from the reduction
in hotel booking fees and lower ADRs.
International hotel net revenue declined $17.1 million
(excluding the impact of foreign currency fluctuations)
primarily due to lower transaction volume and lower average net
revenue per transaction for HotelClub. The lower volume was
driven by poor performance at HotelClub for European
destinations and more intense competition in the industry. Lower
net revenue per transaction was driven by lower ADRs, lower
average length of hotel stays and a shift in the geographic mix
of bookings towards markets where average booking values are
lower and where we earn lower margins. The decline for HotelClub
was partially offset by an increase in hotel net revenue for
ebookers, which was primarily driven by higher transaction
volume.
Vacation package. Net revenue from vacation
package bookings increased $2.9 million, or 3%, for the
year ended December 31, 2009 compared with the year ended
December 31, 2008. Foreign currency fluctuations decreased
net revenue from vacation package bookings by $0.6 million.
The increase in net revenue from vacation package bookings,
excluding the impact of foreign currency fluctuations, was
$3.5 million.
Lower average net revenue per transaction drove a
$22.2 million decrease in domestic net revenue from
vacation packages, which was partially offset by a
$20.1 million increase due to higher volume. Net revenue
per transaction decreased mainly due to lower ADRs, a
significant reduction in hotel booking fees charged on our
websites and a reduction in hotel breakage revenue. Volume for
vacation packages increased due to a shift in customer
preference from stand-alone travel products towards vacation
packages.
The increase in international vacation package net revenue
(excluding the impact of foreign currency fluctuations) was
$5.6 million and was primarily driven by higher transaction
volume.
Advertising and media. Advertising and media
net revenue remained flat for each of the years ended
December 31, 2009 and December 31, 2008 due to a
general reduction in online display advertising spending by
companies and our focus on driving transaction growth and
optimizing our mix of advertising, media and transaction revenue
during 2009.
Other. Other net revenue decreased
$10.2 million, or 9%, for the year ended December 31,
2009 compared with the year ended December 31, 2008.
Foreign currency fluctuations decreased other net revenue by
$2.2 million. The decrease in other net revenue, excluding
the impact of foreign currency fluctuations, was
$8.0 million.
48
A decline in global car net revenue and travel insurance net
revenue primarily drove the decrease in other net revenue. The
decline in car net revenue was driven by lower volume, partially
offset by higher net revenue per car booking. More favorable
agreements with certain car rental suppliers and higher car ADRs
drove the higher net revenue per car booking. The decrease in
travel insurance revenue was primarily due to lower air fares
and lower incentives, partially offset by an increase in air and
vacation package transaction volume.
Cost of
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
$
|
|
|
%
|
|
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
|
Change
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer service costs
|
|
$
|
53,179
|
|
|
$
|
61,240
|
|
|
$
|
(8,061
|
)
|
|
|
(13
|
)%
|
Credit card processing fees
|
|
|
39,562
|
|
|
|
42,616
|
|
|
|
(3,054
|
)
|
|
|
(7
|
)%
|
Other
|
|
|
45,635
|
|
|
|
59,479
|
|
|
|
(13,844
|
)
|
|
|
(23
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
$
|
138,376
|
|
|
$
|
163,335
|
|
|
$
|
(24,959
|
)
|
|
|
(15
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The decrease in cost of revenue was primarily driven by an
$8.1 million decrease in customer service costs, a
$3.1 million decrease in credit card processing costs, an
$11.3 million decrease in customer refunds and charge-backs
and a $2.1 million decrease in ticketing and fulfillment
costs.
Customer service costs decreased primarily due to cost savings
driven by reductions in headcount and contract labor and
increased automation of the handling of customer service calls.
In the second half of 2009, we increased our customer service
staffing levels to support the higher volume of air transactions
we had generated since the elimination of booking fees in April
2009 on most flights booked through our domestic leisure
websites. The decrease in credit card processing costs was
primarily due to a decline in our merchant gross bookings and
air booking fees.
During the year ended December 31, 2008, we had a higher
level of charge-backs primarily due to sharply higher fraudulent
credit card usage at one of our international locations. To
address this issue, we installed new revenue protection software
and instituted tighter security measures during the second
quarter of 2008. As a result, we experienced a significant
decline in charge-backs since that time. Customer refunds also
decreased, primarily due to our efforts to improve the customer
experience, which have reduced the number of incidents in which
customer refunds were required.
Ticketing and fulfillment costs decreased as the industry
continued to move towards electronic ticketing to meet the
International Air Transport Association mandate to eliminate
paper tickets.
Selling,
General and Administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
$
|
|
|
%
|
|
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
|
Change
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wages and benefits(a)
|
|
$
|
160,014
|
|
|
$
|
160,237
|
|
|
$
|
(223
|
)
|
|
|
|
|
Contract labor(a)
|
|
|
20,736
|
|
|
|
33,681
|
|
|
|
(12,945
|
)
|
|
|
(38
|
)%
|
Network communications, systems maintenance and equipment
|
|
|
26,657
|
|
|
|
33,411
|
|
|
|
(6,754
|
)
|
|
|
(20
|
)%
|
Other
|
|
|
49,252
|
|
|
|
44,233
|
|
|
|
5,019
|
|
|
|
11
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total selling, general, and administrative
|
|
$
|
256,659
|
|
|
$
|
271,562
|
|
|
$
|
(14,903
|
)
|
|
|
(5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
The amounts presented above for wages and benefits and contract
labor are net of amounts capitalized. |
49
The decrease in selling, general and administrative expense was
primarily driven by a $12.9 million decrease in contract
labor costs, a $6.8 million decrease in network
communications, systems maintenance and equipment costs, a
$3.1 million decrease in travel expenses and a
$1.5 million decrease in professional fees, partially
offset by the absence of $13.8 million of income recorded
in 2008 as a result of the reduction in the present value of our
tax sharing liability following a reduction in our effective
state income tax rate (see Note 8 Tax Sharing
Liability of the Notes to Consolidated Financial Statements).
The remaining decrease in selling, general and administrative
expense was due to decreases in foreign currency losses and
other operating expenses.
Our network communications, systems maintenance and equipment
costs, our use of contract labor and our travel costs decreased
as a result of expense reductions we undertook to manage through
the economic recession and industry downturn. Professional fees
decreased due to lower audit fees and lower tax consulting costs
as a result of completing the post-IPO transition to an in-house
corporate tax department, partially offset by higher legal fees.
Wages and benefits expense remained relatively flat. The
decrease in wages and benefits expense that resulted from the
global work force reductions that we undertook was offset by
severance and additional equity-based compensation expense that
we incurred in connection with these work force reductions and
the departure of the Companys former Chief Executive
Officer as well as higher employee incentive compensation
expense.
Marketing
Marketing expense decreased $95.5 million, or 31%, for the
year ended December 31, 2009 compared with the year ended
December 31, 2008. This decrease was driven by lower online
and offline marketing costs globally. The decrease in online
marketing costs was primarily driven by a change in our approach
to online marketing, placing greater emphasis on attracting more
traffic to our websites through SEO and CRM and improving the
efficiency of our SEM and travel research spending. The decrease
in offline marketing costs was mainly due to cost reductions
taken by us in order to manage through the economic recession
and industry downturn.
Depreciation
and Amortization
Depreciation and amortization increased $2.7 million, or
4%, for the year ended December 31, 2009 compared with the
year ended December 31, 2008. The increase in depreciation
and amortization was primarily due to the acceleration of
depreciation on certain assets whose useful lives were shortened
during the year ended December 31, 2009 and additional
assets placed in service during the period.
Impairment
of Goodwill and Intangible Assets
During the three months ended March 31, 2009, we
experienced a significant decline in our stock price, and
economic and industry conditions continued to weaken. These
factors, coupled with an increase in competitive pressures,
indicated potential impairment of our goodwill and trademarks
and trade names. As a result, in connection with the preparation
of our financial statements for the first quarter of 2009, we
recorded a non-cash impairment charge of $331.5 million, of
which $249.4 million related to goodwill and
$82.1 million related to trademarks and trade names.
During the year ended December 31, 2008, in connection with
our annual planning process, we lowered our long-term earnings
forecast in response to changes in the economic environment,
including the potential future impact of airline capacity
reductions, increased fuel prices and a weakening global
economy. These factors, coupled with a prolonged decline in our
market capitalization, indicated potential impairment of our
goodwill and trademarks and trade names. Additionally, given the
economic environment, our distribution partners were under
increased pressure to reduce their overall costs and could have
attempted to terminate or renegotiate their agreements with us
on more favorable terms to them. These factors indicated that
the carrying value of certain of our finite-lived intangible
assets, specifically customer relationships, may not be
recoverable. As a result, we recorded a non-cash impairment
charge of $297.0 million, of which $209.8 million
50
related to goodwill, $74.2 million related to trademarks
and trade names and $13.0 million related to customer
relationships. See Note 3 Impairment of
Goodwill and Intangible Assets of the Notes to Consolidated
Financial Statements.
Net
Interest Expense
Net interest expense decreased by $5.1 million, or 8%, for
the year ended December 31, 2009 compared with the year
ended December 31, 2008. The decrease in net interest
expense was primarily due to lower interest expense incurred on
the term loan, which was primarily driven by lower interest
rates. A decrease in interest expense accreted on the tax
sharing liability also contributed to the decrease. These
decreases were partially offset by a decline in interest income
earned. During the years ended December 31, 2009 and
December 31, 2008, $15.5 million and
$18.1 million of the total net interest expense recorded
was non-cash, respectively.
Other
Income
During the year ended December 31, 2009, we purchased and
retired $10.0 million in principal amount of the term loan.
The principal amount of the term loan purchased (net of
associated unamortized debt issuance costs of $0.1 million)
exceeded the amount we paid to purchase the debt (inclusive of
miscellaneous fees incurred) by $2.2 million. Accordingly,
we recorded a $2.2 million gain on extinguishment of this
portion of the term loan during the year ended December 31,
2009. There was no gain on extinguishment of debt recorded
during the year ended December 31, 2008 (see
Note 7 Term Loan and Revolving Credit Facility
of the Notes to Consolidated Financial Statements).
Provision
(Benefit) for Income Taxes
We recorded a tax provision of $9.2 million for the year
ended December 31, 2009 and a tax benefit of
$2.0 million for the year ended December 31, 2008. The
provision for income taxes for the year ended December 31,
2009 was primarily due to a full valuation allowance established
against the deferred tax assets of our Australia-based business.
The provision for income tax for the year ended
December 31, 2009 and the tax benefit for the year ended
December 31, 2008 were each disproportionate to the amount
of pre-tax net loss incurred during each respective period
because we were not able to realize any tax benefits on the
goodwill impairment charge and only a limited amount of tax
benefit on the trademarks and trade names impairment charge,
which were recorded during each year. The tax benefit recorded
for the year ended December 31, 2008 related to certain of
our international subsidiaries.
Related
Party Transactions
For a discussion of certain relationships and related party
transactions, see Note 17 - Related Party Transactions of
the Notes to Consolidated Financial Statements.
Seasonality
For a discussion of seasonal fluctuations in the demand for the
products and services we offer, see Item 1,
Business Seasonality.
LIQUIDITY
AND CAPITAL RESOURCES
Liquidity
Our principal sources of liquidity are our cash flows from
operations, cash and cash equivalents, and borrowings under our
$85.0 million revolving credit facility, which was
effectively reduced to a $72.5 million revolving credit
facility following the bankruptcy of Lehman Commercial Paper
Inc. in October 2008 (Revolver). At
December 31, 2010 and December 31, 2009, our cash and
cash equivalents balances were $97.2 million and
$88.7 million, respectively. We had $60.1 million and
$25.8 million of availability under the
51
Revolver at December 31, 2010 and December 31, 2009,
respectively. Total available liquidity from cash and cash
equivalents and the Revolver was $157.3 million and
$114.5 million at December 31, 2010 and
December 31, 2009, respectively.
We require letters of credit to support certain commercial
agreements, leases and certain regulatory agreements. The
majority of these letters of credit have been issued by
Travelport on our behalf. At December 31, 2010 and
December 31, 2009, there were $72.3 million and
$59.3 million of outstanding letters of credit issued by
Travelport on our behalf, respectively, pursuant to the
Separation Agreement, as amended, that we entered into with
Travelport in connection with the IPO (the Separation
Agreement). Under the Separation Agreement, Travelport has
agreed to issue U.S. Dollar denominated letters of credit
on our behalf in an aggregate amount not to exceed
$75.0 million so long as Travelport and its affiliates (as
defined in the Separation Agreement) own at least 50% of our
voting stock.
In addition, at December 31, 2010 and December 31,
2009, there were the equivalent of $12.4 million and
$4.5 million of outstanding letters of credit issued under
the Revolver, respectively, which were denominated in Pounds
Sterling. The amount of letters of credit issued under the
Revolver reduces the amount available to us for borrowings.
Under our merchant model, customers generally pay us for
reservations at the time of booking, and we pay our suppliers at
a later date, which is generally when the customer uses the
reservation, except in the case of merchant air which may occur
prior to the consumption date. Initially, we record these
customer receipts as accrued merchant payables and either
deferred income or net revenue, depending on the travel product.
The timing difference between when cash is collected from our
customers and when payments are made to our suppliers improves
our operating cash flow and represents a source of liquidity for
us. If our merchant model gross bookings increase, we would
expect our operating cash flow to increase. Conversely, if our
merchant model gross bookings decline or there are changes to
the model which reduce the time between the receipt of cash from
our customers and payments to suppliers, we would expect our
operating cash flow to decline.
Historically, under both our merchant and retail models, we
charged customers a service fee for booking air travel, hotels
and certain other travel products on our websites, and cash
generated by these booking fees represented a significant
portion of our operating cash flow and a source of liquidity for
us. In April 2009, we removed booking fees on most flights
booked through our domestic leisure websites, and we
significantly reduced booking fees on all hotel stays booked
through these same websites.
Seasonal fluctuations in our business also affect the timing of
our cash flows. Gross bookings are generally highest in the
first half of the year as customers plan and purchase their
spring and summer vacations. As a result, our cash receipts are
generally highest in the first half of the year. We generally
have net cash outflows during the second half of the year since
cash payments to suppliers typically exceed the cash inflows
from new merchant reservations. While we expect this seasonal
cash flow pattern to continue, changes in our business model
could affect the seasonal nature of our cash flows.
On January 26, 2010, we completed two transactions that
improved our overall liquidity and financial position. In the
first transaction, PAR Investment Partners L.P.
(PAR) exchanged $49.6 million aggregate
principal amount of the term loan for 8,141,402 shares of
our common stock. We immediately retired the portion of the term
loan purchased from PAR in accordance with the amendment to the
credit agreement that we entered into in June 2009.
Concurrently, Travelport purchased 9,025,271 shares of our
common stock for $50.0 million in cash (see
Note 7 Term Loan and Revolving Credit Facility
of the Notes to Consolidated Financial Statements). We used a
portion of the proceeds from Travelports stock purchase to
purchase an additional $14.0 million aggregate principal
amount of the term loan in May 2010. We intend to use the
remaining proceeds from Travelports stock purchase for
general corporate purposes.
As of December 31, 2010, we had a working capital deficit
of $234.4 million compared with a deficit of
$249.6 million as of December 31, 2009. Prior to the
IPO, we operated with a working capital deficit primarily as a
result of the cash management system used by Travelport to pool
cash from all of its subsidiaries, including us, as well as the
fact that certain operating cash flows generated by us were used
to fund certain of our financing and investing activities, such
as capital expenditures incurred for the development
52
and implementation of our new technology platform. The net
proceeds we received from the IPO of our common stock and the
$600.0 million term loan facility (Term Loan)
did not decrease this working capital deficit because those
proceeds were used to repay $860.0 million of intercompany
notes payable to affiliates of Travelport, to pay a
$108.9 million dividend to an affiliate of Travelport and
to settle other intercompany balances between us and Travelport
that were generated prior to the IPO. As a result, immediately
following the IPO, we continued to have a working capital
deficit. Because of this deficit, we use cash from customer
transactions and borrowings under the Revolver to fund our
working capital requirements and certain investing and financing
commitments, such as capital expenditures and principal payments
on the Term Loan, respectively.
Over time, we expect to continue to decrease this deficit
through growth in our business and generating positive cash flow
from operations, which we expect to achieve by increasing our
global hotel transactions, continuing to offer new and
innovative functionality on our websites, improving our
operating efficiency and simplifying the way we do business.
We generated positive cash flow from operations for the years
ended December 31, 2008 through December 31, 2010
despite experiencing net losses in each of these years, and we
expect annual cash flow from operations to remain positive in
the foreseeable future. We generally use this cash flow to fund
our operations, make principal and interest payments on our
debt, finance capital expenditures and meet our other cash
operating needs. For the year ended December 31, 2011, we
expect our capital expenditures to be between $42.0 million
and $48.0 million, a portion of which is discretionary in
nature. We do not intend to declare or pay any cash dividends on
our common stock in the foreseeable future.
We currently believe that cash flow generated from operations,
cash on hand and cash available under the Revolver will provide
sufficient liquidity to fund our operating activities, capital
expenditures and other obligations over at least the next twelve
months. However, in the future, our liquidity could be reduced
as a result of the termination of any major suppliers
participation on our websites, such as AA, changes in our
business model, changes to payment terms or other requirements
imposed by suppliers or regulatory agencies, such as requiring
us to provide letters of credit or other forms of financial
security or increases in such requirements, lower than
anticipated operating cash flows, or other unanticipated events,
such as unfavorable outcomes in our legal proceedings, including
in the case of hotel occupancy proceedings, certain
jurisdictions requirements that we provide financial
security or pay an assessment to the municipality in order to
challenge the assessment in court, or our inability to recover
defense costs. The liquidity provided by cash flows from our
merchant model gross bookings could be negatively impacted if
our merchant model gross bookings decline as a result of
economic conditions or other factors. If as a result of these
requirements, we require letters of credit which exceed the
availability under the facility provided by Travelport, or if
the Travelport facility is no longer available to us, we would
be required to issue these letters of credit under the Revolver
or to establish cash reserves, which would reduce our liquidity
and cash available to grow our business.
In regards to our long-term liquidity needs, we believe that
cash flow generated from operations, cash on hand and cash
available under the Revolver through its maturity in July 2013
will provide sufficient liquidity to fund our operating
activities and capital expenditures. However, if in the future,
we require more liquidity than is available to us under the
Revolver, or we are unable to refinance or extend the Revolver
by its July 2013 maturity date, or we are unable to refinance or
repay the Term Loan by its July 2014 maturity date, we may need
to raise additional funds through debt or equity offerings.
53
Cash
Flows
Our net cash flows from operating, investing and financing
activities for the periods indicated in the tables below were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(in thousands)
|
|
|
Beginning cash and cash equivalents
|
|
$
|
88,656
|
|
|
$
|
31,193
|
|
|
$
|
24,685
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
|
98,609
|
|
|
|
105,074
|
|
|
|
76,258
|
|
Investing activities
|
|
|
(40,142
|
)
|
|
|
(43,591
|
)
|
|
|
(58,171
|
)
|
Financing activities
|
|
|
(49,075
|
)
|
|
|
(6,368
|
)
|
|
|
(7,818
|
)
|
Effect of changes in exchange rates on cash and cash equivalents
|
|
|
(826
|
)
|
|
|
2,348
|
|
|
|
(3,761
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
8,566
|
|
|
|
57,463
|
|
|
|
6,508
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending cash and cash equivalents
|
|
$
|
97,222
|
|
|
$
|
88,656
|
|
|
$
|
31,193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparison
of the year ended December 31, 2010 to the year ended
December 31, 2009
Operating
Activities
Cash provided by operating activities consists of our net loss,
adjusted for non-cash items such as depreciation, amortization,
impairment of goodwill and intangible assets, impairment of
property and equipment and other assets, stock based
compensation and changes in various working capital items,
principally accounts receivable, accrued expenses, accrued
merchant payables, deferred income and accounts payable.
We generated cash flow from operations of $98.6 million for
the year ended December 31, 2010 compared with
$105.1 million for the year ended December 31, 2009.
The decrease in operating cash flow was mainly due to the
elimination of most air booking fees and the significant
reduction of hotel booking fees in April 2009 as well as changes
in the timing of payments received from GDSs. In addition,
during the year ended December 31, 2010, we made payments
related to employee incentive compensation costs accrued in
2009. There were no such payments made in the year ended
December 31, 2009. The changes in our other working capital
accounts also decreased operating cash flow. These decreases
were partially offset by increases in operating cash flow due to
higher merchant gross bookings in the year ended
December 31, 2010 compared with the year ended
December 31, 2009, a decrease in cash interest payments and
the timing of payments related to our marketing spending.
Investing
Activities
Cash flow used in investing activities decreased to
$40.1 million for the year ended December 31, 2010
from $43.6 million for the year ended December 31,
2009 primarily due to lower capital spending.
Financing
Activities
Cash flow used in financing activities increased to
$49.1 million for the year ended December 31, 2010
from $6.4 million for the year ended December 31,
2009. This change was primarily due to the repayment of
borrowings made under the Revolver, an increase in principal
payments made on the Term Loan due to our requirement to make a
prepayment from excess cash flow in March 2010, an increase in
cash used to repurchase portions of the Term Loan and an
increase in payments made under the tax sharing agreement with
the Founding Airlines. The increase in cash flow used in
financing activities was partially offset by cash proceeds
received, net of issuance costs, from the stock purchase by
Travelport in January 2010 (see Note 7 Term
Loan and Revolving Credit Facility of the Notes to Consolidated
Financial Statements).
54
Comparison
of the year ended December 31, 2009 to the year ended
December 31, 2008
Operating
Activities
We generated cash flow from operations of $105.1 million
for the year ended December 31, 2009 compared with
$76.3 million for the year ended December 31, 2008.
The increase in operating cash flow was primarily due to cost
reductions taken by us in 2009, improvements in our overall
marketing efficiency and a decrease in cash interest payments.
These operating cash flow increases were partially offset by a
decrease in operating cash flow due to lower merchant hotel
gross bookings in the first three quarters of 2009 compared with
the first three quarters of 2008, as a result of lower global
ADRs. The elimination of most air booking fees, the reduction of
hotel booking fees and the shortening of payment terms with a
key vendor during 2009 also negatively impacted our operating
cash flow.
The changes in our working capital accounts, which are partially
due to the factors mentioned above and to the general timing of
payments, also contributed to the increase in our operating cash
flow. During the fourth quarter of 2009, there was a significant
increase in merchant bookings compared with the fourth quarter
of 2008, which also drove the increase in operating cash flow
for the year ended December 31, 2009.
Investing
Activities
Cash flow used in investing activities decreased
$14.6 million, to $43.6 million for the year ended
December 31, 2009 from $58.2 million for the year
ended December 31, 2008 due to lower capital spending
during the year ended December 31, 2009 resulting from cost
reduction efforts taken in late 2008 and 2009.
Financing
Activities
Cash flow used in financing activities decreased to
$6.4 million for the year ended December 31, 2009 from
$7.8 million for the year ended December 31, 2008
primarily due to a decrease in payments made under the tax
sharing agreement with the Founding Airlines and a decrease in
capital lease payments. The decrease in cash flow used in
financing activities is partially offset by payments made by us
in June 2009 to purchase $10.0 million in principal amount
of the Term Loan (see Note 7 Term Loan and
Revolving Credit Facility of the Notes to Consolidated Financial
Statements) and a decrease in net borrowings made under the
Revolver during the year ended December 31, 2009.
Financing
Arrangements
On July 25, 2007, we entered into a $685.0 million
senior secured credit agreement (Credit Agreement)
consisting of the Term Loan and the Revolver. The Term Loan and
the Revolver bear interest at variable rates, at our option, of
LIBOR or an alternative base rate plus a margin. At
December 31, 2010 and December 31, 2009,
$492.0 million and $576.6 million of borrowings were
outstanding on the Term Loan, respectively. At December 31,
2010, there were no outstanding borrowings under the Revolver.
At December 31, 2009, $42.2 million of borrowings were
outstanding under the Revolver, all of which were denominated in
U.S. dollars.
In addition, at December 31, 2010 and December 31,
2009, there were the equivalent of $12.4 million and
$4.5 million of outstanding letters of credit issued under
the Revolver, respectively, which were denominated in Pounds
Sterling. The amount of letters of credit issued under the
Revolver reduces the amount available to us for borrowings.
On June 2, 2009, we entered into an amendment (the
Amendment) to our Credit Agreement, which permitted
us to purchase portions of the outstanding Term Loan on a
non-pro rata basis using cash up to $10.0 million and
future cash proceeds from equity issuances and in exchange for
equity interests on or prior to June 2, 2010. Any portion
of the Term Loan purchased by us was retired pursuant to the
terms of the Amendment. During the years ended December 31,
2010 and December 31, 2009, we purchased $63.6 million
and $10.0 million aggregate principal amount of the Term
Loan, respectively (see Note 7 Term Loan and
Revolving Credit Facility of the Notes to Consolidated Financial
Statements).
55
The Term Loan and Revolver are both secured by substantially all
of our and our domestic subsidiaries tangible and
intangible assets, including a pledge of 100% of the outstanding
capital stock or other equity interests of substantially all of
our direct and indirect domestic subsidiaries and 65% of the
capital stock or other equity interests of certain of our
foreign subsidiaries, subject to certain exceptions. The Term
Loan and Revolver are also guaranteed by substantially all of
our domestic subsidiaries.
The Credit Agreement contains various customary restrictive
covenants that limit our ability to, among other things:
|
|
|
|
|
incur additional indebtedness or enter into guarantees;
|
|
|
|
enter into sale or leaseback transactions;
|
|
|
|
make investments, loans or acquisitions;
|
|
|
|
grant or incur liens on our assets;
|
|
|
|
sell our assets;
|
|
|
|
engage in mergers, consolidations, liquidations or dissolutions;
|
|
|
|
engage in transactions with affiliates; and
|
|
|
|
make restricted payments.
|
The Credit Agreement requires us to maintain a minimum fixed
charge coverage ratio and not to exceed a maximum total leverage
ratio, each as defined in the Credit Agreement. The minimum
fixed charge coverage ratio that we are required to maintain for
the remainder of the Credit Agreement is 1 to 1. The maximum
total leverage ratio that we are required not to exceed is 3.5
to 1 and declines to 3 to 1 effective March 31, 2011.
If we fail to comply with these covenants and we are unable to
obtain a waiver or amendment, our lenders could accelerate the
maturity of all amounts borrowed under the Term Loan and
Revolver and could proceed against the collateral securing this
indebtedness. We are permitted, however, to cure any such
failure by issuing equity to certain permitted holders, as
defined in the Credit Agreement, which include The Blackstone
Group and certain of its affiliates. The amount of the net cash
proceeds received from this equity issuance would then be
applied to increase consolidated EBITDA, as defined in the
Credit Agreement and on which the covenant calculations are
based, for the applicable quarter. As of December 31, 2010,
we were in compliance with all covenants and conditions of the
Credit Agreement.
In addition, we are required to make an annual prepayment on the
Term Loan in the first quarter of each fiscal year in an amount
up to 50% of the prior years excess cash flow, as defined
in the Credit Agreement. Based on our excess cash flow for the
year ended December 31, 2009, we made a $21.0 million
prepayment on the Term Loan in the first quarter of 2010. Based
on our excess cash flow for the year ended December 31,
2010, we are required to make a $19.8 million prepayment on
the Term Loan in the first quarter of 2011. Prepayments from
excess cash flow are applied, in order of maturity, to the
scheduled quarterly Term Loan principal payments. As a result,
we will not be required to make any scheduled principal payments
on the Term Loan during 2011. The potential amount of prepayment
from excess cash flow that will be required beyond the first
quarter of 2011 is not reasonably estimable as of
December 31, 2010.
When we were a wholly owned subsidiary of Travelport, Travelport
provided guarantees, letters of credit and surety bonds on our
behalf under our commercial agreements and leases and for the
benefit of regulatory agencies. Under the Separation Agreement,
we are required to use commercially reasonable efforts to have
Travelport released from any then outstanding guarantees and
surety bonds. Travelport no longer provides surety bonds on our
behalf or guarantees in connection with commercial agreements or
leases entered into or replaced by us subsequent to the IPO. At
December 31, 2010 and December 31, 2009, there were
$72.3 million and $59.3 million of outstanding letters
of credit issued by Travelport on our behalf, respectively.
Under the Separation Agreement, Travelport has agreed to issue
U.S. dollar denominated letters of credit on our behalf in
an aggregate amount not to exceed $75.0 million so long as
Travelport and its affiliates (as defined in the Separation
Agreement) own at least 50% of our voting stock.
56
Financial
Obligations
Commitments
and Contingencies
We are party to various cases brought by consumers and
municipalities and other U.S. governmental entities
involving hotel occupancy taxes and our merchant hotel business
model. We believe that we have meritorious defenses, and we are
vigorously defending against these claims, proceedings and
inquiries (see Note 10 Commitments and
Contingencies of the Notes to Consolidated Financial Statements).
Litigation is inherently unpredictable and, although we believe
we have valid defenses in these matters, unfavorable resolutions
could occur. We cannot estimate our range of loss, except to the
extent taxing authorities have issued assessments against us.
Although we believe it is unlikely that an adverse outcome will
result from these proceedings, an adverse outcome could be
material to us with respect to earnings or cash flows in any
given reporting period.
We are currently seeking to recover insurance reimbursement for
costs incurred to defend the hotel occupancy tax cases. We
recorded a reduction to selling, general and administrative
expense in our consolidated statements of operations for
reimbursements received of $6.3 million, $6.0 million
and $7.8 million for the years ended December 31,
2010, December 31, 2009 and December 31, 2008,
respectively. The recovery of additional amounts, if any, by us
and the timing of receipt of these recoveries is unclear. As a
result, as of December 31, 2010, we had not recognized a
reduction to selling, general and administrative expense in our
consolidated statements of operations for the outstanding
contingent claims for which we have not received reimbursement.
Contractual
Obligations
The following table summarizes our future contractual
obligations as of December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
Thereafter
|
|
|
Total
|
|
|
|
(in thousands)
|
|
|
Term Loan(a)
|
|
$
|
19,808
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
472,213
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
492,021
|
|
Interest(b)
|
|
|
18,699
|
|
|
|
15,553
|
|
|
|
15,397
|
|
|
|
8,745
|
|
|
|
|
|
|
|
|
|
|
|
58,394
|
|
Contract exit costs(c)
|
|
|
7,732
|
|
|
|
2,285
|
|
|
|
1,229
|
|
|
|
647
|
|
|
|
278
|
|
|
|
63
|
|
|
|
12,234
|
|
Operating leases
|
|
|
5,692
|
|
|
|
4,565
|
|
|
|
5,135
|
|
|
|
4,601
|
|
|
|
2,490
|
|
|
|
20,104
|
|
|
|
42,587
|
|
Travelport GDS contract(d)
|
|
|
41,045
|
|
|
|
20,000
|
|
|
|
20,000
|
|
|
|
20,000
|
|
|
|
|
|
|
|
|
|
|
|
101,045
|
|
Tax sharing liability(e)
|
|
|
21,182
|
|
|
|
20,375
|
|
|
|
17,604
|
|
|
|
18,171
|
|
|
|
18,729
|
|
|
|
98,989
|
|
|
|
195,050
|
|
Telecommunications service agreements
|
|
|
2,500
|
|
|
|
4,156
|
|
|
|
1,656
|
|
|
|
1,656
|
|
|
|
|
|
|
|
|
|
|
|
9,968
|
|
Systems infrastructure agreements
|
|
|
2,225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,225
|
|
Software license agreements
|
|
|
202
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
202
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations (f)
|
|
$
|
119,085
|
|
|
$
|
66,934
|
|
|
$
|
61,021
|
|
|
$
|
526,033
|
|
|
$
|
21,497
|
|
|
$
|
119,156
|
|
|
$
|
913,726
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
The amounts shown in the table above represent future payments
under the Term Loan (see Note 7 Term Loan and
Revolving Credit Facility of the Notes to Consolidated Financial
Statements). However, the timing of the future payments shown in
the table above could change as we are required to make an
annual prepayment on the Term Loan in the first quarter of each
fiscal year in an amount up to 50% of the prior years
excess cash flow, as defined in the Credit Agreement. Based on
our cash flow for the year ended December 31, 2010, we are
required to make a prepayment on the Term Loan of
$19.8 million in the first quarter of 2011. The potential
amount of prepayments from excess cash flow that will be
required beyond the first quarter of 2011 is not reasonably
estimable as of December 31, 2010. As a result, the table
above excludes prepayments that could be required from excess
cash flow beyond the first quarter of 2011. |
|
(b) |
|
Represents estimated interest payments on the variable portion
of the Term Loan based on the one-month LIBOR as of
December 31, 2010 and fixed interest payments under
interest rate swaps. |
|
(c) |
|
Represents costs due to the early termination of an agreement. |
57
|
|
|
(d) |
|
We have an agreement with Travelport to use GDS services
provided by both Galileo and Worldspan (the Travelport GDS
Service Agreement). The Travelport GDS Service Agreement
is structured such that we earn incentive revenue for each
segment that is processed through the Worldspan and Galileo GDSs
(the Travelport GDSs). This agreement requires that
we process a certain minimum number of segments for our domestic
brands through the Travelport GDSs each year. Our domestic
brands were required to process a total of 33.7 million
segments during the year ended December 31, 2010,
16.0 million segments through Worldspan and
17.7 million segments through Galileo. The required number
of segments processed annually for Worldspan is fixed at
16.0 million segments, while the required number of
segments for Galileo is subject to adjustment based upon the
actual segments processed by our domestic brands in the
preceding year. We are required to process approximately
16.8 million segments through Galileo during the year
ending December 31, 2011. Our failure to process at least
95% of these segments through the Travelport GDSs would result
in a shortfall payment of $1.25 per segment below the required
minimum. We are not subject to these minimum volume thresholds
to the extent that we process all eligible segments through the
Travelport GDS. Historically, we have met the minimum segment
requirement for our domestic brands. The table above includes
shortfall payments required by the agreement if we do not
process any segments through Worldspan during the remainder of
the contract term and shortfall payments required if we do not
process any segments through Galileo during the year ending
December 31, 2011. Because the required number of segments
for Galileo adjusts based on the actual segments processed in
the preceding year, we are unable to predict shortfall payments
that may be required beyond 2011. However, we do not expect to
make any shortfall payments for our domestic brands in the
foreseeable future. |
|
|
|
The Travelport GDS Service Agreement also requires that ebookers
use the Travelport GDSs exclusively in certain countries for
segments processed through GDSs in Europe. Our failure to
process at least 95% of these segments through the Travelport
GDSs would result in a shortfall payment of $1.25 per segment
for each segment processed through an alternative GDS provider.
We failed to meet this minimum segment requirement during each
of the years ended December 31, 2010, December 31,
2009 and December 31, 2008, and as a result, we were
required to make shortfall payments of $0.4 million,
$0.4 million and $0.2 million to Travelport related to
each of these years, respectively. Because the required number
of segments to be processed through the Travelport GDSs is
dependent on the actual segments processed by ebookers in
certain countries in a given year, we are unable to predict
shortfall payments that may be required for the years beyond
2010. As a result, the table above excludes any shortfall
payments that may be required related to our ebookers brands for
the years beyond 2010. If we meet the minimum number of
segments, we are not required to make shortfall payments to
Travelport (see Note 17 Related Party
Transactions of the Notes to Consolidated Financial Statements). |
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(e) |
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We expect to make approximately $195.1 million of payments
in connection with the tax sharing agreement with the Founding
Airlines (see Note 8 Tax Sharing Liability of
the Notes to Consolidated Financial Statements). |
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(f) |
|
Excluded from the above table are $3.8 million of
liabilities for uncertain tax positions for which the period of
settlement is not currently determinable. |
Other
Commercial Commitments and Off-Balance Sheet
Arrangements
In the ordinary course of business, we obtain surety bonds and
bank guarantees, issued for the benefit of a third party, to
secure performance of certain of our obligations to third
parties (see Note 10 Commitments and
Contingencies of the Notes to Consolidated Financial Statements).
We are also required to issue letters of credit to certain
suppliers and
non-U.S. regulatory
and government agencies. See Financing Arrangements
above for further discussion of our outstanding letters of
credit.
CRITICAL
ACCOUNTING POLICIES
The preparation of our consolidated financial statements and
related notes in conformity with generally accepted accounting
principles requires us to make judgments, estimates and
assumptions that affect the
58
amounts reported therein. An accounting policy is considered to
be critical if it meets the following two criteria:
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the policy requires an accounting estimate to be made based on
assumptions about matters that are highly uncertain at the time
the estimate is made; and
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different estimates that reasonably could have been used or
changes in the estimates that are reasonably likely to occur
from period to period would have a material impact on our
consolidated financial statements.
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We believe that the estimates and assumptions used when
preparing our consolidated financial statements were the most
appropriate at that time. However, events that are outside of
our control cannot be predicted and, as such, they cannot be
contemplated in evaluating such estimates and assumptions. We
have discussed these estimates with our Audit Committee.
Presented below are those accounting policies that we believe
require subjective and complex judgments that could potentially
affect our reported results. Although we believe these policies
to be the most critical, other accounting policies also have a
significant effect on our consolidated financial statements and
certain of these policies may also require the use of estimates
and assumptions (see Note 2 Summary of
Significant Accounting Policies of the Notes to Consolidated
Financial Statements).
Revenue
Recognition
We recognize revenue when it is earned and realizable, when
persuasive evidence of an arrangement exists, services have been
rendered, the price is fixed or determinable, and collectability
is reasonably assured. We have two primary types of contractual
arrangements with our vendors, which we refer to herein as the
merchant and retail models. Under both
the merchant and retail models, we record revenue earned net of
all amounts paid to our suppliers.
We provide customers the ability to book air travel, hotels, car
rentals and other travel products and services through our
various websites. These travel products and services are made
available to our customers for booking on a stand-alone basis or
as part of a vacation package.
Under the merchant model, we generate revenue for our services
based on the difference between the total amount the customer
pays for the travel product and the negotiated net rate plus
estimated taxes that the supplier charges us for that product.
Customers generally pay us for reservations at the time of
booking. Initially, we record these customer receipts as accrued
merchant payables and either deferred income or net revenue,
depending on the travel product. In the merchant model, we do
not take on credit risk with the customer, however we are
subject to charge-backs and fraud risk which we monitor closely;
we have the ability to determine the price; we are not
responsible for the actual delivery of the flight, hotel room or
car rental; we take no inventory risk; we have no ability to
determine or change the products or services delivered; and the
customer chooses the supplier.
We recognize net revenue under the merchant model when we have
no further obligations to the customer. For merchant air
transactions, this is at the time of booking. For merchant hotel
transactions and merchant car transactions, net revenue is
recognized at the time of check-in or customer
pick-up,
respectively. The timing of revenue recognition is different for
merchant air travel because our primary service to the customer
is fulfilled at the time of booking.
We accrue for the cost of merchant hotel and merchant car
transactions based on amounts we expect to be invoiced by
suppliers. If we do not receive an invoice within a certain
period of time, generally within six months, or the invoice
received is less than the accrued amount, we reverse a portion
of the accrued cost when we determine it is not probable that we
will be required to pay the supplier, based on our historical
experience and contract terms. This would result in an increase
in net revenue and a decrease to the accrued merchant payable.
Under the retail model, we pass reservations booked by our
customers to the travel supplier for a commission. In the retail
model, we do not take on credit risk with the customer; we are
not the primary
59
obligor with the customer; we have no latitude in determining
pricing; we take no inventory risk; we have no ability to
determine or change the products or services delivered; and the
customer chooses the supplier.
We recognize net revenue under the retail model when the
reservation is made, secured by a customer with a credit card
and we have no further obligations to the customer. For air
transactions, this is at the time of booking. For hotel
transactions and car transactions, net revenue is recognized at
the time of check-in or customer
pick-up,
respectively, net of an allowance for cancelled reservations.
The timing of recognition is different for retail hotel and
retail car transactions than for retail air travel because
unlike air travel where the reservation is secured by a
customers credit card at booking, car rental bookings and
hotel bookings are not secured by a customers credit card
until the
pick-up date
and check-in date, respectively. Allowances for cancelled
reservations primarily relate to cancellations that do not occur
through our website, but instead occur directly through the
supplier of the travel product. The amount of the allowance is
determined based on our historical experience. The majority of
commissions earned under the retail model are based upon
contractual agreements.
Vacation packages offer customers the ability to book a
combination of travel products. For example, travel products
booked in a vacation package may include a combination of air
travel, hotel and car rental reservations. We recognize net
revenue for the entire package when the customer uses the
reservation, which generally occurs on the same day for each
travel product included in the vacation package.
Under both the merchant and retail models, we may, depending
upon the brand and the travel product, charge our customers a
service fee for booking their travel reservation. We recognize
revenue for service fees at the time we recognize the net
revenue for the corresponding travel product. We also may
receive override commissions from suppliers if we meet certain
contractual volume thresholds. These commissions are recognized
when the amount of the commissions becomes fixed or
determinable, which is generally upon notification by the
respective travel supplier.
We utilize GDS services provided by Galileo, Worldspan and
Amadeus IT Group. Under our GDS service agreements, we earn
revenue in the form of an incentive payment for air, car and
hotel segments that are processed through a GDS. Revenue is
recognized for these incentive payments at the time the travel
reservation is processed through the GDS, which is generally at
the time of booking.
We also generate other revenue, which is primarily comprised of
revenue from advertising, including sponsoring links on our
websites, and travel insurance. Advertising revenue is derived
primarily from the delivery of advertisements on our websites
and is recognized either at the time of display of each
individual advertisement, or ratably over the advertising
delivery period, depending on the terms of the advertising
contract. Revenues generated from sponsoring links are
recognized upon notification from the alliance partner that a
transaction has occurred. Travel insurance revenue is recognized
when the reservation is made, secured by a customer with a
credit card and we have no further obligations to the customer,
which for travel insurance is at the time of booking.
If our judgments regarding net revenue are inaccurate, actual
net revenue could differ from the amount we recognize, directly
impacting our results of operations.
Impairment
of Long-Lived Assets, Goodwill and Indefinite-Lived Intangible
Assets
Long-Lived
Assets
We evaluate the recoverability of our long-lived assets,
including property and equipment and finite-lived intangible
assets, when circumstances indicate that the carrying value of
those assets may not be recoverable. This analysis is performed
by comparing the carrying values of the assets to the current
and expected future cash flows to be generated from these
assets, on an undiscounted basis. If this analysis indicates
that the carrying value of an asset is not recoverable, the
carrying value is reduced to fair value through an impairment
charge in our consolidated statements of operations. The
evaluation of long-lived assets for impairment requires
assumptions about operating strategies and estimates of future
cash flows. An estimate of future cash flows requires us to
assess current and projected market conditions as well as
operating performance. A variation of the assumptions used could
lead to a different conclusion regarding the recoverability of
an asset
60
and could have a significant effect on our consolidated
financial statements. As a result of our decision in the fourth
quarter of 2010 to migrate HotelClub to the global technology
platform, we recorded a $4.5 million non-cash charge during
the year ended December 31, 2010 to impair capitalized
software for HotelClub. This charge was included in the
impairment of property and equipment and other assets expense
line item in our consolidated statement of operations. The
remaining capitalized software balance at HotelClub following
this charge was not material.
Goodwill
and Other Intangibles
We assess the carrying value of goodwill and other
indefinite-lived intangible assets for impairment annually or
more frequently whenever events occur and circumstances change
indicating potential impairment. We perform our annual
impairment testing of goodwill and other indefinite-lived
intangible assets in the fourth quarter of each year, in
connection with our annual planning process.
We assess goodwill for possible impairment using a two-step
process. The first step identifies if there is potential
goodwill impairment. If the step one analysis indicates that
impairment may exist, a step two analysis is performed to
measure the amount of the goodwill impairment, if any.
Application of the goodwill impairment test requires
managements judgment, including identifying reporting
units, assigning assets and liabilities to reporting units and
determining the fair value of each reporting unit. We estimate
the fair value of our reporting units to which goodwill is
allocated using generally accepted valuation methodologies,
including market and income based approaches, and relevant data
available through and as of the testing date. The market
approach is a valuation method in which fair value is estimated
based on observed prices in actual transactions and on asking
prices for similar assets. Under the market approach, the
valuation process is essentially that of comparison and
correlation between the subject asset and other similar assets.
The income approach is a method in which fair value is estimated
based on the cash flows that an asset could be expected to
generate over its useful life, including residual value cash
flows. These cash flows are then discounted to their present
value equivalents using a rate of return that accounts for the
relative risk of not realizing the estimated annual cash flows
and for the time value of money. Variations of the income
approach are used to estimate certain of the intangible asset
fair values.
Our trademarks and trade names are indefinite-lived intangible
assets. We test these assets for impairment by comparing their
carrying values to their estimated fair values. If the estimated
fair values are less than the carrying amounts of the intangible
assets, then the carrying values are reduced to fair value
through an impairment charge recorded to our consolidated
statement of operations. We use a market or income valuation
approach, or a combination of both, to estimate fair values of
the relevant trademarks and trade names.
Our testing for impairment involves estimates of our future cash
flows, which requires us to assess current and projected market
conditions as well as operating performance. Our estimates may
differ from actual cash flows due to changes in our operating
performance, capital structure or capital expenditure needs as
well as changes to general economic and travel industry
conditions. We must also make estimates and judgments in the
selection of a discount rate that reflects the risk inherent in
those future cash flows. The impairment analysis may also
require certain assumptions about other businesses with limited
financial histories. A variation of the assumptions used could
lead to a different conclusion regarding the fair value of an
asset and could have a significant effect on our consolidated
financial statements.
During the year ended December 31, 2010, we performed our
annual impairment test of goodwill and trademarks and trade
names as of October 1, 2010. We used the income approach to
estimate the fair value of our reporting units which had
goodwill balances and used the market approach to corroborate
these estimates. We considered the market approach from a
reasonableness standpoint by comparing the multiples of the
guideline companies with the implied multiples from the income
approach, but primarily relied upon our observed market
capitalization to assess reasonableness of the income approach
conclusions. We used an income valuation approach to estimate
the fair value of the relevant trademarks and trade names and
property and equipment.
We determined that the estimated fair value of our domestic
reporting unit substantially exceeded its carrying value, as
fair value exceeded carrying value by greater than 50%. The
carrying value of our
61
HotelClub reporting unit exceeded its fair value and additional
procedures were required to determine the fair value of its
other assets, including property and equipment and trademarks.
The carrying values of the capitalized software and trademarks
associated with HotelClub each exceeded their estimated fair
values. Additionally, it was determined that the carrying value
of our CheapTickets trademark exceeded its fair value. The
estimated fair value of our Orbitz and ebookers trademarks each
substantially exceeded their carrying values, as fair value
exceeded carrying value by greater than 25% in each case.
In connection with our annual impairment test and as a result of
lower than expected performance and future cash flows for
HotelClub and CheapTickets, we recorded a non-cash impairment
charge of $70.2 million during the year ended
December 31, 2010, of which $41.8 million was to
impair the goodwill of HotelClub and $28.4 million was to
impair the trademarks and trade names associated with HotelClub
and CheapTickets. These charges were included in the impairment
of goodwill and intangible assets expense line item in our
consolidated statement of operations. As a result of our
decision in the fourth quarter of 2010 to migrate HotelClub to
the global technology platform, we also recorded a
$4.5 million non-cash charge to impair HotelClub
capitalized software. This charge was included in the impairment
of property and equipment and other assets expense line item in
our consolidated statement of operations. The remaining
capitalized software balance at HotelClub following this charge
was not material.
The key assumptions used in determining the estimated fair value
of our HotelClub reporting unit were the terminal growth rate,
forecasted cash flows and the discount rate. We assumed a
terminal growth rate of 4% and a discount rate of 16% in
determining the estimated fair value of our HotelClub reporting
unit. For our trademarks and trade names, the key assumptions
used in determining the estimated fair value were the terminal
growth rate, estimated future revenues, an assumed royalty rate
and the discount rate. We assumed a terminal growth rate of 4%,
a pre-tax royalty rate of 1% and a discount rate of 17% in
determining the estimated fair value of our HotelClub
trademarks, and we assumed a terminal growth rate of 0%, a
pre-tax royalty rate of 1% and a discount rate of 14% in
determining the estimated fair value of our CheapTickets
trademark. While certain of these inputs are observable,
significant judgment was required to select certain inputs from
observed market data. Our estimates of future revenues and cash
flows for our reporting units have historically varied, in some
cases significantly, from actual results and may change in the
future due to a number of factors, including economic
conditions, competitive pressures and in the case of HotelClub,
a shift in the mix of its bookings away from the European hotel
market and towards the Asia Pacific hotel market, which is an
immature market and now the primary market in which it operates.
The impact of these and other factors, on future revenues and
cash flows can be difficult to predict.
For sensitivity purposes, we considered the impact of each of
the following scenarios on the estimated fair value of our
HotelClub reporting unit and the amount of the corresponding
goodwill impairment charge required: if the terminal growth rate
was decreased by 100 basis points; if estimated forecasted
cash flows were reduced by 10%; or if the discount rate was
increased by 100 basis points. Based on our analysis, a
change in each assumption, assuming all other assumptions and
estimates remain constant, would have resulted in an additional
goodwill impairment charge of less than $4 million.
We also performed a sensitivity analysis on our trademarks and
trade names. For sensitivity purposes, we considered the impact
of each of the following scenarios on the estimated fair value
of the HotelClub and CheapTickets trademarks: if estimated
future revenues were reduced by 10%; if the terminal growth rate
was decreased by 100 basis points; if the assumed royalty
rate was decreased by 100 basis points; or if the discount
rate was increased by 100 basis points. Based on our
analysis, a change in each assumption for each of the relevant
trademarks, assuming all other assumptions and estimates remain
constant, would have resulted in an additional impairment charge
of less than $5 million for each of the CheapTickets and
HotelClub trademarks.
As a result, if actual results
and/or the
underlying assumptions differ from our expectations, a future
impairment charge for our goodwill and trademarks and trade
names may be necessary.
Accounting
for Income Taxes
Our provision for income taxes is determined using the asset and
liability method. Under this method, deferred tax assets and
liabilities are calculated based upon the temporary differences
between the financial
62
statement and income tax bases of assets and liabilities using
the combined federal and state effective tax rates that are
applicable to us in a given year. The deferred tax assets are
recorded net of a valuation allowance when, based on the weight
of available evidence, we believe it is more likely than not
that some portion or all of the recorded deferred tax assets
will not be realized in future periods. Increases to the
valuation allowance are recorded as increases to the provision
for income taxes. Effective January 1, 2009, to the extent
that any valuation allowances established by us in purchase
accounting are reduced, these reductions are recorded through
our consolidated statements of operations. These reductions were
previously recorded through goodwill. The realization of the
deferred tax assets, net of a valuation allowance, is primarily
dependent on estimated future taxable income. The generation of
future taxable income may require a decrease to the valuation
allowance, which could result in a significant tax benefit in
the period in which the valuation allowance is adjusted.
Accounting
for Tax Sharing Liability
We have a liability included in our consolidated balance sheets
that relates to a tax sharing agreement between Orbitz and the
Founding Airlines. The agreement governs the allocation of tax
benefits resulting from a taxable exchange that took place in
connection with the Orbitz initial public offering in December
2003 (Orbitz IPO). As a result of this taxable
exchange, the Founding Airlines incurred a taxable gain. The
taxable exchange caused Orbitz to have additional future tax
deductions for depreciation and amortization due to the
increased tax basis of its assets. The additional tax deductions
for depreciation and amortization may reduce the amount of taxes
we are required to pay in future years. For each tax period
during the term of the tax sharing agreement, we are obligated
to pay the Founding Airlines a significant percentage of the
amount of the tax benefit realized as a result of the taxable
exchange. The tax sharing agreement commenced upon consummation
of the Orbitz IPO and continues until all tax benefits have been
utilized.
We use discounted cash flows in calculating and recognizing the
tax sharing liability. We review the calculation of the tax
sharing liability on a quarterly basis and make revisions to our
estimated timing of payments when appropriate. We also assess
whether there are any significant changes, such as changes in
the amount of payments and tax rates, that could materially
affect the present value of the tax sharing liability. Although
the expected gross remaining payments that may be due under this
agreement were $195.1 million as of December 31, 2010,
the timing and amount of payments may change. Any changes in
timing of payments are recognized prospectively as accretions to
the tax sharing liability in our consolidated balance sheets and
non-cash interest expense in our consolidated statements of
operations. Any changes in the amount of payments are recognized
in selling, general and administrative expense in our
consolidated statements of operations.
The valuation of the tax sharing liability requires us to make
certain estimates in projecting the quarterly depreciation and
amortization benefit we expect to receive, as well as the
associated effective income tax rates. The estimates require
certain assumptions as to our future operating performance and
taxable income, the tax rate, the timing of tax payments,
current and projected market conditions, and the applicable
discount rate. The discount rate assumption is based on our
weighted-average cost of capital at the time of the Blackstone
Acquisition, which was approximately 12%. A variation of the
assumptions used could lead to a different conclusion regarding
the carrying value of the tax sharing liability and could have a
significant effect on our consolidated financial statements.
At the time of the Blackstone Acquisition, Cendant (now Avis
Budget Group, Inc.) indemnified Travelport and us for a portion
of the amounts due under the tax sharing agreement. As a result,
we had recorded a $37.0 million long-term asset included in
other non-current assets in our consolidated balance sheets at
December 31, 2010 and December 31, 2009. Cendant is
obligated to pay us this amount when it receives the tax
benefit. We regularly monitor the financial condition of Cendant
to assess the collectability of this asset.
Equity-Based
Compensation
We measure equity-based compensation cost at fair value and
recognize the corresponding compensation expense on a
straight-line basis over the service period during which awards
are expected to vest. We include
63
equity-based compensation expense in the selling, general and
administrative line of our consolidated statements of
operations. The fair value of restricted stock and restricted
stock units is determined based on the average of the high and
low price of our common stock on the date of grant. The fair
value of stock options is determined on the date of grant using
the Black-Scholes valuation model, which incorporates a number
of variables, some of which are based on estimates and
assumptions. These variables include stock price, exercise
price, expected life, expected volatility, dividend yield, and
the risk-free interest rate. Stock price and exercise price are
set at fair value on the date of grant. Expected volatility is
based on implied volatilities for publicly traded options and
historical volatility for comparable companies over the
estimated expected life of the stock options. The expected life
represents the period of time the stock options are expected to
be outstanding and is based on the simplified
method. We use the simplified method due to
the lack of sufficient historical exercise data to provide a
reasonable basis upon which to otherwise estimate the expected
life of the stock options. The risk-free interest rate is based
on yields on U.S. Treasury strips with a maturity similar
to the estimated expected life of the stock options.
The amount of equity-based compensation expense recorded each
period is net of estimated forfeitures. We estimate forfeitures
based on historical employee turnover rates, the terms of the
award issued and assumptions regarding future employee turnover.
We periodically perform an analysis to determine if estimated
forfeitures are reasonable based on actual facts and
circumstances, and adjustments are made as necessary. If our
estimates differ significantly from actual results, our
consolidated financial statements could be materially affected.
Internal
Use Software
We capitalize the costs of software developed for internal use.
Capitalization commences when the preliminary project stage of
the application has been completed and it is probable that the
project will be completed and used to perform the function
intended. Amortization commences when the software is placed
into service. The determination of costs to be capitalized as
well as the useful life of the software requires us to make
estimates and judgments.
Recently
Issued Accounting Pronouncements
See Note 2 Summary of Significant Accounting
Policies of the Notes to Consolidated Financial Statements for
information regarding recently issued accounting pronouncements.
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Item 7A.
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Quantitative
and Qualitative Disclosures About Market Risk.
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Foreign
Currency Risk
Our international operations are subject to risks typical of
international operations, including, but not limited to,
differing economic conditions, changes in political climate,
differing tax structures and foreign exchange rate volatility.
Accordingly, our future results could be materially adversely
impacted by changes in these or other factors.
Transaction
Exposure
We use foreign currency contracts to manage our exposure to
changes in foreign currency exchange rates associated with our
foreign currency denominated receivables, payables, intercompany
transactions and borrowings under the Revolver. We primarily
hedge our foreign currency exposure to the Pound Sterling, Euro
and Australian dollar. We do not engage in trading, market
making or speculative activities in the derivatives markets. The
foreign currency contracts utilized by us do not qualify for
hedge accounting treatment, and as a result, any fluctuations in
the value of these foreign currency contracts are recognized in
selling, general and administrative expense in our consolidated
statements of operations as incurred. The fluctuations in the
value of these foreign currency contracts do, however, largely
offset the impact of changes in the value of the underlying risk
that they are intended to economically hedge. As of
December 31, 2010 and December 31, 2009, we had
foreign currency contracts with net notional values equivalent
to $174.1 million and $130.4 million, respectively.
64
Translation
Exposure
Foreign exchange rate fluctuations may adversely impact our
financial position as the assets and liabilities of our foreign
operations are translated into U.S. dollars in preparing
our consolidated balance sheets. The effect of foreign exchange
rate fluctuations on our consolidated balance sheets at
December 31, 2010 and December 31, 2009 was a net
translation gain of $3.6 million and a net translation loss
of $(3.6) million, respectively. This gain or loss is
recognized as an adjustment to shareholders equity through
accumulated other comprehensive income (loss).
Interest
Rate Risk
The Term Loan and the Revolver bear interest at a variable rate
based on LIBOR or an alternative base rate. We limit interest
rate risk associated with the Term Loan using interest rate
swaps with a combined notional amount of $300.0 million as
of December 31, 2010 to hedge fluctuations in LIBOR (see
Note 13 Derivative Financial Instruments of the
Notes to Consolidated Financial Statements). We do not engage in
trading, market making or speculative activities in the
derivatives markets.
Sensitivity
Analysis
We assess our market risk based on changes in foreign currency
exchange rates and interest rates utilizing a sensitivity
analysis that measures the potential impact on earnings, fair
values and cash flows based on a hypothetical 10% change
(increase and decrease) in foreign currency rates and interest
rates. We used December 31, 2010 market rates to perform a
sensitivity analysis separately for each of our market risk
exposures. The estimates assume instantaneous, parallel shifts
in interest rate yield curves and exchange rates. We determined,
through this analysis, that the potential decrease in net
current assets from a hypothetical 10% adverse change in quoted
foreign currency exchange rates would be $7.5 million at
December 31, 2010 compared with $8.5 million at
December 31, 2009. There are inherent limitations in the
sensitivity analysis, primarily due to assumptions that foreign
exchange rate movements are linear and instantaneous. The effect
of a hypothetical 10% change in market rates of interest on
interest expense would be $0.1 million at December 31,
2010 and December 31, 2009, which represents the effect on
annual interest expense related to the unhedged portion of the
Term Loan. The hedged portion of the Term Loan is not affected
by changes in market rates of interest as it has effectively
been converted to a fixed interest rate through interest rate
swaps.
65
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Item 8.
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Financial
Statements and Supplementary Data.
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MANAGEMENTS
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting as defined in
Rules 13a-15(f)
and
15d-15(f)
under the Exchange Act. Under the supervision and with the
participation of our management, including our Chief Executive
Officer and Chief Financial Officer, we conducted an evaluation
of the effectiveness of our internal control over financial
reporting based on the Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this
evaluation, our management concluded that our internal control
over financial reporting was effective as of December 31,
2010. Our independent registered public accounting firm,
Deloitte & Touche LLP, audited our financial
statements contained in this Annual Report on
Form 10-K
and has issued an attestation report on the effectiveness of our
internal control over financial reporting as of
December 31, 2010, which is included below.
66
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Orbitz Worldwide, Inc.
We have audited the accompanying consolidated balance sheets of
Orbitz Worldwide, Inc. and subsidiaries (the
Company) as of December 31, 2010 and 2009, and
the related consolidated statements of operations, cash flows,
comprehensive loss, and shareholders equity for each of
the three years in the period ended December 31, 2010. Our
audits also included the financial statement schedule listed in
the Index at Item 15. We also have audited the
Companys internal control over financial reporting as of
December 31, 2010, based on criteria established in
Internal Control - Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway
Commission. The Companys management is responsible for
these financial statements and financial statement schedule, for
maintaining effective internal control over financial reporting,
and for its assessment of the effectiveness of internal control
over financial reporting, included in the accompanying
Managements Report on Internal Control over Financial
Reporting. Our responsibility is to express an opinion on
these financial statements and financial statement schedule and
an opinion on the Companys internal control over financial
reporting based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement and whether effective internal
control over financial reporting was maintained in all material
respects. Our audits of the financial statements included
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. Our audit of internal control over financial
reporting included obtaining an understanding of internal
control over financial reporting, assessing the risk that a
material weakness exists, and testing and evaluating the design
and operating effectiveness of internal control based on the
assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our
opinions.
A companys internal control over financial reporting is a
process designed by, or under the supervision of, the
companys principal executive and principal financial
officers, or persons performing similar functions, and effected
by the companys board of directors, management, and other
personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles and that receipts and expenditures of the company are
being made only in accordance with authorizations of management
and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of the inherent limitations of internal control over
financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a
timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting
to future periods are subject to the risk that the controls may
become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Orbitz Worldwide, Inc. and subsidiaries as of
December 31, 2010 and 2009, and the results of their
operations and their cash flows for each of the three years in
the period ended
67
December 31, 2010, in conformity with accounting principles
generally accepted in the United States of America. Also, in our
opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as
a whole, presents fairly, in all material respects, the
information set forth therein. Also, in our opinion, the Company
maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2010, based on
the criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
/s/ Deloitte &
Touche LLP
Chicago, Illinois
March 1, 2011
68
ORBITZ
WORLDWIDE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Net revenue
|
|
$
|
757,487
|
|
|
$
|
737,648
|
|
|
$
|
870,276
|
|
Cost and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
153,516
|
|
|
|
138,376
|
|
|
|
163,335
|
|
Selling, general and administrative
|
|
|
244,114
|
|
|
|
256,659
|
|
|
|
271,562
|
|
Marketing
|
|
|
217,520
|
|
|
|
214,445
|
|
|
|
309,980
|
|
Depreciation and amortization
|
|
|
72,891
|
|
|
|
69,156
|
|
|
|
66,480
|
|
Impairment of goodwill and intangible assets
|
|
|
70,151
|
|
|
|
331,527
|
|
|
|
296,989
|
|
Impairment of property and equipment and other assets (see
Notes 4 and 9)
|
|
|
11,099
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
769,291
|
|
|
|
1,010,163
|
|
|
|
1,108,346
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss)
|
|
|
(11,804
|
)
|
|
|
(272,515
|
)
|
|
|
(238,070
|
)
|
Other (expense) income
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest expense
|
|
|
(44,070
|
)
|
|
|
(57,322
|
)
|
|
|
(62,467
|
)
|
Other income
|
|
|
18
|
|
|
|
2,115
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense
|
|
|
(44,052
|
)
|
|
|
(55,207
|
)
|
|
|
(62,447
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(55,856
|
)
|
|
|
(327,722
|
)
|
|
|
(300,517
|
)
|
Provision (benefit) for income taxes
|
|
|
2,381
|
|
|
|
9,233
|
|
|
|
(1,955
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(58,237
|
)
|
|
$
|
(336,955
|
)
|
|
$
|
(298,562
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share basic and diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share
|
|
$
|
(0.58
|
)
|
|
$
|
(4.01
|
)
|
|
$
|
(3.58
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding
|
|
|
101,269,274
|
|
|
|
84,073,593
|
|
|
|
83,342,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
69
ORBITZ
WORLDWIDE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
Assets
|
|
2010
|
|
|
2009
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
97,222
|
|
|
$
|
88,656
|
|
|
|
|
|
Accounts receivable (net of allowance for doubtful accounts of
$956 and $935, respectively)
|
|
|
54,702
|
|
|
|
54,708
|
|
|
|
|
|
Prepaid expenses
|
|
|
17,425
|
|
|
|
17,399
|
|
|
|
|
|
Due from Travelport, net
|
|
|
15,449
|
|
|
|
3,188
|
|
|
|
|
|
Other current assets
|
|
|
3,627
|
|
|
|
5,702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
188,425
|
|
|
|
169,653
|
|
|
|
|
|
Property and equipment, net
|
|
|
158,063
|
|
|
|
180,962
|
|
|
|
|
|
Goodwill
|
|
|
677,964
|
|
|
|
713,123
|
|
|
|
|
|
Trademarks and trade names
|
|
|
128,431
|
|
|
|
155,090
|
|
|
|
|
|
Other intangible assets, net
|
|
|
7,649
|
|
|
|
18,562
|
|
|
|
|
|
Deferred income taxes, non-current
|
|
|
8,147
|
|
|
|
9,954
|
|
|
|
|
|
Other non-current assets
|
|
|
48,024
|
|
|
|
46,898
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
1,216,703
|
|
|
$
|
1,294,242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
26,491
|
|
|
$
|
30,279
|
|
|
|
|
|
Accrued merchant payable
|
|
|
233,850
|
|
|
|
219,073
|
|
|
|
|
|
Accrued expenses
|
|
|
105,798
|
|
|
|
112,771
|
|
|
|
|
|
Deferred income
|
|
|
30,850
|
|
|
|
30,924
|
|
|
|
|
|
Term loan, current
|
|
|
19,808
|
|
|
|
20,994
|
|
|
|
|
|
Other current liabilities
|
|
|
5,994
|
|
|
|
5,162
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
422,791
|
|
|
|
419,203
|
|
|
|
|
|
Term loan, non-current
|
|
|
472,213
|
|
|
|
555,582
|
|
|
|
|
|
Line of credit
|
|
|
|
|
|
|
42,221
|
|
|
|
|
|
Tax sharing liability
|
|
|
101,545
|
|
|
|
108,736
|
|
|
|
|
|
Unfavorable contracts
|
|
|
8,068
|
|
|
|
9,901
|
|
|
|
|
|
Other non-current liabilities
|
|
|
22,233
|
|
|
|
28,096
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
1,026,850
|
|
|
|
1,163,739
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (see Note 10)
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par value, 100 shares
authorized, no shares issued or outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value, 140,000,000 shares
authorized, 102,342,860 and 83,831,561 shares issued and
outstanding, respectively
|
|
|
1,023
|
|
|
|
838
|
|
|
|
|
|
Treasury stock, at cost, 25,237 and 24,521 shares held,
respectively
|
|
|
(52
|
)
|
|
|
(48
|
)
|
|
|
|
|
Additional paid in capital
|
|
|
1,029,215
|
|
|
|
921,425
|
|
|
|
|
|
Accumulated deficit
|
|
|
(843,609
|
)
|
|
|
(785,372
|
)
|
|
|
|
|
Accumulated other comprehensive income (loss) (net of
accumulated tax benefit of $2,558 and $2,558, respectively)
|
|
|
3,276
|
|
|
|
(6,340
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Shareholders Equity
|
|
|
189,853
|
|
|
|
130,503
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders Equity
|
|
$
|
1,216,703
|
|
|
$
|
1,294,242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
70
ORBITZ
WORLDWIDE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(58,237
|
)
|
|
$
|
(336,955
|
)
|
|
$
|
(298,562
|
)
|
Adjustments to reconcile net loss to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gain on extinguishment of debt
|
|
|
(57
|
)
|
|
|
(2,172
|
)
|
|
|
|
|
Depreciation and amortization
|
|
|
72,891
|
|
|
|
69,156
|
|
|
|
66,480
|
|
Impairment of goodwill and intangible assets
|
|
|
70,151
|
|
|
|
331,527
|
|
|
|
296,989
|
|
Impairment of property and equipment and other assets
|
|
|
11,099
|
|
|
|
|
|
|
|
|
|
Amortization of unfavorable contract liability
|
|
|
(9,226
|
)
|
|
|
(3,300
|
)
|
|
|
(3,300
|
)
|
Non-cash net interest expense
|
|
|
15,797
|
|
|
|
15,451
|
|
|
|
18,104
|
|
Deferred income taxes
|
|
|
1,494
|
|
|
|
6,920
|
|
|
|
(4,032
|
)
|
Stock compensation
|
|
|
12,535
|
|
|
|
14,099
|
|
|
|
14,812
|
|
Provision for bad debts
|
|
|
34
|
|
|
|
566
|
|
|
|
25
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(256
|
)
|
|
|
4,508
|
|
|
|
429
|
|
Deferred income
|
|
|
(831
|
)
|
|
|
8,575
|
|
|
|
(436
|
)
|
Due to/from Travelport, net
|
|
|
(12,126
|
)
|
|
|
6,344
|
|
|
|
(5,351
|
)
|
Accrued merchant payable
|
|
|
14,593
|
|
|
|
3,582
|
|
|
|
3,232
|
|
Accounts payable, accrued expenses and other current liabilities
|
|
|
(11,636
|
)
|
|
|
(10,848
|
)
|
|
|
(3,030
|
)
|
Other
|
|
|
(7,616
|
)
|
|
|
(2,379
|
)
|
|
|
(9,102
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
98,609
|
|
|
|
105,074
|
|
|
|
76,258
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment additions
|
|
|
(40,010
|
)
|
|
|
(42,909
|
)
|
|
|
(58,203
|
)
|
Changes in restricted cash
|
|
|
(132
|
)
|
|
|
(682
|
)
|
|
|
|
|
Proceeds from asset sales
|
|
|
|
|
|
|
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) investing activities
|
|
|
(40,142
|
)
|
|
|
(43,591
|
)
|
|
|
(58,171
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock, net of issuance costs
|
|
|
48,930
|
|
|
|
|
|
|
|
|
|
Payments of fees to repurchase a portion of the term loan
|
|
|
(248
|
)
|
|
|
|
|
|
|
|
|
Capital lease payments and payments on the term loan
|
|
|
(20,994
|
)
|
|
|
(5,924
|
)
|
|
|
(7,070
|
)
|
Payments to extinguish debt
|
|
|
(13,488
|
)
|
|
|
(7,774
|
)
|
|
|
|
|
Employee tax withholdings related to net share settlements of
equity-based awards
|
|
|
(2,984
|
)
|
|
|
(422
|
)
|
|
|
(659
|
)
|
Proceeds from exercise of employee stock options
|
|
|
72
|
|
|
|
422
|
|
|
|
|
|
Payments on tax sharing liability
|
|
|
(18,885
|
)
|
|
|
(11,075
|
)
|
|
|
(19,577
|
)
|
Proceeds from line of credit
|
|
|
|
|
|
|
99,457
|
|
|
|
68,935
|
|
Payments on line of credit
|
|
|
(42,221
|
)
|
|
|
(81,052
|
)
|
|
|
(49,447
|
)
|
Proceeds from note payable
|
|
|
800
|
|
|
|
|
|
|
|
|
|
Payments on note payable
|
|
|
(57
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) financing activities
|
|
|
(49,075
|
)
|
|
|
(6,368
|
)
|
|
|
(7,818
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effects of changes in exchange rates on cash and cash equivalents
|
|
|
(826
|
)
|
|
|
2,348
|
|
|
|
(3,761
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
8,566
|
|
|
|
57,463
|
|
|
|
6,508
|
|
Cash and cash equivalents at beginning of period
|
|
|
88,656
|
|
|
|
31,193
|
|
|
|
24,685
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
97,222
|
|
|
$
|
88,656
|
|
|
$
|
31,193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax payments (refunds), net
|
|
$
|
1,120
|
|
|
$
|
1,151
|
|
|
$
|
(2,082
|
)
|
Cash interest payments, net of capitalized interest of $17, $82
and $544, respectively
|
|
$
|
27,935
|
|
|
$
|
42,075
|
|
|
$
|
47,467
|
|
Non-cash investing activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures incurred not yet paid
|
|
$
|
2,948
|
|
|
$
|
307
|
|
|
$
|
2,011
|
|
Non-cash financing activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment of term loan in connection with debt-equity exchange
(see Note 7)
|
|
$
|
49,564
|
|
|
$
|
|
|
|
$
|
|
|
See Notes to Consolidated Financial Statements.
71
ORBITZ
WORLDWIDE, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Net loss
|
|
$
|
(58,237
|
)
|
|
$
|
(336,955
|
)
|
|
$
|
(298,562
|
)
|
Other comprehensive income (loss), net of income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency translation adjustment
|
|
|
7,197
|
|
|
|
5,602
|
|
|
|
(6,947
|
)
|
Unrealized gains (losses) on floating to fixed interest rate
swaps
|
|
|
2,419
|
|
|
|
9,520
|
|
|
|
(8,367
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
|
9,616
|
|
|
|
15,122
|
|
|
|
(15,314
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
$
|
(48,621
|
)
|
|
$
|
(321,833
|
)
|
|
$
|
(313,876
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
72
ORBITZ
WORLDWIDE, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS
EQUITY
(in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Unrealized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Losses) Gains from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Interest
|
|
|
Foreign
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Treasury Stock
|
|
|
Paid in
|
|
|
Accumulated
|
|
|
Rate
|
|
|
Currency
|
|
|
Shareholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Swaps
|
|
|
Translation
|
|
|
Equity
|
|
|
Balance at December 31, 2007
|
|
|
83,107,909
|
|
|
$
|
831
|
|
|
|
8,852
|
|
|
$
|
1
|
|
|
$
|
893,131
|
|
|
$
|
(149,855
|
)
|
|
$
|
(3,930
|
)
|
|
$
|
(2,218
|
)
|
|
$
|
737,960
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(298,562
|
)
|
|
|
|
|
|
|
|
|
|
|
(298,562
|
)
|
Amortization of equity-based compensation awards granted to
employees, net of shares withheld to satisfy employee tax
withholding obligations upon vesting
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,191
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,191
|
|
Common shares issued upon vesting of restricted stock units
|
|
|
233,878
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares issued upon lapse of restrictions on deferred
stock units
|
|
|
12,853
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares withheld to satisfy employee tax withholding
obligations upon vesting of restricted stock
|
|
|
(2,617
|
)
|
|
|
|
|
|
|
2,617
|
|
|
|
(38
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(38
|
)
|
Restricted stock forfeited
|
|
|
(6,586
|
)
|
|
|
|
|
|
|
6,586
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,367
|
)
|
|
|
(6,947
|
)
|
|
|
(15,314
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
|
83,345,437
|
|
|
|
834
|
|
|
|
18,055
|
|
|
|
(37
|
)
|
|
|
907,319
|
|
|
|
(448,417
|
)
|
|
|
(12,297
|
)
|
|
|
(9,165
|
)
|
|
|
438,237
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(336,955
|
)
|
|
|
|
|
|
|
|
|
|
|
(336,955
|
)
|
Amortization of equity-based compensation awards granted to
employees, net of shares withheld to satisfy employee tax
withholding obligations upon vesting
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,688
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,688
|
|
Common shares issued upon vesting of restricted stock units
|
|
|
425,068
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares issued upon exercise of stock options
|
|
|
67,522
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
422
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
422
|
|
Common shares withheld to satisfy employee tax withholding
obligations upon vesting of restricted stock
|
|
|
(4,453
|
)
|
|
|
|
|
|
|
4,453
|
|
|
|
(11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11
|
)
|
Restricted stock forfeited
|
|
|
(2,013
|
)
|
|
|
|
|
|
|
2,013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,520
|
|
|
|
5,602
|
|
|
|
15,122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
|
83,831,561
|
|
|
|
838
|
|
|
|
24,521
|
|
|
|
(48
|
)
|
|
|
921,425
|
|
|
|
(785,372
|
)
|
|
|
(2,777
|
)
|
|
|
(3,563
|
)
|
|
|
130,503
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(58,237
|
)
|
|
|
|
|
|
|
|
|
|
|
(58,237
|
)
|
Amortization of equity-based compensation awards granted to
employees, net of shares withheld to satisfy employee tax
withholding obligations upon vesting
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,555
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,555
|
|
Common shares issued pursuant to Exchange Agreement and Stock
Purchase Agreement (see Note 7)
|
|
|
17,166,673
|
|
|
|
172
|
|
|
|
|
|
|
|
|
|
|
|
98,176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
98,348
|
|
Common shares issued upon vesting of restricted stock units
|
|
|
1,333,624
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
(13
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares issued upon exercise of stock options
|
|
|
11,718
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72
|
|
Common shares withheld to satisfy employee tax withholding
obligations upon vesting of restricted stock
|
|
|
(716
|
)
|
|
|
|
|
|
|
716
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4
|
)
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,419
|
|
|
|
7,197
|
|
|
|
9,616
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2010
|
|
|
102,342,860
|
|
|
$
|
1,023
|
|
|
|
25,237
|
|
|
$
|
(52
|
)
|
|
$
|
1,029,215
|
|
|
$
|
(843,609
|
)
|
|
$
|
(358
|
)
|
|
$
|
3,634
|
|
|
$
|
189,853
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
73
ORBITZ
WORLDWIDE, INC.
Description
of the Business
Orbitz, Inc. (Orbitz) was formed in early 2000 by
American Airlines, Inc., Continental Airlines, Inc., Delta Air
Lines, Inc., Northwest Airlines, Inc. and United Air Lines, Inc.
(the Founding Airlines). In November 2004, Orbitz
was acquired by Cendant Corporation (Cendant), whose
online travel distribution businesses included the HotelClub and
RatesToGo brands (collectively referred to as
HotelClub) and the CheapTickets brand. In February
2005, Cendant acquired ebookers Limited, an international online
travel brand which currently has operations in 12 countries
throughout Europe (ebookers).
On August 23, 2006, Travelport Limited
(Travelport), which consisted of Cendants
travel distribution services businesses, including the
businesses that currently comprise Orbitz Worldwide, Inc., was
acquired by affiliates of The Blackstone Group
(Blackstone) and Technology Crossover Ventures
(TCV). We refer to this acquisition as the
Blackstone Acquisition.
Orbitz Worldwide, Inc. was incorporated in Delaware on
June 18, 2007 and was formed to be the parent company of
the
business-to-consumer
travel businesses of Travelport, including Orbitz, ebookers and
HotelClub and the related subsidiaries and affiliates of those
businesses. We are the registrant as a result of the completion
of the initial public offering (IPO) of
34,000,000 shares of our common stock on July 25,
2007. At December 31, 2010 and December 31, 2009,
Travelport and investment funds that own
and/or
control Travelports ultimate parent company beneficially
owned approximately 56% and 57% of our outstanding common stock,
respectively.
We are a leading global online travel company that uses
innovative technology to enable leisure and business travelers
to search for and book a broad range of travel products and
services. Our brand portfolio includes Orbitz, CheapTickets, The
Away Network and Orbitz for Business in the United States;
ebookers in Europe; and HotelClub based in Australia, which has
operations globally. We provide customers with the ability to
book a wide array of travel products and services from suppliers
worldwide, including air travel, hotels, vacation packages, car
rentals, cruises, travel insurance and destination services such
as ground transportation, event tickets and tours.
Basis of
Presentation
The accompanying consolidated financial statements present the
accounts of Orbitz, ebookers and HotelClub and the related
subsidiaries and affiliates of those businesses, collectively
doing business as Orbitz Worldwide, Inc. These entities became
wholly-owned subsidiaries of ours as part of an intercompany
restructuring that was completed on July 18, 2007 in
connection with the IPO. Prior to the IPO, these entities had
operated as indirect, wholly-owned subsidiaries of Travelport.
Our consolidated financial statements were presented in millions
in our SEC filings for periods prior to the first quarter of
2010. Beginning with our first quarter 2010
Form 10-Q,
our consolidated financial statements are presented in thousands.
|
|
2.
|
Summary
of Significant Accounting Policies
|
Principles
of Consolidation
The accompanying consolidated financial statements have been
prepared in accordance with accounting principles generally
accepted in the United States (GAAP). All
intercompany balances and transactions have been eliminated in
the consolidated financial statements.
74
ORBITZ
WORLDWIDE, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Use of
Estimates
The preparation of our consolidated financial statements and
related notes in conformity with GAAP requires us to make
certain estimates and assumptions. Our estimates and assumptions
affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities as of the date
of our consolidated financial statements and the reported
amounts of revenue and expense during any period.
Our significant estimates include the collectability of other
non-current assets, sales allowances, the realization of
deferred tax assets, amounts that may be due under the tax
sharing agreement, impairment of long-lived assets, goodwill and
indefinite-lived intangible assets, estimated forfeitures
related to equity-based compensation expense, and costs to be
capitalized as well as the useful life of capitalized software.
Actual results could differ from our estimates.
During the first quarter of 2010, we had a change in estimate
related to the timing of our recognition of travel insurance
revenue. Prior to the first quarter of 2010, we recorded travel
insurance revenue one month in arrears, upon receipt of payment,
as we did not have sufficient reporting from our travel
insurance supplier to conclude that the price was fixed or
determinable prior to that time. Our travel insurance supplier
implemented timelier reporting, and as a result, beginning with
the first quarter of 2010, we were able to recognize travel
insurance revenue on an accrual basis rather than one month in
arrears. This change in estimate resulted in a $2.5 million
increase in net revenue and net income and a $0.02 increase in
basic and diluted earnings per share for the year ended
December 31, 2010.
Foreign
Currency Translation
Balance sheet accounts of our operations outside of the United
States are translated from foreign currencies into
U.S. dollars at the exchange rates as of the consolidated
balance sheet dates. Revenues and expenses are translated at
average exchange rates during the period. Foreign currency
translation gains or losses are included in accumulated other
comprehensive income (loss) in shareholders equity. Gains
and losses resulting from foreign currency transactions, which
are denominated in currencies other than the entitys
functional currency, are included in our consolidated statements
of operations.
Revenue
Recognition
We recognize revenue when it is earned and realizable, when
persuasive evidence of an arrangement exists, services have been
rendered, the price is fixed or determinable, and collectability
is reasonably assured. We have two primary types of contractual
arrangements with our vendors, which we refer to herein as the
merchant and retail models. Under both
the merchant and retail models, we record revenue earned net of
all amounts paid to our suppliers.
We provide customers the ability to book air travel, hotels, car
rentals and other travel products and services through our
various websites. These travel products and services are made
available to our customers for booking on a stand-alone basis or
as part of a vacation package.
Under the merchant model, we generate revenue for our services
based on the difference between the total amount the customer
pays for the travel product and the negotiated net rate plus
estimated taxes that the supplier charges us for that product.
Customers generally pay us for reservations at the time of
booking. Initially, we record these customer receipts as accrued
merchant payables and either deferred income or net revenue,
depending on the travel product. In the merchant model, we do
not take on credit risk with the customer, however we are
subject to charge-backs and fraud risk which we monitor closely;
we have the ability to determine the price; we are not
responsible for the actual delivery of the flight, hotel room or
car rental; we take no inventory risk; we have no ability to
determine or change the products or services delivered; and the
customer chooses the supplier.
75
ORBITZ
WORLDWIDE, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
We recognize net revenue under the merchant model when we have
no further obligations to the customer. For merchant air
transactions, this is at the time of booking. For merchant hotel
transactions and merchant car transactions, net revenue is
recognized at the time of check-in or customer
pick-up,
respectively. The timing of revenue recognition is different for
merchant air travel because our primary service to the customer
is fulfilled at the time of booking.
We accrue for the cost of merchant hotel and merchant car
transactions based on amounts we expect to be invoiced by
suppliers. If we do not receive an invoice within a certain
period of time, generally within six months, or the invoice
received is less than the accrued amount, we reverse a portion
of the accrued cost when we determine it is not probable that we
will be required to pay the supplier, based on our historical
experience and contract terms. This would result in an increase
in net revenue and a decrease to the accrued merchant payable.
Under the retail model, we pass reservations booked by our
customers to the travel supplier for a commission. In the retail
model, we do not take on credit risk with the customer; we are
not the primary obligor with the customer; we have no latitude
in determining pricing; we take no inventory risk; we have no
ability to determine or change the products or services
delivered; and the customer chooses the supplier.
We recognize net revenue under the retail model when the
reservation is made, secured by a customer with a credit card
and we have no further obligations to the customer. For air
transactions, this is at the time of booking. For hotel
transactions and car transactions, net revenue is recognized at
the time of check-in or customer
pick-up,
respectively, net of an allowance for cancelled reservations.
The timing of recognition is different for retail hotel and
retail car transactions than for retail air travel because
unlike air travel where the reservation is secured by a
customers credit card at booking, car rental bookings and
hotel bookings are not secured by a customers credit card
until the
pick-up date
and check-in date, respectively. Allowances for cancelled
reservations primarily relate to cancellations that do not occur
through our websites, but instead occur directly through the
supplier of the travel product. The amount of the allowance is
determined based on our historical experience. The majority of
commissions earned under the retail model are based upon
contractual agreements.
Vacation packages offer customers the ability to book a
combination of travel products. For example, travel products
booked in a vacation package may include a combination of air
travel, hotel and car rental reservations. We recognize net
revenue for the entire package when the customer uses the
reservation, which generally occurs on the same day for each
travel product included in the vacation package.
Under both the merchant and retail models, we may, depending
upon the brand and the travel product, charge our customers a
service fee for booking their travel reservation. We recognize
revenue for service fees at the time we recognize the net
revenue for the corresponding travel product. We also may
receive override commissions from suppliers if we meet certain
contractual volume thresholds. These commissions are recognized
when the amount of the commissions becomes fixed or
determinable, which is generally upon notification by the
respective travel supplier.
We utilize global distribution systems (GDS)
services provided by Galileo, Worldspan and Amadeus IT Group.
Under our GDS service agreements, we earn revenue in the form of
an incentive payment for air, car and hotel segments that are
processed through a GDS. Revenue is recognized for these
incentive payments at the time the travel reservation is
processed through the GDS, which is generally at the time of
booking.
We also generate other revenue, which is primarily comprised of
revenue from advertising, including sponsoring links on our
websites, and travel insurance. Advertising revenue is derived
primarily from the delivery of advertisements on our websites
and is recognized either at the time of display of each
individual advertisement, or ratably over the advertising
delivery period, depending on the terms of the advertising
contract. Revenues generated from sponsoring links are
recognized upon notification from the alliance partner that a
transaction has occurred. Travel insurance revenue is recognized
when the reservation is made, secured
76
ORBITZ
WORLDWIDE, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
by a customer with a credit card and we have no further
obligations to the customer, which for travel insurance is at
the time of booking.
Cost of
Revenue
Our cost of revenue is primarily comprised of direct costs
incurred to generate revenue, including costs to operate our
customer service call centers, credit card processing fees,
customer refunds and charge-backs, commissions to private label
partners (affiliate commissions) and connectivity
and other processing costs. These costs are generally variable
in nature and are primarily driven by transaction volume.
Marketing
Expense
Our marketing expense is primarily comprised of online marketing
costs, such as search and banner advertising, and offline
marketing costs, such as television, radio and print
advertising. Online advertising expense is recognized based on
the terms of the individual agreements, which are generally over
the ratio of the number of impressions delivered over the total
number of contracted impressions, or
pay-per-click,
or on a straight-line basis over the term of the contract.
Offline marketing expense is recognized in the period in which
it is incurred. Our online marketing costs are significantly
greater than our offline marketing costs.
Income
Taxes
Our provision for income taxes is determined using the asset and
liability method. Under this method, deferred tax assets and
liabilities are calculated based upon the temporary differences
between the financial statement and income tax bases of assets
and liabilities using the combined federal and state effective
tax rates that are applicable to us in a given year. The
deferred tax assets are recorded net of a valuation allowance
when, based on the weight of available evidence, we believe it
is more likely than not that some portion or all of the recorded
deferred tax assets will not be realized in future periods.
Increases to the valuation allowance are recorded as increases
to the provision for income taxes. Effective January 1,
2009, to the extent that any valuation allowances established by
us in purchase accounting are reduced, these reductions are
recorded through our consolidated statements of operations.
These reductions were previously recorded through goodwill. The
realization of the deferred tax assets, net of a valuation
allowance, is primarily dependent on estimated future taxable
income. A change in our estimate of future taxable income may
require an increase or decrease to the valuation allowance.
Derivative
Financial Instruments
We measure derivatives at fair value and recognize them in our
consolidated balance sheets as assets or liabilities, depending
on our rights or obligations under the applicable derivative
contract. For our derivatives designated as fair value hedges,
if any, the changes in the fair value of both the derivative
instrument and the hedged item are recorded in earnings. For our
derivatives designated as cash flow hedges, the effective
portions of changes in fair value of the derivative are reported
in other comprehensive income and are subsequently reclassified
into earnings when the hedged item affects earnings. Changes in
fair value of derivative instruments not designated as hedging
instruments, and ineffective portions of hedges, are recognized
in earnings in the current period.
We manage interest rate exposure by utilizing interest rate
swaps to achieve a desired mix of fixed and variable rate debt.
As of December 31, 2010, we had three interest rate swaps
that effectively converted $300.0 million of the
$600.0 million term loan facility from a variable to a
fixed interest rate (see Note 13 Derivative
Financial Instruments). We determined that our interest rate
swaps qualified for hedge accounting and were highly effective
as hedges. Accordingly, we have recorded the change in fair
value of our interest rate swaps in accumulated other
comprehensive income (loss).
77
ORBITZ
WORLDWIDE, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
We have entered into foreign currency contracts to manage
exposure to changes in foreign currencies associated with
receivables, payables and forecasted earnings. These foreign
currency contracts did not qualify for hedge accounting
treatment. As a result, the changes in fair values of the
foreign currency contracts were recorded in selling, general and
administrative expense in our consolidated statements of
operations.
We do not enter into derivative instruments for speculative
purposes. We require that the hedges or derivative financial
instruments be effective in managing the interest rate risk or
foreign currency risk exposure that they are designated to
hedge. Hedges that qualify for hedge accounting are formally
designated as such at the inception of the contract. When the
terms of an underlying transaction are modified, or when the
underlying hedged item ceases to exist, resulting in some
ineffectiveness, the change in the fair value of the derivative
instrument will be included in earnings. Additionally, any
derivative instrument used for risk management that becomes
ineffective is
marked-to-market
each period. We believe that our credit risk has been mitigated
by entering into these agreements with major financial
institutions. Net interest differentials to be paid or received
under our interest rate swaps are included in interest expense
as incurred or earned.
Concentration
of Credit Risk
Our cash and cash equivalents are potentially subject to
concentration of credit risk. We maintain cash and cash
equivalent balances with financial institutions that, in some
cases, are in excess of Federal Deposit Insurance Corporation
insurance limits or are foreign institutions.
Cash and
Cash Equivalents
We consider cash and highly liquid investments, such as money
market funds, with an original maturity of three months or less
to be cash and cash equivalents. Cash and cash equivalents are
stated at cost, which approximates or equals fair value due to
their short-term nature.
Allowance
for Doubtful Accounts
Our accounts receivable were reported in our consolidated
balance sheets net of an allowance for doubtful accounts. We
provide for estimated bad debts based on our assessment of our
ability to realize receivables, considering historical
collection experience, the general economic environment and
specific customer information. When we determine that a
receivable is not collectable, the account is charged to expense
in our consolidated statements of operations. Bad debt expense
is recorded in selling, general and administrative expense in
our consolidated statements of operations. During the years
ended December 31, 2010, December 31, 2009 and
December 31, 2008, we recorded bad debt expense of $0,
$0.6 million and $0, respectively.
Property
and Equipment, Net
Property and equipment is recorded at cost, net of accumulated
depreciation and amortization. We depreciate and amortize
property and equipment over their estimated useful lives using
the straight-line method. The estimated useful lives by asset
category are:
|
|
|
Asset Category
|
|
Estimated Useful Life
|
|
Leasehold improvements
|
|
Shorter of assets useful life or non-cancellable lease term
|
Capitalized software
|
|
3 - 10 years
|
Furniture, fixtures and equipment
|
|
3 - 7 years
|
We capitalize the costs of software developed for internal use
when the preliminary project stage of the application has been
completed and it is probable that the project will be completed
and used to perform the function intended. Amortization
commences when the software is placed into service.
78
ORBITZ
WORLDWIDE, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
We also capitalize interest on internal software development
projects. The amount of interest capitalized is computed by
applying our weighted-average borrowing rate to qualifying
expenditures. During the years ended December 31, 2010,
December 31, 2009 and December 31, 2008, we
capitalized $0, $0.1 million and $0.5 million of
interest, respectively.
We evaluate the recoverability of our long-lived assets,
including property and equipment and finite-lived intangible
assets, when circumstances indicate that the carrying value of
those assets may not be recoverable. This analysis is performed
by comparing the carrying values of the assets to the current
and expected future cash flows to be generated from these
assets, on an undiscounted basis. If this analysis indicates
that the carrying value of an asset is not recoverable, the
carrying value is reduced to fair value through an impairment
charge in our consolidated statements of operations.
Goodwill,
Trademarks and Other Intangible Assets
Goodwill represents the excess of the purchase price over the
estimated fair value of the underlying assets acquired and
liabilities assumed in the acquisition of a business. We assign
goodwill to reporting units that are expected to benefit from
the business combination as of the acquisition date. Goodwill is
not subject to amortization.
Our indefinite-lived intangible assets include our trademarks
and trade names, which are not subject to amortization. Our
finite-lived intangible assets primarily include our customer
and vendor relationships and are amortized over their estimated
useful lives, generally 4 to 8 years, using the
straight-line method. Our intangible assets primarily relate to
the acquisition of entities accounted for using the purchase
method of accounting and are estimated by management based on
the fair value of assets received.
We assess the carrying value of goodwill and other
indefinite-lived intangible assets for impairment annually or
more frequently whenever events occur and circumstances change
indicating potential impairment. We perform our annual
impairment testing of goodwill and other indefinite-lived
intangible assets in the fourth quarter of each year, in
connection with our annual planning process.
We assess goodwill for possible impairment using a two-step
process. The first step identifies if there is potential
goodwill impairment. If the step one analysis indicates that
impairment may exist, a step two analysis is performed to
measure the amount of the goodwill impairment, if any. Goodwill
impairment exists when the estimated fair value of goodwill is
less than its carrying value. If impairment exists, the carrying
value of the goodwill is reduced to fair value through an
impairment charge in our consolidated statements of operations.
For purposes of goodwill impairment testing, we estimate the
fair value of our reporting units to which goodwill is allocated
using generally accepted valuation methodologies, including
market and income based approaches, and relevant data available
through and as of the testing date. The market approach is a
valuation method in which fair value is estimated based on
observed prices in actual transactions and on asking prices for
similar assets. Under the market approach, the valuation process
is essentially that of comparison and correlation between the
subject asset and other similar assets. The income approach is a
method in which fair value is estimated based on the cash flows
that an asset could be expected to generate over its useful
life, including residual value cash flows. These cash flows are
then discounted to their present value equivalents using a rate
of return that accounts for the relative risk of not realizing
the estimated annual cash flows and for the time value of money.
Variations of the income approach are used to estimate certain
of the intangible asset fair values.
We assess our trademarks and trade names for impairment by
comparing their carrying values to their estimated fair values.
Impairment exists when the estimated fair value of the trademark
or trade name is less than its carrying value. If impairment
exists, then the carrying value is reduced to fair value through
an impairment charge recorded to our consolidated statements of
operations. We use a market or income valuation approach, or a
combination of both, to estimate fair values of the relevant
trademarks and trade names.
79
ORBITZ
WORLDWIDE, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Tax
Sharing Liability
We have a liability included in our consolidated balance sheets
that relates to a tax sharing agreement between Orbitz and the
Founding Airlines. The agreement governs the allocation of tax
benefits resulting from a taxable exchange that took place in
connection with the Orbitz initial public offering in December
2003 (Orbitz IPO). As a result of this taxable
exchange, the Founding Airlines incurred a taxable gain. The
taxable exchange caused Orbitz to have additional future tax
deductions for depreciation and amortization due to the
increased tax basis of its assets. The additional tax deductions
for depreciation and amortization may reduce the amount of taxes
we are required to pay in future years. For each tax period
during the term of the tax sharing agreement, we are obligated
to pay the Founding Airlines a significant percentage of the
amount of the tax benefit realized as a result of the taxable
exchange. The tax sharing agreement commenced upon consummation
of the Orbitz IPO and continues until all tax benefits have been
utilized.
We use discounted cash flows in calculating and recognizing the
tax sharing liability. We review the calculation of the tax
sharing liability on a quarterly basis and make revisions to our
estimated timing of payments when appropriate. We also assess
whether there are any significant changes, such as changes in
the amount of payments and tax rates, that could materially
affect the present value of the tax sharing liability. Although
the expected gross remaining payments that may be due under this
agreement were $195.1 million as of December 31, 2010,
the timing and amount of payments may change. Any changes in
timing of payments are recognized prospectively as accretions to
the tax sharing liability in our consolidated balance sheets and
non-cash interest expense in our consolidated statements of
operations. Any changes in the amount of payments are recognized
in selling, general and administrative expense in our
consolidated statements of operations.
At the time of the Blackstone Acquisition, Cendant (now Avis
Budget Group, Inc.) indemnified Travelport and us for a portion
of the amounts due under the tax sharing agreement. As a result,
we recorded a $37.0 million long-term asset included in
other non-current assets in our consolidated balance sheets at
December 31, 2010 and December 31, 2009. Cendant is
obligated to pay us this amount when it receives the tax
benefit. We regularly monitor the financial condition of Cendant
to assess the collectability of this asset.
Equity-Based
Compensation
We measure equity-based compensation cost at fair value and
recognize the corresponding compensation expense on a
straight-line basis over the service period during which awards
are expected to vest. We include equity-based compensation
expense in the selling, general and administrative line of our
consolidated statements of operations. The fair value of
restricted stock and restricted stock units is determined based
on the average of the high and low price of our common stock on
the date of grant. The fair value of stock options is determined
on the date of grant using the Black-Scholes valuation model.
The amount of equity-based compensation expense recorded each
period is net of estimated forfeitures. We estimate forfeitures
based on historical employee turnover rates, the terms of the
award issued and assumptions regarding future employee turnover.
Hotel
Occupancy Taxes
Some states and localities impose a tax on the use or occupancy
of hotel accommodations (hotel occupancy tax).
Generally, hotels collect hotel occupancy tax based on the
amount of money they receive for renting their hotel rooms and
remit the tax to the appropriate taxing authorities. Using the
travel services our websites offer, customers are able to make
hotel room reservations. While applicable tax provisions vary
among different taxing jurisdictions, we generally believe that
the law does not require us to collect and remit hotel occupancy
tax on the compensation that we receive for our travel services.
Some tax authorities have initiated lawsuits or administrative
proceedings asserting that we are required to collect and remit
hotel occupancy tax on the amount of money we receive from
customers for facilitating their reservations. The
80
ORBITZ
WORLDWIDE, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
ultimate resolution in all jurisdictions cannot be determined at
this time. We establish an accrual for legal proceedings (tax or
otherwise) when we determine that a loss is both probable and
can be reasonably estimated. See Note 10
Commitments and Contingencies.
Recently
Issued Accounting Pronouncements
In September 2009, the FASB issued guidance that allows
companies to allocate arrangement consideration in a multiple
element arrangement in a way that better reflects the
transaction economics. It provides another alternative for
establishing fair value for a deliverable when vendor specific
objective evidence or third party evidence for deliverables in
an arrangement cannot be determined. When this evidence cannot
be determined, companies will be required to develop a best
estimate of the selling price to separate deliverables and
allocate arrangement consideration using the relative selling
price method. The guidance also expands the disclosure
requirements to require that an entity provide both qualitative
and quantitative information about the significant judgments
made in applying this guidance. This guidance is effective on a
prospective basis for revenue arrangements entered into or
materially modified on or after January 1, 2011. The
adoption of this guidance did not have a material impact on our
consolidated financial statements.
In January 2010, the FASB issued guidance that requires expanded
disclosures about fair value measurements. This guidance adds
new requirements for disclosures about transfers into and out of
Levels 1 and 2 and separate disclosures about purchases,
sales, issuances and settlements relating to Level 3
measurements. It also clarifies existing fair value disclosures
about the level of disaggregation and about inputs and valuation
techniques used to measure fair value. This guidance was
effective for the first reporting period beginning after
December 15, 2009, except for the requirement to provide
the Level 3 activity of purchases, sales, issuances and
settlements on a gross basis, which was effective for fiscal
years beginning after December 15, 2010, and for interim
periods within those fiscal years. The adoption of this guidance
did not have an impact on our consolidated financial statements.
The applicable disclosures are included in
Note 18 Fair Value Measurements.
|
|
3.
|
Impairment
of Goodwill and Intangible Assets
|
We assess the carrying value of goodwill and other
indefinite-lived intangible assets for impairment annually or
more frequently whenever events occur and circumstances change
indicating potential impairment. We also evaluate the
recoverability of our long-lived assets, including our property
and equipment and finite-lived intangible assets, when
circumstances indicate that the carrying value of those assets
may not be recoverable. See Note 2 Summary of
Significant Accounting Policies for further information on our
accounting policy for goodwill, other indefinite-lived
intangible assets and finite-lived intangible assets.
2010
During the year ended December 31, 2010, we performed our
annual impairment test of goodwill and trademark and trade names
as of October 1, 2010.
We estimated the fair value of our reporting units to which
goodwill is allocated using generally accepted valuation
methodologies, including market and income based approaches, and
relevant data available through and as of October 1, 2010.
We used the income approach to estimate the fair value of our
reporting units which had goodwill balances and used the market
approach to corroborate these estimates. We considered the
market approach from a reasonableness standpoint by comparing
the multiples of the guideline companies with the implied
multiples from the income approach, but primarily relied upon
our observed market capitalization to assess reasonableness of
the income approach conclusions. The key assumptions used in
determining the estimated fair value of our reporting units were
the terminal growth rate, forecasted cash flows and the discount
rate.
81
ORBITZ
WORLDWIDE, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
We used appropriate valuation techniques to separately estimate
the fair values of all of our trademarks and trade names as of
October 1, 2010 and compared those estimates to the
respective carrying values. We used an income valuation approach
to estimate fair value of the relevant trademarks and trade
names. The key assumptions used in determining the estimated
fair value of our trademarks and trade names were the terminal
growth rate, estimated future revenues, an assumed royalty rate
and the discount rate. While certain of these inputs are
observable, significant judgment was required to select certain
inputs from observed market data.
We were also required to determine the fair value of the
property and equipment associated with HotelClub, both as a
result of our decision in the fourth quarter of 2010 to migrate
HotelClub to the global technology platform and as part of our
annual goodwill impairment test. Additionally, we were required
to determine the fair values of the finite-lived intangible
assets related to our HotelClub reporting unit as of
October 1, 2010. We used an income valuation approach to
estimate the fair value of the property and equipment and
finite-lived intangible assets.
In connection with our annual impairment test and as a result of
lower than expected performance and future cash flows for
HotelClub and CheapTickets, we recorded a non-cash impairment
charge of $70.2 million during the year ended
December 31, 2010, of which $41.8 million was to
impair the goodwill of HotelClub and $28.4 million was to
impair the trademarks and trade names associated with HotelClub
and CheapTickets. These charges were included in the impairment
of goodwill and intangible assets expense line item in our
consolidated statement of operations. As a result of our
decision to migrate HotelClub to the global technology platform,
we also recorded a $4.5 million non-cash charge to impair
HotelClub capitalized software. This charge was included in the
impairment of property and equipment and other assets expense
line item in our consolidated statement of operations. The
remaining capitalized software balance at HotelClub following
this charge was not material.
2009
During the three months ended March 31, 2009, we
experienced a significant decline in our stock price, and
economic and industry conditions continued to weaken. These
factors, coupled with an increase in competitive pressures,
indicated potential impairment of our goodwill and trademarks
and trade names. As a result, in connection with the preparation
of our financial statements for the first quarter of 2009, we
performed an interim impairment test of goodwill and trademarks
and trade names.
We estimated the fair value of our reporting units to which
goodwill is allocated using generally accepted valuation
methodologies, including market and income based approaches, as
described above, and relevant data available through and as of
March 31, 2009. The key assumptions used in determining the
estimated fair value of our reporting units were the terminal
growth rate, forecasted cash flows and the discount rate.
We used appropriate valuation techniques to separately estimate
the fair values of all of our trademarks and trade names as of
March 31, 2009 and compared those estimates to the
respective carrying values. We used an income valuation approach
to estimate fair values of the relevant trademarks and trade
names. The key assumptions used in determining the estimated
fair value of our trademarks and trade names were the terminal
growth rate, estimated future revenues, an assumed royalty rate
and the discount rate. While certain of these inputs are
observable, significant judgment was required to select certain
inputs from observed market data.
As part of our interim impairment test, we were required to
determine the fair values of our finite-lived intangible assets,
including our customer and vendor relationships, as of
March 31, 2009. We determined the fair values of our
finite-lived intangible assets by discounting the estimated
future cash flows of these assets.
As a result of our interim impairment test, we concluded that
the goodwill across all of our reporting units which had
goodwill balances and the trademarks and trade names associated
with our HotelClub, Orbitz and CheapTickets brands were
impaired. Accordingly, we recorded a non-cash impairment charge
of
82
ORBITZ
WORLDWIDE, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
$331.5 million during the year ended December 31,
2009, of which $249.4 million was to impair goodwill and
$82.1 million was to impair trademarks and trade names.
These charges were included in the impairment of goodwill and
intangible assets expense line item in our consolidated
statement of operations.
2008
During the year ended December 31, 2008, in connection with
our annual planning process, we lowered our long-term earnings
forecast in response to changes in the economic environment,
including the potential future impact of airline capacity
reductions, increased fuel prices and a weakening global
economy. These factors, coupled with a prolonged decline in our
market capitalization, indicated potential impairment of our
goodwill and trademarks and trade names. Additionally, given the
economic environment, our distribution partners were under
increased pressure to reduce their overall costs and could have
attempted to terminate or renegotiate their agreements with us
on more favorable terms to them. These factors indicated that
the carrying value of certain of our finite-lived intangible
assets, specifically customer relationships, may not be
recoverable. As a result, in connection with the preparation of
our financial statements for the third quarter of 2008, we
performed an interim impairment test of our goodwill,
indefinite-lived intangible assets and finite-lived intangible
assets.
For purposes of testing goodwill for potential impairment, we
estimated the fair value of the applicable reporting units to
which all goodwill is allocated using generally accepted
valuation methodologies, including the market and income based
approaches, and relevant data available through and as of
September 30, 2008.
We further used appropriate valuation techniques to separately
estimate the fair values of all of our trademarks and trade
names as of September 30, 2008 and compared those estimates
to the respective carrying values. We used a market or income
valuation approach to estimate fair values of the relevant
trademarks and trade names.
We also determined the estimated fair values of certain of our
finite-lived intangible assets as of September 30, 2008,
specifically certain of our customer relationships whose
carrying values exceeded their expected future cash flows on an
undiscounted basis. We determined the fair values of these
customer relationships by discounting the estimated future cash
flows of these assets. We then compared the estimated fair
values to the respective carrying values.
As a result of this testing, we concluded that the goodwill and
trademarks and trade names related to both our domestic and
international subsidiaries as well as the customer relationships
related to our domestic subsidiaries were impaired. Accordingly,
we recorded a non-cash impairment charge of $297.0 million
during the year ended December 31, 2008, of which
$209.8 million was to impair goodwill, $74.2 million
was to impair trademarks and trade names and $13.0 million
was to impair customer relationships. These charges were
included in the impairment of goodwill and intangible assets
expense line item in our consolidated statements of operations.
|
|
4.
|
Property
and Equipment, Net
|
Property and equipment, net, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
December 31, 2009
|
|
|
|
(in thousands)
|
|
|
Capitalized software
|
|
$
|
252,968
|
|
|
$
|
221,261
|
|
Furniture, fixtures and equipment
|
|
|
72,941
|
|
|
|
68,896
|
|
Leasehold improvements
|
|
|
13,352
|
|
|
|
13,443
|
|
Construction in progress
|
|
|
14,310
|
|
|
|
13,482
|
|
|
|
|
|
|
|
|
|
|
Gross property and equipment
|
|
|
353,571
|
|
|
|
317,082
|
|
Less: accumulated depreciation and amortization
|
|
|
(195,508
|
)
|
|
|
(136,120
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
158,063
|
|
|
$
|
180,962
|
|
|
|
|
|
|
|
|
|
|
83
ORBITZ
WORLDWIDE, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
For the years ended December 31, 2010, December 31,
2009 and December 31, 2008, we recorded depreciation and
amortization expense related to property and equipment in the
amount of $61.7 million, $52.2 million and
$47.7 million, respectively.
There were no assets subject to capital leases at
December 31, 2010 and December 31, 2009.
During the year ended December 31, 2010, we recorded a
non-cash charge of $4.5 million to impair capitalized
software assets for HotelClub. This charge was included in the
impairment of property and equipment and other assets expense
line item in our consolidated statement of operations (see
Note 3 Impairment of Goodwill and Intangible
Assets).
|
|
5.
|
Goodwill
and Intangible Assets
|
In connection with the Blackstone Acquisition, the carrying
values of our assets and liabilities were revised to reflect
fair values as of August 23, 2006. The total amount of
resulting goodwill that was assigned to us was $1.2 billion.
Goodwill and indefinite-lived intangible assets consisted of the
following at December 31, 2010 and December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
December 31, 2009
|
|
|
|
(in thousands)
|
|
|
Goodwill and Indefinite-Lived Intangible Assets:
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
677,964
|
|
|
$
|
713,123
|
|
Trademarks and trade names
|
|
|
128,431
|
|
|
|
155,090
|
|
The changes in the carrying amount of goodwill during the years
ended December 31, 2010 and December 31, 2009 were as
follows:
|
|
|
|
|
|
|
Amount
|
|
|
|
(in thousands)
|
|
|
Balance at December 31, 2008, net of accumulated impairment
of $209,753
|
|
$
|
948,648
|
|
Impairment (a)
|
|
|
(249,446
|
)
|
Impact of foreign currency translation (b)
|
|
|
13,921
|
|
|
|
|
|
|
Balance at December 31, 2009, net of accumulated impairment
of $459,199
|
|
|
713,123
|
|
Impairment (a)
|
|
|
(41,753
|
)
|
Impact of foreign currency translation (b)
|
|
|
6,594
|
|
|
|
|
|
|
Balance at December 31, 2010, net of accumulated impairment
of $500,952
|
|
$
|
677,964
|
|
|
|
|
|
|
|
|
|
(a) |
|
During the years ended December 31, 2010, December 31,
2009 and December 31, 2008, we recorded non-cash impairment
charges related to goodwill and trademarks and trade names (see
Note 3 Impairment of Goodwill and Intangible
Assets). |
|
(b) |
|
Goodwill is allocated among our subsidiaries, including certain
international subsidiaries. As a result, the carrying amount of
our goodwill is impacted by foreign currency translation each
period. |
84
ORBITZ
WORLDWIDE, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Finite-lived intangible assets consisted of the following at
December 31, 2010 and December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
December 31, 2009
|
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
Weighted-
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
Weighted-
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
Average
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
Average
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Useful Life
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Useful Life
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
(in years)
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
(in years)
|
|
|
Finite-Lived Intangible Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships (c)
|
|
$
|
12,000
|
|
|
$
|
(6,625
|
)
|
|
$
|
5,375
|
|
|
|
6
|
|
|
$
|
66,190
|
|
|
$
|
(50,329
|
)
|
|
$
|
15,861
|
|
|
|
4
|
|
Vendor relationships and other
|
|
|
5,779
|
|
|
|
(3,505
|
)
|
|
|
2,274
|
|
|
|
7
|
|
|
|
5,072
|
|
|
|
(2,371
|
)
|
|
|
2,701
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Finite-Lived Intangible Assets
|
|
$
|
17,779
|
|
|
$
|
(10,130
|
)
|
|
$
|
7,649
|
|
|
|
7
|
|
|
$
|
71,262
|
|
|
$
|
(52,700
|
)
|
|
$
|
18,562
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(c) |
|
During the year ended December 31, 2010, we wrote off the
gross carrying amount and corresponding accumulated amortization
related to $54.2 million of fully amortized customer
relationship intangible assets whose useful lives expired during
the period. |
For the years ended December 31, 2010, December 31,
2009 and December 31, 2008, we recorded amortization
expense related to finite-lived intangible assets in the amount
of $11.2 million, $17.0 million and
$18.8 million, respectively. These amounts were included in
depreciation and amortization expense in our consolidated
statements of operations.
The table below shows estimated amortization expense related to
our finite-lived intangible assets over their remaining useful
lives:
|
|
|
|
|
Year
|
|
(in thousands)
|
|
|
2011
|
|
$
|
3,138
|
|
2012
|
|
|
2,067
|
|
2013
|
|
|
1,717
|
|
2014
|
|
|
727
|
|
|
|
|
|
|
Total
|
|
$
|
7,649
|
|
|
|
|
|
|
Accrued expenses consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
December 31, 2009
|
|
|
|
(in thousands)
|
|
|
Employee costs (a)
|
|
|
$20,367
|
|
|
|
$32,684
|
|
Tax sharing liability, current
|
|
|
19,813
|
|
|
|
17,390
|
|
Advertising and marketing
|
|
|
18,282
|
|
|
|
17,897
|
|
Contract exit costs (b)
|
|
|
7,732
|
|
|
|
4,858
|
|
Customer service costs
|
|
|
6,306
|
|
|
|
5,575
|
|
Professional fees
|
|
|
5,900
|
|
|
|
4,414
|
|
Customer refunds
|
|
|
5,126
|
|
|
|
2,963
|
|
Airline rebates
|
|
|
4,907
|
|
|
|
6,121
|
|
Technology costs
|
|
|
4,894
|
|
|
|
4,413
|
|
Customer incentive costs
|
|
|
2,541
|
|
|
|
2,062
|
|
Unfavorable contracts, current
|
|
|
2,490
|
|
|
|
3,300
|
|
Other
|
|
|
7,440
|
|
|
|
11,094
|
|
|
|
|
|
|
|
|
|
|
Total accrued expenses
|
|
|
$105,798
|
|
|
|
$112,771
|
|
|
|
|
|
|
|
|
|
|
85
ORBITZ
WORLDWIDE, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
(a) |
|
The change in accrued employee costs primarily represented lower
accrued employee incentive compensation at December 31,
2010 compared with December 31, 2009. |
|
(b) |
|
In connection with our early termination of an agreement in
2007, we are required to make termination payments totaling
$18.5 million from January 1, 2008 to
December 31, 2016. We accreted interest expense of
$1.0 million, $1.3 million and $1.4 million
related to the termination liability during the years ended
December 31, 2010, December 31, 2009 and
December 31, 2008, respectively. We also made termination
payments of $1.1 million, $3.6 million and
$1.5 million during the years ended December 31, 2010,
December 31, 2009 and December 31, 2008, respectively.
At December 31, 2010, the net present value of the
remaining termination payments of $11.1 million was
included in our consolidated balance sheets, $7.7 million
of which was included in accrued expenses and $3.4 million
of which was included in other non-current liabilities. At
December 31, 2009, the net present value of the remaining
termination payments of $11.3 million was included in our
consolidated balance sheets, $4.9 million of which was
included in accrued expenses and $6.4 million of which was
included in other non-current liabilities. |
|
|
7.
|
Term Loan
and Revolving Credit Facility
|
On July 25, 2007, we entered into a $685.0 million
senior secured credit agreement (Credit Agreement)
consisting of a seven-year $600.0 million term loan
facility (Term Loan) and a six-year
$85.0 million revolving credit facility, which was
effectively reduced to a $72.5 million revolving credit
facility following the bankruptcy of Lehman Commercial Paper
Inc. in October 2008 (Revolver).
Term
Loan
The Term Loan bears interest at a variable rate, at our option,
of LIBOR plus a margin of 300 basis points or an
alternative base rate plus a margin of 200 basis points.
The alternative base rate is equal to the higher of the Federal
Funds Rate plus one half of 1% and the prime rate
(Alternative Base Rate). The principal amount of the
Term Loan is payable in quarterly installments of
$1.3 million, with the final installment (equal to the
remaining outstanding balance) due upon maturity in July 2014.
In addition, we are required to make an annual prepayment on the
Term Loan in the first quarter of each fiscal year in an amount
up to 50% of the prior years excess cash flow, as defined
in the Credit Agreement. Based on our excess cash flow for the
year ended December 31, 2009, we made a $21.0 million
prepayment on the Term Loan in the first quarter of 2010. Based
on our excess cash flow for the year ended December 31,
2010, we are required to make a $19.8 million prepayment on
the Term Loan in the first quarter of 2011. Prepayments from
excess cash flow are applied, in order of maturity, to the
scheduled quarterly Term Loan principal payments. As a result,
we will not be required to make any scheduled principal payments
on the Term Loan during 2011.
The changes in the Term Loan during the years ended
December 31, 2010 and December 31, 2009 were as
follows:
|
|
|
|
|
|
|
Amount
|
|
|
|
(in thousands)
|
|
|
Balance at December 31, 2008
|
|
$
|
592,500
|
|
Scheduled principal payments
|
|
|
(5,924
|
)
|
Repurchases (a)
|
|
|
(10,000
|
)
|
|
|
|
|
|
Balance at December 31, 2009
|
|
|
576,576
|
|
Prepayment from excess cash flow
|
|
|
(20,994
|
)
|
Repurchases (b)
|
|
|
(63,561
|
)
|
|
|
|
|
|
Balance at December 31, 2010
|
|
$
|
492,021
|
|
|
|
|
|
|
|
|
|
|
(a)
|
On June 2, 2009, we entered into an amendment (the
Amendment) to our Credit Agreement, which permitted
us to purchase portions of the outstanding Term Loan on a
non-pro rata basis using cash up
|
86
ORBITZ
WORLDWIDE, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
to $10.0 million and future cash proceeds from equity
issuances and in exchange for equity interests on or prior to
June 2, 2010. Any portion of the Term Loan purchased by us
was retired pursuant to the Amendment.
|
On June 17, 2009, we completed the purchase of
$10.0 million in principal amount of the Term Loan, as
required by the Amendment. We immediately retired this portion
of the Term Loan in accordance with the Amendment. The principal
amount of the Term Loan purchased (net of associated unamortized
debt issuance costs of $0.1 million) exceeded the amount we
paid to purchase the debt (inclusive of miscellaneous fees
incurred) by $2.2 million. Accordingly, we recorded a
$2.2 million gain on extinguishment of this portion of the
Term Loan, which was included in other income in our
consolidated statement of operations for the year ended
December 31, 2009.
|
|
|
|
(b)
|
On January 26, 2010, pursuant to an Exchange Agreement we
entered into with PAR Investment Partners, L.P.
(PAR), as amended, PAR exchanged $49.6 million
aggregate principal amount of the Term Loan for
8,141,402 shares of our common stock. We immediately
retired the portion of the Term Loan purchased from PAR in
accordance with the Amendment. The fair value of our common
shares issued in the exchange was $49.4 million. After
taking into account the write-off of unamortized debt issuance
costs of $0.4 million and $0.2 million of other
miscellaneous fees incurred to purchase this portion of the Term
Loan, we recorded a $0.4 million loss on extinguishment of
this portion of the Term Loan, which was included in other
income in our consolidated statement of operations for the year
ended December 31, 2010. Concurrently, pursuant to a Stock
Purchase Agreement we entered into with Travelport, Travelport
purchased 9,025,271 shares of our common stock for
$50.0 million in cash. We incurred $1.1 million of
issuance costs associated with these equity investments by PAR
and Travelport, which were included in additional paid in
capital in our consolidated balance sheet at December 31,
2010.
|
In May 2010, we used a portion of the cash proceeds received
from Travelports purchase of shares of our common stock in
January 2010 to purchase $14.0 million in principal amount
of the Term Loan. We immediately retired this portion of the
Term Loan in accordance with the Amendment. The principal amount
of the Term Loan purchased (net of associated unamortized debt
issuance costs of $0.1 million) exceeded the amount we paid
to purchase this portion of the Term Loan by $0.4 million.
Accordingly, we recorded a $0.4 million gain on
extinguishment of a portion of the Term Loan, which was included
in other income in our consolidated statement of operations for
the year ended December 31, 2010.
At December 31, 2010, $300.0 million of the Term Loan
had a fixed interest rate as a result of interest rate swaps and
$192.0 million had a variable interest rate based on LIBOR,
resulting in a blended weighted-average interest rate of 4.27%
(see Note 13 Derivative Financial Instruments).
At December 31, 2009, $200.0 million of the Term Loan
had a fixed interest rate as a result of interest rate swaps and
$376.6 million had a variable interest rate based on LIBOR,
resulting in a blended weighted-average interest rate of 4.26%.
Revolver
The Revolver provides for borrowings and letters of credit of up
to $72.5 million ($42.6 million in U.S. dollars
and the equivalent of $29.9 million denominated in Euros
and Pounds Sterling) and bears interest at a variable rate, at
our option, of LIBOR plus a margin of 200 basis points or
an Alternative Base Rate plus a margin of 100 basis points.
The margin is subject to change based on our total leverage
ratio, as defined in the Credit Agreement, with a maximum margin
of 250 basis points on LIBOR-based loans and 150 basis
points on Alternative Base Rate loans. We incur a commitment fee
of 50 basis points on any unused amounts on the Revolver.
The Revolver matures in July 2013.
At December 31, 2010, there were no outstanding borrowings
under the Revolver, and the equivalent of $12.4 million of
outstanding letters of credit issued under the Revolver, which
were denominated in Pounds
87
ORBITZ
WORLDWIDE, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Sterling. At December 31, 2009, there were
$42.2 million of borrowings outstanding under the Revolver,
all of which were denominated in U.S. dollars and had a
variable interest rate equal to the
U.S.-dollar
LIBOR rate plus 225 basis points, or 2.48%. At
December 31, 2009, there were also the equivalent of
$4.5 million of outstanding letters of credit issued under
the Revolver, which were denominated in Pounds Sterling. The
amount of letters of credit issued under the Revolver reduces
the amount available to us for borrowings. We had
$60.1 million and $25.8 million of availability under
the Revolver at December 31, 2010 and December 31,
2009, respectively. Commitment fees on unused amounts under the
Revolver were $0.3 million, $0.1 million and
$0.4 million for the years ended December 31, 2010,
December 31, 2009 and December 31, 2008, respectively.
We incurred an aggregate of $5.0 million of debt issuance
costs in connection with the Term Loan and Revolver. These costs
are being amortized to interest expense over the contractual
terms of the Term Loan and Revolver based on the effective-yield
method. Amortization of debt issuance costs was
$0.7 million for each of the years ended December 31,
2010, December 31, 2009 and December 31, 2008.
The Term Loan and Revolver are both secured by substantially all
of our and our domestic subsidiaries tangible and
intangible assets, including a pledge of 100% of the outstanding
capital stock or other equity interests of substantially all of
our direct and indirect domestic subsidiaries and 65% of the
capital stock or other equity interests of certain of our
foreign subsidiaries, subject to certain exceptions. The Term
Loan and Revolver are also guaranteed by substantially all of
our domestic subsidiaries.
The Credit Agreement contains various customary restrictive
covenants that limit our ability to, among other things: incur
additional indebtedness or enter into guarantees; enter into
sale or leaseback transactions; make investments, loans or
acquisitions; grant or incur liens on our assets; sell our
assets; engage in mergers, consolidations, liquidations or
dissolutions; engage in transactions with affiliates; and make
restricted payments.
The Credit Agreement requires us to maintain a minimum fixed
charge coverage ratio and not to exceed a maximum total leverage
ratio, each as defined in the Credit Agreement. The minimum
fixed charge coverage ratio that we are required to maintain for
the remainder of the Credit Agreement is 1 to 1. The maximum
total leverage ratio that we were required not to exceed was 3.5
to 1 at December 31, 2010 and declines to 3 to 1 effective
March 31, 2011. As of December 31, 2010, we were in
compliance with all covenants and conditions of the Credit
Agreement.
The table below shows the aggregate maturities of the Term Loan
over the remaining term of the Credit Agreement, excluding any
mandatory prepayments that could be required under the Term Loan
beyond the first quarter of 2011. The potential amount of
prepayment from excess cash flow that will be required beyond
the first quarter of 2011 is not reasonably estimable as of
December 31, 2010.
|
|
|
|
|
Year
|
|
(in thousands)
|
|
|
2011
|
|
$
|
19,808
|
|
2012
|
|
|
|
|
2013
|
|
|
|
|
2014
|
|
|
472,213
|
|
|
|
|
|
|
Total
|
|
$
|
492,021
|
|
|
|
|
|
|
We have a liability included in our consolidated balance sheets
that relates to a tax sharing agreement between Orbitz and the
Founding Airlines. The agreement governs the allocation of tax
benefits resulting from a taxable exchange that took place in
connection with the Orbitz IPO in December 2003. As a result of
this taxable exchange, the Founding Airlines incurred a taxable
gain. The taxable exchange caused Orbitz to have additional
future tax deductions for depreciation and amortization due to
the increased tax basis of its assets. The additional tax
deductions for depreciation and amortization may reduce the
amount of taxes we are
88
ORBITZ
WORLDWIDE, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
required to pay in future years. For each tax period during the
term of the tax sharing agreement, we are obligated to pay the
Founding Airlines a significant percentage of the amount of the
tax benefit realized as a result of the taxable exchange. The
tax sharing agreement commenced upon consummation of the Orbitz
IPO and continues until all tax benefits have been utilized.
As of December 31, 2010, the estimated remaining payments
that may be due under this agreement were approximately
$195.1 million. Payments under the tax sharing agreement
are generally due in the second, third and fourth calendar
quarters of the year, with two payments due in the second
quarter. We estimated that the net present value of our
obligation to pay tax benefits to the Founding Airlines was
$121.4 million and $126.1 million at December 31,
2010 and December 31, 2009, respectively. This estimate was
based upon certain assumptions, including our future operating
performance and taxable income, the tax rate, the timing of tax
payments, current and projected market conditions, and the
applicable discount rate, all of which we believe are
reasonable. The discount rate assumption was based on our
weighted-average cost of capital at the time of the Blackstone
Acquisition, which was approximately 12%. These assumptions are
inherently uncertain, however, and actual results could differ
from our estimates.
The table below shows the changes in the tax sharing liability
during the past two years:
|
|
|
|
|
|
|
Amount
|
|
|
|
(in thousands)
|
|
|
Balance at December 31, 2008
|
|
$
|
123,798
|
|
Accretion of interest expense(a)
|
|
|
13,509
|
|
Cash payments
|
|
|
(11,075
|
)
|
Adjustment due to a reduction in our effective tax rate(b)
|
|
|
(106
|
)
|
|
|
|
|
|
Balance at December 31, 2009
|
|
|
126,126
|
|
Accretion of interest expense(a)
|
|
|
14,117
|
|
Cash payments
|
|
|
(18,885
|
)
|
|
|
|
|
|
Balance at December 31, 2010
|
|
$
|
121,358
|
|
|
|
|
|
|
|
|
|
|
(a)
|
We accreted interest expense related to the tax sharing
liability of $14.1 million, $13.5 million and
$15.9 million for the years ended December 31, 2010,
December 31, 2009 and December 31, 2008, respectively.
|
|
|
|
|
(b)
|
This adjustment was recorded to appropriately reflect our
liability under the tax sharing agreement following a reduction
in our effective tax rate during the year ended
December 31, 2008. The reduction in our effective tax rate
reduced the estimated remaining payments that may be due to the
airlines under the tax sharing agreement. This adjustment was
recorded as a reduction to selling, general and administrative
expense in our consolidated statements of operations, as this
liability represents a commercial liability, not a tax
liability. If our effective tax rate changes in the future, we
may be required to further adjust our liability under the tax
sharing agreement.
|
Based upon the future payments we expect to make, the current
portion of the tax sharing liability of $19.8 million and
$17.4 million was included in accrued expenses in our
consolidated balance sheets at December 31, 2010 and
December 31, 2009, respectively. The long-term portion of
the tax sharing liability of $101.6 million and
$108.7 million was reflected as the tax sharing liability
in our consolidated balance sheets at December 31, 2010 and
December 31, 2009, respectively.
89
ORBITZ
WORLDWIDE, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The table below shows the estimated payments under the tax
sharing agreement over the next five years:
|
|
|
|
|
Year
|
|
(in thousands)
|
|
|
2011
|
|
$
|
21,182
|
|
2012
|
|
|
20,375
|
|
2013
|
|
|
17,604
|
|
2014
|
|
|
18,171
|
|
2015
|
|
|
18,729
|
|
Thereafter
|
|
|
98,989
|
|
|
|
|
|
|
Total
|
|
$
|
195,050
|
|
|
|
|
|
|
At the time of the Blackstone Acquisition, Cendant (now Avis
Budget Group, Inc.) indemnified Travelport and us for a portion
of the amounts due under the tax sharing agreement. As a result,
we had recorded a long-term asset of $37.0 million for such
amounts, which was included in other non-current assets in our
consolidated balance sheets at December 31, 2010 and
December 31, 2009. We expect to collect this amount when
Cendant receives the tax benefit. Similar to our trade accounts
receivable, if we were, in the future, to determine that all or
a portion of this amount is not collectable, the portion of this
asset that was no longer deemed collectable would be charged to
expense in our consolidated statements of operations.
In December 2003, we entered into amended and restated airline
charter associate agreements (Charter Associate
Agreements) with the Founding Airlines as well as US
Airways (Charter Associate Airlines). These
agreements pertain to our Orbitz business, which was owned by
the Founding Airlines at the time we entered into the
agreements. Under each Charter Associate Agreement, the Charter
Associate Airline has agreed to provide Orbitz with information
regarding the airlines flight schedules, published air
fares and seat availability at no charge and with the same
frequency and at the same time as this information is provided
to the airlines own website or to a website branded and
operated by the airline and any of its alliance partners or to
the airlines internal reservation system. The agreements
also provide Orbitz with nondiscriminatory access to seat
availability for published fares, as well as marketing and
promotional support. Under each agreement, the Charter Associate
Airline provides us with agreed upon transaction payments when
consumers book air travel on the Charter Associate Airline on
Orbitz.com. The payments we receive are based on the value of
the tickets booked and gradually decrease over time. The
agreements expire on December 31, 2013. However, certain of
the Charter Associate Airlines may terminate their agreements
for any reason or no reason prior to the scheduled expiration
date upon thirty days prior notice to us.
Under the Charter Associate Agreements, we must pay a portion of
the GDS incentive revenue we earn from Worldspan back to the
Charter Associate Airlines in the form of a rebate. The rebate
payments are required when airline tickets for travel on a
Charter Associate Airline are booked through our Orbitz.com and
OrbitzforBusiness.com websites utilizing Worldspan. We also
receive in-kind marketing and promotional support from the
Charter Associate Airlines under the Charter Associate
Agreements.
The rebate structure under the Charter Associate Agreements was
considered unfavorable when compared with market conditions at
the time of the Blackstone Acquisition. As a result, a net
unfavorable contract liability was established on the
acquisition date. The amount of this liability was determined
based on the discounted cash flows of the expected future rebate
payments we would be required to make to the Charter Associate
Airlines, net of the fair value of the expected in-kind
marketing and promotional support we would receive from the
Charter Associate Airlines. The portion of the net unfavorable
contract liability related to the expected future rebate
payments is amortized as an increase to net revenue, whereas the
partially offsetting asset for the expected in-kind marketing
and promotional support is amortized as an increase to marketing
expense in our consolidated statements of operations, both on a
straight-line basis over the remaining contractual term.
90
ORBITZ
WORLDWIDE, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The table below shows the changes in the net unfavorable
contract liability during the past two years:
|
|
|
|
|
|
|
Amount
|
|
|
|
(in thousands)
|
|
|
Balance at December 31, 2008
|
|
$
|
16,501
|
|
Amortization (a)
|
|
|
(3,300
|
)
|
|
|
|
|
|
Balance at December 31, 2009
|
|
|
13,201
|
|
Amortization (a)
|
|
|
(9,226
|
)
|
Impairment (b)
|
|
|
6,583
|
|
|
|
|
|
|
Balance at December 31, 2010
|
|
$
|
10,558
|
|
|
|
|
|
|
|
|
|
|
(a)
|
We recognized net amortization for the unfavorable portion of
the Charter Associate Agreements in the amount of
$9.2 million ($14.7 million was recorded as an
increase to net revenue and $5.5 million was recorded as an
increase to marketing expense) for the year ended
December 31, 2010 and $3.3 million ($9.3 million
was recorded as an increase to net revenue and $6.0 million
was recorded as an increase to marketing expense) for each of
the years ended December 31, 2009 and December 31,
2008. For the year ended December 31, 2010, the
$14.7 million recorded as an increase to net revenue
included $5.6 million in accelerated amortization related
to the termination of our Charter Associate Agreement with
American Airlines (AA) effective December 2010. As a
result of this termination, we are no longer required to make
rebate payments to AA under this agreement, and therefore, we
reduced the unfavorable contract liability by $5.6 million.
This reduction was recorded as an increase to net revenue in our
consolidated statement of operations.
|
|
|
|
|
(b)
|
During the year ended December 31, 2010, we recorded
non-cash charges of $3.6 million to impair the portion of
the asset related to the expected in-kind marketing and
promotional support to be received from Northwest Airlines under
our Charter Associate Agreement with that airline. As a result
of the completion of the operational merger of Northwest
Airlines and Delta Airlines into a single operating carrier,
Northwest Airlines was no longer obligated to provide us with
in-kind marketing and promotional support after June 1,
2010. This impairment charge was included in the impairment of
property and equipment and other assets line item in our
consolidated statement of operations for the year ended
December 31, 2010.
|
As discussed in (a) above, effective December 2010, AA
terminated its Charter Associate Agreement with us.
Consequently, AA was no longer obligated to provide us with
in-kind marketing and promotional support, and we were no longer
required to make rebate payments to AA under this agreement. As
a result, in December 2010, we recorded a $3.0 million
non-cash charge to impair the asset related to the expected
in-kind marketing and promotional support to be received from AA
under its Charter Associate Agreement with us. This impairment
charge was included in the impairment of property and equipment
and other assets line item in our consolidated statement of
operations for the year ended December 31, 2010.
Concurrent with AAs termination of its Charter Associate
Agreement with us, AA also terminated the Supplier Link
Agreement that it entered into with Orbitz in February 2004. The
Supplier Link Agreement established a direct link between
Orbitz.com and AAs internal reservation systems and
required that Orbitz book certain airline tickets through that
direct link rather than through a GDS. Additionally, AA
terminated our authority to ticket AA flights on our Orbitz.com
and OrbitzforBusiness.com websites.
At December 31, 2010 and December 31, 2009, the net
unfavorable contract liability was $10.6 million and
$13.2 million, respectively. The current portion of the
liability of $2.5 million and $3.3 million was
included in accrued expenses in our consolidated balance sheets
at December 31, 2010 and December 31, 2009,
respectively.
91
ORBITZ
WORLDWIDE, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The long-term portion of the liability of $8.1 million and
$9.9 million was included in unfavorable contracts in our
consolidated balance sheets at December 31, 2010 and
December 31, 2009, respectively.
|
|
10.
|
Commitments
and Contingencies
|
The following table summarizes our commitments as of
December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
Thereafter
|
|
|
Total
|
|
|
|
(in thousands)
|
|
|
Contract exit costs (a)
|
|
$
|
7,732
|
|
|
$
|
2,285
|
|
|
$
|
1,229
|
|
|
$
|
647
|
|
|
$
|
278
|
|
|
$
|
63
|
|
|
$
|
12,234
|
|
Operating leases (b)
|
|
|
5,692
|
|
|
|
4,565
|
|
|
|
5,135
|
|
|
|
4,601
|
|
|
|
2,490
|
|
|
|
20,104
|
|
|
|
42,587
|
|
Travelport GDS contract (c)
|
|
|
41,045
|
|
|
|
20,000
|
|
|
|
20,000
|
|
|
|
20,000
|
|
|
|
|
|
|
|
|
|
|
|
101,045
|
|
Telecommunications service agreements
|
|
|
2,500
|
|
|
|
4,156
|
|
|
|
1,656
|
|
|
|
1,656
|
|
|
|
|
|
|
|
|
|
|
|
9,968
|
|
Systems infrastructure agreements
|
|
|
2,225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,225
|
|
Software license agreements
|
|
|
202
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
202
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
59,396
|
|
|
$
|
31,006
|
|
|
$
|
28,020
|
|
|
$
|
26,904
|
|
|
$
|
2,768
|
|
|
$
|
20,167
|
|
|
$
|
168,261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Represents costs due to the early termination of an agreement.
|
|
|
|
|
(b)
|
These operating leases are primarily for facilities and
equipment and represent non-cancellable leases. Certain leases
contain periodic rent escalation adjustments and renewal
options. Our operating leases expire at various dates, with the
latest maturing in 2023. For the years ended December 31,
2010, December 31, 2009 and December 31, 2008, we
recorded rent expense in the amount of $6.1 million,
$6.8 million and $6.4 million, respectively. As a
result of various subleasing arrangements that we have entered
into, we are expecting approximately $4.1 million in
sublease income through 2014.
|
|
|
|
|
(c)
|
We have an agreement with Travelport to use GDS services
provided by both Galileo and Worldspan (the Travelport GDS
Service Agreement). The Travelport GDS Service Agreement
is structured such that we earn incentive revenue for each
segment that is processed through the Worldspan and Galileo GDSs
(the Travelport GDSs). This agreement requires that
we process a certain minimum number of segments for our domestic
brands through the Travelport GDSs each year. Our domestic
brands were required to process a total of 33.7 million
segments during the year ended December 31, 2010,
16.0 million segments through Worldspan and
17.7 million segments through Galileo. The required number
of segments processed annually for Worldspan is fixed at
16.0 million segments, while the required number of
segments for Galileo is subject to adjustment based upon the
actual segments processed by our domestic brands in the
preceding year. We are required to process approximately
16.8 million segments through Galileo during the year
ending December 31, 2011. Our failure to process at least
95% of these segments through the Travelport GDSs would result
in a shortfall payment of $1.25 per segment below the required
minimum. We are not subject to these minimum volume thresholds
to the extent that we process all eligible segments through the
Travelport GDS. Historically, we have met the minimum segment
requirement for our domestic brands. The table above includes
shortfall payments required by the agreement if we do not
process any segments through Worldspan during the remainder of
the contract term and shortfall payments required if we do not
process any segments through Galileo during the year ending
December 31, 2011. Because the required number of segments
for Galileo adjusts based on the actual segments processed in
the preceding year, we are unable to predict shortfall payments
that may be required beyond 2011. However, we do not expect to
make any shortfall payments for our domestic brands in the
foreseeable future.
|
92
ORBITZ
WORLDWIDE, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Travelport GDS Service Agreement also requires that ebookers
use the Travelport GDSs exclusively in certain countries for
segments processed through GDSs in Europe. Our failure to
process at least 95% of these segments through the Travelport
GDSs would result in a shortfall payment of $1.25 per segment
for each segment processed through an alternative GDS provider.
We failed to meet this minimum segment requirement during each
of the years ended December 31, 2010, December 31,
2009 and December 31, 2008, and as a result, we were
required to make shortfall payments of $0.4 million,
$0.4 million and $0.2 million to Travelport related to
each of these years, respectively. Because the required number
of segments to be processed through the Travelport GDSs is
dependent on the actual segments processed by ebookers in
certain countries in a given year, we are unable to predict
shortfall payments that may be required for the years beyond
2010. As a result, the table above excludes any shortfall
payments that may be required related to our ebookers brands for
the years beyond 2010. If we meet the minimum number of
segments, we are not required to make shortfall payments to
Travelport (see Note 17 Related Party
Transactions).
In addition to the commitments shown above, we are required to
make principal payments on the Term Loan (see
Note 7 Term Loan and Revolving Credit
Facility). We also expect to make approximately
$195.1 million of payments in connection with the tax
sharing agreement with the Founding Airlines (see
Note 8 Tax Sharing Liability). Also excluded
from the above table are $3.8 million of liabilities for
uncertain tax positions for which the period of settlement is
not currently determinable.
Company
Litigation
We are involved in various claims, legal proceedings and
governmental inquiries related to contract disputes, business
practices, intellectual property and other commercial,
employment and tax matters.
We are party to various cases brought by consumers and
municipalities and other U.S. governmental entities
involving hotel occupancy taxes and our merchant hotel business
model. Some of the cases are purported class actions, and most
of the cases were brought simultaneously against other online
travel companies, including Expedia, Travelocity and Priceline.
The cases allege, among other things, that we violated the
jurisdictions hotel occupancy tax ordinances. While not
identical in their allegations, the cases generally assert
similar claims, including violations of local or state occupancy
tax ordinances, violations of consumer protection ordinances,
conversion, unjust enrichment, imposition of a constructive
trust, demand for a legal or equitable accounting, injunctive
relief, declaratory judgment, and in some cases, civil
conspiracy. The plaintiffs seek relief in a variety of forms,
including: declaratory judgment, full accounting of monies owed,
imposition of a constructive trust, compensatory and punitive
damages, disgorgement, restitution, interest, penalties and
costs, attorneys fees, and where a class action has been
claimed, an order certifying the action as a class action. An
adverse ruling in one or more of these cases could require us to
pay tax retroactively and prospectively and possibly pay
penalties, interest and fines. The proliferation of additional
cases could result in substantial additional defense costs.
We have also been contacted by several municipalities or other
taxing bodies concerning our possible obligations with respect
to state or local hotel occupancy or related taxes. The
following taxing bodies have issued notices to the Company: the
Louisiana Department of Revenue; the New Mexico Taxation and
Revenue Department; the Wyoming Department of Revenue; the
Colorado Department of Revenue; the Montana Department of
Revenue; an entity representing 84 cities and 14 counties
in Alabama; 43 cities in California; the cities of Phoenix,
Arizona; North Little Rock and Pine Bluff, Arkansas; Colorado
Springs and Steamboat Springs, Colorado; St. Louis,
Missouri; and the counties of Jefferson, Arkansas; Brunswick and
Stanly, North Carolina; Duval, Florida; and Davis, Summit,
Salt Lake and Weber, Utah. These taxing authorities have not
issued assessments, but have requested information to conduct an
audit and/or
have requested that the Company register to pay local hotel
occupancy taxes. Additional taxing authorities have begun audit
proceedings and some have issued assessments against the
Company, individually ranging from $0 to approximately
$40.9 million, and totaling approximately
$68.3 million.
93
ORBITZ
WORLDWIDE, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Assessments that are administratively final and subject to
judicial review have been issued by the cities of Anaheim,
San Francisco and San Diego, California; the counties
of Miami-Dade and Broward, Florida; the Indiana Department of
Revenue and the Wisconsin Department of Revenue. In addition,
the following taxing authorities have issued assessments which
are subject to further review by the taxing authorities: the
West Virginia Department of Revenue; the Texas Comptroller; the
South Carolina Department of Revenue; Hawaii Department of
Taxation; the cities of Los Angeles and Santa Monica,
California; the city of Denver, Colorado; the city of
Philadelphia, Pennsylvania; the cities of Alpharetta,
Cartersville, Cedartown, College Park, Dalton, East Point,
Hartwell, Macon, Rockmart, Rome, Tybee Island and Warner Robins,
Georgia; and the counties of Augusta, Clayton, Cobb, DeKalb,
Fulton, Gwinnett, Hart and Richmond, Georgia; Osceola, Florida;
and Montgomery, Maryland. The Company disputes that any hotel
occupancy or related tax is owed under these ordinances and is
challenging the assessments made against the Company. If the
Company is found to be subject to the hotel occupancy tax
ordinance by a taxing authority and appeals the decision in
court, certain jurisdictions may attempt to require us to
provide financial security or pay the assessment to the
municipality in order to challenge the tax assessment in court.
We believe that we have meritorious defenses, and we are
vigorously defending against these claims, proceedings and
inquiries. As of December 31, 2010, we had a
$1.9 million accrual related to various legal proceedings.
Litigation is inherently unpredictable and, although we believe
we have valid defenses in these matters, unfavorable resolutions
could occur. We cannot estimate our range of loss, except to the
extent taxing authorities have issued assessments against us.
Although we believe it is unlikely that an adverse outcome will
result from these proceedings, an adverse outcome could be
material to us with respect to earnings or cash flows in any
given reporting period.
We are currently seeking to recover insurance reimbursement for
costs incurred to defend the hotel occupancy tax cases. We
recorded a reduction to selling, general and administrative
expense in our consolidated statements of operations for
reimbursements received of $6.3 million, $6.0 million
and $7.8 million for the years ended December 31,
2010, December 31, 2009 and December 31, 2008,
respectively. The recovery of additional amounts, if any, by us
and the timing of receipt of these recoveries is unclear. As
such, as of December 31, 2010, we had not recognized a
reduction to selling, general and administrative expense in our
consolidated statements of operations for the outstanding
contingent claims for which we have not received reimbursement.
Surety
Bonds and Bank Guarantees
In the ordinary course of business, we obtain surety bonds and
bank guarantees, issued for the benefit of a third party, to
secure performance of certain of our obligations to third
parties. At December 31, 2010 and December 31, 2009,
there were $0.7 million and $0.8 million of surety
bonds outstanding, respectively. At December 31, 2010 and
December 31, 2009, there were $1.6 million and
$1.5 million of bank guarantees outstanding, respectively.
Financing
Arrangements
We are required to issue letters of credit to certain suppliers
and
non-U.S. regulatory
and government agencies. The majority of these letters of credit
were issued by Travelport on our behalf under the terms of the
Separation Agreement (as amended) entered into in connection
with the IPO. At December 31, 2010 and December 31,
2009, there were $72.3 million and $59.3 million of
outstanding letters of credit issued by Travelport on our
behalf, respectively (see Note 17 - Related Party
Transactions). In addition, at December 31, 2010 and
December 31, 2009, there were the equivalent of
$12.4 million and $4.5 million of outstanding letters
of credit issued under the Revolver, respectively, which were
denominated in Pounds Sterling. Total letter of credit fees were
$4.1 million, $3.8 million and $2.5 million for
the years ended December 31, 2010, December 31, 2009
and December 31, 2008, respectively.
94
ORBITZ
WORLDWIDE, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Pre-tax income (loss) for U.S. and
non-U.S. operations
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(in thousands)
|
|
|
U.S.
|
|
$
|
37,723
|
|
|
$
|
(274,674
|
)
|
|
$
|
(123,692
|
)
|
Non-U.S.
|
|
|
(93,579
|
)
|
|
|
(53,048
|
)
|
|
|
(176,825
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
$
|
(55,856
|
)
|
|
$
|
(327,722
|
)
|
|
$
|
(300,517
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The provision (benefit) for income taxes consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(in thousands)
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal and state
|
|
$
|
93
|
|
|
$
|
1,404
|
|
|
$
|
154
|
|
Non-U.S.
|
|
|
794
|
|
|
|
909
|
|
|
|
1,923
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
887
|
|
|
|
2,313
|
|
|
|
2,077
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal and state
|
|
|
|
|
|
|
|
|
|
|
829
|
|
Non-U.S.
|
|
|
1,494
|
|
|
|
6,920
|
|
|
|
(4,861
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,494
|
|
|
|
6,920
|
|
|
|
(4,032
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision (benefit) for income taxes
|
|
$
|
2,381
|
|
|
$
|
9,233
|
|
|
$
|
(1,955
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010 and December 31, 2009, our
U.S. federal, state and foreign income taxes receivable was
$0.3 million and $0.2 million, respectively.
The provision for income taxes for the year ended
December 31, 2010 was primarily due to taxes on the net
income of certain European-based subsidiaries that had not
established a valuation allowance and U.S., state and local
income taxes. The provision for income taxes for the year ended
December 31, 2009 was primarily due to a full valuation
allowance established against $10.9 million of foreign
deferred tax assets related to our Australia-based business, as
it was determined that it was more likely than not that these
deferred tax assets were no longer realizable. We are required
to assess whether valuation allowances should be established
against our deferred tax assets based on the consideration of
all available evidence using a more likely than not
standard on a tax jurisdiction by jurisdiction basis. We
assessed the available positive and negative evidence to
estimate if sufficient future taxable income would be generated
to utilize the existing deferred tax assets. A significant piece
of objective negative evidence evaluated in our determination
was cumulative losses incurred over the three year period ended
December 31, 2010. This objective evidence limited our
ability to consider other subjective evidence such as future
income projections.
The tax provisions recorded for the years ended
December 31, 2010 and December 31, 2009 were
disproportionate to the amount of pre-tax net loss incurred
during each respective period primarily because we were not able
to realize any tax benefits on the goodwill and trademark and
trade names impairment charges recorded during each of those
years. The amount of the tax benefit recorded during the year
ended December 31, 2008 is disproportionate to the amount
of pre-tax net loss incurred during the year primarily because
we were not able to realize any tax benefit on the goodwill
impairment charge and only a limited amount of tax benefit on
the trademarks and trade names impairment charge recorded during
the year ended December 31, 2008.
95
ORBITZ
WORLDWIDE, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Our effective income tax rate differs from the U.S. federal
statutory rate as follows for the years ended December 31,
2010, December 31, 2009 and December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Federal statutory rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
State and local income taxes, net of federal benefit
|
|
|
(1.0
|
)
|
|
|
(0.2
|
)
|
|
|
0.1
|
|
Taxes on
non-U.S.
operations at differing rates
|
|
|
(5.4
|
)
|
|
|
(0.8
|
)
|
|
|
(1.3
|
)
|
Change in valuation allowance
|
|
|
(6.0
|
)
|
|
|
(10.5
|
)
|
|
|
(9.0
|
)
|
Goodwill impairment charges
|
|
|
(25.9
|
)
|
|
|
(26.6
|
)
|
|
|
(24.8
|
)
|
Reserve for uncertain tax positions
|
|
|
(0.1
|
)
|
|
|
(0.1
|
)
|
|
|
0.1
|
|
Other
|
|
|
(0.9
|
)
|
|
|
0.4
|
|
|
|
0.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
|
(4.3
|
)%
|
|
|
(2.8
|
)%
|
|
|
0.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current and non-current deferred income tax assets and
liabilities in various jurisdictions are comprised of the
following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(in thousands)
|
|
|
Current deferred income tax assets (liabilities):
|
|
|
|
|
|
|
|
|
Accrued liabilities and deferred income
|
|
$
|
4,479
|
|
|
$
|
4,699
|
|
Provision for bad debts
|
|
|
156
|
|
|
|
82
|
|
Prepaid expenses
|
|
|
(1,470
|
)
|
|
|
(1,846
|
)
|
Tax sharing liability
|
|
|
7,195
|
|
|
|
6,315
|
|
Change in reserve accounts
|
|
|
2,808
|
|
|
|
1,780
|
|
Other
|
|
|
(404
|
)
|
|
|
(404
|
)
|
Valuation allowance
|
|
|
(12,717
|
)
|
|
|
(10,580
|
)
|
|
|
|
|
|
|
|
|
|
Current net deferred income tax assets
|
|
$
|
47
|
|
|
$
|
46
|
|
|
|
|
|
|
|
|
|
|
Non-current deferred income tax assets (liabilities):
|
|
|
|
|
|
|
|
|
U.S. net operating loss carryforwards
|
|
$
|
46,041
|
|
|
$
|
47,381
|
|
Non-U.S. net
operating loss carryforwards
|
|
|
102,157
|
|
|
|
94,768
|
|
Accrued liabilities and deferred income
|
|
|
4,038
|
|
|
|
5,972
|
|
Depreciation and amortization
|
|
|
106,015
|
|
|
|
116,272
|
|
Tax sharing liability
|
|
|
36,874
|
|
|
|
39,485
|
|
Change in reserve accounts
|
|
|
2,930
|
|
|
|
3,595
|
|
Other
|
|
|
9,895
|
|
|
|
21,769
|
|
Valuation allowance
|
|
|
(299,803
|
)
|
|
|
(319,288
|
)
|
|
|
|
|
|
|
|
|
|
Non-current net deferred income tax assets
|
|
$
|
8,147
|
|
|
$
|
9,954
|
|
|
|
|
|
|
|
|
|
|
96
ORBITZ
WORLDWIDE, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The current and deferred income tax assets were presented in our
consolidated balance sheets as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(in thousands)
|
|
|
Current net deferred income tax assets:
|
|
|
|
|
|
|
|
|
Deferred income tax asset, current(a)
|
|
$
|
47
|
|
|
$
|
46
|
|
|
|
|
|
|
|
|
|
|
Current net deferred income tax assets
|
|
$
|
47
|
|
|
$
|
46
|
|
|
|
|
|
|
|
|
|
|
Non-current net deferred income tax assets:
|
|
|
|
|
|
|
|
|
Deferred income tax asset, non-current
|
|
$
|
8,147
|
|
|
$
|
9,954
|
|
|
|
|
|
|
|
|
|
|
Non-current net deferred income tax assets
|
|
$
|
8,147
|
|
|
$
|
9,954
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
The current portion of the deferred income tax asset at
December 31, 2010 and December 31, 2009 is included in
other current assets in our consolidated balance sheets.
|
As of December 31, 2010 and December 31, 2009, we had
established valuation allowances against the majority of our
deferred tax assets. As a result, any changes in our gross
deferred tax assets and liabilities during the years ended
December 31, 2010 and December 31, 2009 were largely
offset by corresponding changes in our valuation allowances,
resulting in a decrease in our net deferred tax assets of
$1.8 million and $4.3 million, respectively.
The net deferred tax assets at December 31, 2010 and
December 31, 2009 amounted to $8.2 million and
$10.0 million, respectively. These net deferred tax assets
relate to temporary tax to book differences in
non-U.S. jurisdictions,
the realization of which is, in managements judgment, more
likely than not. We have assessed, based on experience with
relevant taxing authorities, our expectations of future taxable
income, carry-forward periods available and other relevant
factors, that we will be more likely than not to recognize these
deferred tax assets.
As of December 31, 2010, we had U.S. federal and state
net operating loss carry-forwards of approximately
$115.1 million and $143.9 million, respectively, which
expire between 2021 and 2029. In addition, we had
$371.6 million of
non-U.S. net
operating loss carry-forwards, most of which do not expire.
Additionally, we had $4.5 million of U.S. federal and
state income tax credit carry-forwards which expire between 2027
and 2030 and $1.1 million of U.S. federal income tax
credits which have no expiration date. No provision has been
made for U.S. federal or
non-U.S. deferred
income taxes on approximately $11.3 million of accumulated
and undistributed earnings of foreign subsidiaries at
December 31, 2010. A provision has not been established
because it is our present intention to reinvest the
undistributed earnings indefinitely in those foreign operations.
The determination of the amount of unrecognized
U.S. federal or
non-U.S. deferred
income tax liabilities for unremitted earnings at
December 31, 2010 is not practicable.
In December 2009, as permitted under the U.K. group relief
provisions, we surrendered $17.2 million of net operating
losses generated in 2007 to Donvand Limited, a subsidiary of
Travelport. A full valuation allowance had previously been
established for such net operating losses. As a result, upon
surrender, we reduced our gross deferred tax assets and the
corresponding valuation allowance by $4.8 million.
We have established a liability for unrecognized tax benefits
that management believes to be adequate. Once established,
unrecognized tax benefits are adjusted if more accurate
information becomes available, or a change in circumstance or an
event occurs necessitating a change to the liability. Given the
inherent complexities of the business and that we are subject to
taxation in a substantial number of jurisdictions, we routinely
assess the likelihood of additional assessment in each of the
taxing jurisdictions.
97
ORBITZ
WORLDWIDE, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The table below shows the changes in this liability during the
years ended December 31, 2010 and December 31, 2009:
|
|
|
|
|
|
|
Amount
|
|
|
|
(in thousands)
|
|
|
Balance at December 31, 2008
|
|
$
|
5,765
|
|
Decrease in unrecognized tax benefits as a result of tax
positions taken during the prior year
|
|
|
(970
|
)
|
Impact of foreign currency translation
|
|
|
115
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
|
4,910
|
|
Decrease in unrecognized tax benefits as a result of tax
positions taken during the prior year
|
|
|
(1,140
|
)
|
Impact of foreign currency translation
|
|
|
26
|
|
|
|
|
|
|
Balance at December 31, 2010
|
|
$
|
3,796
|
|
|
|
|
|
|
The total amount of unrecognized tax benefits that, if
recognized, would affect our effective tax rate was
$1.0 million and $1.1 million at December 31,
2010 and December 31, 2009, respectively. We do not expect
our liability for unrecognized tax benefits to significantly
change over the next twelve months.
We recognize interest and penalties related to unrecognized tax
benefits in income tax expense. We recognized interest and
penalties of $0.1 million, $0.2 million and
$0.2 million during the years ended December 31, 2010,
December 31, 2009 and December 31, 2008, respectively.
Accrued interest and penalties were $0.7 million and
$0.6 million as of December 31, 2010 and
December 31, 2009, respectively.
We file income tax returns in the U.S. federal jurisdiction
and various state and foreign jurisdictions. A number of years
may elapse before an uncertain tax position, for which we have
unrecognized tax benefits, is audited and finally resolved. We
adjust these unrecognized tax benefits, as well as the related
interest and penalties, in light of changing facts and
circumstances. Settlement of any particular position could
require the use of cash. Favorable resolution could be
recognized as a reduction to our effective income tax rate in
the period of resolution.
The number of years with open tax audits varies depending on the
tax jurisdiction. Our major taxing jurisdictions include the
United States (federal and state), the United Kingdom and
Australia. With limited exceptions, we are no longer subject to
U.S. federal, state and local income tax examinations by
tax authorities for years before 2006. We are no longer subject
to U.K. federal income tax examinations for years before 2007.
We are no longer subject to Australian federal income tax
examinations for years before 2006.
With respect to periods prior to the Blackstone Acquisition, we
are only required to take into account income tax returns for
which we or one of our subsidiaries is the primary taxpaying
entity, namely separate state returns and
non-U.S. returns.
Uncertain tax positions related to U.S. federal and state
combined and unitary income tax returns filed are only
applicable in the post-acquisition accounting period. We and our
domestic subsidiaries currently file a consolidated income tax
return for U.S. federal income tax purposes.
|
|
12.
|
Equity-Based
Compensation
|
We issue share-based awards under the Orbitz Worldwide, Inc.
2007 Equity and Incentive Plan, as amended (the
Plan) . The Plan provides for the grant of
equity-based awards, including restricted stock, restricted
stock units, stock options, stock appreciation rights and other
equity-based awards to our directors, officers and other
employees, advisors and consultants who are selected by the
Compensation Committee of the Board of Directors (the
Compensation Committee) for participation in the
Plan. At our Annual Meeting of Shareholders on June 2,
2010, our shareholders approved an amendment to the Plan,
increasing the number of shares of our common stock available
for issuance under the Plan from 15,100,000 shares to
98
ORBITZ
WORLDWIDE, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
18,100,000 shares, subject to adjustment as provided by the
Plan. As of December 31, 2010, 6,131,563 shares were
available for future issuance under the Plan.
Stock Options
The table below summarizes the stock option activity under the
Plan during the year ended December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
Aggregate
|
|
|
|
|
|
|
Weighted-Average
|
|
|
Remaining
|
|
|
Intrinsic
|
|
|
|
|
|
|
Exercise Price
|
|
|
Contractual Term
|
|
|
Value
|
|
|
|
Shares
|
|
|
(per share)
|
|
|
(in years)
|
|
|
(in thousands)
|
|
|
Outstanding at December 31, 2009
|
|
|
4,236,083
|
|
|
$
|
9.46
|
|
|
|
6.5
|
|
|
$
|
4,737
|
|
Granted
|
|
|
1,050,000
|
|
|
$
|
4.88
|
|
|
|
6.5
|
|
|
|
|
|
Granted in connection with stock option exchange(a)
|
|
|
433,488
|
|
|
$
|
5.22
|
|
|
|
6.5
|
|
|
|
|
|
Exercised
|
|
|
(11,718
|
)
|
|
$
|
6.12
|
|
|
|
4.5
|
|
|
|
|
|
Forfeited
|
|
|
(708,422
|
)
|
|
$
|
12.34
|
|
|
|
5.9
|
|
|
|
|
|
Cancelled in connection with stock option exchange(a)
|
|
|
(1,260,598
|
)
|
|
$
|
15.00
|
|
|
|
6.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2010
|
|
|
3,738,833
|
|
|
$
|
5.28
|
|
|
|
5.5
|
|
|
$
|
2,379
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2010
|
|
|
1,627,340
|
|
|
$
|
5.58
|
|
|
|
5.2
|
|
|
$
|
839
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
On May 3, 2010, we commenced an offer to eligible employees
to exchange certain
out-of-the-money
options to purchase our common stock for a lesser number of new
stock options with an exercise price equal to the fair market
value of our common stock at the completion of the exchange
offer. Stock options eligible for the exchange were those with
an exercise price per share of $15.00 that were granted at the
time of the IPO. The offering period closed on May 28,
2010. On that date, 1,260,598 stock options were tendered and
exchanged for 433,488 new stock options with an exercise price
of $5.22 per share. No incremental compensation expense was
recognized in connection with the exchange because the fair
value of the new stock options granted approximated the fair
value of the stock options exchanged. The vesting terms and
contractual expiration of the new stock options granted in the
exchange are the same as those of the old stock options.
However, the option holders who elected to participate in the
exchange were required to wait until the six-month anniversary
of the completion of the exchange before exercising any of their
new stock options, including those new stock options that vested
during that six-month period.
|
The exercise price of stock options granted under the Plan is
equal to the fair market value of the underlying stock on the
date of grant. Stock options generally expire seven to ten years
from the grant date. The stock options granted at the time of
the IPO as additional compensation to our employees who
previously held equity awards under Travelports
Equity-Based Long-Term Incentive Plan (the Travelport
Plan) vested quarterly over a three-year period and became
fully vested in May 2010. All other stock options vest annually
over a four-year period, or vest over a four-year period, with
25% of the awards vesting after one year and the remaining
awards vesting on a monthly basis thereafter. The fair value of
stock options on the date of grant is amortized on a
straight-line basis over the requisite service period.
The fair value of stock options granted under the Plan is
estimated on the date of grant using the Black-Scholes
option-pricing model. The weighted-average assumptions for stock
options granted during the years ended December 31, 2010
(excluding the stock options granted in connection with the
stock option exchange), December 31, 2009 and
December 31, 2008 are outlined in the following table.
Expected volatility is based on implied volatilities for
publicly traded options and historical volatility for comparable
companies over the
99
ORBITZ
WORLDWIDE, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
estimated expected life of the stock options. The expected life
represents the period of time the stock options are expected to
be outstanding and is based on the simplified
method. We use the simplified method due to
the lack of sufficient historical exercise data to provide a
reasonable basis upon which to otherwise estimate the expected
life of the stock options. The risk-free interest rate is based
on yields on U.S. Treasury strips with a maturity similar
to the estimated expected life of the stock options. We use
historical turnover to estimate employee forfeitures.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
Assumptions:
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Dividend yield (a)
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected volatility
|
|
|
42
|
%
|
|
|
49
|
%
|
|
|
41
|
%
|
Expected life (in years)
|
|
|
4.69
|
|
|
|
4.58
|
|
|
|
4.76
|
|
Risk-free interest rate
|
|
|
2.09
|
%
|
|
|
1.47
|
%
|
|
|
3.62
|
%
|
|
|
|
|
(a)
|
Our dividend yield is estimated to be zero since we did not
declare or pay any cash dividends on our common stock during the
years ended December 31, 2010, December 31, 2009 or
December 31, 2008, and we do not intend to in the
foreseeable future. Any future determination to pay dividends
will be at the discretion of our board of directors, may require
the consent of Travelport and will depend on several factors,
including our financial condition, results of operations,
capital requirements, restrictions contained in existing and
future financing instruments and other factors that our board of
directors may deem relevant.
|
Based on the above assumptions, the weighted-average grant date
fair value of stock options granted during the years ended
December 31, 2010, December 31, 2009 and
December 31, 2008 was $1.88, $1.73 and $2.54, respectively.
During the years ended December 31, 2010, December 31,
2009 and December 31, 2008, the total fair value of options
that vested during the period was $2.2 million,
$5.0 million and $4.3 million, respectively. In
addition, the intrinsic value of options exercised was $0 for
each of the years ended December 31, 2010,
December 31, 2009 and December 31, 2008.
Restricted
Stock Units
The table below summarizes activity regarding unvested
restricted stock units under the Plan during the year ended
December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
Grant Date
|
|
|
|
Restricted
|
|
|
Fair Value
|
|
|
|
Stock Units
|
|
|
(per share)
|
|
|
Unvested at December 31, 2009
|
|
|
5,650,750
|
|
|
$
|
4.31
|
|
Granted
|
|
|
1,550,000
|
|
|
$
|
5.01
|
|
Vested (a)
|
|
|
(2,030,192
|
)
|
|
$
|
6.92
|
|
Forfeited
|
|
|
(936,968
|
)
|
|
$
|
4.09
|
|
|
|
|
|
|
|
|
|
|
Unvested at December 31, 2010
|
|
|
4,233,590
|
|
|
$
|
3.37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
We issued 1,333,624 shares of common stock in connection
with the vesting of restricted stock units during the year ended
December 31, 2010, which is net of the number of shares
retained (but not issued) by us in satisfaction of minimum tax
withholding obligations associated with the vesting.
|
The restricted stock units granted at the time of the IPO upon
conversion of unvested equity-based awards previously held by
our employees under the Travelport Plan vested quarterly over a
three-year period and
100
ORBITZ
WORLDWIDE, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
became fully vested in May 2010. All other restricted stock
units cliff vest at the end of either a two-year or three-year
period, or vest annually over a three-year or four-year period.
The fair value of restricted stock units on the date of grant is
amortized on a straight-line basis over the requisite service
period.
The fair value of restricted stock units that vested during the
years ended December 31, 2010, December 31, 2009 and
December 31, 2008 was $14.0 million, $5.2 million
and $3.4 million, respectively. The weighted-average grant
date fair value of restricted stock units granted during the
years ended December 31, 2010, December 31, 2009 and
December 31, 2008 was $5.01, $1.92 and $6.12 per unit,
respectively.
Restricted
Stock
The table below summarizes activity regarding unvested
restricted stock under the Plan during the year ended
December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
Grant Date
|
|
|
|
|
|
|
Fair Value
|
|
|
|
Restricted Stock
|
|
|
(per share)
|
|
|
Unvested at December 31, 2009
|
|
|
2,195
|
|
|
$
|
8.45
|
|
Vested (a)
|
|
|
(2,195
|
)
|
|
$
|
8.45
|
|
|
|
|
|
|
|
|
|
|
Unvested at December 31, 2010
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Includes 716 shares of common stock transferred to us in
satisfaction of minimum tax withholding obligations associated
with the vesting of restricted stock. These shares are held by
us in treasury.
|
Shares of restricted stock were granted upon conversion of the
Class B partnership interests previously held by our
employees under the Travelport Plan. The restricted stock vested
quarterly over a three-year period and became fully vested in
May 2010. The fair value of restricted stock on the date of
grant was amortized on a straight-line basis over the requisite
service period.
The total fair value of the restricted stock that vested was $0,
$0.1 million and $0.1 million for the years ended
December 31, 2010, December 31, 2009 and
December 31, 2008, respectively. No restricted stock was
granted during the years ended December 31, 2010,
December 31, 2009 and December 31, 2008.
Performance-Based
Restricted Stock Units
The table below summarizes activity regarding unvested
performance-based restricted stock units (PSUs)
under the Plan during the year ended December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
Performance-Based
|
|
|
Grant Date
|
|
|
|
Restricted
|
|
|
Fair Value
|
|
|
|
Stock Units
|
|
|
(per share)
|
|
|
Unvested at December 31, 2009 (a)
|
|
|
227,679
|
|
|
$
|
6.28
|
|
Granted (b)
|
|
|
387,000
|
|
|
$
|
4.90
|
|
Forfeited
|
|
|
(53,571
|
)
|
|
$
|
6.28
|
|
|
|
|
|
|
|
|
|
|
Unvested at December 31, 2010
|
|
|
561,108
|
|
|
$
|
5.33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
On June 19, 2008, the Compensation Committee approved a
grant of 249,108 PSUs to certain of our executive officers. The
PSUs entitled the executives to receive a certain number of
shares of our common stock based on the Companys
satisfaction of certain financial and strategic performance
goals, including net revenue growth, adjusted EBITDA margin
improvement and the achievement of specified technology
milestones during fiscal years 2008, 2009 and 2010 (the
Performance Period).
|
101
ORBITZ
WORLDWIDE, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
The performance conditions also provided that if the
Companys aggregate adjusted EBITDA during the Performance
Period did not equal or exceed a certain threshold, each PSU
award would be forfeited. The fair value of each PSU was $6.28.
As of December 31, 2010, we expected none of these PSUs to
vest. In the first quarter of 2011, upon determination by the
Compensation Committee that the performance conditions were not
satisfied, these PSUs were forfeited.
|
|
|
|
|
(b)
|
On June 2, 2010, the Compensation Committee approved a
grant of PSUs to certain of our executive officers. The PSUs
entitle the executives to receive one share of our common stock
for each PSU, subject to the satisfaction of a performance
condition. The performance condition required that the
Companys adjusted EBITDA for fiscal year 2010 equaled or
exceeded a certain threshold, or each PSU would be forfeited. If
this performance condition was met, the PSUs would vest annually
over a four-year period. The performance condition for these
PSUs was met.
|
Non-Employee
Directors Deferred Compensation Plan
We have a deferred compensation plan that enables our
non-employee directors to defer the receipt of certain
compensation earned in their capacity as non-employee directors.
Eligible directors may elect to defer up to 100% of their annual
retainer fees (which are paid by us on a quarterly basis). We
require that at least 50% of the annual retainer be deferred
under the Plan. In addition, 100% of the annual equity grant
payable to non-employee directors is deferred under the Plan.
We grant deferred stock units to each participating director on
the date that the deferred fees would have otherwise been paid
to the director. The deferred stock units are issued as
restricted stock units under the Plan and are immediately vested
and non-forfeitable. The deferred stock units entitle the
non-employee director to receive one share of our common stock
for each deferred stock unit on the date that is 200 days
immediately following the non-employee directors
retirement or termination of service from the board of
directors, for any reason. The entire grant date fair value of
deferred stock units is expensed on the date of grant.
The table below summarizes the deferred stock unit activity
under the Plan during the year ended December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
Grant Date
|
|
|
|
Deferred
|
|
|
Fair Value
|
|
|
|
Stock Units
|
|
|
(per share)
|
|
|
Outstanding at December 31, 2009
|
|
|
692,066
|
|
|
$
|
4.13
|
|
Granted
|
|
|
272,036
|
|
|
$
|
5.06
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2010
|
|
|
964,102
|
|
|
$
|
4.39
|
|
|
|
|
|
|
|
|
|
|
The weighted-average grant date fair value for deferred stock
units granted during the years ended December 31, 2010,
December 31, 2009 and December 31, 2008 was $5.06,
$2.45 and $5.58, respectively.
Compensation
Expense
We recognized total equity-based compensation expense of
$12.5 million, $14.1 million and $14.8 million
during the years ended December 31, 2010, December 31,
2009 and December 31, 2008, respectively, none of which has
provided us a tax benefit.
As of December 31, 2010, a total of $14.0 million of
unrecognized compensation costs related to unvested stock
options, unvested restricted stock units and unvested PSUs are
expected to be recognized over the remaining weighted-average
period of three years.
102
ORBITZ
WORLDWIDE, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
13.
|
Derivative
Financial Instruments
|
Interest
Rate Hedges
At December 31, 2010, we had the following interest rate
swaps outstanding that effectively converted $300.0 million
of the Term Loan from a variable to a fixed interest rate. We
pay a fixed interest rate on the swaps and in exchange receive a
variable interest rate based on either the three-month or the
one-month LIBOR.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Interest
|
|
Variable Interest
|
Notional Amount
|
|
Effective Date
|
|
Maturity Date
|
|
Rate Paid
|
|
Rate Received
|
|
$100.0 million
|
|
May 30, 2008
|
|
May 31, 2011
|
|
3.39%
|
|
Three-month LIBOR
|
$100.0 million
|
|
January 29, 2010
|
|
January 31, 2012
|
|
1.15%
|
|
One-month LIBOR
|
$100.0 million
|
|
January 29, 2010
|
|
January 31, 2012
|
|
1.21%
|
|
Three-month LIBOR
|
The following interest rate swaps that effectively converted
portions of the Term Loan from a variable to a fixed interest
rate matured:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Interest
|
|
Variable Interest
|
Notional Amount
|
|
Effective Date
|
|
Maturity Date
|
|
Rate Paid
|
|
Rate Received
|
|
$100.0 million
|
|
July 25, 2007
|
|
December 31, 2008
|
|
5.21%
|
|
Three-month LIBOR
|
$200.0 million
|
|
July 25, 2007
|
|
December 31, 2009
|
|
5.21%
|
|
Three-month LIBOR
|
$100.0 million
|
|
September 30, 2008
|
|
September 30, 2010
|
|
2.98%
|
|
One-month LIBOR
|
The objective of entering into our interest rate swaps is to
protect against volatility of future cash flows and effectively
hedge a portion of the variable interest payments on the Term
Loan. We determined that these designated hedging instruments
qualify for cash flow hedge accounting treatment. Our interest
rate swaps are the only derivative financial instruments that we
have designated as hedging instruments.
The interest rate swaps were reflected in our consolidated
balance sheets at market value. The corresponding market
adjustment was recorded to accumulated other comprehensive
income (loss). The following table shows the fair value of our
interest rate swaps at December 31, 2010 and
December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements as of
|
|
|
|
Balance Sheet Location
|
|
December 31, 2010
|
|
|
December 31, 2009
|
|
|
|
|
|
(in thousands)
|
|
|
Liability Derivatives:
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
Other current liabilities
|
|
$
|
1,286
|
|
|
$
|
1,899
|
|
Interest rate swaps
|
|
Other non-current liabilities
|
|
|
1,631
|
|
|
|
3,437
|
|
The following table shows the market adjustments recorded during
the years ended December 31, 2010, December 31, 2009
and December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss)
|
|
|
|
|
|
|
(Loss) Reclassified
|
|
|
Recognized in Income
|
|
|
|
Gain (Loss) in Other
|
|
|
from Accumulated
|
|
|
(Ineffective Portion
|
|
|
|
Comprehensive
|
|
|
OCI into
|
|
|
and the Amount
|
|
|
|
Income
|
|
|
Interest Expense
|
|
|
Excluded from
|
|
|
|
(OCI)
|
|
|
(Effective Portion)
|
|
|
Effectiveness Testing)
|
|
|
|
Years Ended December 31,
|
|
|
Years Ended December 31,
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
2,419
|
|
|
$
|
9,520
|
|
|
$
|
(8,367
|
)
|
|
$
|
(6,758
|
)
|
|
$
|
(13,909
|
)
|
|
$
|
(5,647
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
103
ORBITZ
WORLDWIDE, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The amount of loss recorded in accumulated other comprehensive
income at December 31, 2010 that is expected to be
reclassified to interest expense in the next twelve months if
interest rates remain unchanged is approximately
$3.1 million after-tax.
Foreign
Currency Hedges
We enter into foreign currency contracts to manage our exposure
to changes in the foreign currency associated with foreign
currency receivables, payables, intercompany transactions and
borrowings under the Revolver. We primarily hedge our foreign
currency exposure to the Pound Sterling, Euro and Australian
dollar. As of December 31, 2010, we had foreign currency
contracts outstanding with a total net notional amount of
$174.1 million, all of which matured in January 2011. The
foreign currency contracts do not qualify for hedge accounting
treatment. Accordingly, changes in the fair value of the foreign
currency contracts were recorded in net loss, as a component of
selling, general and administrative expense in our consolidated
statements of operations.
The following table shows the fair value of our foreign currency
hedges at December 31, 2010 and December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements as of
|
|
|
Balance Sheet Location
|
|
December 31, 2010
|
|
December 31, 2009
|
|
|
|
|
(in thousands)
|
|
Liability Derivatives:
|
|
|
|
|
|
|
|
|
|
|
Foreign currency hedges
|
|
Other current liabilities
|
|
$
|
2,227
|
|
|
$
|
1,208
|
|
The following table shows the changes in the fair value of our
foreign currency contracts recorded in net loss during the years
ended December 31, 2010, December 31, 2009 and
December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) Gain in Selling, General &
|
|
|
|
Administrative Expense
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(in thousands)
|
|
|
Foreign currency hedges (a)
|
|
$
|
(1,353
|
)
|
|
$
|
(6,782
|
)
|
|
$
|
14,120
|
|
|
|
|
(a) |
|
We recorded transaction (losses) gains associated with the
re-measurement of our foreign denominated assets and liabilities
of $(3.7) million, $3.3 million and
$(19.1) million in the years ended December 31, 2010,
December 31, 2009 and December 31, 2008, respectively.
Transaction (losses) gains were included in selling, general and
administrative expense in our consolidated statements of
operations. The net impact of transaction (losses) gains
associated with the re-measurement of our foreign denominated
assets and liabilities and (losses) gains incurred on our
foreign currency hedges was a net loss of $(5.1) million,
$(3.5) million and $(5.0) million in the years ended
December 31, 2010, December 31, 2009 and
December 31, 2008, respectively. |
On January 6, 2009, our former President and Chief
Executive Officer resigned. In connection with his resignation
and pursuant to the terms of his employment agreement with the
Company, we incurred total expenses of $2.1 million in the
year ended December 31, 2009 relating to severance benefits
and other termination-related costs, which were included in
selling, general and administrative expense in our consolidated
statement of operations. The majority of these cash payments
were made in equal amounts over a twenty-four month period from
his resignation date, with the final payment made in December
2010. In addition, we recorded $1.8 million of additional
equity-based compensation expense in the year ended
December 31, 2009 related to the accelerated vesting of
certain equity-based awards held by him, which is net of any
related forfeitures.
104
ORBITZ
WORLDWIDE, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
We also reduced our workforce by approximately 130 domestic and
international employees during the year ended December 31,
2009, and as a result we incurred $4.6 million of expenses
related to severance benefits and other termination-related
costs, which were included in selling, general and
administrative expense in our consolidated statement of
operations. Of the total employees severed, approximately 50
were severed in the first quarter of 2009 and an additional
50 employees were severed in the second quarter of 2009 in
response to weakening demand in the travel industry and
deteriorating economic conditions. The remaining
30 employees were severed in the fourth quarter of 2009 in
an effort to better align the staffing levels of ebookers with
its business objectives. As of December 31, 2010, all of
these costs had been paid.
During the year ended December 31, 2008, we reduced our
workforce by approximately 160 domestic and international
employees, primarily in response to weakening demand in the
travel industry and deteriorating economic conditions. In
connection with this workforce reduction, we incurred total
expenses of $3.4 million during the year ended
December 31, 2008 related to severance benefits and other
termination-related costs, which were included in selling,
general and administrative expense in our consolidated statement
of operations.
|
|
15.
|
Employee
Benefit Plans
|
We sponsor a defined contribution savings plan for employees in
the United States that provides certain of our eligible
employees an opportunity to accumulate funds for retirement.
HotelClub and ebookers sponsor similar defined contribution
savings plans. We match the contributions of participating
employees on the basis specified by the plans. Beginning on
January 1, 2009, we reduced our matching contribution
percentage for our defined contribution savings plan for
employees in the United States from a maximum of 6% of
participant compensation to a maximum of 3% of participant
compensation. Additionally, effective January 1, 2009, new
employees in the United States are not eligible for Company
matching contributions until they have attained one year of
service with the Company. We recorded total expense related to
these plans in the amount of $4.9 million,
$5.0 million and $7.0 million for the years ended
December 31, 2010, December 31, 2009 and
December 31, 2008, respectively.
The following table presents the calculation of basic and
diluted net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(in thousands, except share and per share data)
|
|
|
Net loss
|
|
$
|
(58,237
|
)
|
|
$
|
(336,955
|
)
|
|
$
|
(298,562
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding for basic and diluted net
loss per share (a)
|
|
|
101,269,274
|
|
|
|
84,073,593
|
|
|
|
83,342,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
|
$
|
(0.58
|
)
|
|
$
|
(4.01
|
)
|
|
$
|
(3.58
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Stock options, restricted stock, restricted stock units and PSUs
are not included in the calculation of diluted net loss per
share for the years ended December 31, 2010,
December 31, 2009 and December 31, 2008 because we had
a net loss for each year. Accordingly, the inclusion of these
equity awards would have had an antidilutive effect on diluted
net loss per share. |
105
ORBITZ
WORLDWIDE, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following outstanding equity awards are not included in the
diluted net loss per share calculation above because they would
have had an antidilutive effect:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
Antidilutive equity awards
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Stock options
|
|
|
3,738,833
|
|
|
|
4,236,083
|
|
|
|
4,216,805
|
|
Restricted stock units
|
|
|
4,233,590
|
|
|
|
5,650,750
|
|
|
|
2,724,356
|
|
Restricted stock
|
|
|
|
|
|
|
2,195
|
|
|
|
18,661
|
|
Performance-based restricted stock units
|
|
|
561,108
|
|
|
|
227,679
|
|
|
|
249,108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
8,533,531
|
|
|
|
10,116,707
|
|
|
|
7,208,930
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17.
|
Related
Party Transactions
|
Related
Party Transactions with Travelport and its
Subsidiaries
The following table summarizes the related party balances with
Travelport and its subsidiaries as of December 31, 2010 and
December 31, 2009, reflected in our consolidated balance
sheets. We net settle amounts due to and from Travelport.
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
December 31, 2009
|
|
|
|
(in thousands)
|
|
|
Due from Travelport, net
|
|
$
|
15,449
|
|
|
$
|
3,188
|
|
The following table summarizes the related party transactions
with Travelport and its subsidiaries for the years ended
December 31, 2010, December 31, 2009 and
December 31, 2008, reflected in our consolidated statements
of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(in thousands)
|
|
|
Net revenue (a)
|
|
$
|
117,619
|
|
|
$
|
122,032
|
|
|
$
|
149,171
|
|
Cost of revenue
|
|
|
477
|
|
|
|
592
|
|
|
|
1
|
|
Selling, general and administrative expense
|
|
|
486
|
|
|
|
215
|
|
|
|
2,997
|
|
Interest expense
|
|
|
4,016
|
|
|
|
3,779
|
|
|
|
2,545
|
|
|
|
|
|
(a)
|
These amounts include net revenue related to our GDS services
agreement and bookings sourced through Donvand Limited and
OctopusTravel Group Limited (doing business as Gullivers Travel
Associates, GTA) for the periods presented.
|
Stock
Purchase Agreement
On January 26, 2010, Travelport purchased
9,025,271 shares of our common stock for $50.0 million
in cash (see Note 7 Term Loan and Revolving
Credit Facility).
Net
Operating Losses
In December 2009, as permitted under the U.K. group relief
provisions, we surrendered $17.2 million of net operating
losses generated in 2007 to Donvand Limited, a subsidiary of
Travelport (see Note 11 Income Taxes).
106
ORBITZ
WORLDWIDE, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Separation
Agreement
We entered into a Separation Agreement with Travelport at the
time of the IPO. This agreement, as amended, provided the
general terms for the separation of our respective businesses.
When we were a wholly-owned subsidiary of Travelport, Travelport
provided guarantees, letters of credit and surety bonds on our
behalf under our commercial agreements and leases and for the
benefit of regulatory agencies. Under the Separation Agreement,
we are required to use commercially reasonable efforts to have
Travelport released from any then outstanding guarantees and
surety bonds. As a result, Travelport no longer provides surety
bonds on our behalf or guarantees in connection with commercial
agreements or leases entered into or replaced by us subsequent
to the IPO.
In addition, Travelport is obligated to continue to issue
letters of credit on our behalf so long as Travelport and its
affiliates (as defined in the Separation Agreement, as amended)
own at least 50% of our voting stock, in an aggregate amount not
to exceed $75.0 million (denominated in U.S. dollars).
Travelport charges us fees for issuing, renewing or extending
letters of credit on our behalf. This fee was included in
interest expense in our consolidated statements of operations.
At December 31, 2010 and December 31, 2009, there were
$72.3 million and $59.3 million of outstanding letters
of credit issued by Travelport on our behalf, respectively (see
Note 10 - Commitments and Contingencies).
Transition
Services Agreement
At the time of the IPO, we entered into a Transition Services
Agreement with Travelport. Under this agreement, as amended,
Travelport provided us with certain transition services,
including insurance, human resources and employee benefits,
payroll, tax, communications, collocation and data center
facilities, information technology and other existing shared
services. We also provided Travelport with certain services,
including accounts payable, information technology hosting, data
warehousing and storage as well as Sarbanes-Oxley compliance
testing and deficiency remediation. The terms for the services
provided under the Transition Services Agreement generally
expired on March 31, 2008, subject to certain exceptions.
The term of the Transition Services Agreement was extended until
September 30, 2009 for services Travelport provided us
related to the support and maintenance of applications for
storage of certain financial and human resources data and until
December 31, 2009 for services Travelport provided to us
related to non-income tax return preparation and consulting
services. The charges for these services were based on the time
expended by the employee or service provider billed at the
approximate human resource cost, including wages and benefits.
Master
License Agreement
We entered into a Master License Agreement with Travelport at
the time of the IPO. Pursuant to this agreement, Travelport
licenses certain of our intellectual property and pays us fees
for related maintenance and support services. The licenses
include our supplier link technology; portions of ebookers
booking, search and vacation package technologies; certain of
our products and online booking tools for corporate travel;
portions of our private label vacation package technology; and
our extranet supplier connectivity functionality.
The Master License Agreement granted us the right to use a
corporate online booking product developed by Travelport. We
have entered into a value added reseller license with Travelport
for this product.
Equipment,
Services and Use Agreements
Prior to the IPO, we shared certain office locations with
Travelport. In connection with the IPO, we entered into an
Equipment, Services and Use Agreement for each office occupied
by both parties. This agreement commenced in most locations on
June 1, 2007 and provided that the cost of the shared space
would be ratably allocated. The agreement expired on
December 31, 2007 but automatically renewed if no
termination notice was served. Termination notices were served
for all but two locations as of December 31,
107
ORBITZ
WORLDWIDE, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
2010. Travelport remained liable to landlords for all lease
obligations with guarantee agreements, unless expressly released
from this liability by the relevant landlord.
GDS
Service Agreements
In connection with the IPO, we entered into the Travelport GDS
Service Agreement, which expires on December 31, 2014. The
Travelport GDS Service Agreement is structured such that we earn
incentive revenue for each air, car and hotel segment that is
processed through the Travelport GDSs. This agreement requires
that we process a certain minimum number of segments for our
domestic brands through the Travelport GDSs each year. Our
domestic brands were required to process a total of
33.7 million, 36.0 million and 38.3 million
segments through the Travelport GDSs during the years ended
December 31, 2010, December 31, 2009 and
December 31, 2008, respectively. Of the required number of
segments, 16.0 million segments were required to be
processed each year through Worldspan, and 17.7 million,
20.0 million and 22.3 million segments were required
to be processed through Galileo during the years ended
December 31, 2010, December 31, 2009 and
December 31, 2008, respectively. The required number of
segments processed in future years for Worldspan is fixed at
16.0 million segments, while the required number of
segments for Galileo is subject to adjustment based upon the
actual segments processed by our domestic brands in the
preceding year. Our failure to process at least 95% of these
segments through the Travelport GDSs would result in a shortfall
payment of $1.25 per segment below the required minimum. We are
not subject to these minimum volume thresholds to the extent
that we process all eligible segments through the Travelport
GDS. No payments were made to Travelport related to the minimum
segment requirement for our domestic brands for the years ended
December 31, 2010, December 31, 2009 and
December 31, 2008.
The Travelport GDS Service Agreement also requires that ebookers
use the Travelport GDSs exclusively in certain countries for
segments processed through GDSs in Europe. Our failure to
process at least 95% of these segments through the Travelport
GDSs would result in a shortfall payment of $1.25 per segment
for each segment processed through an alternative GDS provider.
We failed to meet this minimum segment requirement during each
of the years ended December 31, 2010, December 31,
2009 and December 31, 2008, and as a result, we were
required to make shortfall payments of $0.4 million,
$0.4 million and $0.2 million to Travelport related to
each of these years, respectively.
A significant portion of our GDS services are provided through
the Travelport GDS Service Agreement. For the years ended
December 31, 2010, December 31, 2009 and
December 31, 2008, we recognized $113.3 million,
$111.6 million and $108.2 million of incentive revenue
for segments processed through Galileo and Worldspan,
respectively, which accounted for more than 10% of our total net
revenue.
Hotel
Sourcing and Franchise Agreement
We entered into a Master Supply and Services Agreement (the
GTA Agreement) with GTA, a wholly-owned subsidiary
of Travelport, which became effective on January 1, 2008.
Under the GTA Agreement, we pay GTA a contract rate for hotel
and destination services inventory it makes available to us for
booking on our websites. The contract rate exceeds the prices at
which suppliers make their inventory available to GTA for
distribution and is based on a percentage of the rates GTA makes
such inventory available to its other customers. We are also
subject to additional fees if we exceed certain specified
booking levels. The initial term of the GTA Agreement expired on
December 31, 2010. Under this agreement, we were restricted
from providing access to hotels and destination services content
to certain of GTAs clients until December 31, 2010.
Corporate
Travel Agreement
We provide corporate travel management services to Travelport
and its subsidiaries. We believe that this agreement was
executed on terms comparable to those of unrelated third parties.
108
ORBITZ
WORLDWIDE, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Agreements
Involving Tecnovate
In July 2007, we sold Tecnovate eSolutions Private Limited
(Tecnovate) to Travelport. In connection with the
sale, we entered into an agreement to continue using the
services of Tecnovate, which included call center and telesales,
back office administrative, information technology and financial
services.
In December 2007, Travelport subsequently sold Tecnovate to an
affiliate of Blackstone, Intelenet Global Services
(Intelenet). Prior to the sale, Travelport paid us
an incentive fee of $5.0 million for entering into an
amended service agreement to continue using the services of
Tecnovate following its sale to Intelenet. We deferred the
incentive fee and recognized it as a reduction to expense on a
straight-line basis over the original three-year term of the
agreement, which expired in September 2010.
Related
Party Transactions with Affiliates of Blackstone and
TCV
In the normal course of conducting business, we have entered
into various agreements with affiliates of Blackstone and TCV.
We believe that these agreements have been executed on terms
comparable to those of unrelated third parties. For example, we
have agreements with certain hotel management companies that are
affiliates of Blackstone and that provide us with access to
their inventory. We also purchase services from certain
Blackstone and TCV affiliates such as telecommunications and
advertising. In addition, various Blackstone and TCV affiliates
utilize our partner marketing programs and corporate travel
services.
We have also entered into various outsourcing agreements with
Intelenet, that provide us with call center and telesales, back
office administrative, information technology and financial
services. In April 2010, we entered into an agreement with
Intelenet pursuant to which Intelenet loaned us
$0.8 million to finance the cost of outsourcing customer
service functions for certain of our ebookers websites to
Intelenet. This loan is interest-free and is payable in equal
monthly installments beginning in October 2010 through its
maturity in March 2014.
The following table summarizes the related party balances with
affiliates of Blackstone and TCV as of December 31, 2010
and December 31, 2009, reflected in our consolidated
balance sheets:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
December 31, 2009
|
|
|
|
(in thousands)
|
|
|
Accounts receivable
|
|
$
|
235
|
|
|
$
|
62
|
|
Prepaid expenses
|
|
|
|
|
|
|
78
|
|
Accounts payable
|
|
|
6,288
|
|
|
|
5,432
|
|
Accrued expenses
|
|
|
1,965
|
|
|
|
2,461
|
|
Accrued merchant payable
|
|
|
14,135
|
|
|
|
6,131
|
|
Other current liabilities
|
|
|
229
|
|
|
|
|
|
Other non-current liabilities
|
|
|
514
|
|
|
|
|
|
The following table summarizes the related party transactions
with affiliates of Blackstone and TCV for the years ended
December 31, 2010, December 31, 2009 and
December 31, 2008, reflected in our consolidated statements
of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(in thousands)
|
|
|
Net revenue
|
|
$
|
22,098
|
|
|
$
|
16,793
|
|
|
$
|
14,131
|
|
Cost of revenue (a)
|
|
|
30,166
|
|
|
|
26,429
|
|
|
|
29,715
|
|
Selling, general and administrative expense (b)
|
|
|
2,913
|
|
|
|
3,136
|
|
|
|
5,492
|
|
Marketing expense
|
|
|
54
|
|
|
|
|
|
|
|
461
|
|
109
ORBITZ
WORLDWIDE, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
(a) |
|
The amounts shown represent call center and telesales costs
incurred under our outsourcing agreements with Intelenet. |
|
(b) |
|
Of the amounts shown for the years ended December 31, 2010,
December 31, 2009 and December 31, 2008,
$2.5 million, $2.6 million and $4.8 million,
respectively, represent costs incurred under our outsourcing
agreements with Intelenet for back office administrative,
information technology and financial services. |
|
|
18.
|
Fair
Value Measurements
|
The following table shows the fair value of our financial assets
and financial liabilities that are required to be measured at
fair value on a recurring basis as of December 31, 2010 and
December 31, 2009, which were classified as cash and cash
equivalents, other current liabilities and other non-current
liabilities in our consolidated balance sheets. We currently do
not have non-financial assets and non-financial liabilities that
are required to be measured at fair value on a recurring basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements as of
|
|
|
|
December 31, 2010
|
|
|
December 31, 2009
|
|
|
|
|
|
|
Quoted
|
|
|
Significant
|
|
|
|
|
|
|
|
|
Quoted
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
prices in
|
|
|
other
|
|
|
Significant
|
|
|
|
|
|
prices in
|
|
|
other
|
|
|
Significant
|
|
|
|
Balance at
|
|
|
active
|
|
|
observable
|
|
|
unobservable
|
|
|
Balance at
|
|
|
active
|
|
|
observable
|
|
|
unobservable
|
|
|
|
December 31,
|
|
|
markets
|
|
|
inputs
|
|
|
inputs
|
|
|
December 31,
|
|
|
markets
|
|
|
inputs
|
|
|
inputs
|
|
|
|
2010
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
2009
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds (a)
|
|
$
|
49,097
|
|
|
$
|
49,097
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
54,319
|
|
|
$
|
54,319
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency hedge liabilities (see Note 13
Derivative Financial Instruments)
|
|
$
|
2,227
|
|
|
$
|
2,227
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,208
|
|
|
$
|
1,208
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap liabilities (see Note 13
Derivative Financial Instruments)
|
|
$
|
2,917
|
|
|
$
|
|
|
|
$
|
2,917
|
|
|
$
|
|
|
|
$
|
5,336
|
|
|
$
|
|
|
|
$
|
5,336
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
The money market funds as of December 31, 2009 are included
in the table above for comparative purposes. |
We value our foreign currency hedges based on the difference
between the foreign currency contract rate and widely available
foreign currency rates as of the measurement date. Our foreign
currency hedges are short-term in nature, generally maturing
within 30 days.
We value our interest rate hedges using valuations that are
calibrated to the initial trade prices. Using a market-based
approach, subsequent valuations are based on observable inputs
to the valuation model including interest rates, credit spreads
and volatilities.
The following table shows the fair value of our non-financial
assets that were required to be measured at fair value on a
non-recurring basis during the year ended December 31,
2010. These non-financial assets, which included the goodwill,
trademarks and certain property and equipment associated with
our HotelClub reporting unit as well as the trademark associated
with our CheapTickets brand, were required to be measured at
fair value as of October 1, 2010 in connection with the
annual impairment test we performed on our
110
ORBITZ
WORLDWIDE, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
goodwill and trademarks and trade names in the fourth quarter of
2010 (see Note 3 Impairment of Goodwill and
Intangible Assets).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using
|
|
|
|
|
|
|
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted
|
|
|
other
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
prices in
|
|
|
observable
|
|
|
unobservable
|
|
|
|
|
|
|
Balance at
|
|
|
active markets
|
|
|
inputs
|
|
|
inputs
|
|
|
Total
|
|
|
|
October 1, 2010
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
(Losses)
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
29,118
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
29,118
|
|
|
$
|
(41,753
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks and trade names
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HotelClub
|
|
$
|
4,658
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
4,658
|
|
|
$
|
(17,752
|
)
|
CheapTickets
|
|
|
4,354
|
|
|
|
|
|
|
|
|
|
|
|
4,354
|
|
|
|
(10,646
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total trademarks and trade names
|
|
$
|
9,012
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
9,012
|
|
|
$
|
(28,398
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized software
|
|
$
|
1,865
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,865
|
|
|
$
|
(4,516
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In addition to the assets shown in the table above, we were also
required to measure the assets related to the expected in-kind
marketing and promotional support to be received from each of
Northwest Airlines and American Airlines at fair value during
the year ended December 31, 2010. Upon completion of the
operational merger of Northwest Airlines and Delta Airlines into
a single operating carrier, Northwest Airlines was no longer
obligated to provide us with in-kind marketing and promotional
support after June 1, 2010. As a result, we recorded a
charge to impair this asset. In December 2010, American Airlines
terminated its Charter Associate Agreement with us. As a result,
American Airlines was no longer obligated to provide us with
in-kind marketing and promotional support after December 2010,
and we recorded a charge to impair this asset (see Note 9 -
Unfavorable Contracts).
The following table shows the fair value of our non-financial
assets that were required to be measured at fair value on a
non-recurring basis during the year ended December 31,
2009. These non-financial assets, which included the goodwill
for all of our reporting units which had goodwill balances and
the trademarks and trade names associated with our HotelClub,
Orbitz and CheapTickets brands, were required to be measured at
fair value as of March 31, 2009 in connection with the
interim impairment test we performed on our goodwill and
trademarks and trade names in the first quarter of 2009 (see
Note 3 Impairment of Goodwill and Intangible
Assets).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted
|
|
|
other
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
prices in
|
|
|
observable
|
|
|
unobservable
|
|
|
|
|
|
|
Balance at
|
|
|
active markets
|
|
|
inputs
|
|
|
inputs
|
|
|
Total
|
|
|
|
March 31, 2009
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
(Losses)
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
697,900
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
697,900
|
|
|
$
|
(249,446
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks and trade names
|
|
$
|
149,793
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
149,793
|
|
|
$
|
(82,081
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
Value of Financial Instruments
For certain of our financial instruments, including cash and
cash equivalents, accounts receivable, accounts payable, accrued
merchant payable and accrued expenses, the carrying value
approximates or equals fair value due to their short-term nature.
The carrying value of the Term Loan was $492.0 million at
December 31, 2010, compared with a fair value of
approximately $465.9 million. At December 31, 2009,
the carrying value of the Term Loan was
111
ORBITZ
WORLDWIDE, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
$576.6 million, compared with a fair value of
$537.9 million. The fair values were determined based on
quoted market ask prices.
We determine operating segments based on how our chief operating
decision maker manages the business, including making operating
decisions and evaluating operating performance. We operate in
one segment and have one reportable segment.
We maintain operations in the United States, United Kingdom,
Australia, Germany, Sweden, France, Finland, Ireland, the
Netherlands, Switzerland and other international territories.
The table below presents net revenue by geographic area: the
United States and all other countries. Net revenue is allocated
based on where the booking originated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(in thousands)
|
|
|
Net revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
579,386
|
|
|
$
|
584,834
|
|
|
$
|
686,321
|
|
All other countries
|
|
|
178,101
|
|
|
|
152,814
|
|
|
|
183,955
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
757,487
|
|
|
$
|
737,648
|
|
|
$
|
870,276
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The table below presents property and equipment, net, by
geographic area: the United States and all other countries.
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
December 31, 2009
|
|
|
|
(in thousands)
|
|
|
Long-lived assets
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
149,559
|
|
|
$
|
167,909
|
|
All other countries
|
|
|
8,504
|
|
|
|
13,053
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
158,063
|
|
|
$
|
180,962
|
|
|
|
|
|
|
|
|
|
|
|
|
20.
|
Quarterly
Financial Data (Unaudited)
|
The following table presents certain unaudited consolidated
quarterly financial information for each of the eight quarters
in the period ended December 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
June 30,
|
|
|
March 31,
|
|
|
|
2010(a)
|
|
|
2010
|
|
|
2010
|
|
|
2010
|
|
|
|
(in thousands, except per share data)
|
|
|
Net revenue
|
|
$
|
182,364
|
|
|
$
|
194,479
|
|
|
$
|
193,491
|
|
|
$
|
187,153
|
|
Cost and expenses
|
|
|
250,037
|
|
|
|
166,918
|
|
|
|
171,949
|
|
|
|
180,387
|
|
Operating (loss) income
|
|
|
(67,673
|
)
|
|
|
27,561
|
|
|
|
21,542
|
|
|
|
6,766
|
|
Net (loss) income
|
|
|
(78,041
|
)
|
|
|
15,332
|
|
|
|
9,733
|
|
|
|
(5,261
|
)
|
Basic net (loss) income per share
|
|
|
(0.76
|
)
|
|
|
0.15
|
|
|
|
0.10
|
|
|
|
(0.05
|
)
|
Diluted net (loss) income per share
|
|
|
(0.76
|
)
|
|
|
0.15
|
|
|
|
0.09
|
|
|
|
(0.05
|
)
|
112
ORBITZ
WORLDWIDE, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
June 30,
|
|
|
March 31,
|
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2009(a)
|
|
|
|
(in thousands, except per share data)
|
|
|
Net revenue
|
|
$
|
174,693
|
|
|
$
|
186,603
|
|
|
$
|
187,959
|
|
|
$
|
188,393
|
|
Cost and expenses
|
|
|
168,390
|
|
|
|
164,368
|
|
|
|
165,437
|
|
|
|
511,968
|
|
Operating income (loss)
|
|
|
6,303
|
|
|
|
22,235
|
|
|
|
22,522
|
|
|
|
(323,575
|
)
|
Net (loss) income
|
|
|
(18,055
|
)
|
|
|
6,980
|
|
|
|
10,276
|
|
|
|
(336,156
|
)
|
Basic and diluted net (loss) income per share
|
|
|
(0.21
|
)
|
|
|
0.08
|
|
|
|
0.12
|
|
|
|
(4.02
|
)
|
|
|
|
|
(a)
|
During the three months ended December 31, 2010 and the
three months ended March 31, 2009, we recorded non-cash
impairment charges related to goodwill and intangible assets in
the amount of $70.2 million and $331.5 million,
respectively (see Note 3 Impairment of Goodwill
and Intangible Assets).
|
ITA
Software, Inc. (ITA) Agreement
On February 1, 2011, we and ITA entered into an agreement
concerning the use of ITAs air fare search solution, QPX.
Under this agreement, the parties have modified terms concerning
our use of QPX for the Orbitz.com and Cheaptickets.com websites
for the year ending December 31, 2011 under the Software
License Agreement between us and ITA, which expires on
December 31, 2011. This agreement also provides us with
continued use of QPX for the Orbitz.com and Cheaptickets.com
websites, commencing January 1, 2012 and continuing until
December 31, 2015. We will pay ITA minimum annual fees of
$9.5 million for this use. We will be entitled to create a
threshold number of passenger name records (PNRs) per year
resulting from QPX air search results, and we will pay ITA a
per-PNR fee to create PNRs above this annual threshold amount.
ITA will provide us with access to the most
up-to-date
functionality related to QPX that ITA makes generally available
to all of its customers.
Travelport
Agreement
On February 1, 2011, we entered into a Letter Agreement
with Travelport (the Letter Agreement), which amends
and clarifies certain terms set forth in agreements that we have
previously entered into with Travelport and provides certain
benefits to us so long as certain conditions are met.
The Letter Agreement contains an agreement relating to the
absence of ticketing authority on AA. Under this agreement, our
segment incentives payable from Travelport under the
parties Travelport GDS Service Agreement, would be
increased effective December 22, 2010 until the earliest of
April 21, 2011, the reinstatement of ticketing authority by
AA for our Orbitz.com website, the consummation of a direct
connect relationship with AA, or the determination by our Audit
Committee of the Board of Directors (the Audit
Committee) that we are engaged in a discussion with AA
that is reasonably likely to result in a direct connect
relationship between us and AA.
The Letter Agreement also contains an amendment to the
Travelport GDS Service Agreement. This amendment establishes a
higher threshold at which potential decreases in
Travelports segment incentive payments to us can take
effect and reduces the percentage impact of the potential
decreases. We are entitled to receive these benefits as long as
our Audit Committee does not determine that we are engaged in a
discussion with any airline that is reasonably likely to result
in a direct connect relationship and we have not consummated a
direct connect relationship with any airline.
113
ORBITZ
WORLDWIDE, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Under the Letter Agreement, we were also permitted to proceed
with an arrangement with ITA that provides for our use of
ITAs airfare search solution after December 31, 2011.
Also pursuant to the Letter Agreement, we have agreed to the
circumstances under which we will use
e-Pricing
for searches on our websites through December 31, 2014.
114
Schedule II
Valuation and Qualifying Accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Charged to
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of
|
|
|
Costs and
|
|
|
Charged to
|
|
|
|
|
|
Balance at
|
|
|
|
Period
|
|
|
Expenses
|
|
|
Other Accounts
|
|
|
Deductions
|
|
|
End of Period
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
Tax Valuation Allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2010
|
|
$
|
329,868
|
|
|
$
|
3,344
|
|
|
$
|
(20,692
|
)(a)
|
|
$
|
|
|
|
$
|
312,520
|
|
Year Ended December 31, 2009
|
|
|
319,512
|
|
|
|
34,560
|
|
|
|
(19,398
|
)(a)
|
|
|
(4,806
|
)(b)
|
|
|
329,868
|
|
Year Ended December 31, 2008
|
|
|
329,601
|
|
|
|
26,636
|
|
|
|
(36,725
|
)(a)
|
|
|
|
|
|
|
319,512
|
|
|
|
|
(a) |
|
Represents foreign currency translation adjustments to the
valuation allowance. In addition, the amounts for the years
ended December 31, 2010 and December 31, 2009 include
reclassification adjustments between our gross deferred tax
assets and the corresponding valuation allowance. The amount for
the year ended December 31, 2010 also includes the effects
of a U.K. tax rate change. |
|
(b) |
|
Represents the surrender of $17.2 million of net operating
losses generated in the year ended December 31, 2007 to
Donvand Limited, a subsidiary of Travelport, as permitted under
the U.K. group relief provisions. A full valuation allowance had
previously been established for these net operating losses. As a
result, upon surrender, we reduced our gross deferred tax assets
and the corresponding valuation allowance by $4.8 million. |
115
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure.
|
None.
|
|
Item 9A.
|
Controls
and Procedures.
|
Evaluation
of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive
Officer and Chief Financial Officer, has evaluated the
effectiveness of our disclosure controls and procedures (as such
term is defined in
Rules 13a-15(e)
and
15d-15(e)
under the Securities Exchange Act of 1934, as amended (the
Exchange Act)) as of December 31, 2010. Based
on such evaluation, our Chief Executive Officer and Chief
Financial Officer have concluded that, as of the end of such
period, our disclosure controls and procedures were effective.
Changes
in Internal Control over Financial Reporting
There were no changes in our internal control over financial
reporting (as such term is defined in
Rules 13a-15(f)
and
15d-15(f)
under the Exchange Act) during the fiscal quarter ended
December 31, 2010 that have materially affected, or are
reasonably likely to materially affect, our internal control
over financial reporting.
Managements
Report on Internal Control over Financial Reporting
Management is required to assess and report on the effectiveness
of its internal control over financial reporting as of
December 31, 2010. As a result of that assessment,
management determined that there were no material weaknesses as
of December 31, 2010 and, therefore, concluded that our
internal control over financial reporting was effective.
Managements Report on Internal Control over Financial
Reporting is included in Item 8, Financial Statements
and Supplementary Data.
The effectiveness of our internal control over financial
reporting as of December 31, 2010 has been audited by
Deloitte & Touche LLP, our independent registered
public accounting firm, as stated in their report included in
Item 8, Financial Statements and Supplementary
Data.
|
|
Item 9B.
|
Other
Information.
|
None.
PART III
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance.
|
Certain information required by Item 401 of
Regulation S-K
will be included under the caption
Proposal 1 Election of Directors in
the 2011 Proxy Statement, and that information is incorporated
by reference herein. The information required by Item 405
of
Regulation S-K
will be included under the caption Corporate
Governance Section 16(a) Beneficial Ownership
Reporting Compliance in the 2011 Proxy Statement, and that
information is incorporated by reference herein.
The information required by Item 407(c)(3) of
Regulation S-K
will be included under the caption Corporate
Governance Director Selection Procedures, and
the information required under Items 407(d)(4) and (d)(5)
of
Regulation S-K
will be included under the caption Corporate
Governance Committees of the Board of
Directors Audit Committee in the 2011 Proxy
Statement, and that information is incorporated by reference
herein.
Code of
Business Conduct
We have adopted the Orbitz Worldwide, Inc. Code of Ethics and
Business Conduct (the Code of Business Conduct)
which applies to all of our directors and employees, including
our chief executive officer,
116
chief financial officer and principal accounting officer. In
addition, we have adopted a Code of Ethics for our chief
executive officer and senior financial officers. The Code of
Business Conduct and the Code of Ethics are available on the
corporate governance page of our Investor Relations website at
www.orbitz-ir.com. Amendments to, or waivers from,
the Code of Business Conduct applicable to these senior
executives will be posted on our website and provided to you
without charge upon written request to Orbitz Worldwide, Inc.,
Attention: Corporate Secretary, 500 W. Madison Street,
Suite 1000, Chicago, Illinois 60661.
|
|
Item 11.
|
Executive
Compensation.
|
The information required by Item 402 of
Regulation S-K
will be included under the captions Executive
Compensation, Summary Compensation Table and
Director Compensation in the 2011 Proxy Statement,
and that information is incorporated by reference herein.
The information required by Items 407(e)(4) and (e)(5) of
Regulation S-K
will be included under the captions Corporate
Governance Compensation Committee Interlocks and
Insider Participation and Compensation Committee
Report in the 2011 Proxy Statement, and that information
is incorporated by reference herein.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
|
The information required by Item 201(d) of
Regulation S-K
is included in Item 5, Market for Registrants
Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities. The information required by
Item 403 of
Regulation S-K
will be included under the caption Security
Ownership in the 2011 Proxy Statement, and that
information is incorporated by reference herein.
|
|
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence.
|
The information required by Item 404 of
Regulation S-K
will be included under the caption Certain Relationships
and Related Person Transactions in the 2011 Proxy
Statement, and that information is incorporated by reference
herein.
The information required by Item 407(a) of
Regulation S-K
will be included under the caption Corporate
Governance Independence of Directors in the
2011 Proxy Statement, and that information is incorporated by
reference herein.
|
|
Item 14.
|
Principal
Accounting Fees and Services.
|
The information concerning principal accounting fees and
services and the information required by Item 14 will be
included under the caption Fees Incurred for Services of
Deloitte & Touche LLP and Approval of
Services Provided by Independent Registered Public Accounting
Firm in the 2011 Proxy Statement, and that information is
incorporated by reference herein.
117
PART IV
|
|
Item 15.
|
Exhibits,
Financial Statement Schedules.
|
(a)(1) Financial Statements: The following financial statements
are included in Item 8 herein:
(a)(2) Financial Statement Schedules: The following financial
statement schedule is included in Item 8 herein:
All other schedules are omitted because they are either not
required, are not applicable, or the information is included in
the consolidated financial statements and notes thereto.
(a)(3) Exhibits:
118
EXHIBIT INDEX
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
3
|
.1
|
|
Amended and Restated Certificate of Incorporation of Orbitz
Worldwide, Inc. (incorporated by reference to Exhibit 3.1
to Amendment No. 6 to the Orbitz Worldwide, Inc.
Registration Statement on
Form S-1
(Reg.
No. 333-142797)
filed on July 18, 2007).
|
|
3
|
.2
|
|
Amended and Restated By-laws of Orbitz Worldwide, Inc.
(incorporated by reference to Exhibit 3.2 to Amendment
No. 6 to the Orbitz Worldwide, Inc. Registration Statement
on
Form S-1
(Reg.
No. 333-142797)
filed on July 18, 2007).
|
|
3
|
.3
|
|
Amendment to the Amended and Restated By-laws of Orbitz
Worldwide, Inc., effective as of December 4, 2007
(incorporated by reference to Exhibit 3.1 to the Orbitz
Worldwide, Inc. Current Report on
Form 8-K
filed on December 5, 2007).
|
|
4
|
.1
|
|
Specimen Common Stock Certificate (incorporated by reference to
Exhibit 4.1 to Amendment No. 6 to the Orbitz
Worldwide, Inc. Registration Statement on
Form S-1
(Reg.
No. 333-142797)
filed on July 18, 2007).
|
|
10
|
.1
|
|
Form of Second Amended and Restated Airline Charter Associate
Agreement between Orbitz, LLC and the Founding Airlines
(incorporated by reference to Exhibit 10.1 to Amendment
No. 5 to the Orbitz, Inc. Registration Statement on
Form S-1
(Registration
No. 333-88646)
filed on November 25, 2003).
|
|
10
|
.2
|
|
Second Amendment to the Second Amended and Restated Airline
Charter Associate Agreement, dated as of July 7, 2009,
between Orbitz, LLC and United Air Lines, Inc. (incorporated by
reference to Exhibit 10.2 to the Orbitz Worldwide, Inc.
Quarterly Report on
Form 10-Q
for the Quarterly Period ended September 30, 2009).
|
|
10
|
.3
|
|
Form of Supplier Link Agreement between Orbitz Worldwide, Inc.
and certain airlines (incorporated by reference to
Exhibit 10.7 to Amendment No. 2 to the Orbitz
Worldwide, Inc. Registration Statement on
Form S-1
(Registration
No. 333-142797)
filed on June 13, 2007).
|
|
10
|
.4
|
|
Amendment to the Orbitz Supplier Link Agreement, dated as of
July 7, 2009, between Orbitz, LLC and United Air Lines,
Inc. (incorporated by reference to Exhibit 10.3 to the
Orbitz Worldwide, Inc. Quarterly Report on
Form 10-Q
for the Quarterly Period ended September 30, 2009).
|
|
10
|
.5
|
|
Tax Agreement, dated as of November 25, 2003, between
Orbitz, Inc. and American Airlines, Inc., Continental Airlines,
Inc., Omicron Reservations Management, Inc., Northwest Airlines,
Inc. and UAL Loyalty Services, Inc. (incorporated by reference
to Exhibit 10.36 to Amendment No. 5 to the Orbitz,
Inc. Registration Statement on
Form S-1
(Registration
No. 333-88646)
filed on November 25, 2003).
|
|
10
|
.6
|
|
Global Agreement, dated as of January 1, 2004, between
ebookers Limited and Amadeus Global Travel Distribution, S.A.
(incorporated by reference to Exhibit 10.17 to Amendment
No. 5 to the Orbitz Worldwide, Inc. Registration Statement
on
Form S-1
(Registration
No. 333-142797)
filed on July 13, 2007).
|
|
10
|
.7
|
|
Amendment to Global Agreement, dated as of July 30, 2004,
between ebookers Limited and Amadeus Global Travel Distribution,
S.A. (incorporated by reference to Exhibit 10.18 to
Amendment No. 3 to the Orbitz Worldwide, Inc. Registration
Statement on
Form S-1
(Registration
No. 333-142797)
filed on June 29, 2007).
|
|
10
|
.8
|
|
Complementary and Amendment Agreement to Global Agreement,
effective as of September 1, 2006, between ebookers Limited
and Amadeus Global Travel Distribution, S.A. (incorporated by
reference to Exhibit 10.19 to Amendment No. 5 to the
Orbitz Worldwide, Inc. Registration Statement on
Form S-1
(Registration
No. 333-142797)
filed on July 13, 2007).
|
|
10
|
.9
|
|
Amendment, effective October 1, 2007, between Amadeus IT
Group, S.A. and ebookers Limited (incorporated by reference to
Exhibit 10.2 to the Orbitz Worldwide, Inc.
Form 10-Q
for the Quarterly Period Ended March 31, 2008).
|
|
10
|
.10
|
|
Amendment, effective February 1, 2008, between Amadeus IT
Group, S.A. and ebookers Limited (incorporated by reference to
Exhibit 10.1 to the Orbitz Worldwide, Inc.
Form 10-Q
for the Quarterly Period Ended September 30, 2008).
|
119
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
10
|
.11
|
|
Amendment to the Global Agreement, effective as of July 1,
2008, between Amadeus IT Group, S.A. and ebookers Limited
(incorporated by reference to Exhibit 10.3 to the Orbitz
Worldwide, Inc. Quarterly Report on
Form 10-Q
for the Quarterly Period ended March 31, 2010).
|
|
10
|
.12
|
|
Complimentary and Amendment Agreement, effective as of
July 1, 2009, between Amadeus IT Group S.A. and ebookers
Limited (incorporated by reference to Exhibit 10.1 to the
Orbitz Worldwide, Inc. Current Report on
Form 8-K
filed on July 30, 2009).
|
|
10
|
.13
|
|
Amendment to the Global Agreement, effective as of March 8,
2010, between Amadeus IT Group, S.A. and ebookers Limited
(incorporated by reference to Exhibit 10.4 to the Orbitz
Worldwide, Inc. Quarterly Report on
Form 10-Q
for the Quarterly Period ended March 31, 2010).
|
|
10
|
.14
|
|
Amendment to the Global Agreement, effective as of
December 22, 2010, between Amadeus IT Group, S.A. and
ebookers Limited.
|
|
10
|
.15
|
|
Credit Agreement, dated as of July 25, 2007, among Orbitz
Worldwide, Inc., UBS AG, Stamford Branch, as administrative
agent, collateral agent and an L/C issuer, UBS Loan Finance LLC,
as swing line lender, Credit Suisse Securities (USA) LLC, as
syndication agent, and Lehman Brothers Inc., as documentation
agent, and the other Lenders party thereto (incorporated by
reference to Exhibit 10.1 to the Orbitz Worldwide, Inc.
Current Report on
Form 8-K
filed on July 27, 2007).
|
|
10
|
.16
|
|
Amendment No. 1, dated as of June 2, 2009, by and
among Orbitz Worldwide, Inc., the lenders party thereto, and UBS
AG, Stamford Branch, as administrative agent (incorporated by
reference to Exhibit 10.1 to the Orbitz Worldwide, Inc.
Current Report on
Form 8-K
filed on June 4, 2009).
|
|
10
|
.17
|
|
Separation Agreement, dated as of July 25, 2007, by and
between Travelport Limited and Orbitz Worldwide, Inc.
(incorporated by reference to Exhibit 10.2 to the Orbitz
Worldwide, Inc. Current Report on
Form 8-K
filed on July 27, 2007).
|
|
10
|
.18
|
|
First Amendment to Separation Agreement, dated as of May 5,
2008, between Travelport Limited and Orbitz Worldwide, Inc.
(incorporated by reference to Exhibit 10.1 to the Orbitz
Worldwide, Inc. Current Report on
Form 8-K
filed on May 6, 2008).
|
|
10
|
.19
|
|
Second Amendment to Separation Agreement, dated as of
January 23, 2009, between Travelport Limited and Orbitz
Worldwide, Inc. (incorporated by reference to Exhibit 10.12
to the Orbitz Worldwide, Inc. Annual Report on
Form 10-K
for the Fiscal Year ended December 31, 2008).
|
|
10
|
.20
|
|
Tax Sharing Agreement, dated as of July 25, 2007, by and
between Travelport Inc. and Orbitz Worldwide, Inc. (incorporated
by reference to Exhibit 10.4 to the Orbitz Worldwide, Inc.
Current Report on
Form 8-K
filed on July 27, 2007).
|
|
10
|
.21
|
|
Master License Agreement, dated as of July 23, 2007, by and
among Galileo International Technology, LLC, Galileo
International, LLC, Orbitz, LLC, ebookers Limited, Donvand
Limited, Travelport for Business, Inc., Orbitz Development, LLC
and Neat Group Corporation (incorporated by reference to
Exhibit 10.5 to the Orbitz Worldwide, Inc. Current Report
on
Form 8-K/A
filed on February 27, 2008).
|
|
10
|
.22
|
|
Master Supply and Services Agreement, dated as of July 23,
2007, by and among Orbitz Worldwide, LLC, Octopus Travel Group
Limited and Donvand Limited (incorporated by reference to
Exhibit 10.6 to the Orbitz Worldwide, Inc. Current Report
on
Form 8-K/A
filed on February 27, 2008).
|
|
10
|
.23
|
|
Amendment No. 1, dated as of December 31, 2009, to
Master Supply and Services Agreement, dated as of July 23,
2007, among Orbitz Worldwide, LLC, Octopus Travel Group Limited
and Donvand Limited (incorporated by reference to
Exhibit 10.20 to the Orbitz Worldwide, Inc. Annual Report
on
Form 10-K
for the Fiscal Year ended December 31, 2009).
|
|
10
|
.24
|
|
Software License Agreement, dated as of July 23, 2007, by
and between Orbitz Worldwide, LLC and ITA Software, Inc.
(incorporated by reference to Exhibit 10.8 to the Orbitz
Worldwide, Inc. Current Report on
Form 8-K/A
filed on February 27, 2008).
|
|
10
|
.25
|
|
Subscriber Services Agreement, dated as of July 23, 2007,
by and among Orbitz Worldwide, Inc., Galileo International,
L.L.C. and Galileo Nederland B.V. (incorporated by reference to
Exhibit 10.7 to the Orbitz Worldwide, Inc. Current Report
on
Form 8-K/A
filed on February 27, 2008).
|
120
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
10
|
.26
|
|
First Amendment, dated as of February 8, 2008, to
Subscriber Services Agreement, dated as of July 23, 2007,
between Galileo International, L.L.C., Galileo Nederland B.V.
and Orbitz Worldwide, LLC (incorporated by reference to
Exhibit 10.3 to the Orbitz Worldwide, Inc.
Form 10-Q
for the Quarterly Period ended March 31, 2008).
|
|
10
|
.27
|
|
Second Amendment, dated as of April 4, 2008, to Subscriber
Services Agreement, dated as of July 23, 2007, between
Galileo International, L.L.C., Galileo Nederland B.V. and Orbitz
Worldwide, LLC (incorporated by reference to Exhibit 10.3
to the Orbitz Worldwide, Inc.
Form 10-Q
for the Quarterly Period ended June 30, 2008).
|
|
10
|
.28
|
|
Third Amendment, dated as of January 23, 2009, to
Subscriber Services Agreement, dated as of July 23, 2007,
between Travelport International, L.L.C. (f/k/a Galileo
International, L.L.C.), Travelport Global Distribution System
B.V. (f/k/a Galileo Nederland B.V.) and Orbitz Worldwide, LLC
(incorporated by reference to Exhibit 10.24 to the Orbitz
Worldwide, Inc. Annual Report on
Form 10-K
for the Fiscal Year ended December 31, 2008).
|
|
10
|
.29
|
|
Fourth Amendment, dated as of July 8, 2009, to Subscriber
Services Agreement, dated as of July 23, 2007, between
Travelport International, L.L.C. (f/k/a Galileo International,
L.L.C.), Travelport Global Distribution System B.V. (f/k/a
Galileo Nederland B.V.) and Orbitz Worldwide, LLC (incorporated
by reference to Exhibit 10.1 to the Orbitz Worldwide, Inc.
Quarterly Report on
Form 10-Q
for the Quarterly Period ended September 30, 2009).
|
|
10
|
.30
|
|
Fifth Amendment, dated as of November 5, 2009, to
Subscriber Services Agreement, dated as of July 23, 2007,
between Travelport International, L.L.C. (f/k/a Galileo
International, L.L.C.), Travelport Global Distribution System
B.V. (f/k/a Galileo Nederland B.V.) and Orbitz Worldwide, LLC.
(incorporated by reference to Exhibit 10.27 to the Orbitz
Worldwide, Inc. Annual Report on
Form 10-K
for the Fiscal Year ended December 31, 2009).
|
|
10
|
.31
|
|
Sixth Amendment, dated as of February 18, 2010, to
Subscriber Services Agreement, dated as of July 23, 2007,
between Travelport, LP (f/k/a Travelport International, L.L.C.),
Travelport Global Distribution System B.V. (f/k/a Galileo
Nederland B.V.) and Orbitz Worldwide, LLC. (incorporated by
reference to Exhibit 10.1 to the Orbitz Worldwide, Inc.
Quarterly Report on
Form 10-Q
for the Quarterly Period ended March 31, 2010).
|
|
10
|
.32
|
|
Seventh Amendment, dated as of April 1, 2010, to Subscriber
Services Agreement, dated as of July 23, 2007, between
Travelport, LP (f/k/a Travelport International, L.L.C.),
Travelport Global Distribution System B.V. (f/k/a Galileo
Nederland B.V.) and Orbitz Worldwide, LLC. (incorporated by
reference to Exhibit 10.2 to the Orbitz Worldwide, Inc.
Quarterly Report on
Form 10-Q
for the Quarterly Period ended March 31, 2010).
|
|
10
|
.33
|
|
Eighth Amendment, dated as of August 23, 2010, to
Subscriber Services Agreement, dated as of July 23, 2007,
between Travelport, LP (f/k/a Travelport International, L.L.C.),
Travelport Global Distribution System B.V. (f/k/a Galileo
Nederland B.V.) and Orbitz Worldwide, LLC. (incorporated by
reference to Exhibit 10.1 to the Orbitz Worldwide, Inc.
Quarterly Report on
Form 10-Q
for the Quarterly Period ended September 30, 2010).
|
|
10
|
.34
|
|
Ninth Amendment, dated as of September 28, 2010, to
Subscriber Services Agreement, dated as of July 23, 2007,
between Travelport, LP (f/k/a Travelport International, L.L.C.),
Travelport Global Distribution System B.V. (f/k/a Galileo
Nederland B.V.) and Orbitz Worldwide, LLC. (incorporated by
reference to Exhibit 10.2 to the Orbitz Worldwide, Inc.
Quarterly Report on
Form 10-Q
for the Quarterly Period ended September 30, 2010).
|
|
10
|
.35
|
|
Tenth Amendment, dated as of October 22, 2010, to
Subscriber Services Agreement, dated as of July 23, 2007,
between Travelport, LP (f/k/a Travelport International, L.L.C.),
Travelport Global Distribution System B.V. (f/k/a Galileo
Nederland B.V.) and Orbitz Worldwide, LLC.
|
|
10
|
.36
|
|
Master Services Agreement, effective as of August 8, 2007,
between Pegasus Solutions, Inc. and Orbitz Worldwide, LLC
(incorporated by reference to Exhibit 10.1 to the Orbitz
Worldwide, Inc. Current Report on
Form 8-K
filed on September 27, 2007).
|
|
10
|
.37
|
|
Amendment, effective as of January 17, 2008, between
Pegasus Solutions, Inc. and Orbitz Worldwide, LLC (incorporated
by reference to Exhibit 10.16 to the Orbitz Worldwide, Inc.
Annual Report on
Form 10-K
for the Fiscal Year ended December 31, 2007).
|
121
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
10
|
.38
|
|
First Amended UltraDirect Services Schedule to the Master
Services Agreement, effective as of August 8, 2007, between
Pegasus Solutions, Inc. and Orbitz Worldwide, LLC (incorporated
by reference to Exhibit 10.5 to the Orbitz Worldwide, Inc.
Quarterly Report on
Form 10-Q
for the Quarterly Period ended June 30, 2010).
|
|
10
|
.39
|
|
First Amended Pricing Schedule to the Master Services Agreement,
effective as of August 8, 2007, between Pegasus Solutions,
Inc. and Orbitz Worldwide, LLC (incorporated by reference to
Exhibit 10.6 to the Orbitz Worldwide, Inc. Quarterly Report
on
Form 10-Q
for the Quarterly Period ended June 30, 2010).
|
|
10
|
.40
|
|
Exchange Agreement, dated as of November 4, 2009, between
Orbitz Worldwide, Inc. and PAR Investment Partners, L.P.
(incorporated by reference to Exhibit 10.1 to the Orbitz
Worldwide, Inc. Current Report on
Form 8-K
filed on November 10, 2009).
|
|
10
|
.41
|
|
Amendment No. 1, dated as of January 15, 2010, to
Exchange Agreement, by and among Orbitz Worldwide, Inc. and PAR
Investment Partners, L.P. (incorporated by reference to
Exhibit 10.31 to the Orbitz Worldwide, Inc. Annual Report
on
Form 10-K
for the Fiscal Year ended December 31, 2009).
|
|
10
|
.42
|
|
Stock Purchase Agreement, dated as of November 4, 2009,
between Orbitz Worldwide, Inc. and Travelport Limited
(incorporated by reference to Exhibit 10.2 to the Orbitz
Worldwide, Inc. Current Report on
Form 8-K
filed on November 10, 2009).
|
|
10
|
.43
|
|
Shareholders Agreement, dated as of November 4, 2009,
among Orbitz Worldwide, Inc, PAR Investment Partners, L.P. and
Travelport Limited (incorporated by reference to
Exhibit 10.3 to the Orbitz Worldwide, Inc. Current Report
on
Form 8-K
filed on November 10, 2009).
|
|
10
|
.44
|
|
Orbitz Worldwide, Inc. 2007 Equity and Incentive Plan, as
amended and restated, effective June 2, 2010 (incorporated
by reference to Exhibit 10.1 to the Orbitz Worldwide, Inc.
Current Report on
Form 8-K
filed on June 8, 2010).
|
|
10
|
.45*
|
|
Employment Agreement (including Form of Option Award Agreement),
dated as of January 6, 2009, by and between Orbitz
Worldwide, Inc. and Barnaby Harford (incorporated by reference
to Exhibit 10.2 to Orbitz Worldwide, Inc. Current Report on
Form 8-K
filed on January 12, 2009).
|
|
10
|
.46*
|
|
Amendment to Employment Agreement, effective as of July 17,
2009, by and between Orbitz Worldwide, Inc. and Barnaby Harford
(incorporated by reference to Exhibit 10.4 to the Orbitz
Worldwide, Inc. Quarterly Report on
Form 10-Q
for the Quarterly Period ended September 30, 2009).
|
|
10
|
.47*
|
|
Amendment No. 2 to Employment Agreement, effective as of
July 17, 2010, by and between Orbitz Worldwide, Inc. and
Barnaby Harford (incorporated by reference to Exhibit 10.3
to the Orbitz Worldwide, Inc. Quarterly Report on
Form 10-Q
for the Quarterly Period ended September 30, 2010).
|
|
10
|
.48*
|
|
Letter Agreement, dated as of December 30, 2010, between
Orbitz Worldwide, Inc. and Russell Hammer.
|
|
10
|
.49*
|
|
Amended and Restated Employment Agreement, dated as of
December 5, 2008, between Orbitz Worldwide, Inc. and Marsha
Williams (incorporated by reference to Exhibit 10.29 to the
Orbitz Worldwide, Inc. Annual Report on
Form 10-K
for the Fiscal Year ended December 31, 2008).
|
|
10
|
.50*
|
|
Transition and Retirement Agreement and General Release, dated
as of June 8, 2010, between Orbitz Worldwide, Inc. and
Marsha Williams (incorporated by reference to Exhibit 10.1
to the Orbitz Worldwide, Inc. Current Report on
Form 8-K
filed on June 9, 2010).
|
|
10
|
.51*
|
|
Letter Agreement, effective as of August 13, 2007, between
Orbitz Worldwide, Inc. and Mike Nelson (incorporated by
reference to Exhibit 10.10 to the Orbitz Worldwide, Inc.
Quarterly Report on
10-Q for the
Quarterly Period ended September 30, 2007).
|
|
10
|
.52*
|
|
Letter Agreement, effective as of August 14, 2007, between
Orbitz Worldwide, Inc. and James P. Shaughnessy (incorporated by
reference to Exhibit 10.32 to the Orbitz Worldwide, Inc.
Annual Report on
Form 10-K
for the Fiscal Year ended December 31, 2008).
|
|
10
|
.53*
|
|
Letter Agreement, dated March 3, 2009, between Orbitz
Worldwide, Inc. and James P. Shaughnessy (incorporated by
reference to Exhibit 10.33 to the Orbitz Worldwide, Inc.
Annual Report on
Form 10-K
for the Fiscal Year ended December 31, 2008).
|
122
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
10
|
.54*
|
|
Letter Agreement, dated July 31, 2009, between Orbitz
Worldwide, Inc. and James P. Shaughnessy (incorporated by
reference to Exhibit 10.5 to the Orbitz Worldwide, Inc.
Quarterly Report on
Form 10-Q
for the Quarterly Period ended September 30, 2009).
|
|
10
|
.55*
|
|
Letter Agreement, effective as of August 2, 2010, between
Orbitz Worldwide, Inc. and James P. Shaughnessy (incorporated by
reference to Exhibit 10.4 to the Orbitz Worldwide, Inc.
Quarterly Report on
Form 10-Q
for the Quarterly Period ended September 30, 2010).
|
|
10
|
.56*
|
|
Letter Agreement, effective as of March 29, 2010, between
Orbitz Worldwide, Inc. and Samuel M. Fulton.
|
|
10
|
.57*
|
|
Form of Option Award Agreement (incorporated by reference to
Exhibit 10.39 to Amendment No. 6 to the Orbitz
Worldwide, Inc. Registration Statement on
Form S-1
(Registration
No. 333-142797)
filed on July 18, 2007).
|
|
10
|
.58*
|
|
Form of Option Award Agreement for Converted Travelport Equity
Awards (incorporated by reference to Exhibit 10.15 to the
Orbitz Worldwide, Inc. Quarterly Report on
10-Q for the
Quarterly Period ended September 30, 2007).
|
|
10
|
.59*
|
|
Form of Stock Option Award Agreement (Executive Officers)
(incorporated by reference to Exhibit 10.1 to the Orbitz
Worldwide, Inc. Current Report on
Form 8-K
filed on June 25, 2008).
|
|
10
|
.60*
|
|
Form of Stock Option Award Agreement (Non-Executive
Employees) 2010 Stock Option Exchange (incorporated
by reference to Exhibit(d)(2) to the Orbitz Worldwide, Inc.
Schedule TO filed on May 3, 2010).
|
|
10
|
.61*
|
|
Form of Stock Option Award Agreement (Executive
Officers) 2010 Stock Option Exchange (incorporated
by reference to Exhibit(d)(3) to the Orbitz Worldwide, Inc.
Schedule TO filed on May 3, 2010).
|
|
10
|
.62*
|
|
Form of Stock Option Award Agreement (Converted Travelport
Equity) 2010 Stock Option Exchange (incorporated by
reference to Exhibit(d)(4) to the Orbitz Worldwide, Inc.
Schedule TO filed on May 3, 2010).
|
|
10
|
.63*
|
|
Form of Restricted Stock Award Agreement for Converted
Travelport Equity Awards (incorporated by reference to
Exhibit 10.13 to the Orbitz Worldwide, Inc. Quarterly
Report on
10-Q for the
Quarterly Period ended September 30, 2007).
|
|
10
|
.64*
|
|
Form of RSU Award Agreement (incorporated by reference to
Exhibit 10.40 to Amendment No. 6 to the Orbitz
Worldwide, Inc. Registration Statement on
Form S-1
(Registration
No. 333-142797)
filed on July 18, 2007).
|
|
10
|
.65*
|
|
Form of Restricted Stock Unit Award Agreement for Converted
Travelport Equity Awards (incorporated by reference to
Exhibit 10.14 to the Orbitz Worldwide, Inc. Quarterly
Report on
10-Q for the
Quarterly Period ended September 30, 2007).
|
|
10
|
.66*
|
|
Form of Restricted Stock Unit Award Agreement for Senior
Management (incorporated by reference to Exhibit 10.2 to
the Orbitz Worldwide, Inc. Current Report on
Form 8-K
filed on December 18, 2007).
|
|
10
|
.67*
|
|
Form of Restricted Stock Unit Award Agreement (Executive
Officers) (incorporated by reference to Exhibit 10.2 to the
Orbitz Worldwide, Inc. Current Report on
Form 8-K
filed on June 25, 2008).
|
|
10
|
.68*
|
|
Form of CEO Restricted Stock Unit Award Agreement (incorporated
by reference to Exhibit 10.6 to the Orbitz Worldwide, Inc.
Quarterly Report on
Form 10-Q
for the Quarterly Period ended September 30, 2009).
|
|
10
|
.69*
|
|
Form of Performance-Based Restricted Stock Unit Award
Agreement 2008 Equity Grants (incorporated by
reference to Exhibit 10.3 to the Orbitz Worldwide, Inc.
Current Report on
Form 8-K
filed on June 25, 2008).
|
|
10
|
.70*
|
|
Form of Performance-Based Restricted Stock Unit Award Agreement
(Chief Executive Officer) 2010 Equity Grants
(incorporated by reference to Exhibit 10.2 to the Orbitz
Worldwide, Inc. Current Report on
Form 8-K
filed on June 8, 2010).
|
123
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
10
|
.71*
|
|
Form of Performance-Based Restricted Stock Unit Award Agreement
(Executive Officers) 2010 Equity Grants
(incorporated by reference to Exhibit 10.3 to the Orbitz
Worldwide, Inc. Current Report on
Form 8-K
filed on June 8, 2010).
|
|
10
|
.72*
|
|
Amended and Restated Orbitz Worldwide, Inc. Performance-Based
Annual Incentive Plan, effective June 2, 2009 (incorporated
by reference to Exhibit 10.2 to the Orbitz Worldwide, Inc.
Current Report on
Form 8-K
filed on June 4, 2009).
|
|
10
|
.73*
|
|
Orbitz Worldwide, Inc. Non-Employee Directors Deferred
Compensation Plan (incorporated by reference to
Exhibit 10.5 to the Orbitz Worldwide, Inc. Quarterly Report
on 10-Q for
the Quarterly Period ended September 30, 2010).
|
|
10
|
.74*
|
|
Form of Indemnity Agreement for Directors and Officers
(incorporated by reference to Exhibit 10.1 to the Orbitz
Worldwide, Inc. Current Report on
Form 8-K
filed on December 18, 2007).
|
|
21
|
.1
|
|
List of Subsidiaries.
|
|
23
|
.1
|
|
Consent of Deloitte & Touche LLP, independent
registered public accounting firm.
|
|
31
|
.1
|
|
Certification of Chief Executive Officer of Orbitz Worldwide,
Inc. pursuant to
Rule 13a-14(a)/15d-14(a)
of the Securities Exchange Act of 1934.
|
|
31
|
.2
|
|
Certification of Chief Financial Officer of Orbitz Worldwide,
Inc. pursuant to
Rule 13a-14(a)/15d-14(a)
of the Securities Exchange Act of 1934.
|
|
32
|
.1
|
|
Certification of Chief Executive Officer of Orbitz Worldwide,
Inc. pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
32
|
.2
|
|
Certification of Chief Financial Officer of Orbitz Worldwide,
Inc. pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
* |
|
Indicates a management contract or compensatory plan or
arrangement. |
|
|
|
Portions of this exhibit have been omitted pursuant to a request
for confidential treatment filed separately with the SEC. |
124
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
|
|
|
|
|
|
|
|
ORBITZ WORLDWIDE, INC
|
|
|
|
Date: March 1, 2011
|
|
By: /s/ Barney
Harford
Barney
Harford
Chief Executive Officer
|
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.
|
|
|
Date: March 1, 2011
|
|
By: /s/ Barney
Harford
Barney
Harford
Chief Executive Officer and Director
(Principal Executive Officer)
|
|
|
|
Date: March 1, 2011
|
|
By: /s/ Russell
Hammer
Russell
Hammer
Senior Vice President and Chief Financial Officer (Principal
Financial Officer and Principal Accounting Officer)
|
|
|
|
Date: March 1, 2011
|
|
By: /s/ Jeff
Clarke
Jeff
Clarke
Chairman of the Board of Directors
|
|
|
|
Date: March 1, 2011
|
|
By: /s/ Martin
J. Brand
Martin
J. Brand
Director
|
|
|
|
Date: March 1, 2011
|
|
By: /s/ William
C. Cobb
William
C. Cobb
Director
|
125
|
|
|
Date: March 1, 2011
|
|
By: /s/ Richard
P. Fox
Richard
P. Fox
Director
|
|
|
|
Date: March 1, 2011
|
|
By: /s/ Bradley
T. Gerstner
Bradley
T. Gerstner
Director
|
|
|
|
Date: March 1, 2011
|
|
By: /s/ Jill
A. Greenthal
Jill
A. Greenthal
Director
|
|
|
|
Date: March 1, 2011
|
|
By: /s/ William
J.g. Griffith
William
J.G. Griffith
Director
|
|
|
|
Date: March 1, 2011
|
|
By: /s/ Paul
C. Schorr IV
Paul
C. Schorr IV
Director
|
|
|
|
Date: March 1, 2011
|
|
By: /s/ Jaynie
Miller Studenmund
Jaynie
Miller Studenmund
Director
|
126