S-1 1 ds1.htm FORM S-1 Form S-1
Table of Contents

As filed with the Securities and Exchange Commission on November 17, 2010

Registration No. 333-            

 

 

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

Form S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

KAYAK SOFTWARE CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware   4700   54-2139807
(State or other jurisdiction of
incorporation or organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification Number)

55 North Water Street, Suite 1

Norwalk, CT 06854

(203) 899-3100

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

Karen Ruzic Klein

General Counsel

55 North Water Street, Suite 1

Norwalk, CT 06854

(203) 899-3100

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

Copies to:

Michael A. Conza
Bingham McCutchen LLP
One Federal Street
Boston, MA 02110
Tel: (617) 951-8000
Fax: (617) 951-8736
  Richard D. Truesdell, Jr.
Davis Polk & Wardwell LLP
450 Lexington Ave.
New York, NY 10017
Tel: (212) 450-4000
Fax: (212) 701-5800

 

Approximate date of commencement of proposed sale to public: As soon as practicable after this Registration Statement is declared effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box.    ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier registration statement for the same offering.    ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier registration statement for the same offering.    ¨

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):

Large accelerated filer   ¨     Accelerated filer   ¨
Non-accelerated filer   x   (Do not check if a smaller reporting company)   Smaller reporting company   ¨

 

CALCULATION OF REGISTRATION FEE

 
Title of Each Class of Securities to be Registered   Proposed Maximum
Aggregate Offering
Price(1)
  Amount of
Registration Fee(2)

Common Stock, $0.001 par value per share

  $50,000,000   $3,565
 
 
(1)   Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act of 1933. Includes the offering price attributable to shares available for purchase by the underwriters to cover over-allotments, if any.
(2)   Calculated pursuant to Rule 457(o) based on an estimate of the proposed maximum aggregate offering price.

 

The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to Section 8(a), may determine.

 

 

 


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The information in this prospectus is not complete and may be changed. We and the selling stockholders may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and we and the selling stockholders are not soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

PROSPECTUS (Subject to Completion)

Issued November 17 , 2010

 

             SHARES

 

KAYAK Software Corporation

 

COMMON STOCK

 

 

 

KAYAK Software Corporation is offering              shares of its common stock, and the selling stockholders are offering              shares of common stock. We will not receive any proceeds from the sale of shares by the selling stockholders. This is our initial public offering, and no public market exists for our shares. We anticipate that the initial public offering price will be between $              and $              per share.

 

 

 

We intend to apply to list our common stock on the              under the symbol “              .”

 

 

 

Investing in our common stock involves risks. See “Risk Factors” beginning on page 8.

 

 

 

PRICE $              A SHARE

 

 

 

    

Price to

Public

   Underwriting
Discounts

and
Commissions
   Proceeds to
Company
   Proceeds to
Selling
Stockholders

Per share

   $                        $                        $                        $                    

Total

   $                        $                        $                        $                    

 

KAYAK Software Corporation and the selling stockholders have granted the underwriters the right to purchase an additional              shares of common stock to cover over-allotments.

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

The underwriters expect to deliver the shares of common stock to purchasers on                      , 2011.

 

 

 

MORGAN STANLEY

   DEUTSCHE BANK SECURITIES

 

 

 

PIPER JAFFRAY

   STIFEL NICOLAUS WEISEL    PACIFIC CREST SECURITIES

 

                      , 2011


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TABLE OF CONTENTS

 

     Page  

Prospectus Summary

     1   

Risk Factors

     8   

Special Note Regarding Forward-Looking Statements

     22   

Use of Proceeds

     24   

Dividend Policy

     24   

Capitalization

     25   

Dilution

     27   

Selected Consolidated Financial and Operating Data

     29   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     32   

Business

     46   

Management

     57   

 

 

 

We have not, and the selling stockholders have not, authorized anyone to provide any information other than that contained or incorporated by reference in this prospectus or in any free writing prospectus prepared by or on behalf of us or to which we have referred you. We and the selling stockholders take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. We and the selling stockholders are offering to sell, and seeking offers to buy, shares of our common stock only in jurisdictions where offers and sales are permitted. The information in this prospectus or any free-writing prospectus is accurate only as of its date, regardless of its time of delivery or of any sale of shares of our common stock. Our business, financial condition, results of operations and prospects may have changed since that date.

 

Until                     , 2011 (25 days after the commencement of this offering), all dealers that buy, sell or trade shares of our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

 

For investors outside the U.S.: We have not, the selling stockholders have not and the underwriters have not done anything that would permit this offering, or possession or distribution of this prospectus, in any jurisdiction where action for that purpose is required, other than in the U.S. Persons outside the U.S. who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the shares of common stock and the distribution of this prospectus outside of the U.S.

 

Market and Industry Data

 

Except as otherwise noted, all industry and market data in this prospectus were derived directly from data estimated and reported by PhoCusWright Inc. (PhoCusWright) or International Data Corporation (IDC), or were estimated by us using such data as the primary source. Industry publications, studies and surveys generally state that they have been prepared from sources believed to be reliable, although they do not guarantee the accuracy or completeness of such information. While we believe that each of these studies and publications is reliable, we have not independently verified such data, or any other industry or market data from third-party sources referenced in this prospectus.

 

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Trademarks

 

KAYAK®, SideStep®, swoodooTM and Search One and Done® are our key trademarks and are registered under applicable intellectual property laws. This prospectus contains references to our trademarks and service marks and to those belonging to other entities. Solely for convenience, trademarks and trade names referred to in this prospectus may appear without the ® or TM symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensor to these trademarks and trade names. We do not intend our use or display of other companies’ trade names, trademarks or service marks to imply a relationship with, or endorsement or sponsorship of us by, any other companies.

 

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PROSPECTUS SUMMARY

 

This summary highlights information contained elsewhere in this prospectus and does not contain all of the information that you should consider in making your investment decision. Before investing in our common stock, you should carefully read this entire prospectus, including our consolidated financial statements and the related notes and the information set forth under the headings “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in each case included elsewhere in this prospectus. Some of the statements in this prospectus constitute forward-looking statements. See “Special Note Regarding Forward-Looking Statements” for more information.

 

KAYAK SOFTWARE CORPORATION

 

Overview

 

We are a technology-driven company committed to improving online travel. Cofounders of Expedia, Travelocity and Orbitz started KAYAK in 2004 to take a different approach. Our websites and mobile applications enable people to easily research and compare accurate and relevant information from hundreds of other travel websites in one comprehensive, fast and intuitive display. We also provide travel management tools and services such as flight status updates, pricing alerts and itinerary management. Once users find their desired flight, hotel or other travel products, KAYAK sends them to their preferred travel supplier or online travel agent, or OTA, website to complete their purchase.

 

KAYAK’s services are free for travelers. We offer travel suppliers and OTAs an efficient channel to sell their products and services to a highly targeted audience focused on purchasing travel. We earn revenues from both referrals to travel suppliers and OTAs, or distribution revenues, and from a variety of advertising placements on our websites and mobile applications, or advertising revenues.

 

Since our commercial launch in 2005, KAYAK has experienced significant growth:

 

   

For the nine months ended September 30, 2010, we generated $128 million of revenues, representing year-over-year growth of 48%. For the quarter ended September 30, 2010, we generated $48 million of revenues, representing year-over-year growth of 80%;

 

   

For the nine months ended September 30, 2010, we processed more than 469 million user queries for travel information, representing year-over-year growth of 37%. For the quarter ended September 30, 2010, our quarter-over-quarter query volume increased 50% compared to the same period in 2009; and

 

   

KAYAK mobile applications have been downloaded nearly four million times since their introduction in March 2009. For the quarter ended September 30, 2010, we had over one million downloads, representing growth of 152% compared to the same period in 2009.

 

As of October 31, 2010, we had 140 employees, and we had local websites in 14 countries outside the U.S., including the United Kingdom, Germany, France, Spain, Italy and India.

 

Our Industry

 

Market Opportunity

 

As a distribution and advertising platform, we participate in both the online travel market and the online travel advertising market.

 

 

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Online Travel: A Large and Growing Market. The travel industry in the U.S., Europe and Asia Pacific accounted for $723 billion in global expenditures in 2009, and is projected to increase at a 3% compound annual growth rate, or CAGR, through 2011. Of this amount, approximately $216 billion, or 30% was purchased online in 2009 representing a 17% CAGR between 2005 and 2009. We believe that travel, with its research and information intensive nature, real time pricing, electronic fulfillment capabilities and thousands of travel options, is well suited for the online channel. Currently, online travel represents the largest category of e-commerce, with total sales exceeding the combined total of electronics, books, software, appliances and collectibles.

 

Key Online Travel Products. The two largest categories of online travel are airline ticket sales and hotel bookings. In 2009, airline ticket sales represented 52% of total online travel purchases, followed by hotel bookings at 25%. Hotel bookings are the fastest growing online travel category and are projected to grow at a 12% CAGR from 2009 through 2011. Given the significant differentiation among hotels, travelers will typically spend considerable time online researching a hotel stay, making hotel bookings highly suitable for the online channel.

 

Online Travel Advertising: A Large Opportunity to Grow Share of Total Advertising Spend. Travel represents one of the largest advertising categories, with advertisers spending $29 billion globally on travel-related advertising in 2009. Of this amount, only $4 billion, or 13%, was spent online with the remainder being spent primarily on traditional media. We believe that over time more travel advertising will move from offline to online as travel purchases continue to move online. Online travel advertising can also be a more efficient advertising channel, as it enables advertisers to directly target individuals who are researching and planning travel. The online travel advertising market is expected to reach $8 billion by 2014, a CAGR of 15% between 2009 and 2014.

 

Challenges of Our Industry

 

Challenges for Consumers. Travel product pricing and availability change frequently, and information is often fragmented across hundreds of travel sites. Traditional travel websites can be slow and confusing and often lack comprehensive search results. These limitations can make it frustrating for people to find, purchase and manage their travel online. As a result, we believe that travelers continue to search multiple sites for the best prices and options to meet their travel needs.

 

Challenges for Travel Suppliers and OTAs. Travel suppliers and OTAs face two main challenges. One is to distribute their travel products to as many travelers as possible, while still maintaining their brand and owning the customer relationship. In distributing their travel inventory through third party sites, they lose the opportunity to cross sell or upsell additional products and to build brand loyalty. The second challenge they face is to advertise their services to the right audience at the right time, in a cost effective manner. The majority of travel advertising dollars is currently spent in offline media channels, including TV, radio, print and outdoor campaigns. Offline travel advertising can be expensive, and its effectiveness can be difficult to measure and track. Online advertising offers many improvements to traditional advertising, but can still suffer from audience fragmentation, generic advertising placements and complex pricing schemes.

 

Our Strengths

 

We believe that KAYAK offers a better product for consumers, travel suppliers and OTAs.

 

KAYAK Provides a Fast, Intuitive and Comprehensive Travel Planning Experience. We use proprietary software and algorithms to quickly find, consolidate and sort travel information from hundreds of websites. We present these results through an intuitive interface, providing a single place for our users to plan their travel. Once a KAYAK user finds what they want to buy, we give them the flexibility to purchase directly from travel suppliers or OTAs.

 

KAYAK is a Technology-Driven Company Focused on Rapid Innovation and the User Experience. We have invested significant time and resources building a technology platform that delivers the best user experience

 

 

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possible. The majority of our employees are either software engineers or technologists, and we believe we have one of the strongest technology teams in the travel industry. We strive to innovate faster than our competitors, and we release new code to our websites almost every week.

 

KAYAK’s Users are Loyal. We believe that our users are loyal to our brands, products and services. According to a June 2010 study conducted by a market research company on our behalf, KAYAK is a leading brand among the major online travel sites in the U.S. for attributes such as “Finds all the best prices in one place” and “Smarter way to search for travel online.” Through the first nine months of 2010, 72% of our query volume was generated from people who directly visited our websites, and only 8% of our query volume was generated by users referred to us from general search engines.

 

KAYAK’s Proprietary Distribution and Advertising Platform is Optimized for the Travel Industry. We provide travel suppliers and OTAs with access to a valuable audience of people searching for travel information. Our query results include real-time pricing and availability information from travel suppliers and OTAs, from which a user can make a selection and be linked directly into the travel supplier’s or OTA’s purchase process. Our innovative platform allows advertisers to target their placements, create advertising content and link the user to the relevant page on the advertiser’s website, all based on the user’s search parameters.

 

KAYAK’s Unique Business Model is Highly Scalable. We designed our business model and technology platform to be highly scalable and cost efficient. Our software and systems have been designed from inception to handle significant growth in users and queries, without requiring significant re-engineering or major capital expenditures. In addition, we use a combination of our own proprietary software and a variety of public domain technologies so that as we continue to grow our user base, we do not incur significant additional software costs. Since all travel products are purchased by our users directly on the travel supplier’s or OTA’s website, we do not incur meaningful costs or overhead associated with fulfillment or customer service for those travel products. We have relatively low fixed operating costs, and the largest component of our variable operating cost is discretionary marketing.

 

The KAYAK Team Has Deep Industry Experience and Focus. Cofounders of Expedia, Travelocity and Orbitz formed KAYAK in 2004. Our team has extensive and longstanding relationships across the travel industry and, unlike general search engine companies, we focus on a single market category—online travel.

 

Our Growth Strategy

 

Continue to Improve and Expand Our Services. We are dedicated to offering people the best online travel planning experience. We will continue to improve and expand our offerings, adding new travel suppliers and OTAs to our query results, improving our search algorithms to enhance the speed and relevance of our query results, and adding new features to our websites and mobile applications.

 

Increase Consumer Awareness of Our Brands. We believe there is significant opportunity to increase the number of people who use our websites and mobile applications. In November 2009, we commenced a broad reach marketing program which resulted in our unaided awareness increasing to 20% as of September 2010 from 9% as of October 2009. We will continue to invest in broad reach marketing to increase our unaided awareness.

 

Grow Our Business Internationally. We operate websites in 14 countries outside of the U.S., including Germany, the United Kingdom, France, Spain, Italy and India. We believe that the international opportunity for our services is sizable and we intend to invest in both head count and marketing in 2011 and 2012.

 

Expand Our Position in Hotels. We believe that the hotel marketplace is well suited for our services, and we plan to increase the number of hotel queries we process. To capture this opportunity, we are improving our hotel query functionality, increasing our hotel-related marketing and search engine spending and improving cross-promotion of hotels in flight query results.

 

 

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Extend our Leadership Position in Mobile Applications. Mobile devices represent an important growth area in both audience and query volume. We have seen rapid adoption of our KAYAK mobile applications. We plan to extend our leadership position in travel-related mobile applications through continued product development to enhance the loyalty to our brand, products and services.

 

Risks Associated with Our Business

 

We are subject to a number of risks, including risks that may prevent us from achieving our business objectives or may adversely affect our business, financial condition, results of operations, cash flows and prospects. You should carefully consider these risks, including all of the risks discussed in the section entitled “Risk Factors,” beginning on page 8 of this prospectus, before investing in our common stock. Risks relating to our business include, among others:

 

   

we may be unable to maintain or establish relationships with travel suppliers and OTAs;

 

   

we primarily depend on a single third party to provide our airfare query results;

 

   

competition from general search engine companies and other travel companies could adversely affect us;

 

   

if travel suppliers or OTAs choose not to advertise with us or choose to reduce or even eliminate the fees they pay us, our financial performance could be materially adversely affected;

 

   

if we do not continue to innovate and provide tools and services that are useful to travelers, and if we are unable to retain or motivate key personnel or hire, retain and motivate qualified personnel we may not remain competitive, and our revenues and operating results could suffer;

 

   

we may be unable to maintain and increase KAYAK brand awareness and preference; and

 

   

we have limited international experience and may be limited in our ability to expand into international markets.

 

Corporate Information

 

Our principal executive offices are located at 55 North Water Street, Suite 1, Norwalk, CT 06854 and our telephone number at that address is (203) 899-3100. Our corporate website address is www.kayak.com. We do not incorporate the information contained on, or accessible through, our corporate website into this prospectus, and you should not consider it part of this prospectus. We were originally incorporated in Delaware in 2004 under the name Travel Search Company, Inc. We changed our name to Kayak Software Corporation in August 2004.

 

Except where the context otherwise requires or where otherwise indicated, references herein to “KAYAK,” “we,” “our” and “us” refer to the operations of Kayak Software Corporation and its consolidated subsidiaries. Our operations consist primarily of our flagship website KAYAK.com, which is part of a global family of websites that includes kayak.co.uk, swoodoo.com and SideStep.com. We refer to these websites collectively as the KAYAK websites.

 

 

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THE OFFERING

 

Common stock offered by Kayak Software Corporation

  

             shares

Common stock offered by the selling stockholders

  

             shares

Total common stock offered in this offering

  

             shares

Total common stock to be outstanding after this offering

  

             shares

Use of proceeds

   We expect to use the net proceeds from this offering for working capital and other general corporate purposes. We may also use a portion of the proceeds to expand our current business through acquisitions or investments in other strategic businesses, products or technologies. We have no commitments with respect to any such acquisitions or investments at this time.
   We will not receive any proceeds from the sale of shares by the selling stockholders. See “Use of Proceeds.”

Risk Factors

   See “Risk Factors” for a discussion of factors that you should consider carefully before deciding whether to purchase shares of our common stock.

             symbol

  

                     .

 

Except as otherwise indicated, all information in this prospectus:

 

   

assumes no exercise of the underwriters’ over-allotment option;

 

   

assumes the conversion of all outstanding shares of our Series A convertible preferred stock, Series A-1 convertible preferred stock, Series B convertible preferred stock, Series B-1 convertible preferred stock, Series C convertible preferred stock and Series D convertible preferred stock, collectively, our convertible preferred stock, into an aggregate of 26,767,656 shares of our common stock and conversion of all outstanding warrants into warrants to purchase shares of our common stock;

 

   

assumes an initial public offering price of $             per share, the midpoint of the initial public offering price range indicated on the cover of this prospectus;

 

   

excludes 103,904 shares issuable upon the exercise of warrants outstanding as of September 30, 2010 with a weighted average exercise price of $13.57 per share;

 

   

excludes 6,862,226 shares issuable upon the exercise of options outstanding as of September 30, 2010 with a weighted average exercise price of $7.19 per share; and

 

   

excludes 715,451 shares reserved for issuance pursuant to future grants of awards under our Third Amended and Restated 2005 Equity Incentive Plan and 2011 Equity Incentive Plan as of September 30, 2010.

 

 

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SUMMARY CONSOLIDATED HISTORICAL AND OPERATING DATA

 

The following summaries of our consolidated financial and operating data for the periods presented should be read in conjunction with “Selected Consolidated Financial and Operating Data,” “Capitalization,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes included elsewhere in this prospectus. The summary consolidated statements of operations data for the years ended December 31, 2007, 2008 and 2009 have been derived from our audited financial statements included elsewhere in this prospectus. The summary consolidated statements of operations data for the nine months ended September 30, 2009 and September 30, 2010 and the summary consolidated balance sheet data as of September 30, 2010 have been derived from our unaudited financial statements included elsewhere in this prospectus. In the opinion of management, the unaudited interim consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and include all adjustments necessary for the fair presentation of our financial position and results of operations for these periods. The historical results presented below are not necessarily indicative of the results to be expected for any future period, and the results for any interim period may not necessarily be indicative of the results that may be expected for a full year.

 

    Years ended December 31,     Nine months ended
September 30,
 

Consolidated Statements of Operating Data:

  2007     2008     2009     2009     2010  
(in thousands except share and per share amounts)                 (unaudited)  

Revenues

  $ 48,444      $ 112,018      $ 112,698      $ 86,567      $ 128,280   
                                       

Costs and expenses

         

Cost of revenue

    4,990        13,120        10,156        8,071        7,227   

Marketing

    33,624        56,841        57,389        36,020        69,139   

Technology

    4,292        10,382        10,708        8,077        9,723   

Personnel

    8,131        19,150        22,638        16,469        20,987   

General and administrative

    2,046        5,440        6,446        4,562        6,134   
                                       

Total costs and expenses

    53,083        104,933        107,337        73,199        113,210   
                                       

(Loss) income from operations

    (4,639     7,085        5,361        13,368        15,070   

Other income (expense)

    271        (1,569     (1,225     (1,350     1,244   

Income tax expense (benefit)

    —          415        (2,776     1,579        10,156   
                                       

Net (loss) income

  $ (4,368   $ 5,101      $ 6,912      $ 10,439      $ 6,158   
                                       

Net (loss) income per common share

         

Basic

  $ (1.67   $ (1.37   $ (0.92   $ 0.05      $ (0.43

Diluted

  $ (1.67   $ (1.37   $ (0.92   $ 0.05      $ (0.43

Weighted average shares outstanding:

         

Basic

    3,860,114        4,831,777        5,223,187        5,193,555        6,164,171   

Diluted

    3,860,114        4,831,777        5,223,187        5,193,555        6,164,171   

Other Data:

         

Adjusted EBITDA (1)

  $ (1,415   $ 18,699      $ 16,188      $ 21,110      $ 25,178   

Capital expenditures

  $ 1,043      $ 986      $ 2,267      $ 1,939      $ 1,612   

Queries (2)

    238,449        434,540        458,594        342,873        469,048   

Consolidated Balance Sheet Data:

         
                      September 30,
2010
    Pro Forma
as Adjusted
 

Cash and cash equivalents

  

  $ 30,554     

Working capital

  

    50,866     

Total assets

  

    264,346     

Total liabilities

  

    36,293     

Redeemable preferred stock

  

    195,471     

Total stockholders’ equity

  

    32,582     

 

 

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  (1)   Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization, or EBITDA, is a metric used by management to measure operating performance. EBITDA represents net income before other income (expense), net, income tax expense and depreciation and amortization. Adjusted EBITDA represents EBITDA excluding stock-based compensation expense. We present Adjusted EBITDA as a supplemental performance measure because we believe it facilitates operating performance comparisons from period to period and company to company by backing out potential differences caused by variations in capital structures (affecting other income (expense), net), tax positions (such as the impact on periods or companies of changes in effective tax rates), the age and book depreciation of fixed assets (affecting relative depreciation expense), the impact of acquisitions and the impact of stock-based compensation expense. Because Adjusted EBITDA facilitates internal comparisons of operating performance on a more consistent basis, we also use Adjusted EBITDA in measuring our performance relative to that of our competitors. Adjusted EBITDA is not a measurement of our financial performance under GAAP and should not be considered as an alternative to net income, operating income or any other performance measures derived in accordance with GAAP or as an alternative to cash flow from operating activities as a measure of our profitability or liquidity. We understand that although Adjusted EBITDA is frequently used by securities analysts, lenders and others in their evaluation of companies, Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:

 

   

adjusted EBITDA does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments;

 

   

adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

 

   

although depreciation is a non-cash charge, the assets being depreciated will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements; and

 

   

other companies in our industry may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.

 

The following table reconciles net income to Adjusted EBITDA for the periods presented and is unaudited:

 

     Year ended December 31,     Nine months ended
September 30,
 
     2007     2008     2009     2009     2010  

Net (loss) income

   $ (4,368   $ 5,101      $ 6,912      $ 10,439      $ 6,158   

Interest (income) expense

     (209     2,163        (121     (58     (83

Income taxes

     —          415        (2,776     1,579        10,156   

Depreciation and amortization

     1,485        5,214        5,380        4,023        4,923   
                                        

EBITDA

     (3,092     12,893        9,395        15,983        21,154   

Stock-based compensation

     1,739        6,400        5,447        3,719        5,185   

Other (income) expense

     (62     (594     1,346        1,408        (1,161
                                        

Adjusted EBITDA

   $ (1,415   $ 18,699      $ 16,188      $ 21,110      $ 25,178   
                                        

 

  (2)   Queries refer to user requests for travel information we process through our websites and mobile applications.

 

 

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RISK FACTORS

 

Risks Related to Our Business and Industry

 

We may be unable to maintain or establish relationships with travel suppliers and OTAs.

 

Our ability to attract travelers to our websites and use our mobile applications and our services depends in large part on providing a comprehensive set of query results. To do so, we maintain relationships with travel suppliers and OTAs to include their data in our query results. The loss of existing relationships with travel suppliers or OTAs, or an inability to continue to add new ones, may cause our query results to provide incomplete pricing, availability and other information important to travelers using our services. This deficiency could reduce traveler confidence in the query results we provide, making us less popular with travelers.

 

With respect to our flight and fare information, the willingness of airlines to participate in our query results can vary by carrier. Historically, Southwest Airlines has chosen not to include its pricing and availability information in our query results and those of other third parties. If we are unable to continue to display travel data from multiple airline carriers, it would reduce the breadth of our query results and the number of travelers using our services could decline, resulting in a loss of revenues and a decline in our operating results.

 

Recently, there has been an increase in domestic airline consolidation, including the 2008 merger between Delta Air Lines and Northwest Airlines, the 2010 merger between United Airlines and Continental Airlines and the recently announced merger of AirTran Airlines and Southwest Airlines. If one of our airline travel suppliers merges or consolidates with, or is acquired by, another company with which we do not have a relationship, we may lose that airline as a participant in our query results or as an advertiser. We could also lose an airline’s participation in the event of an airline bankruptcy.

 

Approximately 15% of the hotels displayed on our websites are comprised of five hotel chains. A loss of any one of these brand name hotel chains as a travel supplier, or a loss of any one of these chains as a provider of travel information to OTAs, could have a negative impact on our business, results of operations and financial condition.

 

In addition, many of our agreements with travel suppliers and OTAs are short-term agreements that may be terminated on 30 days’ notice. We cannot guarantee that travel suppliers and OTAs will continue to work with us. We may also be unable to negotiate access, pricing or other terms that are consistent or more favorable than our current terms. A failure to retain current terms or obtain more favorable terms with our travel suppliers and OTAs could harm our business and operating results.

 

We primarily depend on a single third party to provide our airfare query results.

 

We license faring engine software from ITA Software, Inc., or ITA, under an agreement which expires on December 31, 2013. This faring engine software provided approximately 42% of our overall airfare query results for the nine months ended September 30, 2010. We have invested significant time and resources to develop proprietary software and practices to optimize the output from ITA’s software for our websites and mobile applications.

 

We may be unable to renew our license with ITA, or we may be able do so only on terms that are less favorable to us, which could negatively impact our ability to quickly provide travelers with comprehensive airline pricing and availability information. Airline travel queries accounted for approximately 85% of the searches performed on our websites and mobile applications for the nine months ended September 30, 2010, and distribution revenues from airline queries represented approximately 26% of our revenues for the nine months ended September 30, 2010. We anticipate domestic queries will continue to represent a significant portion of our overall queries for the foreseeable future. Thus, a loss of access to ITA’s software or an adverse change in our costs associated with use of the ITA software, could have a significant negative effect on the comprehensiveness of our query results and on our revenues and operating results. Moreover, we believe that a significant number of

 

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travelers who use our websites and mobile applications for our non-air travel services first come to our site to conduct queries for airfare, and accordingly a loss, disruption or other negative impact on our airfare query results could also result in a significant decline in the use of, and financial performance of, our query services for non-air travel queries.

 

On July 1, 2010, Google, Inc., or Google, announced an agreement to acquire ITA. If completed, Google could pursue the creation of new flight search tools which will enable people to find comparable flight information on the Internet without using a service like ours. According to Experian Hitwise, in September 2010, approximately 30% of travel searches began with Google. Upon completion of its acquisition of ITA, this number could substantially increase, as Google may choose to offer services that directly compete with the services we offer. Google may also cause ITA not to renew any agreements with us, or to renew agreements with us on less favorable terms. If ITA or Google limit our access to the ITA software or any improvements to the software, increase the price we pay for it or refuse to renew our contract and we are unable to replace ITA with a comparable technology, we may be unable to operate our business effectively and our financial performance may suffer.

 

Competition from general search engine companies could adversely affect us.

 

Large, established Internet search engines with substantial resources and expertise in developing online commerce and facilitating Internet traffic are creating, and are expected to create further, inroads into online travel, both in the U.S. and internationally. For example, in addition to their proposed acquisition of ITA, Google is actively testing a travel search engine that displays hotel information and rates to travelers. Moreover, Microsoft acquired one of our competitors, Farecast.com, in 2008 and relaunched it as Bing Travel, a travel search engine which not only allows users to search for airfare and hotel reservations but also purports to predict the best time to purchase. These initiatives appear to represent a clear intention by Google and Microsoft to appeal more directly to travel consumers and travel suppliers by providing more specific travel-related search results, which could lead to more travelers using services offered by Google or Bing instead of those offered on our websites and mobile applications. For example, if Google chooses to provide comprehensive travel search results such as flight and hotel pricing and availability, and further chooses to integrate such offerings with other Google services such as Google maps and weather information, then the number of users that visit our websites and our ability to attract advertising dollars could be negatively impacted. Google or other leading search engines could choose to direct general searches on their respective websites to their own travel search service and/or materially improve search speed through hardware investments, which also could negatively impact the number of users that visit our websites and our ability to attract advertising dollars. If Google or other leading search engines are successful in offering services that directly compete with ours, we could lose traffic to our websites and mobile applications, which could have a material adverse effect on our business, results of operations and financial condition.

 

If travel suppliers or OTAs choose not to advertise with us, or choose to reduce or even eliminate the fees they pay us, our financial performance could be materially adversely affected.

 

Our current financial model depends almost entirely on fees paid by travel suppliers and OTAs for referrals from our query results and advertising placements. Since we do not have long-term contracts with most of the travel suppliers or OTAs who use our services, these travel suppliers or OTAs could choose to modify or discontinue their relationship with us with little to no advanced notice to us. These changes may include a cessation in the provision of travel data to us, or a reduction in our compensation.

 

During the nine months ended September 30, 2010, our top ten travel suppliers and OTAs accounted for approximately 69% of our total revenues for that period. In particular, for the nine months ended September 30, 2010, Expedia and its affiliates, including its Hotels.com and Hotwire subsidiaries, accounted for 25% of our total revenues. Also during this period, Orbitz and its affiliates, including its CheapTickets and ebookers subsidiaries, accounted for 19% of our total revenues. If our relationship with any of our top travel suppliers or OTAs were to end or otherwise be materially reduced, our revenues and operating results could experience significant decline.

 

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If we do not continue to innovate and provide tools and services that are useful to travelers, we may not remain competitive, and our revenues and operating results could suffer.

 

Our success depends on continued innovation to provide features and services that make our websites and mobile applications useful for travelers. Our competitors are constantly developing innovations in online travel-related services and features. As a result, we must continue to invest significant resources in research and development in order to continually improve the speed, accuracy and comprehensiveness of our services. If we are unable to provide quality features and services that travelers want to use, then travelers may become dissatisfied and use a competitor’s website or mobile applications. If we are unable to continue offering innovative products and services, we may be unable to attract additional users or retain our current users, which could adversely affect our business, results of operations and financial condition.

 

We may be unable to maintain and increase KAYAK brand awareness and preference.

 

We rely heavily on the KAYAK brand. Awareness, perceived quality and perceived differentiated attributes of the KAYAK brand are important aspects of our efforts to attract and expand the number of travelers who use our websites and mobile applications. Since many of our competitors have more resources than we do, and can spend more advertising their brands and services, we are required to spend considerable money and other resources to preserve and increase our brand awareness. Should the competition for top-of-mind awareness and brand preference increase among online travel services, we may not be able to successfully maintain or enhance the strength of our brand. Even if we are successful in our branding efforts, such efforts may not be cost effective. If we are unable to maintain or enhance traveler and advertiser awareness of our brand cost effectively, our business, results of operations and financial condition would be adversely affected.

 

In November 2009, we began a broad-reach marketing campaign that included television commercials and signage advertising in major U.S. airports. We do not know if these additional marketing investments will result in new or additional travelers visiting our websites or using our mobile applications. If we are unable to recover these additional costs through an increase in the number of travelers using our services, we will likely experience a decline in our financial results.

 

We have registered domain names for websites that we use in our business, such as KAYAK.com, kayak.co.uk, swoodoo.com and SideStep.com. If we lose the ability to use a domain name, we would be forced to incur significant expenses to market our services under a new domain name, which could substantially harm our business. In addition, our competitors could attempt to capitalize on our brand recognition by using domain names similar to ours. Domain names similar to ours have been registered in the U.S. and elsewhere, and in some countries the top level domain name “kayak” is owned by other parties. We may be unable to prevent third parties from acquiring and using domain names that infringe on, are similar to, or otherwise decrease the value of, our brand or our trademarks or service marks. Protecting and enforcing our rights in our domain names and determining the rights of others may require litigation, which could result in substantial costs and diversion of management attention.

 

Competition from other travel companies could adversely affect us.

 

We operate in the highly competitive online travel category. Many of our current and potential competitors, including general search engines, OTAs, travel supplier websites and other travel websites, have existed longer and have larger customer bases, greater brand recognition and significantly greater financial, marketing, personnel, technical and other resources than KAYAK. Some of these competitors may be able to secure services on more favorable terms. In addition, many of these competitors may be able to devote significantly greater resources to:

 

   

marketing and promotional campaigns;

 

   

attracting and retaining key employees;

 

   

securing participation of travel suppliers and access to travel information, including proprietary or exclusive content;

 

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website and systems development; and

 

   

enhancing the speed at which their services return user search results.

 

In addition, consolidation of travel suppliers and OTAs could limit the comprehensiveness of our query results and the need for our services and could result in advertisers terminating their relationships with us.

 

Increased competition could result in reduced operating margins and loss of market share. There can be no assurance that we will be able to compete successfully against current and future competitors or that competition will not have a material adverse effect on our business, results of operations and financial condition.

 

Our business could be negatively affected by changes in general search engine algorithms and dynamics or termination of traffic-generating arrangements.

 

We use Internet search engines, principally through the purchase of travel-related keywords, to generate traffic to our websites. Approximately 8% of our user queries during the nine months ended September 30, 2010 resulted from searches initially entered on general search engine websites. Search engines, such as Google, frequently update and change the logic which determines the placement and ordering of results of a user’s search, which may reduce the effectiveness of the keywords we have purchased. If a major search engine, such as Google, changes its algorithms in a manner that negatively affects the search engine ranking of our websites, or changes its pricing, operating or competitive dynamics to our disadvantage, our business, results of operations and financial condition could be adversely affected. For the nine months ended September 30, 2010 we received 15% of our advertising revenue and 8% of our total revenues from Google. Our contract with Google expires on December 31, 2010. We also rely to a certain extent on advertisements that we place on contextual travel search engines such as Lowfares.com. Approximately 15% of our user queries during the nine months ended September 30, 2010 resulted from traffic-generating arrangements. A loss of one or more of these traffic-generating arrangements as an advertising channel could result in fewer people using our services.

 

We have limited international experience and may be limited in our ability to expand into international markets.

 

We operate websites in 14 countries outside of the U.S., and we generated less than 10% of our net revenues for the nine months ended September 30, 2010 from our international operations. Our senior management team is located in the U.S. and has limited international experience. We believe that international expansion will be important to our future growth, and therefore we currently expect that our international operations will increase. As our international operations expand, we will face increasing risks resulting from operations in multiple countries, including:

 

   

differences and unexpected changes in regulatory requirements and exposure to local economic conditions;

 

   

limits on our ability to enforce our intellectual property rights;

 

   

restrictions on the repatriation of non-U.S. investments and earnings back to the U.S., including withholding taxes imposed by certain foreign jurisdictions;

 

   

requirements to comply with a number of U.S. and international regulations, including the Foreign Corrupt Practices Act;

 

   

uncertainty over our ability to legally enforce our contractual rights; and

 

   

currency exchange rate fluctuations.

 

To the extent we are not able to effectively mitigate or eliminate these risks, our results of operations could be adversely affected. Furthermore, any failure by us to adopt appropriate compliance procedures to ensure that our employees and agents comply with applicable laws and regulations in foreign jurisdictions could result in substantial penalties or restrictions on our ability to conduct business in certain foreign jurisdictions.

 

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Some of our plans for expansion include operating in international markets where we have limited operating experience. These markets may have different competitive conditions, traveler preferences and discretionary spending patterns than the U.S. travel market. As a result, our international operations may be less successful than our U.S. operations. Travelers in other countries may not be familiar with our brands, and we may need to build brand awareness in such countries through greater investments in advertising and promotional activity than we originally planned. In addition, we may find it difficult to effectively hire, manage, motivate and retain qualified employees who share our corporate culture. We may also have difficulty entering into new agreements with foreign travel suppliers and OTAs on economically favorable terms.

 

Our failure to manage growth effectively could harm our business and operating results.

 

Our culture is important to us. We believe it has been a major contributor to our success. As we grow, however, we may have difficulty maintaining our culture or adapting it sufficiently to meet the needs of our operations. Failure to maintain our culture could negatively impact our operations and business results.

 

We have rapidly and significantly expanded our operations and anticipate expanding further to pursue our growth strategy. The number of our employees worldwide has grown from less than 35 in 2006, to 140 as of October 31, 2010. Such expansion increases the complexity of our business and places a significant strain on our management, operations, technical performance, financial resources and internal control over financial reporting functions.

 

There can be no assurance that we will be able to manage our expansion effectively. Our current and planned personnel, systems, procedures and controls may not be adequate to support and effectively manage our future operations, especially as we employ personnel in multiple geographic locations. We may not be able to hire, train, retain, motivate and manage required personnel, which may limit our growth, damage our reputation and negatively affect our financial performance and harm our business.

 

We may not be able to expand our business model beyond providing travelers with travel query results.

 

We plan to expand our business model beyond helping travelers search for travel by offering additional services and tools, including assisted booking services through mobile applications and our websites. This growth strategy depends on various factors, including the willingness of travel suppliers and OTAs to participate in our assisted booking services, as well as travelers’ use of these other new services and a willingness to trust us with their personal information. These newly launched services may not succeed, and, even if we are successful, our revenues may not increase. These new services could also increase our operating costs and result in costs that we have not incurred in the past, including customer service.

 

We are dependent on the leisure travel industry.

 

Our financial prospects are significantly dependent upon leisure travelers using our services. Leisure travel, including leisure airline tickets, hotel room reservations and rental car reservations, is dependent on personal discretionary spending levels. Leisure travel services tend to decline, along with the advertising dollars spent by travel suppliers, during general economic downturns and recessions. The current worldwide economic conditions have led to a general decrease in leisure travel and travel spending, which has negatively impacted the demand for our services.

 

Events beyond our control also may adversely affect the leisure travel industry, with a corresponding negative impact on our business and results of operations. Natural disasters, including hurricanes, tsunamis, earthquakes or volcanic eruptions, as well as other natural phenomena, such as outbreaks of H1N1 influenza (swine flu), avian flu and other pandemics and epidemics, have disrupted normal leisure travel patterns and levels. The leisure travel industry is also sensitive to other events beyond our control, such as work stoppages or labor unrest at any of the major airlines, political instability, regional hostilities, increases in fuel prices, imposition of taxes or surcharges by regulatory authorities, travel related accidents and terrorist attacks, any of

 

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which could have an impact on our business and results of operations. Although the September 2001 terrorist attacks in the U.S. occurred before we were formed, those attacks had a dramatic and sustained impact on the leisure travel industry, and any future terrorist attack, whether on a small or large scale, could have a material and negative impact on our business and results of operations.

 

We rely on the performance of highly skilled personnel, and if we are unable to retain or motivate key personnel or hire, retain and motivate qualified personnel, our business would be harmed.

 

We believe our success has depended, and continues to depend, on the efforts and talents of our senior management and our highly skilled team members. Our future success depends on our continuing ability to attract, develop, motivate and retain highly qualified and skilled employees. The loss of any of our senior management or key employees could materially adversely affect our ability to build on the efforts they have undertaken and to execute our business plan, and we may not be able to find adequate replacements. In particular, the contributions of certain key senior management in the U.S. are critical to our overall success. We cannot ensure that we will be able to retain the services of any members of our senior management or other key employees. We do not maintain any key person life insurance policies.

 

Competition for well-qualified employees in all aspects of our business, including software engineers and other technology professionals, is intense both in the U.S. and abroad. Our continued ability to compete effectively depends on our ability to attract new employees and to retain and motivate existing employees. If we do not succeed in attracting well-qualified employees or retaining and motivating existing employees, our business would be adversely affected.

 

We process, store and use personal data which exposes us to risks of internal and external security breaches and could give rise to liabilities as a result of governmental regulation and differing personal privacy rights.

 

We may acquire personal or confidential information from travelers who use our websites and mobile applications. Substantial or ongoing security breaches to our system, whether resulting from internal or external sources, could significantly harm our business. It is possible that advances in computer circumvention capabilities, new discoveries or other developments, including our own acts or omissions, could result in a compromise or breach of personal and confidential traveler information.

 

We cannot guarantee that our existing security measures will prevent security breaches or attacks. A party, whether internal or external, that is able to circumvent our security systems could steal traveler information or proprietary information or cause significant interruptions in our operations. In the past we have experienced “denial-of-service” type attacks on our system that have made portions of our website unavailable for periods of time. We may need to expend significant resources to protect against security breaches or to address problems caused by breaches, and reductions in website availability could cause a loss of substantial business volume during the occurrence of any such incident. The risk of such security breaches is likely to increase as we expand the number of places where we operate and as the tools and techniques used in these types of attacks become more advanced. Security breaches could result in negative publicity, damage our reputation, expose us to risk of loss or litigation and possible liability and subject us to regulatory penalties and sanctions. Security breaches could also cause travelers and potential users to lose confidence in our security, which would have a negative effect on the value of our brand. Our insurance policies carry low coverage limits and would likely not be adequate to reimburse us for losses caused by security breaches.

 

Companies that we have acquired, and that we may acquire in the future, may employ security and networking standards at levels we find unsatisfactory. The process of enhancing infrastructure to improve security and network standards may be time consuming and expensive and may require resources and expertise that are difficult to obtain. Acquisitions could also increase the number of potential vulnerabilities and could cause delays in detection of an attack, or the timelines of recovery from an attack. Failure to adequately protect against attacks or intrusions could expose us to security breaches of, among other things, personal user data and credit card information that would have an adverse impact on our business, results of operations and financial condition.

 

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We also face risks associated with security breaches affecting third parties conducting business over the Internet. People generally are concerned with security and privacy on the Internet, and any publicized security problems could inhibit the growth of our business. Additionally, security breaches at third parties upon which we rely, such as travel suppliers, could result in negative publicity, damage our reputation, expose us to risk of loss or litigation and possible liability and subject us to regulatory penalties and sanctions.

 

We currently facilitate the purchase of airlines tickets through our mobile applications by allowing travelers to provide us with their personally identifiable information, including credit card information, and assisting them in completing transactions directly with travel suppliers. In the future, we may provide this assistance directly on our websites. In connection with facilitating these transactions, we receive and store certain personally identifiable information, including credit card information. This information is increasingly subject to legislation and regulations in numerous jurisdictions around the world, including the Commission of the European Union through its Data Protection Directive and variations of that directive in the member states of the European Union. Government regulation is typically intended to protect the privacy of personal information that is collected, processed and transmitted in or from the governing jurisdiction. We could be adversely affected if 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, results of operations and financial condition.

 

Litigation could distract management, increase our expenses or subject us to material money damages and other remedies.

 

We are involved in various legal proceedings, including, but not limited to, actions relating to breach of contract and intellectual property infringement that involve claims for substantial amounts of money or for other relief or that might necessitate changes to our business or operations. Please see the discussion regarding those matters in the section entitled “Business—Legal Proceedings.” Regardless of whether any claims against us are valid, or whether we are ultimately held liable or subject to payment of damages, claims may be expensive to defend and may divert management’s time away from our operations. If any 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. Any adverse publicity resulting from actual or potential litigation may also materially and adversely affect our reputation, which in turn could adversely affect our results.

 

Companies in the Internet, technology and media industries are frequently subject to allegations of infringement or other violations of intellectual property rights. We are currently subject to a patent infringement claim and may be subject to future claims relating to intellectual property rights. As we grow our business and expand our operations we may be subject to intellectual property claims by third parties. We plan to vigorously defend our intellectual property rights and our freedom to operate our business; however, regardless of the merits of the claims, intellectual property claims are often time-consuming and extremely expensive to litigate or settle, and are likely to continue to divert managerial attention and resources from our business objectives. Successful infringement claims against us could result in significant monetary liability or prevent us from operating our business, or portions of our business. Resolution of claims may require us to obtain licenses to use intellectual property rights belonging to third parties, which may be expensive to procure, or we may be required to cease using intellectual property altogether. Many of our agreements with travel suppliers, OTAs and other partners require us to indemnify these entities against third-party intellectual property infringement claims, which would increase our defense costs and may require that we pay damages if there were an adverse ruling in any such claims. Any of these events could have a material adverse effect on our business, results of operations or financial condition.

 

Acquisitions and investments could result in operating difficulties, dilution and other harmful consequences.

 

We have acquired a number of businesses in the past, including our acquisitions of SideStep, Inc., or SideStep, and swoodoo AG, or swoodoo. We expect to continue to evaluate and enter into discussions regarding

 

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a wide array of potential strategic transactions. Any transactions that we enter into could be material to our financial condition and results of operations. The process of integrating an acquired company, business or technology may create unforeseen operating difficulties and expenditures. The areas where we face risks include:

 

   

diversion of management time and focus from operating our business to acquisition integration challenges;

 

   

implementation or remediation of controls, procedures and policies at the acquired company;

 

   

coordination of product, engineering and sales and marketing functions;

 

   

retention of employees from the businesses we acquire;

 

   

liability for activities of the acquired company before the acquisition;

 

   

litigation or other claims in connection with the acquired company; and

 

   

in the case of foreign acquisitions, the need to integrate operations across different cultures and languages and to address the particular economic, currency, political and regulatory risks associated with specific countries.

 

Our failure to address these risks or other problems encountered in connection with our past or future acquisitions and investments could cause us to fail to realize the anticipated benefits of such acquisitions or investments, incur unanticipated liabilities and harm our business generally.

 

The requirements of being a public company may strain our resources and distract our management.

 

Following the completion of this offering, we will be required to comply with various regulatory and reporting requirements, including those required by the Securities and Exchange Commission, or the SEC. Complying with these reporting and other regulatory requirements will be time-consuming and will result in increased costs to us and could have a negative effect on our business, results of operations and financial condition.

 

As a public company, we will be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and requirements of the Sarbanes-Oxley Act of 2002, as amended, or SOX. These requirements may place a strain on our systems and resources. The Exchange Act requires that we file annual, quarterly and current reports with respect to our business and financial condition. The SOX requires that we maintain effective disclosure controls and procedures and internal controls over financial reporting. To maintain and improve the effectiveness of our disclosure controls and procedures, we will need to commit significant resources, hire additional staff and provide additional management oversight. We will be implementing additional procedures and processes for the purpose of addressing the standards and requirements applicable to public companies. Sustaining our growth also will require us to commit additional management, operational and financial resources to identify new professionals to join our firm and to maintain appropriate operational and financial systems to adequately support expansion. These activities may divert management’s attention from other business concerns, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.

 

Fluctuations in our financial results make quarterly comparisons and financial forecasting difficult.

 

Our revenues and operating results have varied significantly from quarter to quarter because our business experiences seasonal fluctuations, which reflect seasonal trends for the travel products distributed through and advertised on our platform. Traditional leisure travel bookings in the U.S. and Europe are generally higher in the second and third calendar quarters of the year as travelers take spring and summer vacations. In the fourth quarter of the calendar year, demand for travel services in the U.S. and Europe generally declines. We have seen and expect to continue to see, that the most significant portion of our revenues will be earned in the second and third quarters. The current state of the global economic environment, combined with the seasonal nature of our

 

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business and our relatively limited operating history, makes forecasting future operating results difficult. Because our business is changing and evolving, our historical operating results may not be useful to you in predicting our future operating results. Advertising spending has historically been cyclical in nature, reflecting overall economic conditions as well as individual travel patterns. Our rapid growth has tended to mask the cyclicality and seasonality of our business. As our growth rate slows, the cyclicality and seasonality in our business will become more pronounced and cause our operating results to fluctuate.

 

Any significant disruption in service on our websites or in our computer systems, which are currently hosted primarily by third-party providers, could damage our reputation and result in a loss of users, which would harm our business and operating results.

 

Our brands, reputation and ability to attract and retain travelers to use our websites and mobile applications depend upon the reliable performance of our network infrastructure and content delivery processes. We have experienced interruptions in these systems in the past, including server failures that temporarily slowed down the performance of our websites and mobile applications, and we may experience interruptions in the future. Interruptions in these systems, whether due to system failures, computer viruses or physical or electronic break-ins, could affect the security or availability of our services on our websites and mobile applications and prevent or inhibit the ability of travelers to access our services. Problems with the reliability or security of our systems could harm our reputation, and damage to our reputation and the cost of remedying these problems could negatively affect our business, financial condition and results of operations.

 

Substantially all of the communications, network and computer hardware used to operate our website are located at facilities in Medford and Somerville, Massachusetts and, with respect to our swoodoo operations, Freiburg, Germany. We do not own or control the operation of these facilities. Our systems and operations are vulnerable to damage or interruption from fire, flood, power loss, telecommunications failure, terrorist attacks, acts of war, electronic and physical break-ins, computer viruses, earthquakes and similar events. The occurrence of any of the foregoing events could result in damage to our systems and hardware or could cause them to fail completely, and our insurance may not cover such events or may be insufficient to compensate us for losses that may occur. Our systems are not completely redundant, so a failure of our system at one site could result in reduced functionality for our travelers, and a total failure of our systems at both U.S. sites could cause our websites or mobile applications to be inaccessible by our travelers. Problems faced by our third-party web hosting providers with the telecommunications network providers with which they contract or with the systems by which they allocate capacity among their customers, including us, could adversely affect the experience of our travelers. Our third-party web hosting providers could decide to close their facilities without adequate notice. Any financial difficulties, such as bankruptcy reorganization, faced by our third-party web hosting providers or any of the service providers with whom they contract may have negative effects on our business, the nature and extent of which are difficult to predict. If our third-party web hosting providers are unable to keep up with our growing needs for capacity, this could have an adverse effect on our business. Any errors, defects, disruptions or other performance problems with our services could harm our reputation and have an adverse effect on our business, financial condition and results of operations.

 

Governmental regulation and associated legal uncertainties may adversely affect our business.

 

Many of the services we offer are regulated by federal and state governments, and our ability to provide these services is and will continue to be affected by government regulations. The implementation of unfavorable regulations or unfavorable interpretations of existing regulations by courts or regulatory bodies could require us to incur significant compliance costs, cause the development of the affected markets to become impractical and otherwise have a material adverse effect on our business, results of operations and financial condition.

 

In addition, our business strategy involves expansion into regions around the world, many of which have different legislation, regulatory environments, tax laws and levels of political stability. Compliance with foreign legal, regulatory or tax requirements will place demands on our time and resources, and we may nonetheless experience unforeseen and potentially adverse legal, regulatory or tax consequences.

 

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We assist with the processing of customer credit card transactions which results in us receiving and storing 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 government regulations require us to significantly change our business practices with respect to this type of information.

 

Fluctuations in foreign currency exchange rates affect financial results in U.S. dollar terms.

 

A portion of our revenues come from international operations. Revenues generated and expenses incurred by our international subsidiaries are often denominated in local currencies. As a result, our consolidated U.S. dollar financial statements are subject to fluctuations due to changes in exchange rates as the financial results of our international subsidiaries are translated from local currencies into U.S. dollars. Our financial results are subject to changes in exchange rates that impact the settlement of transactions in non local currencies.

 

Risks Related to Our Intellectual Property

 

We may not be able to adequately protect our intellectual property, which could harm the value of our brands and adversely affect our business.

 

We regard our intellectual property as critical to our success, and we rely on trademark, copyright and patent law, trade secret protection and confidentiality and/or license agreements to protect our proprietary rights. If we are not successful in protecting our intellectual property, it could have a material adverse effect on our business, results of operations and financial condition.

 

While we believe that our issued patents and pending patent applications help to protect our business, there can be no assurance that our operations do not, or will not, infringe valid, enforceable third-party patents of third parties or that competitors will not devise new methods of competing with us that are not covered by our patents or patent applications. There can also be no assurance that our patent applications will be approved, that any patents issued will adequately protect our intellectual property, or that such patents will not be challenged by third parties or found to be invalid or unenforceable or that our patents will be effective in preventing third parties from utilizing a copycat business model to offer the same service in one or more categories. Moreover, we rely on intellectual property and technology developed or licensed by third parties, and we may not be able to obtain or continue to obtain licenses and technologies from these third parties at all or on reasonable terms.

 

Effective trademark, service mark, copyright and trade secret protection may not be available in every country in which our services are provided. The laws of certain countries do not protect proprietary rights to the same extent as the laws of the U.S. and, therefore, in certain jurisdictions, we may be unable to protect our proprietary technology adequately against unauthorized third party copying or use, which could adversely affect our competitive position. We have licensed in the past, and expect to license in the future, certain of our proprietary rights, such as trademarks or copyrighted material, to third parties. These licensees may take actions that might diminish the value of our proprietary rights or harm our reputation, even if we have agreements prohibiting such activity. Also to the extent third parties are obligated to indemnify us for breaches of our intellectual property rights, these third parties may be unable to meet these obligations. Any of these events could have a material adverse effect on our business, results of operations or financial condition.

 

Claims by third parties that we infringe their intellectual property rights could result in significant costs and have a material adverse effect on our business, results of operations or financial condition.

 

We are currently subject to a patent infringement claim. Please see the discussion regarding this claim in the section entitled “Business—Legal Proceedings.” We may be subject to future claims relating to our intellectual property rights. As we grow our business and expand our operations we expect that we will continue to be subject to intellectual property claims. Resolving claims may require us to obtain licenses to use intellectual

 

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property rights belonging to third parties, which may be expensive to procure, or we may be required to cease using intellectual property altogether. Any of these events could have a material adverse effect on our business, results of operations or financial condition.

 

Confidentiality agreements with employees and others may not adequately prevent disclosure of trade secrets and other proprietary information.

 

A substantial amount of our processes and technologies is protected by trade secret laws. In order to protect these technologies and processes, we rely in part on confidentiality agreements with our employees, licensees, independent contractors and other advisors. These agreements may not effectively prevent disclosure of confidential information, including trade secrets, and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. In addition, others may independently discover our trade secrets and proprietary information, and in such cases we could not assert any trade secret rights against such parties. To the extent that our employees, contractors or other third parties with which we do business use intellectual property owned by others in their work for us, disputes may arise as to the rights in related or resulting know-how and inventions. Laws regarding trade secret rights in certain markets in which we operate may afford little or no protection to our trade secrets. The loss of trade secret protection could make it easier for third parties to compete with our products by copying functionality. In addition, any changes in, or unexpected interpretations of, the trade secret and other intellectual property laws in any country in which we operate may compromise our ability to enforce our trade secret and intellectual property rights. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection could adversely affect our business, revenue, reputation and competitive position.

 

Our use of “open source” software could adversely affect our ability to offer our services and subject us to possible litigation.

 

We use open source software in connection with our development. From time to time, companies that use open source software have faced claims challenging the use of open source software and/or compliance with open source license terms. We could be subject to suits by parties claiming ownership of what we believe to be open source software, or claiming noncompliance with open source licensing terms. Some open source licenses require users who distribute software containing open source to make available all or part of such software, which in some circumstances could include valuable proprietary code of the user. While we monitor the use of open source software and try to ensure that none is used in a manner that would require us to disclose our proprietary source code or that would otherwise breach the terms of an open source agreement, such use could inadvertently occur, in part because open source license terms are often ambiguous. Any requirement to disclose our proprietary source code or pay damages for breach of contract could be harmful to our business, results of operations or financial condition, and could help our competitors develop products and services that are similar to or better than ours.

 

Risks Related to this Offering and Ownership of Our Common Stock

 

Our securities have no prior market and an active trading market may not develop, which may cause our common stock to trade at a discount from the initial public offering price.

 

Prior to this offering, there has been no public market for our common stock. The initial public offering price for our common stock will be determined through negotiations between us and the representatives of the underwriters and may not be indicative of the market price of our common stock after this offering. If you purchase shares of our common stock, you may not be able to resell those shares at or above the initial public offering price. We cannot predict the extent to which investor interest in us will lead to the development of an active trading market on                      or otherwise or how liquid that market might become. An active public market for our common stock may not develop or be sustained after the offering. If an active public market does not develop or is not sustained, it may be difficult for you to sell your shares of common stock at a price that is attractive to you, or at all.

 

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Our stock price may be volatile or may decline regardless of our operating performance, and you may not be able to resell your shares at or above the initial public offering price and the price of our common stock may fluctuate significantly.

 

After this offering, the market price for our common stock is likely to be volatile, in part because our shares have not been traded publicly. In addition, the market price of our common stock may fluctuate significantly in response to a number of factors, most of which we cannot control, including:

 

   

traveler preferences and competition from other travel sites;

 

   

changes in general economic or market conditions or trends in our industry or the economy as a whole and, in particular, in the leisure travel environment;

 

   

changes in key personnel;

 

   

entry into new geographic markets;

 

   

actions and announcements by us or our competitors or significant acquisitions, divestitures, strategic partnerships, joint ventures or capital commitments;

 

   

changes in operating performance and stock market valuations of other Internet companies;

 

   

investors’ perceptions of our prospects and the prospects of the online travel industry;

 

   

fluctuations in quarterly operating results, as well as differences between our actual financial and operating results and those expected by investors;

 

   

the public’s response to press releases or other public announcements by us or third parties, including our filings with the SEC;

 

   

announcements relating to litigation;

 

   

guidance, if any, that we provide to the public, any changes in this guidance or our failure to meet this guidance;

 

   

changes in financial estimates or ratings by any securities analysts who follow our common stock, our failure to meet these estimates or failure of those analysts to initiate or maintain coverage of our common stock;

 

   

the development and sustainability of an active trading market for our common stock;

 

   

future sales of our common stock by our officers, directors and significant stockholders; and

 

   

changes in accounting principles.

 

These and other factors may lower the market price of our common stock, regardless of our actual operating performance. As a result, our common stock may trade at prices significantly below the initial public offering price.

 

The stock markets, including                    , have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many Internet companies. In the past, stockholders have instituted securities class action litigation following periods of market volatility. If we were involved in securities litigation, we could incur substantial costs and our resources and the attention of management could be diverted from our business.

 

Future sales of our common stock, or the perception in the public markets that these sales may occur, may depress our stock price.

 

Sales of substantial amounts of our common stock in the public market after this offering, or the perception that these sales could occur, could adversely affect the price of our common stock and could impair our ability to raise capital through the sale of additional shares. Upon completion of this offering, we will have approximately

 

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         shares of common stock outstanding. Our shares of common stock offered in this offering will be freely tradable without restriction under the Securities Act, except for any shares of our common stock that may be held or acquired by our directors, executive officers and other affiliates, as that term is defined in the Securities Act, which will be restricted securities under the Securities Act. Restricted securities may not be sold in the public market unless the sale is registered under the Securities Act or an exemption from registration is available.

 

KAYAK, each of our officers, directors, all of the selling stockholders and substantially all of our other existing stockholders have agreed with the underwriters, subject to certain exceptions, not to dispose of or hedge any of the shares of our common stock or securities convertible into or exchangeable for shares of our common stock during the period from the date of this prospectus continuing through the date 180 days after the date of this prospectus, without the prior written consent of Morgan Stanley & Co. Incorporated, or Morgan Stanley. See “Underwriters” for a more detailed description of the terms of these “lock-up” arrangements. All of our shares of common stock outstanding as of the date of this prospectus may be sold in the public market by existing stockholders 180 days after the date of this prospectus, subject to applicable volume and other limitations imposed under federal securities laws. See “Shares Eligible for Future Sale” for a more detailed description of the restrictions on selling shares of our common stock after this offering. Sales by our existing stockholders of a substantial number of shares in the public market, or the threat of a substantial sale, could cause the market price of our common stock to decrease significantly.

 

In the future, we may also issue our securities in connection with investments or acquisitions. The amount of shares of our common stock issued in connection with an investment or acquisition could constitute a material portion of our then-outstanding shares of our common stock. Any issuance of additional securities in connection with investments or acquisitions may result in additional dilution to you.

 

If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.

 

The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. We do not currently have and may never obtain research coverage by securities and industry analysts. If no securities or industry analysts commence coverage of our company, the trading price for our common stock would be negatively impacted. If we obtain securities or industry analyst coverage and if one or more of the analysts who cover us downgrades our common stock or publishes inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts cease coverage of us or fail to publish reports on us regularly, demand for our common stock could decrease, which could cause our stock price and trading volume to decline.

 

Our internal controls over financial reporting may not be effective and our independent registered public accounting firm may not be able to certify as to their effectiveness, which could have a significant and adverse effect on our business and reputation.

 

We are evaluating our internal controls over financial reporting in order to allow management to report on, and our independent registered public accounting firm to attest to, our internal controls over financial reporting, as required by Section 404 of SOX, and rules and regulations of the SEC thereunder, which we refer to as Section 404. We are in the process of documenting and testing our internal control procedures in order to satisfy the requirements of Section 404.

 

As we continue our evaluation, we may identify material weaknesses that we may not be able to remediate in time to meet the December 31, 2011 deadline imposed by SOX, for compliance with the requirements of Section 404. In addition, if we fail to achieve and maintain the adequacy of our internal controls, as such standards are modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404. We cannot be certain as to the timing of completion of our evaluation, testing and any remediation actions or the impact of the same on our operations. If we are not able to implement the requirements of

 

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Section 404 in a timely manner or with adequate compliance, our independent registered public accounting firm may not be able to opine as to the effectiveness of our internal control over financial reporting and we may be subject to sanctions or investigation by regulatory authorities, such as the SEC. As a result, there could be a negative reaction in the financial markets due to a loss of confidence in the reliability of our financial statements. In addition, we may be required to incur costs in improving our internal control system and the hiring of additional personnel. Any such action could negatively affect our results of operations and cash flows.

 

Our management and other affiliates have significant control of our common stock and could control our actions in a manner that conflicts with the interests of other stockholders.

 

After giving effect to the offering, our executive officers, directors and their affiliated entities together will beneficially own approximately                 % of our outstanding capital stock, assuming the exercise of options, warrants and other common stock equivalents, which are currently exercisable and held by these stockholders. As a result, these stockholders, acting together, will be able to exercise considerable influence over matters requiring approval by our stockholders, including the election of directors, and may not always act in the best interests of other stockholders. Such a concentration of ownership may have the effect of delaying or preventing a change in our control, including transactions in which our stockholders might otherwise receive a premium for their shares over then current market prices.

 

We do not expect to pay any cash dividends for the foreseeable future.

 

The continued operation and growth of our business will require substantial cash. Accordingly, we do not anticipate that we will pay any cash dividends on shares of our common stock for the foreseeable future. Any determination to pay dividends in the future will be at the discretion of our board of directors and will depend upon our results of operations, financial condition, contractual restrictions relating to indebtedness we may incur, restrictions imposed by applicable law and other factors our board of directors deems relevant. Accordingly, if you purchase shares in this offering, realization of a gain on your investment will depend on the appreciation of the price of our common stock, which may never occur. Investors seeking cash dividends in the foreseeable future should not purchase our common stock.

 

Antitakeover provisions in our charter documents and Delaware law might discourage or delay acquisition attempts for us that you might consider favorable.

 

Our amended and restated certificate of incorporation and amended and restated by-laws to be in effect upon completion of this offering will contain provisions that may make the acquisition of us more difficult without the approval of our board of directors. These provisions, among other things:

 

   

authorize the issuance of undesignated preferred stock, the terms of which may be established and the shares of which may be issued without stockholder approval, and which may include supermajority voting, special approval, dividend or other rights or preferences superior to the rights of the holders of common stock;

 

   

prohibit stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of our stockholders;

 

   

provide that our board of directors is expressly authorized to make, alter or repeal our amended and restated by-laws; and

 

   

establish advance notice requirements for nominations for elections to our board of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings.

 

These antitakeover provisions and other provisions under Delaware law may prevent new investors from influencing significant corporate decisions, could discourage, delay or prevent a transaction involving a change-in-control, even if doing so would benefit our stockholders. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors of your choosing and to cause us to take other corporate actions you desire.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This prospectus, including the sections entitled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” contains forward-looking statements concerning our business, operations and financial performance and condition as well as our plans, objectives and expectations for our business operations and financial performance and condition. Any statements that are not of historical facts may be deemed to be forward-looking statements. You can identify these statements by words such as “aim,” “anticipate,” “assume,” “believe,” “could,” “due,” “estimate,” “expect,” “goal,” “intend,” “may,” “objective,” “plan,” “potential,” “positioned,” “predict,” “should,” “target,” “will,” “would” and other similar expressions or words that convey uncertainty of future events or outcomes to identify these forward-looking statements. These statements are not guarantees of future performance or development and involve known and unknown risks, uncertainties and other factors that are in some cases beyond our control. All of our forward-looking statements are subject to risks and uncertainties that may cause our actual results to differ materially from our expectations. Factors that may cause such differences include, but are not limited to, the risks described under “Risk Factors,” including:

 

   

our ability to maintain or establish relationships with travel suppliers and OTAs;

 

   

our dependence on a single third party to provide our airfare query results;

 

   

our ability to remain competitive by continuing to innovate and provide tools and services that are useful to travelers;

 

   

competition from other travel companies;

 

   

impact on us of changes in general search engine algorithms of major search engines, such as Google, or termination of traffic-generating arrangements with contextual travel search engines;

 

   

our ability to expand our business model beyond providing travelers with travel search results;

 

   

limitations on our ability to expand into and operate in international markets;

 

   

sensitivity of the leisure travel industry to general economic downturns and recessions, natural disasters and other natural phenomena;

 

   

our dependence upon key executive management or our ability to hire or retain additional personnel;

 

   

impact of litigation in which we currently are, or in the future may be, a party;

 

   

failure of our security measures to prevent internal or external security breaches of personal data processed, stored or used by us;

 

   

any significant disruption in service on our website or in our computer systems, which are currently hosted primarily by third-party providers;

 

   

governmental regulation and associated legal uncertainties;

 

   

our ability to adequately protect our intellectual property rights;

 

   

failure of our confidentiality agreements to effectively prevent disclosure of confidential information, including trade secrets, and to provide an adequate remedy in the event of unauthorized disclosure of confidential information; and

 

   

increased strains on our resources of being a public company.

 

We derive many of our forward-looking statements from our own operating budgets and forecasts, which are based upon many detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and it is impossible for us to anticipate all factors that could affect our actual results. Important factors that could cause actual results to differ materially from our expectations, or cautionary statements, are disclosed under “Risk Factors” and “Management’s Discussion and

 

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Analysis of Financial Condition and Results of Operations” in this prospectus. All written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the cautionary statements contained in this prospectus as well as other cautionary statements that are made from time to time in our other SEC filings and public communications. You should evaluate all forward-looking statements made in this prospectus in the context of these risks and uncertainties.

 

This prospectus also contains estimates and other statistical data made by independent parties and by us relating to market size and growth and other data about our industry. We obtained the industry and market data in this prospectus from our own research as well as from industry and general publications, surveys and studies conducted by third parties, some of which may not be publicly available. This data involves a number of assumptions and limitations and contains projections and estimates of the future performance of the industries in which we operate that are subject to a high degree of uncertainty. We caution you not to give undue weight to such projections, assumptions and estimates. While we believe that these publications, studies and surveys are reliable, we have not independently verified the data contained in them.

 

Potential investors and other readers are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on the forward-looking statements. These forward-looking statements speak only as of the date of this prospectus. Unless required by law, we do not intend to update or revise any forward-looking statements publicly to reflect new information or future events or otherwise. You should, however, review the factors and risks we describe in the reports we will file from time to time with the SEC after the date of this prospectus. See “Where You Can Find Additional Information.”

 

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USE OF PROCEEDS

 

We estimate that the net proceeds we receive from this offering will be approximately $            million based on the assumed initial public offering price of $            per share, which is the midpoint of the range included on the cover page of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters’ option to purchase additional shares in this offering from us is exercised in full, our estimated net proceeds will be approximately $            million, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. The selling stockholders have granted to the underwriters an option to purchase up to an additional             shares of common stock, on a pro rata basis. We will not receive any proceeds from the sale of shares of our common stock by the selling stockholders. A $1.00 increase or decrease in the assumed initial public offering price of $            per share would increase or decrease the net proceeds we receive from this offering by approximately $            million, assuming the number of shares offered by us as set forth on the cover page of this prospectus remains the same and after deducting the estimated underwriter discounts and commissions and estimated offering expenses payable by us.

 

We expect to use the net proceeds for working capital and other general corporate purposes. We may also use a portion of the proceeds to expand our current business through acquisitions or investments in other strategic businesses, products or technologies. We have no commitments with respect to any such acquisitions or investments at this time. We will have broad discretion in the way we use the net proceeds, which will afford us significant flexibility to pursue our business strategies.

 

We intend to invest the net proceeds in short- and intermediate-term interest-bearing obligations, investment-grade instruments, certificates of deposit or guaranteed obligations of the U.S. government, pending their use as described above.

 

The primary purposes of this offering are to raise additional working capital, create a public market for our common stock for the benefit of our current stockholders, allow us easier and quicker access to the public markets should we need more capital in the future, increase the profile and prestige of our company with existing and possible future travelers, vendors and strategic partners and make our stock more valuable and attractive to our employees and potential employees for compensation purposes.

 

DIVIDEND POLICY

 

We have never declared or paid any cash dividends on our capital stock. We do not expect to pay dividends on our capital stock for the foreseeable future. Instead, we anticipate that all of our earnings in the foreseeable future will be retained and used in the operation and growth of our business. Any future determination to pay dividends will be at the discretion of our board of directors, subject to compliance with applicable law and any contractual provisions, including under agreements for indebtedness that we may incur, that may restrict or limit our ability to pay dividends, and will depend upon, among other factors, our results of operations, financial condition, capital requirements and other factors that our board of directors deems relevant.

 

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CAPITALIZATION

 

The following table sets forth our cash and cash equivalents and capitalization at September 30, 2010:

 

   

on an actual basis;

 

   

on a pro forma basis to give effect to the conversion of all outstanding shares of our convertible preferred stock into 26,767,656 shares of our common stock; and

 

   

on a pro forma as adjusted basis to reflect: (i) the pro forma basis conversions set forth above, (ii) the sale by us of                  shares of common stock in this offering and our receipt of the estimated net proceeds from that sale, based on an assumed public offering price of $             per share, which is the midpoint of the range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us and (iii) the filing of our restated certificate of incorporation which will occur prior to the closing of this offering.

 

Our capitalization following the completion of this offering will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing. You should read this table together with our consolidated financial statements and the related notes appearing elsewhere in this prospectus and the sections of this prospectus titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Use of Proceeds” and “Selected Consolidated Financial and Operating Data.”

 

     Actual      Pro
Forma
     Pro
Forma
as
Adjusted
 
    

(unaudited)

(in thousands, except share and
per share amounts)

 

Cash and cash equivalents

   $ 30,554         
                          

Convertible Preferred Stock(1):

        

Series A convertible preferred stock, $0.001 par value: 6,600,000 shares authorized, 6,600,000 shares issued and outstanding, actual

   $ 6,600         

Series A-1 convertible preferred stock, $0.001 par value: 1,176,051 shares authorized, 1,176,051 shares issued and outstanding, actual

  

 

1,650

  

     

Series B convertible preferred stock, $0.001 par value: 4,989,308 shares authorized, 4,989,308 shares issued and outstanding, actual

     7,000         

Series B-1 convertible preferred stock, $0.001 par value: 2,138,275 shares authorized, 2,138,275 shares issued or outstanding, actual

  

 

3,000

  

     

Series C convertible preferred stock, $0.001 par value: 3,897,084 shares authorized, 3,855,180 shares issued or outstanding, actual

  

 

11,500

  

     

Series D convertible preferred stock, $0.001 par value: 8,075,666 shares authorized, 8,008,842 shares issued and outstanding, actual

     165,721         
                          

Total convertible preferred stock

   $ 195,471         
                          

 

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     Actual      Pro
Forma
     Pro
Forma
as
Adjusted
 
    

(unaudited)

(in thousands, except share and
per share amounts)

 

Stockholders’ Equity:

        

Common Stock, $0.001 par value: 45,000,000 shares authorized, 7,321,625 shares issued and outstanding, actual;              shares authorized, shares issued and outstanding, on a pro forma and pro forma as adjusted basis

   $ 7         

Additional paid-in capital

     35,515         

Accumulated other comprehensive income

     1,503         

Accumulated deficit

     (4,443)         
                          

Total stockholders’ equity

   $ 32,582         
                          

Total capitalization

   $ 228,053         
                          

 

(1)   All convertible preferred stock assumes no shares authorized, no shares issued and no shares outstanding, on a pro forma and pro forma as adjusted basis.

 

In the table above, the number of shares outstanding as of September 30, 2010 does not include:

 

   

6,862,226 shares issuable upon the exercise of options outstanding with a weighted average exercise price of approximately $7.19 per share;

 

   

715,451 shares reserved for issuance pursuant to future grants of awards under our Third Amended and Restated 2005 Equity Incentive Plan and 2011 Equity Incentive Plan; and

 

   

103,904 shares issuable upon the exercise of outstanding warrants at a weighted average exercise price of approximately $13.57 per share.

 

Each $1.00 increase or decrease in the assumed initial public offering price of $            per share, the midpoint of the range set forth on the cover page of this prospectus, would increase or decrease the amount of cash and cash equivalents by approximately $            million and total stockholders’ equity by approximately $            million, assuming the number of shares offered by us as set forth on the cover page of this prospectus remains the same and after deducting the estimated underwriting discounts and commissions and estimated expenses payable by us.

 

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DILUTION

 

Dilution is the amount by which the portion of the offering price paid by the purchasers of our common stock in this offering exceeds the net tangible book value per share of our common stock after the offering.

 

If you invest in our common stock, you will be diluted to the extent the initial public offering price per share of our common stock exceeds the net tangible book value per share of our common stock immediately after this offering. Our net tangible book value as of September 30, 2010 was approximately $            million, or $            per share of common stock. The net tangible book value per share represents the amount of our tangible net worth, or total tangible assets less total liabilities, divided by             shares of our common stock outstanding as of that date.

 

The pro forma net tangible book value of our common stock as of September 30, 2010 was approximately $             million, or $            per share. Pro forma net tangible book value per share represents our total pro forma tangible assets less total pro forma liabilities, divided by the pro forma number of shares of common stock outstanding as of September 30, 2010, in each case after giving effect to the conversion of all outstanding convertible preferred stock into common stock.

 

The above information assumes no exercise of stock options or conversion of warrants outstanding as of September 30, 2010.

 

After giving effect to the issuance and sale of             shares of our common stock to be sold by us in this offering and our receipt of the estimated net proceeds from such sale, based on an assumed public offering price of $            per share, which is the midpoint of the range set forth on the cover page of this prospectus, and after deducting the estimated underwriting discounts and commissions and the estimated expenses of the offering, our pro forma as adjusted net tangible book value per share as of September 30, 2010 would have been approximately $            million, or $            per share. This amount represents an immediate increase in pro forma as adjusted net tangible book value of $            per share to existing stockholders and immediate dilution in pro forma as adjusted net tangible book value of $            per share to new investors purchasing shares of our common stock in this offering.

 

The following table illustrates the per share dilution to new investors purchasing shares of our common stock in this offering, without giving effect to the over-allotment option granted to the underwriters:

 

Assumed initial public offering price per share

      $                
           

Net tangible book value per share at September 30, 2010, before giving effect to this offering

     $                  

Increase per share attributable to conversion of convertible preferred stock and warrants

     

Pro forma net tangible book value before this offering

     

Increase in pro forma net tangible book value per share attributable to new investors purchasing shares in this offering

     $                  

Pro forma as adjusted net tangible book value per share after giving effect to this offering

        $               

Dilution per share to new investors

        $               

 

A $1.00 increase (decrease) in the assumed initial public offering price of $            per share would increase (decrease) our pro forma as adjusted net tangible book value by $            million, the pro forma as adjusted net tangible book value per share after this offering by $            and the dilution per share to new investors by $             assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

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The following table summarizes as of September 30, 2010, after giving effect to this offering:

 

   

the total number of shares of common stock purchased from us;

 

   

the total consideration paid to us before deducting estimated underwriting discounts and commissions payable by us of $            million and estimated offering expenses of approximately $            million; and

 

   

the average price per share paid by existing stockholders and by new investors who purchase shares of common stock in this offering at the assumed initial public offering price of $             per share.

 

     Shares Purchased     Total Consideration     Average
Price Per
Share
 
     Number      Percent     Amount      Percent    

Existing stockholders

        $                      $                

New investors

            
                              

Total

        100        100  

 

The foregoing table does not reflect proceeds to be realized by existing stockholders in connection with the sales by them in this offering, options outstanding under our stock option plans or stock options to be granted after the offering. Following the offering, there will be             options outstanding with an average exercise price of $             per share and             warrants outstanding with an average exercise price of $            per share.

 

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SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA

 

The tables on the following pages set forth the consolidated financial and operating data as of and for the periods indicated. The consolidated statements of operations data presented below for the years ended December 31, 2005 through 2009 and the balance sheet data as of the years then ended have been derived from our consolidated financial statements. Financial statements for fiscal year 2005 and 2006 are not included in this prospectus. The consolidated statements of operations data for the nine-month periods ended September 30, 2009 and 2010 and the balance sheet data at September 30, 2010 are derived from our unaudited interim consolidated financial statements and include all adjustments, consisting of normal and recurring adjustments that we consider necessary for a fair presentation of the financial position and results of operations as of and for such periods. Operating results for the nine months ended September 30, 2010 are not necessarily indicative of the results that may be expected for the full 2010 fiscal year. See “Risk Factors” and the notes to our consolidated financial statements. You should read the consolidated financial data presented on the following pages in conjunction with our consolidated financial statements, the notes to our consolidated financial statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

Consolidated Statements of Operations Data:

(in thousands, except share and per share amounts)

 

    Year ended December 31,     Nine months
ended September 30,
 
     2005     2006     2007     2008     2009     2009     2010  

Revenues

  $ 3,270      $ 16,890      $ 48,444      $ 112,018      $ 112,698      $ 86,567      $ 128,280   

Costs and expenses

             

Cost of revenues

    954        2,073        4,990        13,120        10,156        8,071        7,227   

Marketing

    3,531        13,483        33,624        56,841        57,389        36,020        69,139   

Technology

    1,778        2,433        4,292        10,382        10,708        8,077        9,723   

Personnel

    2,742        4,691        8,131        19,150        22,638        16,469        20,987   

General and administrative

    1,043        1,303        2,046        5,440        6,446        4,562        6,134   
                                                       

Total costs and expenses

    10,048        23,983        53,083        104,933        107,337        73,199        113,210   
                                                       

(Loss) income from operations

    (6,778     (7,093     (4,639     7,085        5,361        13,368        15,070   

Other income (expense)

    160        422        271        (1,569     (1,225     (1,350     1,244   

Income tax expense (benefit)

    —          —          —          415        (2,776     1,579        10,156   
                                                       

Net (loss) income

  $ (6,618   $ (6,671   $ (4,368   $ 5,101      $ 6,912      $ 10,439      $ 6,158   
                                                       

Net (loss) income per common share:

             

Basic

      $ (1.67   $ (1.37   $ (0.92   $ 0.05      $ (0.43

Diluted

      $ (1.67   $ (1.37   $ (0.92   $ 0.05      $ (0.43

Weighted average shares outstanding:

             

Basic

        3,860,114        4,831,777        5,223,187        5,193,555        6,164,171   

Diluted

        3,860,114        4,831,777        5,223,187        5,193,555        6,164,171   

Other Data:

             

Adjusted EBITDA(1)

  $ (6,223   $ (5,558   $ (1,415   $ 18,699      $ 16,188      $ 21,110      $ 25,178   

Capital expenditures

  $ 1,185      $ 1,029      $ 1,043      $ 986      $ 2,267      $ 1,939      $ 1,612   

Queries(2)

    NA        101,943        238,449        434,540        458,594        342,873        469,048   

 

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Consolidated Balance Sheet Data:

(in thousands)

 

    December 31,     September  30,
2010
       
  2005     2006     2007     2008     2009          

Cash and cash equivalents

  $ 3,162      $ 3,808      $ 25,061      $ 23,609      $ 15,950      $ 30,554     

Working capital

    3,332        11,754        27,984        38,453        36,019        50,866     

Total assets

    5,887        16,200        221,494        232,544        222,823        264,346     

Long-term obligations(3) and redeemable preferred stock

    15,250        29,853        225,578        220,413        196,552        200,058     

Total stockholders’ (deficit) equity

    (10,287     (16,205     (18,533     (6,135     6,753        32,582     

 

(1)   Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization, or EBITDA, is a metric used by management to measure operating performance. EBITDA represents net income before other income (expense), net, income tax expense and depreciation and amortization. Adjusted EBITDA represents EBITDA excluding stock-based compensation expense. We present Adjusted EBITDA as a supplemental performance measure because we believe it facilitates operating performance comparisons from period to period and company to company by backing out potential differences caused by variations in capital structures (affecting other income (expense), net), tax positions (such as the impact on periods or companies of changes in effective tax rates), the age and book depreciation of fixed assets (affecting relative depreciation expense), the impact of acquisitions and the impact of stock-based compensation expense. Because Adjusted EBITDA facilitates internal comparisons of operating performance on a more consistent basis, we also use Adjusted EBITDA in measuring our performance relative to that of our competitors. Adjusted EBITDA is not a measurement of our financial performance under GAAP and should not be considered as an alternative to net income, operating income or any other performance measures derived in accordance with GAAP or as an alternative to cash flow from operating activities as a measure of our profitability or liquidity. We understand that although Adjusted EBITDA is frequently used by securities analysts, lenders and others in their evaluation of companies, Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:

 

   

adjusted EBITDA does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments;

 

   

adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

 

   

although depreciation is a non-cash charge, the assets being depreciated will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements; and

 

   

other companies in our industry may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.

 

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The following table reconciles net income to Adjusted EBITDA for the periods presented and is unaudited:

 

     Year ended December 31,     Nine months ended
September 30,
 
     2005     2006     2007     2008     2009     2009     2010  

Net (loss) income

   $ (6,618   $ (6,671   $ (4,368   $ 5,101      $ 6,912      $ 10,439      $ 6,158   

Interest (income) expense

     (160     (422     (209     2,163        (121     (58     (83

Income taxes

     —          —          —          415        (2,776     1,579        10,156   

Depreciation and amortization

     545        855        1,485        5,214        5,380        4,023        4,923   
                                                        

EBITDA

     (6,233     (6,238     (3,092     12,893        9,395        15,983        21,154   

Stock-based compensation

     10        680        1,739        6,400        5,447        3,719        5,185   

Other (income) expense

     —          —          (62     (594     1,346        1,408        (1,161
                                                        

Adjusted EBITDA

   $ (6,223   $ (5,558   $ (1,415   $ 18,699      $ 16,188      $ 21,110      $ 25,178   
                                                        

 

(2)   Queries refer to user requests for travel information we process through our websites and mobile applications.

 

(3)   Long-term obligations includes current and long-term portions of debt, warrant liability and acquisition-related put liability.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

You should read the following discussion together with our consolidated financial statements and the related notes included elsewhere in this prospectus. This discussion contains forward-looking statements about our business and operations. Our actual results may differ materially from those we currently anticipate as a result of many factors, including those we describe under “Risk Factors” and elsewhere in this prospectus. See “Special Note Regarding Forward-Looking Statements.”

 

Overview

 

We are a technology-driven company committed to improving online travel. Cofounders of Expedia, Travelocity and Orbitz started KAYAK in 2004 to take a different approach to online travel. Our websites and mobile applications enable people to easily research and compare accurate and relevant information from hundreds of other travel websites in one comprehensive, fast and intuitive display. Once users find their desired flight, hotel or other travel product, KAYAK sends them to their preferred travel supplier or OTA website to complete their purchase. We also provide travel management tools and services such as flight status updates, pricing alerts and itinerary management.

 

How We Generate Revenues

 

KAYAK’s services are free for travelers. We earn revenues from both referrals to travel suppliers and OTAs (distribution revenues) and from advertising placements on our websites and mobile applications (advertising revenues). On the distribution side, travel suppliers and OTAs either pay us a set cost per click, or CPC, at the time of referral, or a fixed cost per acquisition, or CPA, if the user eventually completes the acquisition, or as a percentage of the transaction value. We earn CPA and percentage of transaction revenues when people buy travel and the travel supplier or OTA pays us a set fee, in the case of CPA, or percentage of the total price of the travel purchased.

 

Advertising revenues primarily come from payments for text-based sponsored links, graphical display advertisements and compare units. Compare units allow travel suppliers and OTAs to launch their results in a separate window. Most of our advertisers pay us on a CPC basis or on a cost per thousand impression basis, or CPM.

 

We generate a significant portion of our revenues from a few large customers. Orbitz accounted for 41.4% of total distribution revenues and 18.8% of total revenues for the nine months ended September 30, 2010. Our contract with Orbitz expires on December 31, 2013. Expedia and its affiliates, including Hotels.com and Hotwire, combined accounted for 45.6% of our advertising revenues and 24.9% of our total revenues for the nine months ended September 30, 2010. We have separate contracts with Expedia and each of its affiliates, each of which have varying terms and expiration dates. We also received 14.8% of our advertising revenues and 8.1% of our total revenues from Google for the nine months ended September 30, 2010. Our contract with Google expires on December 31, 2010, and we are currently in the process of negotiating renewal of this contract.

 

2010 Highlights and Trends

 

Revenue Growth

 

Our revenue for the nine months ended September 30, 2010 was $128 million, a 48.2% increase over the same period in the prior year. This increase in revenue is primarily due to increased travel queries on our websites, which were up 36.8% over the same period. In addition, during this period, revenues per query increased 8.3%. We attribute this increase to a combination of our marketing initiatives, more users buying travel products and improvements to our platform. We believe that traffic and searches on our website will continue to increase in 2011 as more people learn about our websites and our brand.

 

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Brand Marketing

 

We began investing in KAYAK brand advertising, including TV advertisements and billboards, in late 2009, and for the nine months ended September 30, 2010, we spent $28.9 million on these activities. We believe that this investment contributed significantly to our revenue growth. Brand awareness is an important part of our growth strategy and we expect to continue to invest at this level or above in brand marketing in the foreseeable future.

 

Hotel Growth

 

We intend to expand our hotel offerings. For the nine months ended September 30, 2010, hotel queries accounted for 11.2% of our total queries, which was higher than the 10.7% in the same period in the prior year. We believe that the number of consumer choices, combined with the predominately fixed nature of hotel operating costs, results in a willingness of hoteliers to pay a premium for quality referrals and offers attractive opportunities for future growth.

 

International Expansion

 

Our revenues from international operations accounted for approximately 7% of our total revenue for the nine months ended September 30, 2010. We acquired swoodoo in May 2010. As a result of our swoodoo acquisition, our international revenues more than doubled from approximately $2 million during the three months ended September 2009 to approximately $4 million during the same period in 2010. We believe that this strategic acquisition will strengthen our presence and team in Europe. While we expect our revenues from international operations to increase at a rate faster than our U.S. operations, we do not expect our international operations to contribute to our profits in the near term as we plan to continue to invest in our international team and brand.

 

Mobile Products

 

Queries conducted on our mobile applications accounted for 7.0% of our total queries for the nine months ended September 30, 2010. However, mobile applications accounted for less than 1% of total revenues during that period. We believe mobile applications will continue to gain prominence, and we expect to continue to commit resources to improve the features, functionality and commercialization of our mobile applications. We also believe over time mobile applications will begin to contribute meaningful revenue to our business.

 

Cash and Debt

 

As of September 30, 2010, we had cash and cash equivalents and marketable securities of $34.4 million and no outstanding long- or short-term debt. Given the recent financial turmoil and low interest rates, we hold most of our funds as cash and cash equivalents or marketable securities, and the rest is invested in highly rated money market funds and commercial paper.

 

Results of Operations

 

Our results of operations as a percentage of revenue and period-over-period variances are discussed below. All dollars and query amounts are presented in thousands.

 

Operating Metrics

 

Our operating results are affected by certain key metrics. These metrics help us to predict financial results and evaluate our business. These metrics consist of queries and revenue per thousand queries.

 

Queries

 

Queries refer to user queries for travel information we process through our websites and mobile applications. Query metrics are used to understand and predict historical and future fluctuations in revenues.

 

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Revenue per Thousand Queries

 

We use Revenue per Thousand Queries, or RPM, to measure how effectively we convert user queries to revenues. RPM is calculated as total revenues divided by total thousand queries.

 

The revenue tables below detail our query volume and RPM for each of the periods presented.

 

Revenues

 

     Nine months ended
September 30,
     % increase  
     2009      2010     
     (unaudited)         

Distribution revenues

   $ 39,091       $ 58,296         49.1

% of total revenues

     45.2%         45.4%      

Advertising and other revenues

   $ 47,476       $ 69,984         47.4

% of total revenues

     54.8%         54.6%      

Total revenues

   $ 86,567       $ 128,280         48.2

Queries

     342,873         469,048         36.8

RPM

   $ 252       $ 273         8.3

 

Revenues for the nine months ended September 30, 2010 increased over the same period in 2009 primarily due to a 36.8% increase in website queries. These additional queries accounted for $31.9 million of the $41.7 million increase. During the same period average revenues per query increased 8.3%, primarily as a result of improved advertising sales. Our acquisition of swoodoo contributed $4.5 million to our revenues for the nine months ended September 30, 2010.

 

     Year ended December 31,      % increase
2007 to 2008
    % increase
2008 to 2009
 
     2007      2008      2009       

Distribution revenues

   $ 27,731       $ 55,668       $ 51,363         100.7     (7.7 )% 

% of total revenues

     57.2%         49.7%         45.6%        

Advertising and other revenues

   $ 20,713       $ 56,350       $ 61,335         172.1     8.8

% of total revenues

     42.8%         50.3%         54.4%        

Total revenues

   $ 48,444       $ 112,018       $ 112,698         131.2     0.6

Queries

     238,449         434,540         458,594         82.2     5.5

RPM

   $ 203       $ 258       $ 246         26.9     (4.7 )% 

 

Between 2008 and 2009, total queries increased 5.5% primarily due to an increase in self-directed traffic. Distribution revenues decreased primarily due to a reduction in average revenue per query. We believe this reduction was a direct result of the loss of OTA booking fees and the recent economic downturn, which led to lower airfares and hotel room rates. Since we earn a percentage of the total purchased price on certain types of transactions, we experienced lower per transaction revenue in 2009 compared to 2008. During the same period, our advertising revenues increased. This growth was a result of increased display advertising sales and higher volume of compare units.

 

Total revenues increased $63.6 million from 2007 to 2008, primarily a result of an 82.2% increase in total queries. The increase in queries was partially attributable to our acquisition of SideStep, which was completed in December 2007, and partially attributable to an increase in self-directed traffic. Average revenue per query increased 26.9% primarily due to an increase in compare units. Compare revenues increased $10.8 million in 2008 as compared to 2007. In addition, we began offering display advertising for the first time in 2008, which contributed $5.3 million in revenues.

 

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Cost of revenues

 

Cost of revenues consists of fees we pay to third parties to process airfare queries and costs associated with our advertising syndication activities. Our syndication activities consisted of text-based advertisements on other websites in exchange for a portion of the total fees received from those advertisements. We cancelled the majority of our advertising syndication contracts in April 2009 to focus on our core business, resulting in decreased cost of revenues.

 

     Nine months ended
September 30,
     % (decrease)  
     2009      2010     
     (unaudited)         

Cost of revenues

   $ 8,071       $ 7,227         (10.5 )% 

% of revenues

     9.3%         5.6%      

 

Our cost of revenues decreased for the nine months ended September 30, 2010 compared to the same period in 2009 due to the elimination of the advertising syndication costs discussed above. These costs were $2.3 million for the nine months ended September 30, 2009.

 

     Year ended December 31,      % increase
2007 to 2008
     % (decrease)
2008 to 2009
 
     2007      2008      2009        

Cost of revenues

   $ 4,990       $ 13,120       $ 10,156         163.0%         (22.6 )% 

% of total revenues

     10.3%         11.7%         9.0%         

 

We experienced a decrease in our costs of revenues from 2008 to 2009 primarily due to lower airfare query costs of $1.7 million. We achieved these cost savings by renegotiating rates with third party search technology providers to reflect our increased volume. Our discontinued advertising syndication program contributed $3.5 million in 2008 and $2.3 million in 2009 to our cost of revenues.

 

Cost of revenues increased $8.1 million from 2007 to 2008 primarily due to a $4.3 million increase in airfare query costs associated with growth in overall airfare queries. The remaining increase was due to a $3.5 million increase in revenue share payments associated with our advertising syndication program.

 

Marketing

 

Marketing consists of online marketing and brand marketing expense. Online marketing includes search engines fees, contextual advertising placements and affiliate marketing. Other marketing includes affiliate expense, public relations cost and other general marketing costs. Under our affiliate marketing program, we provide our services on affiliate websites and pay them a percentage of any revenues received from these services. Brand marketing expense includes TV, billboards and display advertisements, and creative development fees.

 

     Nine months ended
September 30,
     % increase  
     2009      2010     
     (unaudited)         

Online marketing fees

   $ 30,187       $ 32,483         7.6

% of revenues

     34.9%         25.3%      

Brand marketing

   $ 706       $ 28,877         *   

% of revenues

     0.8%         22.5%      

Other marketing

   $ 5,127       $ 7,779         51.7

% of revenues

     5.9%         6.1%      

Total marketing expense

   $ 36,020       $ 69,139         91.9

% of revenues

     41.6%         53.9%      

 

  *   Amount is not meaningful.

 

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Marketing expense for the nine months ended September 30, 2010 increased $33.1 million compared to the same period in 2009 primarily due to the initial launch of our brand marketing campaign. We expect to continue to invest in brand marketing going forward, as we are focused on increasing awareness of our brand and bringing more people to our websites and mobile applications.

 

     Year ended December 31,      % increase
2007 to 2008
    % increase
(decrease)
2008 to 2009
 
     2007      2008      2009       

Online marketing fees

   $ 28,844       $ 48,583       $ 35,813         68.4     (26.3 )% 

% of total revenues

     59.5%         43.4%         31.8%        

Brand marketing

   $ 42       $ 0       $ 15,418         *        *   

% of total revenues

     *         *         13.7%        

Other marketing

   $ 4,738       $ 8,258       $ 6,158         74.3     (25.4 )% 

% of total revenues

     9.8%         7.4%         5.5%        

Total marketing expense

   $ 33,624       $ 56,841       $ 57,389         69.0     1.0

% of total revenues

     69.4%         50.7%         50.9%        

 

  *   Amount is not meaningful.

 

During the second half of 2009, we redesigned our landing pages to drive a greater number of queries on our websites, resulting in higher distribution revenue and lower online marketing cost per query. During this period, we significantly reduced our online marketing activities, resulting in lower online search fees of approximately $12.8 million for 2009, or a 26.3% decrease from the prior year. Also in November and December of 2009, our new investments in brand marketing resulted in a $15.4 million increase to our marketing expense.

 

From 2007 to 2008, marketing expense increased $23.2 million. Of this increase, $19.7 million was due to additional online marketing expense. In addition, other marketing expense increased $3.5 million, most of which was due to a $2.8 million increase in traffic acquisition costs related to our affiliate program.

 

Technology

 

Technology consists primarily of operation of our data centers as well as certain depreciation and amortization expense. In addition, we also categorize minor hardware and software purchases, equipment support and third-party technology consulting or services as technology costs.

 

     Nine months ended
September 30,
     % increase  
         2009              2010         
     (unaudited)         

Technology

   $ 8,077       $ 9,723         20.4

% of revenues

     9.3%         7.6%      

 

The inclusion of swoodoo in our overall results from May 2010 forward accounted for $0.6 million of the total $1.6 million increase in technology costs for the nine months ended September 30, 2010 compared to the same period in 2009. The remainder is due mostly to higher data center costs of $0.5 million.

 

     Year ended December 31,      % increase
2007 to 2008
    % increase
2008 to 2009
 
     2007      2008      2009       

Technology

   $ 4,292       $ 10,382       $ 10,708         141.9     3.1

% of total revenues

     8.9%         9.3%         9.5%        

 

Our technology costs remained relatively consistent between 2009 and 2008. However, technology costs increased $6.1 million between 2007 and 2008. This was caused primarily by a $2.3 million increase in our data center costs and a $3.1 million increase in depreciation and amortization related to certain assets acquired from SideStep.

 

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Personnel

 

Personnel costs consist of wages and benefits paid to our employees, stock-based compensation charges and payroll taxes and recruiting costs. Stock-based compensation is a significant portion of our wage and benefit structure and generally increases as we hire additional people. Many other factors can impact the total stock-based compensation expense, including the strike price, volatility and expected life of the options, among other things. Please see the notes to our consolidated financial statements included elsewhere in this prospectus for more information on our stock options. In October 2010, we issued approximately two million options to existing employees and as such, expect stock-based compensation expense to increase significantly as those options vest over the next four years.

 

     Nine months ended
September 30,
     % increase  
     2009      2010     
     (unaudited)         

Salaries, benefits and taxes

   $ 12,750       $ 15,802         23.9

% of total revenues

     14.7%         12.3%      

Stock-based compensation

   $ 3,719       $ 5,185         39.6

% of total revenues

     4.3%         4.0%      

Total personnel expense

   $ 16,469       $ 20,987         27.4

% of total revenues

     19.0%         16.4%      

 

Salaries, benefits and taxes increased primarily due to an increase of 38 employees between September 2009 and September 2010. Stock-based compensation increased in the nine months ended September 30, 2010 compared to the same period in 2009, due to the grant of 1,595,000 additional common stock options at a weighted average fair value of $6.41 per share.

 

     Year ended December 31,      % increase
2007 to 2008
     % increase
2008 to 2009
 
     2007      2008      2009        

Salaries, benefits and taxes

   $ 6,392       $ 12,750       $ 17,479         110.1%         17.7%   

% of total revenues

     13.2%         11.4%         15.5%         

Stock-based compensation

   $ 1,739       $ 6,400       $ 5,159         303.8%         19.9%   

% of total revenues

     3.6%         5.7%         4.6%         

Total personnel

   $ 8,131       $ 19,150       $ 22,638         135.5%         18.2%   

% of total revenues

     16.8%         17.1%         20.1%         

 

Salaries, benefits and taxes increased from 2008 to 2009 primarily due to an increase of 26 employees. Stock-based compensation increased in the year ended December 31, 2009 compared to the same period in 2008, due to the grant of 3,269,000 additional common stock options at a weighted average fair value of $4.21 per share.

 

Salaries, benefits and taxes increased from 2007 to 2008 primarily due to an increase of 34 employees. Stock-based compensation increased in the year ended December 31, 2008 compared to the same period in 2007, due to the grant of 2,483,000 additional common stock options at a weighted average fair value of $6.54 per share.

 

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General and administrative

 

All other operating costs are classified as general and administrative costs. The largest items in this category of expenses are legal and accounting fees, bad debt expense and facilities expenses. In 2009 general and administrative costs also included $0.3 million of stock-based compensation expense.

 

     Nine months ended
September 30,
     % increase  
     2009      2010     
     (unaudited)         

General and administrative

   $ 4,562       $ 6,134         34.5

% of revenues

     5.3%         4.8%      

 

General and administrative expenses increased $1.6 million for the nine months ended September 30, 2010 compared to the same period in 2009 due to $0.5 million in acquisition related expenses and $0.5 million in higher legal and accounting fees.

 

     Year ended December 31,      % increase
2007 to 2008
    % increase
2008 to 2009
 
     2007      2008      2009       

General and administrative

   $ 2,046       $ 5,440       $ 6,446         165.9     18.5

% of total revenues

     4.2%         4.9%         5.7%        

 

General and administrative costs increased $1.0 million between 2008 and 2009 due to a $0.5 million increase in bad debt expense related to several smaller customers, and a $0.4 million increase in facilities expenses due to the adding more space to accommodate our additional employees.

 

General and administrative costs increased $3.4 million between 2007 and 2008 primarily due to $1.0 million in increased legal and accounting fees, $0.6 million in higher facilities expense and $0.7 million of amortization expense following our acquisition of SideStep.

 

Other income (expense)

 

During the nine months ended September 30, 2010, we recorded a gain of $0.8 million related to our obligation to buy back shares of our common stock issued in connection with our acquisition of swoodoo. In addition, we realized a gain of $0.5 million related to the sale of the TravelPost assets. We incurred a $1.0 million loss on the early extinguishment of debt during the nine months ended September 30, 2009.

 

From December 2007 to January 2009, we had outstanding debt on which we paid interest. We paid off our debt and all accrued interest in January 2009, and we do not expect to issue debt in the near term. We incurred interest expense of $0.2 million, $2.8 million and $0.3 million in each of 2007, 2008 and 2009, respectively.

 

Income tax expense (benefit)

 

Prior to December 31, 2009, we recorded a full valuation allowance against our net tax assets, which consisted primarily of net operating loss carryforwards, due to the uncertainty of our ability to realize those assets. As such, we had nominal income tax expense. On December 31, 2009, we determined that it was more likely than not that we would be able to realize these assets and reversed the valuation allowance, resulting in a tax benefit for that year. For the nine months ended September 30, 2010, we incurred income tax expense of $10.2 million, giving us an effective tax rate of 62%. The primary differences between the statutory rate and our effective tax rate include stock compensation from incentive stock options, state tax expense and gain realized on the sale of certain intangibles. Absent any significant changes in our business, we anticipate that our effective tax rate to gradually decrease in future periods.

 

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Quarterly Financial Data/Seasonality

 

The following table presents consolidated financial data for each of the seven quarters in 2009 and 2010. The operating results are not necessarily indicative of the results for any subsequent quarter.

 

     2009 Quarters ended     2010 Quarters ended  
     Mar 31      June 30      Sept 30      Dec 31     Mar 31     June 30      Sept 30  

Revenues

   $ 30,732       $ 29,253       $ 26,582       $ 26,131      $ 36,745      $ 43,721       $ 47,814   

Costs and expenses:

                  

Cost of revenues

     3,655         2,496         1,920         2,085        2,575        2,303         2,349   

Marketing

     13,638         12,519         9,863         21,369        23,809        21,963         23,367   

Technology

     2,626         2,707         2,744         2,631        2,813        3,380         3,530   

Personnel

     5,363         5,534         5,572         6,169        6,615        7,101         7,271   

General and administrative

     1,570         1,575         1,417         1,884        1,570        2,009         2,555   
                                                            

Operating income

   $ 3,880       $ 4,422       $ 5,066       $ (8,007   $ (637   $ 6,965       $ 8,742   
                                                            

 

Seasonal factors cause our profitability to fluctuate from quarter to quarter. Historically, our highest revenue quarters are the second and third quarters due to the fact that high travel seasons fall in these quarters. However, recent macroeconomic conditions and our rapid growth masked the cyclicality and seasonality of our business during 2009 and 2010. Additionally, our brand marketing expense fluctuates by quarter and we invest in advance of high travel seasons with our lightest spend in the third quarter. As a result of the above two factors, our operating income is typically highest in the second and third quarters.

 

Acquisitions

 

In May 2010, in an effort to expand our European operations, we acquired all of the outstanding stated share capital of swoodoo in exchange for $9.5 million and 825,000 shares of our common stock. Upon the occurrence of certain events, including the closing of this offering, during the 30 business days following our giving notice of such event we will be obligated, at a holder’s request, to repurchase any or all of the shares owned by such holder at a price of €13.33 per share. In December 2007, in an effort to expand our U.S. operations, we acquired all of the outstanding stock of SideStep for cash consideration of $175.6 million.

 

Liquidity and Capital Resources

 

Summary Consolidated Cash Flow Data

(in thousands)

                              
     Year ended December 31,     Nine months ended
September 30,
 
     2007     2008     2009     2009     2010  

Operating cash flows

   $ (1,886   $ 12,879      $ 12,616      $ 16,337      $ 16,287   

Investing cash flows

     (172,443     (9,160     6,964        8,346        (7,164

Financing cash flows

     195,582        (5,171     (27,239     (27,409     5,323   

 

We have funded our operations during the past five years primarily from the issuance of equity securities and cash flows from operations and, to a lesser extent, from the issuance of debt securities. In the first years of our history, we relied on cash provided from the sale of shares of our convertible preferred stock to fund our operations and raised $29.8 million prior to 2007. In 2007, we raised another $165.7 million through the sale of preferred stock to fund our acquisition of SideStep.

 

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As of September 30, 2010, we had cash and cash equivalents and marketable securities of $34.4 million that we expect to utilize, along with operating cash flows, to fund brand marketing, expansion in Europe and general corporate purposes. Our operations currently provide us with most of our liquidity needs, and at this time we have nominal capital expenditure requirements. We believe that cash from operations, together with our cash and short-term investment balance and the proceeds of this offering, will be enough to meet ongoing capital expenditures, working capital requirements and other capital needs over at least the next 12 months.

 

We use our cash to fund our operations, make capital expenditures and acquire complementary businesses from time to time.

 

In December 2007, we entered into a $20.0 million senior term loan with Silicon Valley Bank and an aggregate of $10.0 million of subordinated term loans with Silicon Valley Bank and Gold Hill Capital. These loans were repaid during 2009.

 

In connection with our acquisition of swoodoo, we issued 825,000 shares of our common stock. Upon the occurrence of certain events, including the closing of this offering, during the 30 business days following our giving notice of such event we will be obligated, at a holder’s request, to repurchase any or all of the shares owned by such holder at a price of €13.33 per share. Please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Acquisitionsfor further discussion of our swoodoo acquisition.

 

Our liquidity could be negatively affected by a decrease in demand for our products and services. In addition, we may make acquisitions complementary to our business and may need to raise additional capital through future debt or equity financing to provide for greater flexibility to fund any such acquisitions. Additional financing may not be available at all or on terms favorable to us.

 

Contractual Obligations

 

Our contractual obligations as of December 31, 2009 were as follows:

 

     Amounts due by period
(in thousands)
 
     Total      Less than
1 year
     1-3
years
     3-5
years
     More than
5 years
 

Operating lease obligations

   $ 5,044       $ 1,366       $ 1,966       $ 1,232       $ 480   

Content licensing and technology agreements

   $ 14,631       $ 7,431       $ 7,200       $       $   

Total contractual cash obligations

   $ 19,675       $ 8,797       $ 9,166       $ 1,232       $ 480   

 

We lease our office and data center facilities under noncancelable leases that expire at various points through January 2016. See “Business—Facilities” for further discussion of our leased premises. We are also responsible for certain real estate taxes, utilities and maintenance costs on our office facilities. In addition, we have various content licensing and technology agreements that, if renewed, will continue to incur costs in future periods.

 

Off-Balance Sheet Obligations

 

We had no off-balance sheet obligations as of September 30, 2010.

 

Critical Accounting Policies and Estimates

 

We prepare our Consolidated Financial Statements in accordance with accounting principles generally accepted in the U.S. To do so we make estimates and assumptions that affect our reported amounts of assets, liabilities, revenues and expenses, as well as related disclosure of contingent assets and liabilities. In some cases, we could reasonably have used different accounting policies and estimates. In addition, changes in the accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ materially

 

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from our estimates. To the extent that there are material differences between these estimates and actual results, our financial condition or results of operations will be affected. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. We describe our significant accounting policies in Note 2 of our consolidated financial statements found elsewhere in this prospectus. We believe the following critical accounting estimates are the most significant areas of judgments and estimates used to prepare our financial statements.

 

Revenue Recognition

 

We generate revenue when we refer a user to a third-party website, either through our query results or through advertising placements on our websites. We recognize revenue upon completion of the referral, provided that our fees are fixed and determinable, there is persuasive evidence of the arrangement and collection is reasonably assured, as follows:

 

Distribution Revenues. Revenues are recognized either when a user clicks on a link that refers them to a third-party provider or when the user completes a purchase with the third party provider, depending on terms of the contract. For certain hotels and car rental companies revenue is not earned until the user consumes the travel, in which case we recognize the revenue when notified of the amount earned by the provider or when cash is received.

 

Advertising Revenues. Revenues are recognized when a user clicks on an advertisement that a customer has placed on our website or when we display an advertiser’s advertisement within our query results, regardless of whether the user clicks on the advertisement.

 

Stock-Based Compensation

 

Our stock-based compensation expense is estimated at the grant date based on an award’s fair value as calculated by the Black-Scholes option-pricing model and is recognized as expense over the requisite service period. The Black-Scholes model requires various highly judgmental assumptions including expected volatility and option life. If any of the assumptions used in the Black-Scholes model changes significantly, stock-based compensation expense may differ materially in the future from that recorded in the current period. In addition, we are required to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. We estimate the forfeiture rate based on historical experience. To the extent our actual forfeiture rate is different from our estimate, stock-based compensation expense is adjusted accordingly. Please see Note 14 to our consolidated financial statements found elsewhere in this prospectus for further information regarding our stock-based compensation.

 

Common Stock Valuations

 

For all option grants, the fair value of the common stock underlying the option grants was determined by our board of directors, with the assistance of management. The board of directors and management intended all options granted to be exercisable at a price per share not less than the per share fair value of our common stock underlying those options on the date of grant.

 

To make our estimates, we utilize guidance set forth in the 2004 AICPA Practice Aid, Valuation of Privately-Held Company Equity Securities Issued as Compensation, or the AICPA Guide. We recognize that the value of our stock changes between valuations and as such, consider other factors when determining the fair value of our stock for the purposes of determining stock compensation expense, such as:

 

Sales of our Common Stock. Sales of our common stock can be a strong indicator of the value of our stock, but do not necessarily determine the value. We consider the volume of shares sold in the transaction, the circumstances of the sale and the sophistication and independence of the buyer in order to determine whether or not the sale indicates a new fair value of our common stock.

 

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Sales of our Convertible Preferred Stock. Sales of our convertible preferred stock can assist in estimating the fair value of our common stock. In order to determine the fair value of common after a sale of convertible preferred stock, we consider the volume of shares sold, circumstances of the sale, independence of the buyers and the value of the preferential rights associated with the class of convertible preferred stock sold.

 

Specific Events at KAYAK. In addition to the above factors, we consider significant events at KAYAK that may have impacted our value, such as launch of a new product, signing a significant new customer, significant change in management team, etc.

 

The following sets forth our option grants over the last two years and discusses our methodology to determine the fair value of our common stock at each grant date.

 

In 2009, we issued options to purchase shares of our common stock at the following exercise prices:

 

Grant Date

   Options Granted      Exercise Price      Fair Value of
Common Stock
     Intrinsic Value  

February 26, 2009

     265,000       $ 15.50       $ 7.50       $ —     

May 19, 2009

     535,000       $ 7.50       $ 7.50       $ —     

July 7, 2009

     2,044,000       $ 7.50       $ 7.50       $ —     

July 22, 2009

     170,000       $ 7.50       $ 7.50       $ —     

November 13, 2009

     255,000       $ 7.50       $ 11.29       $ 3.79   

 

In February 2009, the board of directors determined the fair value of our common stock to be $15.50 based on the last sale of 626,664 shares of our common stock to an independent third party in April 2008. The purchaser of the stock was a sophisticated investor with no previous ownership in our company and which performed adequate due diligence to determine a fair value of $15.50 per share. There were no other significant transactions in our stock from April 2008 to February 2009 and as a result, the board of directors believed that this sale best represented the fair value of our common stock on that date. There was no significant change in our operating results or forecasts during this time period.

 

In early 2009, we estimated the fair value of our common stock as of December 31, 2008 using the market approach and the income approach, in order to assist the board of directors in assigning an exercise price to future stock grants. We believe both of these approaches were appropriate methodologies given our stage of development at that time. For the market approach, we utilized the guideline company method by analyzing a population of comparable companies and selected those technology companies that we considered to be the most comparable to us in terms of product offerings, revenues, margins and growth. We then used these guideline companies to develop relevant market multiples and ratios, which were applied to our corresponding financial metrics to estimate our total enterprise value. We relied on the following key assumptions for the market approach:

 

   

our projected revenues determined as of the valuation date based on our estimates; and

 

   

multiples of market value to expected future revenues, determined as of the valuation date, based on a group of comparable public companies.

 

For the income approach, we performed discounted cash flow analyses which utilized projected cash flows as well as a residual value, which were then discounted to the present value in order to arrive at our current equity value to arrive at an enterprise value. We relied on the following key assumptions for the income approach in addition to the management projections discussed above:

 

   

discount rate applied to forecasted future cash flows to calculate the present value of those cash flows; and

 

   

terminal value multiple applied to our last year of forecasted cash flows to calculate the residual value of our future cash flows.

 

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In determining our enterprise value, we applied equal weighting to market and income approaches, as the indicated equity value under the scenarios was reasonably similar. In allocating the total enterprise value between preferred and common stock, we considered the liquidation preferences of the preferred stockholders and utilized the option-pricing method, or OPM, for calculating a range of values for the common stock, based on the likelihood of various liquidity scenarios. The OPM utilized a volatility factor of 80% based on the peer group above and applied a lack of marketability discount of 20%. We assumed a 30% likelihood of an initial public offering within one year, 10% likelihood of a strategic sale and 60% likelihood of remaining as a private company, which produced an indicated value of our common stock of $6.50—$8.48. We then chose the midpoint of the range to arrive at a common stock value of $7.50. This value was significantly lower than our last indicated value due to an overall decrease in public company comparable multiples of 50%, as well as to our lowered forecasted revenues and cash flows as a result of the poor economy.

 

Based on the results of the appraisal, the board of directors determined that the fair value of our common stock was $7.50 per share. There were no significant transactions involving our common stock or convertible preferred stock during 2009.

 

During the fourth quarter of 2009, we increased our forecasted revenue and cash flows due to a strengthening in our results. Accordingly, we performed an updated valuation of our company as of October 31, 2009. This valuation again calculated an overall enterprise value, but relied on the income approach to calculate the value, as we believed that it best considered our expected high growth and profitability. The market approach was used to validate the results of the income approach, but no weight was assigned to it. In performing our calculations, we relied upon the methodologies described above as of October 31, 2009, however, with respect to our application of the market approach we used a multiple of projected EBITDA instead of revenues due to our recent demonstration of profitability.

 

The enterprise value was then allocated to the various classes of our stock using the OPM and applying a 70% volatility factor and 40% likelihood of an initial public offering within 12 months. We then applied a 20% discount to the value due to lack of marketability to arrive at an estimated fair value of our common stock of $11.29, which the board used to determine the exercise price of future stock option grants.

 

In 2010, we issued options to purchase shares of our common stock at the following exercise prices:

 

Grant Date

   Options Granted      Exercise Price      Fair Value of
Common Stock
     Intrinsic Value  

February 11, 2010

     315,000       $ 11.29       $ 11.29       $ —     

April 29, 2010

     1,075,000       $ 13.00       $ 13.00       $ —     

July 22, 2010

     205,000       $ 13.00       $ 14.82       $ 1.82   

October 7, 2010

     140,000       $ 14.82         

October 20, 2010

     2,079,590       $ 14.82         

October 21, 2010

     40,000       $ 15.50         

November 15, 2010

     110,000       $ 16.50         

 

On March 22, 2010, an independent third party investor purchased 769,230 shares of common stock (2.32% of outstanding common equivalents at that time) from existing investors at a price of $13.00 per share. The investor is an institutional investor who previously had no shares in KAYAK and who conducted appropriate due diligence. There were no other significant transactions involving our common stock or convertible preferred stock or significant changes to our business between March 22, 2010 and July 22, 2010. The board of directors concluded that this transaction established the fair value of our common stock which was the best representation of our common stock value at April 29, 2010 and July 22, 2010.

 

We prepared a revised valuation as of July 31, 2010 and utilized the probability weighted expected return method, or PWERM, approach to allocate value to our common shares. The PWERM approach employs various market approach and income approach calculations depending upon the likelihood of a given liquidation scenario

 

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and we believed it to be appropriate given our preparations for an initial public offering. We assumed that there was a 40% likelihood of an initial public offering by mid-May 2011, a 30% probability of a strategic sale and 30% likelihood of remaining a private company. We calculated values under each scenario using financial projections as of July 31, 2010 as follows:

 

Initial Public Offering:

 

   

utilized the market approach using the same peer group for comparison as in the October 31, 2009 valuation;

 

   

applied a one-year forward multiple to projected revenues determined as of the valuation date;

 

   

arrived at an implied share price of $25.81 assuming conversion of all convertible preferred stock to common stock; and

 

   

applied a discount for lack of marketability of shares of 17% and discounted the value back to present value using a discount rate of 22% to arrive at a per share price of $18.42.

 

Strategic Sale:

 

   

utilized the market approach using the same peer group for comparison as in the October 31, 2009 valuation;

 

   

applied a multiple to trailing twelve months revenue based on recent representative transactions;

 

   

arrived at an implied enterprise value at the sale and allocated value to various classes of stock based on whether we believed those shares would convert to common stock or remain as convertible preferred stock; and

 

   

applied a discount for lack of liquidity of 3% and discounted the value back to present value using a discount rate of 22% to arrive at a price per common share of $14.72.

 

Remain as Private Company:

 

   

utilized the income approach and a discount rate of 22% to calculate the present value of expected future cash flows to arrive at an enterprise value; and

 

   

allocated the enterprise value to various classes of shares using the OPM model using a volatility of 48.68% and applied a discount for lack of marketability of 33% to arrive at a price per common share of $10.11.

 

We then applied the probabilities of each liquidity scenario to their respective price per common share to arrive at a value per common share of $14.82.

 

The board of directors approved the issuance of options to purchase our common stock on September 17, 2010 using the fair value established by our valuation. The number of options approved exceeded the amount of available shares in our pool and as a result, we could not grant the options until the pool was increased. Because of the delay in communicating the grants to our employees, the options had a grant date of October 20, 2010. Because the grant date was so much later than the date at which the options were approved and because the possibility of an initial public offering or other liquidity event was increasingly likely, we determined that we should obtain a revised independent appraisal as of the grant date, which valuation is currently in process.

 

Income Taxes

 

We are subject to income taxes in the U.S. and some foreign jurisdictions. Significant judgment is required in evaluating our uncertain tax positions, evaluating the realizability of our net deferred tax assets and determining our provision for income taxes. Although we do not believe that we have any uncertain tax positions, no assurance can be given that the final tax outcome will be consistent with our estimates.

 

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Realization of the future tax benefits depends on many factors, including our ability to continue to generate taxable income within the net operating loss carryforward period. Prior to 2009, we did not have sufficient history of generating taxable income to support the assumption that it was more likely than not that future tax benefits would be realized and as such, a full valuation reserve was recorded against the net deferred tax asset. In 2009, based on historical and expected operating results, we determined that it was more likely than not that future tax benefits would be realized and released the valuation allowance of $3.9 million.

 

Our effective tax rates have differed from the statutory rate primarily due to the impact of state taxes, certain benefits realized related to stock option activities and an increase or decrease in our valuation reserve. Our effective tax rate was 62% for the nine months ended September 30, 2010.

 

Acquisitions

 

We account for acquisitions using the purchase method of accounting. In each case, we allocated the purchase price to the assets acquired, including intangible assets and liabilities assumed, based on estimated fair values at the date of the acquisition.

 

Recoverability of Intangible Assets, Including Goodwill

 

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. When such events occur, we compare the carrying amounts of the assets to their undiscounted expected future cash flows. If this comparison indicates that there is impairment, the amount of the impairment is calculated as the difference between the carrying value and fair value. To date, no such impairments have been recognized. Goodwill is tested for impairment at least annually and whenever events or changes in circumstances indicate that goodwill may be impaired. Goodwill represents the excess of the cost of acquired business over the fair value of the assets acquired at the date of acquisition. There was no impairment of goodwill in 2009 or 2008. Our goodwill is not deductible for tax purposes.

 

Quantitative and Qualitative Disclosures about Market Risk

 

We are exposed to market risks in the ordinary course of our business. These risks primarily consist of foreign exchange and interest rate risks.

 

Foreign Exchange Risk

 

We transact business in various foreign currencies and have some international revenues and costs which are denominated in foreign currencies. This exposes us to foreign currency risk. At this time, our exposure is immaterial, given that the vast majority of our transactions, income and expenses are in U.S. dollars. If exchange rates were to fluctuate significantly, we would see higher gains or losses from transactions in the “Other income (expense)” line of our statement of operations, and larger cumulative translation adjustments in the comprehensive “Other Income” category of our consolidated statement of operations. The volatility of exchange rate is dependent on many factors that we cannot forecast with reliable accuracy. At this time we do not, but we may in the future, enter into derivatives or other financial instruments in an attempt to hedge our foreign currency exchange risk. It is difficult to predict the impact hedging activities would have on our results of operations.

 

Interest Rate Risk

 

We invest our excess cash primarily in highly liquid debt instruments of the U.S. government and its agencies, municipalities in the U.S., debt instruments issued by foreign governments, time deposits, money market and other funds, and corporate debt securities. By policy, we limit the amount of credit exposure to any one issuer.

 

Investments in both fixed rate and floating rate interest earning securities carry a degree of interest rate risk. Fixed rate securities may have their fair market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than predicted if interest rates fall. Due in part to these factors, our income from investments may decrease in the future.

 

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BUSINESS

 

Overview

 

We are a technology-driven company committed to improving online travel. Cofounders of Expedia, Travelocity and Orbitz started KAYAK in 2004 to take a different approach. Our websites and mobile applications enable people to easily research and compare accurate and relevant information from hundreds of other travel websites in one comprehensive, fast and intuitive display. We also provide travel management tools and services such as flight status updates, pricing alerts and itinerary management. Once users find their desired flight, hotel or other travel products, KAYAK sends them to their preferred travel supplier or OTA website to complete their purchase.

 

KAYAK’s services are free for travelers. We offer travel suppliers and OTAs an efficient channel to sell their products and services to a highly targeted audience focused on purchasing travel. We earn revenues from both referrals to travel suppliers and OTAs, or distribution revenues, and from a variety of advertising placements on our websites and mobile applications, or advertising revenues.

 

Since our commercial launch in 2005, KAYAK has experienced significant growth:

 

   

For the nine months ended September 30, 2010, we generated $128 million of revenues, representing year-over-year growth of 48%. For the quarter ended September 30, 2010, we generated $48 million of revenues, representing year-over-year growth of 80%;

 

   

For the nine months ended September 30, 2010, we processed more than 469 million user queries for travel information, representing year-over-year growth of 37%. For the quarter ended September 30, 2010, our quarter-over-quarter query volume increased 50% compared to the same period in 2009; and

 

   

KAYAK mobile applications have been downloaded nearly four million times since their introduction in March 2009. For the quarter ended September 30, 2010, we had over one million downloads, representing growth of 152% compared to the same period in 2009.

 

As of October 31, 2010, we had 140 employees, and we had local websites in 14 countries outside the U.S., including the United Kingdom, Germany, France, Spain, Italy and India.

 

Our Industry

 

Market Opportunity

 

As a distribution and advertising platform, we participate in both the online travel market and the online travel advertising market.

 

Online Travel: A Large and Growing Market

 

The travel industry in the U.S., Europe and Asia Pacific accounted for $723 billion in global expenditures in 2009, and is projected to increase at a 3% CAGR through 2011. Online leisure and unmanaged business travel spend, or online travel spend, was approximately $216 billion of this amount, or 30%, with this category increasing at a 17% CAGR between 2005 and 2009. We believe that travel, with its research and information intensive nature, real-time pricing, electronic fulfillment capabilities and thousands of travel options, is well-suited for the online channel. Currently, online travel represents the largest category of e-commerce, with total sales exceeding the combined total of electronics, books, software, appliances and collectibles. Online travel spend is projected to increase at a 10% CAGR from 2009 through 2011, growing to represent 34% of total travel purchases in 2011.

 

The online travel industry is composed of thousands of travel supplier and OTA websites, which compete for travel bookings. In 2009, travel supplier websites accounted for 63% of total online travel bookings, and the remaining 37% was provided by OTAs.

 

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The Global Opportunity

 

In the U.S., the online travel market increased at an 8% CAGR from 2005 through 2009, reaching $88 billion in 2009, which was 38% of total U.S. travel spend. The U.S. online travel market is projected to grow at a 6% CAGR through 2011.

 

In Europe, the online travel market grew at a 26% CAGR from 2005 through 2009, reaching $92 billion in 2009, which was 32% of total European travel spend. The European online travel market is projected to grow at an 8% CAGR through 2011. The U.K., France and Germany collectively represent 67% of the overall European online travel market.

 

In Asia, the online travel market grew at a 22% CAGR from 2005 through 2009, reaching $36 billion in 2009, which represented 18% of total Asian travel spend. As Internet usage, broadband adoption and online payment capabilities continue to rapidly increase, the Asian online travel market is projected to grow at 25% CAGR from 2009 through 2011.

 

Key Online Travel Products

 

The two largest categories of online travel are airline ticket sales and hotel bookings. In 2009, airline ticket sales represented 52% of total online travel purchases, followed by hotel bookings at 25%.

 

Airline tickets are the most common travel product researched and purchased online, with global online sales reaching 36% of overall global airline ticket sales in 2009. Online airfare sales are projected to grow at a 9% CAGR from 2009 through 2011. There are hundreds of airlines in operation, and the large choice of flight combinations and pricing options, highly variable real-time pricing and the advent of e-ticketing make flights well suited to online research and purchasing. We believe that the combination of choice and variability leads to a lack of confidence among users in the accuracy and comprehensiveness of flight data. Users often search for flights multiple times and on multiple travel websites.

 

Hotel bookings are the fastest growing online travel category. Online hotel bookings are projected to grow at a 12% CAGR from 2009 through 2011. Additionally, only 22% of 2009 hotel bookings occurred online. The hotel market is a highly fragmented travel category, with hundreds of thousands of properties worldwide. This often leaves potential travelers with hundreds of properties to choose from in any given city. Given the significant differentiation among hotels, travelers will typically spend considerable time online researching a hotel stay, making hotel bookings highly suitable for the online channel. We believe that the number of consumer choices combined with the predominately fixed nature of hotel operating costs, results in a willingness of hoteliers to pay a premium for quality referrals.

 

Online Travel Advertising: A Large Opportunity to Grow Share of Total Advertising Spend

 

Online advertising is a large and growing market. The combined online and offline advertising spend for all products and services in 2009 was $559 billion. Of this amount, $58 billion, or 11%, was spent online. Furthermore, for the period from 2009 through 2014, online advertising is projected to grow at a 15% CAGR, as compared to the 4% CAGR projected for combined online and offline advertising.

 

Travel represents one of the largest advertising categories, with advertisers spending $29 billion globally on travel-related advertising in 2009. Of this amount, only $4 billion, or 13%, was spent online with the remainder being spent primarily on traditional media, up from $1.4 billion, or 5% of total travel advertising spend in 2005. This represents a 28% CAGR in online travel advertising spend between 2005 and 2009. We believe that over time more travel advertising will move from offline to online as travel purchases continue to move online. Online travel advertising can also be a more efficient advertising channel, as it enables advertisers to directly target individuals who are researching and planning travel. The online travel advertising market is expected to reach $8 billion by 2014, a CAGR of 15% between 2009 and 2014.

 

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Key Trends in Mobile Travel Planning

 

Mobile phone adoption across the world continues to grow at a rapid pace, creating a strong marketplace for mobile travel applications. The International Telecommunications Union estimated that there were 4 billion mobile subscribers in the world at the end of 2008, representing 61% of the world’s population. In addition, they project this number to grow by at least 1 billion by the end of 2011. We expect that over time, an increasing number of people will use their mobile devices for travel research, planning and booking. Today, there are more than 2,000 travel-related applications available for the iPhone, Android and BlackBerry.

 

The opportunity for mobile advertising is large and growing. U.S. mobile advertising spend is expected to grow from $733 million in 2009 to $4.7 billion in 2014, a 45.1% CAGR. We believe the mobile medium provides a unique opportunity for advertisers to reach travelers with immediately actionable, personalized and context-relevant travel offers.

 

Challenges of Our Industry

 

Challenges for Consumers

 

The Internet has dramatically increased the amount of information readily available to travelers. Planning travel online should be a quick and easy process. However, prices and availability change frequently, and information is often fragmented across hundreds of travel sites. Traditional travel websites can be slow and confusing and often lack comprehensive search results. A 2010 survey by Forrester Research Inc. showed increasing dissatisfaction among users with the online booking experience. Only 47% of U.S. online leisure travelers surveyed said they enjoy using the internet to plan and buy travel, down from 53% in 2007. The same survey showed that only 37% of U.S. online leisure travelers believed that travel websites clearly present choices and tradeoffs, down from 39% in 2008. These limitations can make it frustrating for people to find, purchase and manage their travel online. As a result, we believe that travelers continue to search multiple sites for the best prices and options to meet their travel needs.

 

Challenges for Travel Suppliers and OTAs

 

Travel suppliers and OTAs face two main challenges. One is to distribute their travel products to as many travelers as possible, while still maintaining their brand and owning the customer relationship. In distributing their travel inventory through third party sites, they lose the opportunity to cross sell or upsell additional products and to build brand loyalty. The second challenge they face is to advertise their services to the right audience at the right time, in a cost effective manner. The majority of travel advertising dollars is currently spent in offline media channels, including TV, radio, print and outdoor campaigns. Offline travel advertising can be expensive, and its effectiveness can be difficult to measure and track. Online advertising offers many improvements to traditional advertising, but can still suffer from audience fragmentation, generic advertising placements and complex pricing schemes. Many online advertising platforms do not solve this combination of problems effectively.

 

Our Strengths

 

KAYAK Provides a Fast, Intuitive and Comprehensive Travel Planning Experience

 

KAYAK creates a better way to shop for travel online. We use proprietary software and algorithms to quickly find, consolidate and sort travel information from hundreds of websites. We present these results through an intuitive interface, providing a single place for our users to plan their travel. In the first nine months of 2010, more than 469 million user queries for travel information were processed through our websites and mobile applications. Once a KAYAK user finds what they want to buy, we give them the flexibility to purchase directly from travel suppliers or through OTAs.

 

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KAYAK is a Technology-Driven Company Focused on Rapid Innovation and the User Experience

 

We dedicate the majority of our attention to making high performance software. This software powers our websites and mobile applications by rapidly searching through the large and complex range of travel industry data and presenting it in a clear and intuitive manner. Our proprietary machine learning analysis algorithms detect and remove inaccurate prices or results in this data. Our ranking algorithms determine which results are likely to be the most relevant to the user. Our focus on technology is reflected in our employee base. The majority of our employees are either software engineers or technologists, and we believe we have one of the strongest technology teams in the travel industry. We strive to innovate faster than our competitors, and we release new code to our websites almost every week. Our mobile applications are a recent example of our development capabilities.

 

KAYAK’s Users are Loyal

 

We believe that our users are loyal to our brands, products and services. According to a June 2010 study conducted by a market research company on our behalf, KAYAK is a leading brand among the major online travel sites in the U.S. for attributes such as “Finds all the best prices in one place” and “Smarter way to search for travel online.” Through the first nine months of 2010, 72% of our query volume was generated from people who directly visited our websites, and only 8% of our query volume was generated by users referred to us from general search engines.

 

KAYAK’s Proprietary Distribution and Advertising Platform is Optimized for the Travel Industry

 

We provide travel suppliers and OTAs with access to a valuable audience of people searching for travel information. We also offer these travel companies multiple ways to reach this audience through both our query results and a variety of advertising placements.

 

On the distribution side, our query results include real-time pricing and availability information from travel suppliers and OTAs. We query and display information in direct response to a KAYAK user’s preferences. Our sorting and filtering tools allow users to narrow the query results to meet their specific travel plans. If a user then selects one of these results, we send them directly into the travel supplier’s or OTA’s purchase process.

 

On the advertising side, our innovative platform allows advertisers to target their placements, create advertising content and link the user to the relevant page on the advertiser’s website, all based on the user’s search parameters. As examples, an airline can limit its advertisements to appear only for city pairs that it serves, or a hotelier can purchase advertisements only for dates where its occupancy rates are low. By dynamically creating the content of their advertisements based on these specific search parameters, the airline can include the cities the users searched in their advertisement and the hotelier can advertise a special rate to try to increase their occupancy. The same search parameters can be passed through to an advertiser after a potential traveler clicks on one of their advertisements. This lets the advertiser show the traveler products which meet his or her specific travel needs, without requiring the traveler to do additional work. We believe that our ability to pass a prospective traveler through to the relevant booking page increases the likelihood that a transaction will be completed.

 

KAYAK’s Unique Business Model is Highly Scalable

 

We designed our business model and technology platform to be highly scalable and cost efficient. Our software and systems have been designed from inception to handle significant growth in users and queries, without requiring significant re-engineering or major capital expenditures. In addition, we use a combination of our own proprietary software and a variety of public domain technologies so that as we continue to grow our user base, we do not incur significant additional software costs. Since all travel products are purchased by our users directly on the travel supplier’s or OTA’s website, we do not incur meaningful costs or overhead associated with fulfillment or customer service for those travel products. We have relatively low fixed operating costs, and the largest component of our variable operating cost is discretionary marketing.

 

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The KAYAK Team Has Deep Industry Experience and Focus

 

Cofounders of Expedia, Travelocity and Orbitz formed KAYAK in 2004. Our team has extensive and longstanding relationships across the travel industry and, unlike general search engine companies, we focus on a single market category—online travel. Our mission is to build the best assortment of tools and services to meet the needs of travelers. To accomplish our goal, we have assembled technology and business teams, which each include people that have worked together over many years. In addition to the strength of our management team, our investors include some of the most prominent venture capital and private equity firms, including Sequoia Capital, Accel Partners, General Catalyst Partners and Oak Investment Partners.

 

Our Growth Strategy

 

Continue to Improve and Expand Our Services

 

We are dedicated to offering people the best online travel planning experience. To provide the most comprehensive set of results, we maintain relationships with hundreds of travel suppliers and OTAs and regularly add new sources of travel information. We continue to develop better software and algorithms to reduce the time required to perform a query and enhance the relevance of the results. Additionally, we constantly review the feature set and design of our websites and mobile applications for areas of improvement, and we release new code to our websites on nearly a weekly basis. Examples of recent enhancements to our offering include the introduction of KAYAK on multiple mobile platforms, a trip management tool and KAYAK Explorer, a map-based search feature. We also have several functional initiatives underway, such as making the booking process easier for travelers and better integrating social media and collaboration tools into our websites and mobile applications.

 

Increase Consumer Awareness of Our Brands

 

We believe there is significant opportunity to increase the number of people who use our websites and mobile applications. According to studies conducted by a market research company on our behalf, as of October, 2009 only 9% of online travelers in the U.S. included KAYAK in an unprompted list of online travel sites, known as “unaided awareness.” Since that time, we commenced a broad reach marketing program, which resulted in our unaided awareness increasing to 20% as of September 2010. By comparison, Expedia, Priceline, Travelocity and Orbitz have an average unaided awareness of 52%, according to this survey. We will continue to invest in broad reach marketing to increase our unaided awareness.

 

Grow Our Business Internationally

 

We operate websites in 14 countries outside of the U.S., including Germany, the United Kingdom, France, Spain, Italy and India. We believe that the international opportunity for our services is sizable, and we intend to invest in both head count and marketing in 2011 and 2012. As part of this strategy, we acquired swoodoo, a leading German travel search company, in early 2010. Furthermore, we are currently in the process of establishing a team headquartered in Zurich, Switzerland to coordinate our European efforts.

 

Expand Our Position in Hotels

 

We believe that the hotel marketplace is well suited for our services, and we plan to increase the number of hotel queries we process. The hotel category is highly fragmented and advertisers spend heavily to promote and differentiate their offerings. To capture this opportunity, we are improving our hotel query functionality, increasing our hotel-related marketing and search engine spending, and improving cross-promotion of hotels in flight query results. The hotel share of our total query volume has been increasing steadily, growing from 9.9% in 2008, to 10.7% in 2009 and 11.2% for the first nine months of 2010.

 

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Extend our Leadership Position in Mobile Applications

 

Mobile devices represent an important growth area in both audience and query volume. Smartphone adoption and usage are increasing quickly, and new touch screen devices like the Apple iPad provide opportunities for innovation in features and functionality. We have seen rapid adoption of our KAYAK mobile applications – with nearly four million downloads across several mobile platforms since the release of our first mobile application in March 2009. We believe that our leadership position in travel-related mobile applications, which we plan to extend through continued product development, will enhance the loyalty to our brand, products and services. We plan to capture a portion of the mobile travel distribution and advertising markets with our mobile applications.

 

Our Brands – KAYAK, SideStep and swoodoo

 

We operate our websites and mobile applications under three brands: KAYAK, SideStep and swoodoo. Each of these brands provides the same core set of free services including flight, hotel and other travel search, flight status updates, pricing alerts and itinerary management.

 

We use our KAYAK brand across multiple platforms including: www.kayak.com; local websites in 14 countries outside of the U.S.; a mobile website, m.kayak.com; and the KAYAK mobile smartphone applications currently available on the iPhone, iPad, Android, BlackBerry, Symbian and other platforms. KAYAK branded websites and mobile applications account for most of our query volume, and we will focus our future growth efforts on building the KAYAK brand in the U.S. and in key international markets.

 

The SideStep brand, which we acquired in December 2007, is used for our www.sidestep.com website. The swoodoo brand, which we acquired in May 2010, is used for our www.swoodoo.com website and the related mobile travel application, which is a leading travel search platform in Germany.

 

Our Distribution and Advertising Platform

 

Our websites offer travel suppliers and OTAs an efficient and flexible platform to distribute their travel products through our query results and to advertise throughout our website. We are developing a distribution and advertising platform for our mobile applications.

 

Distribution Revenues

 

We generate distribution revenues by sending qualified leads to travel suppliers and OTAs. After a user has entered a query on our website, reviewed the results, and decided what travel product they are interested in buying, we send the user directly into the travel supplier’s or OTA’s purchase process to complete the transaction. Travel suppliers and OTAs have the flexibility to pay us either when these qualified leads click on a query result or when they purchase a travel product on the travel supplier or OTA website. For the nine months ended September 30, 2010, distribution revenues accounted for 45% of our total revenues.

 

Advertising Revenues

 

We have a proprietary advertising platform called the KAYAK Network, or KN. KN allows advertisers to target the placement and message of their advertisements to the search parameters entered by our users, such as the traveler’s origin, destination and desired travel dates. This technology allows advertisers to target their advertisements better, create more effective messages and to transfer users to their websites more efficiently. Our platform allows advertisers to limit placements to instances when the advertiser has an offer that is relevant to a user’s query. For example, an airline can ensure it only advertises when a user searches for a route offered by such airline, and a hotelier can ensure it only advertises to users who have searched for dates when the hotelier has low occupancy. We also enable advertisers to use a traveler’s search parameters to dynamically create targeted messages, and after the traveler clicks on an advertisement, we can pass the same search information through to the advertiser, thus increasing conversion on their website.

 

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Our platform gives advertisers flexibility in terms of placement types and payment structures. We offer a variety of advertising inventory including text-based sponsored links, graphical display advertisements, mobile advertisements and email-based placements. We also offer a variety of payment terms including cost per click, cost per impression, cost per acquisition or fixed fees. For the nine months ended September 30, 2010, advertising revenues accounted for 55% of our total revenues.

 

Technology and Infrastructure

 

KAYAK is a technology-driven company. Our technology platform powers our websites and mobile applications by rapidly searching through the complex and fragmented range of travel industry data and presenting comprehensive and relevant travel query results to the user in a clear and intuitive manner.

 

Search Capabilities

 

Our software and systems have been designed from inception to handle significant growth in users and queries, without requiring significant re-engineering or major capital expenditures. In the first nine months of 2010, we received and processed more than 469 million user queries for travel information.

 

When a travel query is entered on one of our websites or mobile applications, our technology platform analyzes the travel parameters, determines which websites and other travel databases have relevant travel information and then queries those multiple sources in parallel. Many of those sources operate with differing protocols, and therefore return results in slightly different ways and in differing time frames. Our platform gathers, prioritizes and standardizes this travel data. Our proprietary machine learning analysis algorithms then detect and eliminate inaccurate prices or results in this data, and our ranking algorithms determine which results are likely to be the most relevant and useful to the user. Our technology platform completes these processes and returns a comprehensive and relevant set of results within moments of receiving the travel query from the user.

 

Website Design and Hosting

 

Reliability, speed and integrity are important to us. We have designed our websites and mobile applications using a combination of our own proprietary software and a variety of open source or other public domain technologies. Where appropriate, we have chosen to use public domain technologies to develop and maintain our websites and mobile applications because we believe they are widely used and well proven by the engineering community and end-users, and, therefore, offer us a reliable and efficient development environment and infrastructure. Such technologies also enable us to provide our users with a stable web or mobile experience and are often free. Our limited and selective use of commercially available software means that as we continue to grow the number of users that visit our websites and download our mobile applications, we do not incur significant additional software costs or software licensing fees.

 

Our websites are hosted on hardware and software located at third-party facilities in Medford and Somerville, Massachusetts and, with respect to our swoodoo operations, in Freiburg, Germany. We also use content delivery networks and third-party domain name system, or DNS services to optimize routing and increase the speed of our website pages. We are committed to ensuring that our websites are highly available. Our co-location relationships provide us secured facilities with power redundancy and expandable and redundant bandwidth, and we believe these facilities are well suited to fit our current and planned business needs.

 

Mobile Applications and Platforms

 

We offer mobile applications for the iPhone, iPad, Android, BlackBerry, Symbian and other platforms. These applications combine the speed and comprehensiveness found in our website experience with the convenience and portability offered by today’s smartphones. To enhance the mobile experience, we have also implemented mobile-specific functionality in these applications, such as currency conversion, visual flight status, airport guides, offline travel itineraries and location-based features.

 

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As some smartphone users prefer to use the web browser on their phones rather than download a separate application, we also offer a mobile-optimized website. These users are automatically redirected to m.kayak.com, where we provide an “application-like” experience, including a streamlined interface, touch screen functionality and global positioning system assisted input.

 

Focus on Innovation

 

We strive to continually improve the user-experience on our websites and mobile applications. For example, we routinely work to improve our software and algorithms to further reduce the time required to return query results. We review the feature sets and design of our websites and mobile applications on a regular basis to identify areas for improvement. To aid in our review, we conduct regular formal usability testing, focus groups and A/B testing of new features. We release new code to our websites on a nearly weekly basis. Some examples of our past innovations include an AJAX user interface to update page elements without reloading the entire page and “time sliders” and other tools to filter query results based on relevant criteria, such as specific departure and arrival times for flights.

 

Avoid Unnecessary Complexity

 

As software organizations grow, a common danger is that the software code grows in complexity and can become difficult to maintain. We have been cognizant of this industry tendency since we began operations, and accordingly have designed our software architecture to establish basic rules of separation, dependency and simplicity. For the same reasons, we are purposeful in our use of industry standard hardware and our maintenance of a low technology footprint in our data centers. This pragmatic, “Keep It Simple” culture continues to enable us to rapidly and reliably adapt our system to new products and capabilities.

 

Intellectual Property

 

Our intellectual property, including patents, trademarks, copyrights and trade secrets are an important component of our business. We also rely on confidentiality procedures and contractual provisions to protect our proprietary technology and our brands. In addition, we enter into confidentiality and invention assignment agreements with our employees and consultants and confidentiality agreements with other third parties.

 

Our registered trademarks include: KAYAK, KAYAK.com, KAYAK Network, Search One and Done, SideStep and swoodoo. All of these trademarks, other than swoodoo, are registered in the U.S. and many of them are also registered in other jurisdictions.

 

We have seven issued U.S. patents, and nine U.S. patent applications for various aspects of our technology. Our patents expire at various dates between March 2021 and October 2026.

 

Marketing

 

We believe that continued investment in marketing is important to attracting new users to our websites and mobile applications. We balance our marketing investments between investments designed to grow brand awareness and investments designed to generate immediate query volume from paid search advertising and other online marketing channels. To grow brand awareness, we advertise in broad reach media, including television, outdoor and online display media. Through the first nine months of 2010, we spent $32.5 million on online marketing and $28.9 million on brand marketing. We measure the return on investment of our brand marketing through online brand tracking studies and overall query growth. We plan to continue both online advertising and broad reach advertising for the foreseeable future. We view the costs of our offline brand marketing campaign as relatively fixed, and we believe that as our revenues grow these costs will decrease as a percentage of our total revenues.

 

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Strategic Relationships

 

In an effort to continue to grow our business and offer exceptional services to our users, we enter into strategic relationships with travel suppliers, OTAs, general search engines and travel technology companies. Our strategic relationships include the following:

 

Orbitz Worldwide, Inc.

 

We have maintained a strategic relationship with Orbitz Worldwide, Inc. or OWW, since 2004. Under the terms of our current long-term agreement, which we entered into in April 2009 and have subsequently amended, OWW provides us with full access to their travel information and pays us for any transactions we send to one of their websites. In return, we provide exclusivity to OWW relating to the display of certain core query results. This agreement expires December 31, 2013.

 

Google Inc.

 

We have maintained a strategic relationship with Google since 2004. Under the terms of our current long-term agreement, which we entered into in December, 2004 and have subsequently amended, Google provides us with sponsored link advertisements that, in addition to our own advertisements, are placed throughout our website at locations we determine. Google and KAYAK share the revenues that is generated from these advertisements. This agreement expires December 31, 2010.

 

ITA Software, Inc.

 

In March 2005 we entered into an agreement to license faring engine software from ITA. This faring engine software provides airfare content that is used in a majority of our domestic flight query results and to supplement our international flight query results. This agreement expires on December 31, 2013.

 

Other Relationships

 

In addition, our 2010 commercial relationships have included agreements with over 300 travel suppliers and OTAs. These relationships are established and managed by our Business Development, Advertising Sales and Account Management teams. Our Business Development team negotiates agreements with travel suppliers and OTAs for access to their travel content and for payment from distribution-related referrals. This team is focused on contract negotiation and relationship management. Our Advertising Sales team calls on travel suppliers, OTAs and their advertising agencies and negotiates advertising insertion orders for placements throughout our websites and mobile applications. Our Account Management team works with travel suppliers and OTAs to implement advertising campaigns and optimize spend.

 

Other significant relationships (from a revenue perspective) include:

 

OTAs: Expedia (including Hotwire, Hotels.com and CarRentals.com), Priceline.com (including Booking.com), Travelocity, Travel Holdings (including Easy Click Travel and Tourico Holidays), Airtrade International (including Vayama.com) and Airfare.com;

 

Airlines: Delta Air Lines, United Air Lines, JetBlue Airways, Continental Airlines, AirTran Airways, British Airways, American Airlines, Virgin America, Alaska Airlines, Air Canada, Lufthansa Airlines and Virgin Atlantic;

 

Hotels: InterContinental Hotels Group, Starwood Hotels, Hilton, Choice Hotels, Marriott, Wyndham, Best Western, Harrah’s Entertainment, La Quinta Inn & Suites and Hyatt Hotels and Resorts.

 

Rental Cars: Dollar Thrifty Automotive Group, Enterprise Rent-A-Car, Alamo Rent A Car, National Car Rental and Hertz Rent-a-Car.

 

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Competition

 

We operate in the highly competitive online travel category. We compete both to attract users to our websites and mobile applications and to attract travel suppliers and OTAs to participate in our query results and purchase advertising placements on our websites.

 

Competition for Users

 

In our efforts to attract and retain users, we compete with travel suppliers, OTAs, search engines and other travel information and research websites. Our major competitors include general search engines such as Google and Bing, OTAs such as Expedia and Orbitz and other travel information sites such as TripAdvisor and Travelzoo. In addition, airlines, hotels and other travel suppliers are increasingly focused on attracting users directly to their own websites.

 

Competition for Advertisers

 

While we compete with travel suppliers and OTAs to bring users directly to our websites, such parties also advertise on our websites and mobile applications. Since we do not book travel, and instead offer tools and services which allow travelers to make better informed travel decisions, we do not compete with travel suppliers and OTAs for transactions. We believe that travel suppliers will spend their advertising dollars on the websites and offline media that results in the highest return on investment. This means that we directly compete with search engines, OTAs and traditional offline advertising sources such as TV and print media for travel supplier advertising dollars. We also compete with search engines and offline media sources for advertising from OTAs that look to market their services to travelers. We believe that travel suppliers and OTAs will direct their advertising dollars to the websites, mobile applications and offline media sources that offer the highest return on investment.

 

Employees

 

As of October 31, 2010, we had 140 employees, consisting of 129 in the U.S., eight in Germany and three in England. Of those employees, 87 are on our engineering and development team. As of October 31, 2010, we also had an arrangement with an outsourced engineering team in Lithuania that provides us with a team of approximately 14 contractors for engineering and development functions, and a team of 26 contractors in Pakistan who provide engineering, data analysis and data operator functions.

 

We consider our relationship with our employees to be good. None of our employees is covered by a collective bargaining agreement.

 

Government Regulation

 

Laws and regulations applying to businesses generally and to businesses operating on the Internet affect us. As the growth in Internet commerce continues, the number of laws and regulations specific to operating on the Internet is increasing and includes areas such as privacy, content, advertising, and information security. Moreover, the applicability to the Internet of existing laws governing issues such as intellectual property ownership and infringement, obscenity, libel and personal privacy is uncertain and evolving.

 

Air Transportation Advertising

 

Our travel suppliers and advertisers are subject to laws and regulations relating to the sale of travel, including regulations and standards promulgated by the Department of Transportation, or DOT, related to the advertising and sale of air transportation. We do not sell or book air transportation, and, therefore, we are not positioned similarly to the entities (such as air carriers and ticket agents) that are usually understood to fall within

 

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the scope of the DOT’s regulations and standards. Nevertheless, we intend to ensure that any content created by KAYAK is consistent with the DOT’s regulations and standards, and we seek representations of compliance from our travel suppliers and advertisers for content provided to or promoted by KAYAK.

 

The DOT has recently issued a Notice for Proposed Rulemaking that would revise certain regulations and standards related to the advertising and sale of air transportation. We do not expect that the revisions, if adopted, would substantially impact our business model. However, comments filed by an industry trade association have suggested that DOT in the same proceeding should clarify whether entities similarly positioned to us, known as “metasearch websites,” fall within the scope of the DOT’s regulations and standards. Any action by DOT on this request potentially could impact our business model.

 

Legal Proceedings

 

In April 2009, Parallel Networks, LLC filed a complaint against us for patent infringement in the U.S. District Court for the Eastern District of Texas. The complaint alleged, among other things, that our website technology infringes a patent owned by Parallel Networks purporting to cover a “Method And Apparatus For Client-Server Communication Using a Limited Capability Client Over A Low-Speed Communications Link” (U.S. Patent No. 6,446,111 B1) and sought injunctive relief, monetary damages, costs and attorneys fees. The complaint was dismissed without prejudice in February 2010, but the plaintiff filed a new complaint against us on March 29, 2010 containing similar allegations. On October 27, 2010, the court entered a docket control order that sets trial on February 13, 2011. We denied the allegations in our answer filed June 8, 2010 and requested a declaratory judgment of non-infringement, invalidity and unenforceability. We intend to vigorously defend ourselves in this matter.

 

In August 2010, OWW initiated arbitration with us in the state of New York. OWW contends that we have violated the parties’ 2009 Promotion Agreement by failing to abide by certain exclusivity provisions relating to the display of certain core query results on our websites. It also contends that we owe it in excess of $2.5 million as a result of overpayments that OWW allegedly made to us over the past few years when OWW calculated and reported its own Net Revenue obligations under the agreement. The arbitration was initiated after we provided a “notice of breach” of the agreement to OWW for failing to accurately report and account for Net Revenues under the agreement. To date, OWW has not provided documentation to support the overpayment amount asserted. We have denied the allegations, have asserted a number of affirmative defenses in response to both claims, and continue to stand on our position that OWW has materially breached the agreement. The parties are currently engaged in the early stages of discovery, and expect to continue this phase for the next two months. A hearing date has not yet been definitively set, but the parties expect that the issues will be decided by a three-arbitrator panel before the end of January, 2011.

 

In addition, from time to time, we may become involved in legal proceedings arising in the ordinary course of our business. Such proceedings, even if not meritorious, could result in the expenditure of significant financial and managerial resources.

 

Facilities

 

We lease approximately 6,400 square feet in Norwalk, Connecticut for our corporate headquarters, under a lease that expires in August 31, 2013. We maintain an office of approximately 14,397 square feet in Concord, Massachusetts under a lease that expires February 29, 2016, which office is used primarily by our technology team. We maintain an office of approximately 5,116 square feet in Sunnyvale, California under a lease that expires January 31, 2015, which office is used primarily by our sales team and our west coast engineering team. In addition, we lease office space for our foreign subsidiaries in London, England and Munich, Germany.

 

We believe our space is adequate for our current needs and that suitable additional space will be available to accommodate the foreseeable expansion of our operations.

 

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MANAGEMENT

 

Directors and Executive Officers

 

Below is a list of our executive officers and directors and their respective ages and positions as of October 31, 2010 and a brief account of their business experience.

 

Name

   Age   

Position

Daniel Stephen Hafner

   42   

Chief Executive Officer, Cofounder and Director

Paul M. English

   47   

Chief Technology Officer, Cofounder and Director

Melissa H. Reiter

   41   

Vice President of Finance

Robert M. Birge

   40   

Chief Marketing Officer

Karen Ruzic Klein

   40   

General Counsel and Corporate Secretary

Keith D. Melnick

   41   

Chief Commercial Officer

Paul D. Schwenk

   44   

Senior Vice President of Engineering

William T. O’Donnell, Jr.

   43   

Chief Architect

Dr. Giorgos Zacharia

   36   

Chief Scientist

Dr. Christian W. Saller

   39   

Managing Director for Europe

Terrell B. Jones (1)

   62   

Director

Joel E. Cutler

   52   

Director

Michael Moritz

   56   

Director

Hendrik W. Nelis

   46   

Director

Gregory E. Slyngstad

   54   

Director

 

  (1)   Chairman of our board of directors.

 

Executive Officers

 

Daniel Stephen Hafner, 42, is our cofounder and has been our Chief Executive Officer and a member of our board of directors since January 2004. Prior to founding our company, Mr. Hafner helped establish Orbitz, Inc., an online travel company, and served as Orbitz, Inc.’s Executive Vice President for Consumer Travel Services from May 2000 until December 2003. From June 1997 until April 2000, Mr. Hafner worked as a consultant with the Boston Consulting Group, a management consulting firm, and advised clients in the e-commerce, health care and industrial goods sectors. Mr. Hafner received a B.A. in economics from Dartmouth College and an M.B.A. from the Kellogg School at Northwestern University. The specific experience, qualifications, attributes and skills that Mr. Hafner brings to our board of directors are significant historical knowledge of KAYAK and relationships in marketing, business development and advertising.

 

Paul M. English, 47, is our cofounder and has been our Chief Technology Officer and a member of our board of directors since January 2004. Mr. English was previously Vice President of Technology for Intuit Inc. from March 1999 until March 2002. In 1997, he cofounded Boston Light Software Corp., which was acquired by Intuit Inc. in August 1999. He also helped establish Intermute Inc., a provider of anti-spam and anti-spyware solutions in May 2000. Mr. English also served as Senior Vice President of Product Management and Marketing and Senior Vice President Engineering at Interleaf Inc., a developer and marketer of software products and services, from February 1989 until December 1995. Mr. English has served on the board of directors of Partners-In-Health since October 2010 and Village Health Works since January 2010, two non-profit corporations aimed at providing health care to the poor. He received his B.A. and M.S. in computer science from the University of Massachusetts in Boston. As the cofounder responsible for much of the technology involved in

 

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our business, the specific experience, qualifications, attributes and skills that Mr. English brings to our board of directors are significant technical knowledge and insight on product strategy and a deep commitment to customer service.

 

Melissa H. Reiter, 41, has served as our Vice President of Finance since October 2009. From October 2006 until October 2009, Ms. Reiter held various positions, most recently as the Vice President of Finance, for Potbelly Sandwich Works, LLC, a restaurant chain. From May 2002 until January 2006, she held various positions, most recently as Controller, at Orbitz, Inc. and prior to that, from August 1991 until May 2002, she held various positions, most recently as senior manager, at Arthur Andersen LLP. Ms. Reiter received a B.S. in business administration from Miami University, Ohio.

 

Robert M. Birge, 40, has been our Chief Marketing Officer since May 2009. Mr. Birge has more than 15 years of experience in marketing, most recently as the Chief Marketing Officer for IMG Worldwide, Inc., a sports, entertainment and media company, from August 2006 until May 2009. From April 2001 until July 2006, he held various management positions, including Managing Director, at TBWA/Chiat/Day, an advertising agency. From 1998 to 2001, Mr. Birge worked as a consultant with the Boston Consulting Group, where he assisted in the start-up phase of Orbitz, Inc. He received a B.A. in history and government from Dartmouth College and an M.B.A. from the Kellogg School at Northwestern University.

 

Karen Ruzic Klein, 40, has served as our General Counsel since November 2007 and our Corporate Secretary since February 2008. Ms. Klein also manages all human resource functions for KAYAK. Prior to joining us, Ms. Klein served as Group Vice President, Legal, with Orbitz Worldwide, Inc., an online travel company, from November 2004 until October 2007. From July 2001 until November 2004, she served as Senior Counsel to Orbitz, Inc. Ms. Klein received a B.A. in political science and international relations from the University of Wisconsin and a J.D. from Chicago-Kent College of Law.

 

Keith D. Melnick, 41, has served as our Chief Commercial Officer since August 2010, prior to which he was the Executive Vice President of Corporate Development from June 2006 until August 2010 and Vice President of Business Development from February 2004 until June 2006. Prior to joining us, Mr. Melnick was a management consultant with the Boston Consulting Group since May 1999, where he concentrated primarily on travel, e-commerce, financial services and industrial goods and helped found Orbitz, Inc. From 1996 until 1999, he served in Revenue Management and Finance with American Airlines, Inc. Mr. Melnick received a B.S. in mechanical engineering from the University of Illinois and an M.B.A. in finance with highest honors from the University of Southern California.

 

Paul D. Schwenk, 44, has been our Senior Vice President of Engineering since February 2004 and is responsible for our product development. From 1999 until 2004, Mr. Schwenk was a Senior Group Manager at Intuit Inc., a maker of financial and tax preparation software. From 1998 until 1999, he worked as a Senior Software Engineer at Boston Light Software Corp., a developer of web products and software. In 1997, Mr. Schwenk cofounded, and was the President of, Digital Direct Network, a multi-media networking company. Prior to that, he worked as a software engineer for each of NetCentric Corporation from 1995 until 1997, Avid Technology Inc. from 1994 until 1995 and Interleaf Inc. from 1990 until 1994. Mr. Schwenk received a B.S. in computer science from Rochester Institute of Technology.

 

William T. O’Donnell, Jr., 43, has been our Chief Architect since February 2004 and is responsible for our mobile products and strategy. From 2003 to 2004, he served as Chief Architect at Inuit, Inc. From 1999 to 2003 he served as staff software engineer at Inuit, Inc. From 1998 to 1999 he served as Chief Architect at Boston Light Software. From 1997 to 1998 he served as Chief Technology Officer at Digital Direct Network. From 1995 to 1997, he served as software engineer at Interleaf, Inc., and from 1989 to 1995 he served as software engineer at a variety of technology companies. Mr. O’Donnell received a B.S. in computer engineering from Carnegie Mellon University.

 

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Dr. Giorgos Zacharia, 36, has been our Chief Scientist since February 2009. In February 2007, he founded Emporics Capital Management, a hedge fund management firm, of which he is a general partner. In January 1999, Mr. Zacharia founded Open Ratings Inc., a provider of supply risk management services which was acquired by Dun & Bradstreet Corp. in 2006, and served as its Chief Technology Officer and Chief Scientist until July 2008. Dr. Zacharia has won five medals in International Mathematical and Physics Olympiads and received an M.S. and a Ph.D. in computer science from the Massachusetts Institute of Technology, where he studied as a Fulbright scholar and a Telecom Italia fellow. Dr. Zacharia holds three algorithm patents.

 

Dr. Christian W. Saller, 39, has been our Managing Director for Europe since October 2010 and was our Managing Director for Germany from May 2010. Since February 2008, he has also served as the Chief Executive Officer of swoodoo AG, a German travel search engine that we acquired in May 2010. Dr. Saller previously was the Chief Financial Officer of GIGA Television GmbH, a gaming television network in Germany, from April 2006 until January 2008. From September 2005 until March 2006, Dr. Saller served as the Chief Operating Officer of Betty TV AG, an interactive TV infrastructure company. He received a Ph.D. in mathematics from Munich Technical University and an M.B.A. from the London Business School.

 

Directors

 

The following information pertains to our directors, their ages, principal occupations and other directorships for at least the last five years and information regarding their specific experience, qualifications, attributes or skills. In selecting directors, we consider factors that are in our best interests and those of our stockholders, including diversity of backgrounds, experience and competencies that our board of directors desires to have represented. These competencies include: independence; adherence to ethical standards; the ability to exercise business judgment; substantial business or professional experience and the ability to offer our management meaningful advice and guidance based on that experience; ability to devote sufficient time and effort to the duties of a director; and any other criteria established by our board of directors together with any core competencies or technical expertise necessary for our committees. We believe that each director possesses these qualities and has demonstrated business acumen and an ability to exercise sound judgment, as well as a commitment of service to us and to our board of directors.

 

Joel E. Cutler, 52, has served as a member of our board of directors since March 2004 and also serves on our compensation committee and audit committee and serves as our audit and compensation committee chairman. Mr. Cutler is a managing director of General Catalyst Partners, a venture capital firm that invests in technology companies, which he cofounded in 2000. Prior to cofounding General Catalyst Partners, he cofounded and operated numerous businesses in the travel, information services, specialty retail, consumer direct marketing and payment processing industries. These businesses include: National Leisure Group, a leisure travel technology and distribution company; Retail Growth ATM Systems, a national ATM and interactive network provider; and Starboard Cruise Services, an operator of duty-free retail stores, for whom he served as Chairman of the board of directors and Chief Executive Officer from 1998 until 2002. Mr. Cutler has served on the board of directors and the audit and compensation committees of FanSnap, Inc., an online ticket comparison shopping site, since October 2007, ITA Software, Inc., a provider of airfare pricing and shopping, since January 2006, and Roost, Inc., a real estate search engine operator, since March 2005, all of which are privately held companies. He has also served on the board of directors of TravelPost, Inc., a privately held online hotel reviews and ratings source operator, since March 2010. He previously served on the board of directors of OLX Inc., an operator of a website for classified ads, from September 2006 until August 2010, and Reveal Imaging Technologies, Inc., a developer of threat detection software and services, from July 2003 until August 2010, all of which are privately held companies. He served on the compensation committee of OLX Inc. and Reveal Imaging Technologies, Inc. Additionally, he is a member of the board of directors of Beth Israel Deaconess Medical Center, Children’s Hospital Boston and The Crohn’s and Colitis Foundation of America. Mr. Cutler received a B.A. in government and economics from Colby College and a J.D. from Boston College Law School. The specific experience, qualifications, attributes and skills that Mr. Cutler brings to our board of directors are strong financial acumen and a unique perspectives from providing guidance and counsel to a wide variety of companies in the online technology sector.

 

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Terrell B. Jones, 62, has been the Chairman of our board of directors since March 2004 and also serves on our audit committee. Mr. Jones has been the President of Essential Ideas, a travel and e-commerce consulting firm, since he founded it in May 2002. Prior to founding Essential Ideas, Mr. Jones served in various positions with The SABRE Group, a distributor of electronic travel-related products and services, from 1986 until 2002, including most recently as Chief Executive Officer of Travelocity.com Inc., an online travel services provider and a subsidiary of The SABRE Group, from 1996 until 2002 and Chief Information Officer of The SABRE Group from 1996 until 1998. He has served on the board of directors and audit committee of Earthlink, Inc., a publicly-traded Internet service provider, since May 2003. Additionally, he is member of the board of directors of Rearden Commerce Inc., a privately held provider of web-based services ranging from travel and entertainment to shipping and event planning, since June 2006 and Smart Destinations, a privately held provider of pre-paid access to sightseeing destinations, since July 2009. Mr. Jones previously served on the board of directors and audit committee of Overture Services, Inc. from January 2002 until June 2003, La Quinta Corp. from May 2004 until June 2006 and on the board of directors of Travelocity.com Inc. from March 2000 until May 2002. He received a B.A. in history from Denison University. The specific experience, qualifications attributes and skills that Mr. Jones brings to our board of directors are approximately 29 years of experience in the travel industry, a knowledge of the interaction between e-commerce and travel sectors and public company audit and board experience.

 

Michael Moritz, 56, has served as a member of our board of directors since December 2007. Mr. Moritz has been a member of Sequoia Capital, a venture capital fund, since 1986. Prior to joining Sequoia Capital in 1986, he worked in a variety of positions at Time Warner and was a Founder of Technologic Partners, a technology newsletter and conference company. Mr. Moritz has been a member of the board of directors of Green Dot Corporation, a publicly-traded financial services company, since February 2003. He has previously served on the boards of directors of A123 Systems, Inc., Flextronics Ltd., Google Inc., PayPal, Inc., Red Envelope, Inc., Saba Software, Inc., Yahoo! Inc. and Zappos.com, Inc. He received an M.B.A. from The Wharton School, University of Pennsylvania and an M.A. from the University of Oxford. The specific experience, qualifications attributes and skills that Mr. Moritz brings to our board of directors are his 25 years of experience in the venture capital industry and his service on the boards of directors of a range of private and publicly-traded companies.

 

Hendrik W. Nelis, 46, is a member of our compensation committee and has served on our board of directors since May 2006. Mr. Nelis is a partner at Accel Partners in London, a venture capital fund which he joined in July 2004. Prior to joining Accel Partners, Mr. Nelis was an investor at Perry Capital from 2002 until 2004, a large hedge fund, where he invested in public communications, media and technology companies. From 1999 until 2002, he was an investment banker at Goldman Sachs International, where he advised businesses on corporate finance and mergers and acquisition transactions. Prior to joining Goldman Sachs, Mr. Nelis founded E-Motion, a venture-backed software company. From 1989 to 1993, Mr. Nelis was at Hewlett-Packard in Palo Alto where he held various engineering positions. He received an M.B.A. with distinction from Harvard Business School and a Ph.D. and M.S. in electrical engineering from Delft University of Technology in The Netherlands. The specific experience, qualifications attributes and skills that Mr. Nelis brings to our board of directors are a unique blend of technical expertise and international experience in investing in and advising media and technology companies.

 

Gregory E. Slyngstad, 54, is a member of our compensation committee and has served as a member of our board of directors since January 2004. Mr. Slyngstad has served as the Chief Executive Officer of TravelPost.com, a hotel information website, since March 2010. From March 2000 until April 2002, Mr. Slyngstad was the Executive Vice President of Expedia.com, an online travel booking site that he helped establish during his 15 years at Microsoft Corporation, a global developer and manufacturer of software products and services. Additionally, Mr. Slyngstad cofounded VacationSpot.com, an online reservation network, and was its Chief Operating Officer from June 1997 until March 2000, when it was acquired by Expedia.com. He has been a member of the board of directors of TravelPost, Inc. since March 2010 and Roost, Inc. since April 2006, both of which are privately held companies. The specific experience, qualifications attributes and skills that Mr. Slyngstad brings to our board of directors are over 15 years of experience in the online travel industry and product vision.

 

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Structure of the Board of Directors

 

Board Composition

 

Our business and affairs are managed under the direction of our board of directors. Upon completion of this offering, our board of directors will consist of              members. Effective upon the completion of this offering, our amended and restated by-laws will provide that our board of directors will be fixed from time to time by resolution adopted by the affirmative vote of a majority of the total directors then in office. Each director’s term is subject to the election and qualification of his successor, or his earlier death, resignation or removal. Between annual meetings or special meetings of stockholders, any board vacancies may be filled by a vote of the majority of the remaining directors in officer.

 

Board Composition Prior to Completion of this Offering

 

The following describes the composition of our board of directors and related provisions of our current certificate of incorporation and various agreements. These arrangements will terminate upon completion of this offering.

 

Our current amended and restated certificate of incorporation has provided, among other things, the holders of Series A convertible preferred stock the right to designate two members to our board of directors and the holders of Series C convertible preferred stock and holders of Series D convertible preferred stock the right to designate one member each to the board of directors. In furtherance of those provisions, under our Stockholders’ Agreement and our Fifth Amended and Restated Stock Restriction and Co-Sale Agreement, two directors are to be designated by holders of more than 70% in the aggregate of Series A and Series A-1 convertible preferred stock, or the Series A designator, one director is to be designated by each of the holders of a majority of Series C convertible preferred Stock, or the Series C designator, and funds affiliated with Sequoia Capital, as holders of Series D convertible preferred stock, or the Series D designator, and one additional director is to be designated jointly by the Series A designator, the Series C designator and the Series D designator. Additionally, the Series A designator has the right to designate two members of the compensation committee pursuant to our Sixth Amended and Restated Investor Rights Agreement. Currently, funds affiliated with General Catalyst Partners are the Series A designator, funds affiliated with Accel Partners are the Series C designator and funds affiliated with Sequoia Capital are the Series D designator. Pursuant to these arrangements, Messrs. Cutler and Jones are the appointees of the Series A designator, Mr. Nelis is the appointee of the Series C designator, Mr. Moritz is the appointee of the Series D designator and Mr. Slyngstad is the joint appointee of the three designators.

 

Corporate Governance and Director Independence

 

Under Rule              of the              Rules, independent directors must comprise a majority of a listed company’s board of directors within one year of listing. In addition, the              Rules require that, subject to specified exceptions, each member of a listed company’s audit, compensation and nominating and governance committees be independent within one year of the date of listing. Audit committee members must also satisfy the independence criteria set forth in Rule 10A-3 under the Exchange Act. Under Rule             , a director will only qualify as an “independent director” if, in the opinion of that company’s board of directors, that person does not have a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. In order to be considered to be independent for purposes of Rule 10A-3, a member of an audit committee of a listed company may not, other than in his or her capacity as a member of the audit committee, the board of directors, or any other board committee: (1) accept, directly or indirectly, any consulting, advisory, or other compensatory fee from the listed company or any of its subsidiaries; or (2) be an affiliated person of the listed company or any of its subsidiaries.

 

Our board of directors has determined that Messrs.             ,             ,             ,             and             each qualify as an independent director under the corporate governance rules of the             . In making this determination, our board of directors affirmatively determined that             ,             ,             ,             and             , do not have a relationship with us that would interfere with the exercise of independent judgment in carrying out

 

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the responsibilities of a director. Our board of directors has also determined that Messrs. Hafner and English are not independent under the corporate governance rules of the             because they are executive officers of KAYAK.

 

Board Committees

 

Our board of directors has established an audit committee and a compensation committee. In addition, our board of directors will establish a nominating and corporate governance committee to be effective upon listing our common stock on             . The composition and responsibilities of each committee are described below. Members will serve on these committees until their resignation or until otherwise determined by our board of directors.

 

Audit Committee

 

Our audit committee currently consists of Messrs. Cutler and Jones, with Mr. Cutler serving as chairman. Upon listing our common stock on             , our audit committee will consist of Messrs.             ,              and             . Mr.                     will serve as the chairperson of our audit committee. Our audit committee will have responsibility for, among other things:

 

   

selecting and hiring our independent registered certified public accounting firm and approving the audit and nonaudit services to be performed by our independent registered certified public accounting firm;

 

   

evaluating the qualifications, performance and independence of our independent registered certified public accounting firm;

 

   

monitoring the integrity of our financial statements and our compliance with legal and regulatory requirements as they relate to financial statements or accounting matters;

 

   

reviewing the adequacy and effectiveness of our internal control policies and procedures;

 

   

discussing the scope and results of the audit with the independent registered certified public accounting firm and reviewing with management and the independent registered certified public accounting firm our interim and year-end operating results; and

 

   

preparing the audit committee report required by the SEC to be included in our annual proxy statement.

 

We expect to have two independent audit committee members upon the listing of our common stock on                     , thereby constituting a majority of independent directors, and we expect to have an entirely independent audit committee within one year from the date of listing. Our board of directors has affirmatively determined that Messrs.             and             meet the definition of “independent directors” for purposes of serving on an audit committee under Rule 10A-3 of the Exchange Act and the              Rules. We believe that each member of our audit committee meets the requirements for financial literacy. In addition, Mr.                     qualifies as our “audit committee financial expert.”

 

Our board of directors will adopt a written charter for our audit committee prior to listing our common stock             , to be in place upon completion of this offering. Upon completion of this offering, the written charter for our audit committee will be available on our website at www.kayak.com, the contents of which are not incorporated herein.

 

Compensation Committee

 

Our compensation committee currently consists of Messrs. Cutler, Nelis, and Slyngstad, with Mr. Cutler serving as chairman. Upon listing our common stock on                     , our compensation committee will consist of Messrs.             ,              and             . Mr.                     will serve as the chairperson of our compensation committee. The compensation committee will be responsible for, among other things:

 

   

reviewing and approving compensation of our executive officers including annual base salary, annual incentive bonuses, specific goals, equity compensation, employment agreements, severance and change-in-control arrangements and any other benefits, compensation or arrangements;

 

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reviewing succession planning for our executive officers;

 

   

reviewing and recommending compensation goals, bonus and stock compensation criteria for our employees;

 

   

determining the compensation of our directors;

 

   

reviewing and discussing annually with management our “Executive Compensation—Compensation Discussion and Analysis” disclosure required by SEC rules;

 

   

preparing the compensation committee report required by the SEC to be included in our annual proxy statement; and

 

   

administering, reviewing and making recommendations with respect to our equity compensation plans.

 

We expect to have three independent compensation committee members upon the listing of our common stock on                     , thereby constituting an entirely independent compensation committee on the date of listing. Our board of directors has affirmatively determined that Messrs.             ,              and              meet the definition of “independent directors” for purposes of serving on a compensation committee under applicable SEC and Rules.

 

Our board of directors will adopt a written charter for our compensation committee prior to listing our common stock on                     , to be in place upon completion of this offering. Upon completion of the offering, the written charter for our compensation committee will be available on our website at www.kayak.com, the contents of which are not incorporated herein.

 

Nominating and Corporate Governance Committee

 

We do not currently have a nominating and corporate governance committee. Our board of directors will establish this committee effective upon listing our common stock on                     , which will consist of Messrs.             ,              and             . Mr.                      will serve as the chairperson of our nominating and corporate governance committee.

 

The nominating and corporate governance committee will be responsible for, among other things:

 

   

assisting our board of directors in identifying prospective director nominees and recommending nominees for each annual meeting of stockholders to our board of directors;

 

   

reviewing developments in corporate governance practices and developing and recommending governance principles applicable to our board of directors;

 

   

overseeing the evaluation of our board of directors and management; and

 

   

recommending members for each committee of our board of directors.

 

We expect to have three independent nominating and corporate governance committee members upon the listing of our common stock on                     , thereby constituting an entirely independent committee on the date of listing. Our board of directors has affirmatively determined that Messrs.             ,              and              meet the definition of “independent directors” for purposes of serving on a corporate governance and nominating committee under applicable SEC and the              Rules.

 

Our board of directors will adopt a written charter for our nominating and corporate governance committee prior to listing our common stock on                     , to be in place upon completion of this offering. Upon completion of the offering, the written charter for our nominating and corporate governance committee will be available on our website at www.kayak.com, the contents of which are not incorporated herein.

 

 

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Compensation Committee Interlocks and Insider Participation

 

During the last fiscal year, Messrs. Cutler, Nelis and Slyngstad served on our compensation committee. Each of Messrs. Cutler, Nelis and Slyngstad all have relationships with us that require disclosure under Item 404 of Regulation S-K under the Exchange Act. See “Certain Relationships and Related Party Transactions” for more information.

 

During the past fiscal year, none of our executive officers served as a member of the board of directors or compensation committee, or other committee serving an equivalent function, of any entity that has one or more executive officers who served as members of our board of directors or our compensation committee. None of the members of our compensation committee is an officer or employee of KAYAK, nor have they ever been an officer or employee of KAYAK.

 

Code of Business Conduct and Ethics

 

Prior to the completion of this offering, we will adopt a code of business conduct and ethics that applies to all of our employees, officers and directors, including those officers responsible for financial reporting. Upon completion of the offering, our code of business conduct and ethics will be available on our website at www.kayak.com, the contents of which are not incorporated herein. Any amendments to the code, or any waivers of its requirements, will be disclosed on our website.

 

Board Leadership and Board’s Role in Risk Oversight

 

Upon completion of this offering, Mr. Jones, a non-employee, independent director, will serve as Chairman of our board of directors. We support separating the position of Chief Executive Officer and Chairman to allow our Chief Executive Officer to focus on our day-to-day business, while allowing the Chairman to lead our board of directors in its fundamental role of providing advice to, and independent oversight of, management. Our board of directors recognizes the time, effort and energy that the Chief Executive Officer is required to devote to his position in the current business environment, as well as the commitment required to serve as our Chairman, particularly as our board of directors’ oversight responsibilities continue to grow. Our board of directors also believes that this structure ensures a greater role for the independent directors in the oversight of our company and active participation of the independent directors in setting agendas and establishing priorities and procedures for the work of our board of directors.

 

While our amended and restated by-laws and our corporate governance guidelines to be in effect upon completion of this offering will not require that our Chairman and Chief Executive Officer positions be separate, our board of directors believes that having separate positions and having an independent outside director serve as Chairman is the appropriate leadership structure for us at this time and demonstrates our commitment to good corporate governance.

 

Risk is inherent with every business and we face a number of risks as outlined in the “Risk Factors” section of this prospectus. Management is responsible for the day-to-day management of risks we face, while our board of directors, as a whole and through its audit committee, is responsible for overseeing our management and operations, including overseeing its risk assessment and risk management functions. Our board of directors expects to delegate responsibility for reviewing our policies with respect to risk assessment and risk management to our audit committee through its charter. Our board of directors believes that this oversight responsibility can be most efficiently performed by our audit committee as part of its overall responsibility for providing independent, objective oversight with respect to our accounting and financial reporting functions, internal and external audit functions and systems of internal controls over financial reporting and legal, ethical and regulatory compliance. Our audit committee will regularly report to our board of directors with respect to its oversight of these important areas.

 

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Compensation Policies and Practices and Risk Management

 

We consider in establishing and reviewing our compensation philosophy and programs, whether such programs encourage unnecessary or excessive risk taking. Base salaries are fixed in amount and, consequently, we do not see them as encouraging risk taking. Employees are also eligible to receive a portion of their total compensation in the form of annual cash bonus awards. While the annual cash bonus awards focus on achievement of annual goals and could encourage the taking of short-term risks at the expense of long-term results, our annual cash bonus awards represent only a portion of eligible employees’ total compensation and are tied to both corporate performance measures and individual performance. We believe that the annual cash bonus awards appropriately balance risk with the desire to focus eligible employees on specific goals important to our success and do not encourage unnecessary or excessive risk taking.

 

We also provide our named executive officers and other senior managers long-term equity awards to help further align their interests with our interests and those of our stockholders. See “Executive Compensation—Compensation Discussion and Analysis” for additional discussion regard our compensation practice. We believe that these awards do not encourage unnecessary or excessive risk taking, since the awards are generally provided at the beginning of an employee’s tenure or at various intervals to award achievements or provide additional incentive to build long-term value and are generally subject to vesting schedules to help ensure that executives and senior managers have significant value tied to our long-term corporate success and performance.

 

We believe our compensation philosophy and programs encourage employees to strive to achieve both short- and long-term goals that are important to our success and building stockholder value, without promoting unnecessary or excessive risk taking. We review our compensation policies and practices periodically to determine whether such policies and practices are appropriate in light of our risk management objectives. We have concluded that our compensation philosophy and practices are not reasonably likely to have a material adverse effect on us.

 

Director Compensation

 

Historically, we have not provided cash retainers or fees to our directors for their service on the board of directors or its committees, or for attending board or committee meetings. In addition, our directors who are also employees receive no additional compensation or benefits for service on the board of directors or its committees. All members of our board of directors receive reimbursement of reasonable and documented costs and expenses incurred in connection with attending any meetings of our board of directors or any of our committees.

 

During fiscal year 2009, we granted to each of Messrs. Jones and Slyngstad stock options under our Third Amended and Restated 2005 Equity Incentive Plan to purchase up to 120,000 shares of common stock at an exercise price of $7.50 per share. Each of our nonemployee directors also has an indemnification agreement with us, which we will file as an exhibit to our registration statement of which this prospectus is a part. We also expect our directors to execute a new form of indemnification agreement prior to completion of this offering. See “Certain Relationships and Related Party Transactions—Indemnification of Officers and Directors” for more information.

 

To attract and retain the most highly qualified individuals to serve on our board of directors, upon completion of this offering, those directors who are nonemployees will be eligible to receive compensation from us for their service on our board of directors. Our executives who are members of our board of directors will not receive compensation for their service on our board of directors. Upon completion of this offering, we expect that the nonemployee directors will be paid:

 

   

a base annual retainer of $             in cash;

 

   

an additional $             in cash to the members of the audit, compensation and nominating and corporate governance committees for each meeting attended;

 

   

an additional annual retainer of $             in cash to the chair of the audit committee;

 

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an additional annual retainer of $             in cash to the chair of the compensation committee and the corporate governance and nominating committee; and

 

   

an additional annual retainer of $             in cash to the chairperson of our board of directors.

 

Upon completion of this offering, we intend to provide certain nonemployee directors with equity compensation for service on our board of directors and committees. The amount of this compensation has not been determined, but we anticipate that it will be consistent with amounts paid by comparable public companies. In addition, we will also continue to reimburse directors for reasonable expenses incurred to attend meetings of our board of directors or committees.

 

Fiscal Year 2009 Director Compensation

 

The following table sets forth information regarding the compensation of our non-employee directors for the most recently completed fiscal year.

 

Name

   Fees Earned or
Paid in Cash
     Option Awards
($)(1)
     All Other
Compensation ($)
     Total
($)
 

Joel E. Cutler

                               

Terrell B. Jones(2)

           $                 $     

Michael Moritz

                               

Hendrik W. Nelis

                               

Gregory E. Slyngstad(3)

           $                 $     

 

  (1)   For stock options granted, the value set forth is the full grant date fair value, in accordance with FASB ASC 718. Valuation assumptions used to determine the fair value of the option awards are described in the notes to the financial statements appearing elsewhere in this prospectus.
  (2)   On May 19, 2009, we awarded Mr. Jones stock options to purchase up to 120,000 shares of our common stock having an exercise price of $7.50 per share and a grant date fair value of $            . Under Mr. Jones’ stock option agreement, these options vest in 48 equal monthly installments.
  (3)   On May 19, 2009, we awarded Mr. Slyngstad stock options to purchase up to 120,000 shares of our common stock having an exercise price of $7.50 per share and a grant date fair value of $            . Under Mr. Slyngstad’s stock option agreement, these options vest in 48 equal monthly installments.

 

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EXECUTIVE COMPENSATION

 

Compensation Discussion and Analysis

 

The purpose of this compensation discussion and analysis section is to provide information about the material elements of compensation that are paid, awarded to, or earned by, our “named executive officers,” who consist of our principal executive officer, principal financial officer and our three other most highly compensated executive officers. For fiscal year 2009, our named executive officers, were:

 

   

Daniel Stephen Hafner, President, Chief Executive Officer and Director;

 

   

Melissa H. Reiter, Vice President of Finance;

 

   

Paul M. English, Chief Technology Officer and Director;

 

   

Karen Ruzic Klein, General Counsel and Secretary; and

 

   

Robert M. Birge, Chief Marketing Officer.

 

Historical Compensation Decisions

 

We are a privately held company with a relatively small number of stockholders, including our principal stockholders, Sequoia Capital, General Catalyst Partners, Accel Partners and Oak Investment Partners. As a result, we have not previously been subject to any stock exchange listing or SEC rules requiring a majority of our board of directors to be independent or relating to the formation and functioning of board committees. Most, if not all, of our prior compensation policies and determinations, including those made for fiscal year 2009, have been the product of discussions between our Chief Executive Officer, our Chief Technology Officer and our existing compensation committee and board of directors.

 

Upon completion of this offering, we expect that our compensation committee will review our existing compensation approach to determine whether such approach is appropriate given that we will be a public company. Accordingly, the compensation paid to our named executive officers for fiscal year 2009 is not necessarily indicative of how we will compensate our named executive officers in the future.

 

Compensation Philosophy and Objectives

 

Our board of directors, in consultation with our compensation committee, reviews and approves the compensation of our named executive officers and oversees and administers our executive compensation approach and initiatives. Our executive compensation approach is based upon a philosophy that is designed to:

 

   

attract and retain talented and experienced executives in our industry;

 

   

reward executives whose knowledge, skills and performance are critical to our success;

 

   

align the interests of our executive officers and stockholders by motivating executive officers to increase stockholder value and rewarding executive officers when stockholder value increases; and

 

   

recognize the contributions each executive officer makes to our success.

 

The board of directors meets outside the presence of all of our named executive officers, except Ms. Klein, our General Counsel and Secretary, to consider appropriate compensation for our Chief Executive Officer and Chief Technology Officer. For all other named executive officers, the board of directors meets outside the presence of all named executive officers except our Chief Executive Officer, Chief Technology Officer and our General Counsel and Secretary, and further meets outside the presence of Ms. Klein when her compensation is being considered.

 

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Historically, compensation has been highly individualized, the result of arm’s-length negotiations and based on a variety of informal factors including, in addition to the factors listed above, our financial condition and available resources, our need for a particular position to be filled and the compensation levels of our other executive officers. In addition, we informally considered the competitive market for corresponding positions within the online travel and general technology industries. This informal consideration was based on the general knowledge possessed by members of our board of directors and our executive officers regarding the compensation given to executive officers of other similarly situated companies and through informal benchmarking. As a result, our compensation committee and board of directors historically have applied their discretion to make compensation decisions and set the compensation for each named executive officer on an individual basis.

 

Upon completion of this offering, we expect that our Chief Executive Officer and Chief Technology Officer will review annually with the compensation committee each named executive officer’s performance and recommend appropriate base salary, cash performance awards and grants of equity incentive awards. Based upon these recommendations, and in consideration of the objectives described above and the principles described below, the compensation committee will approve the annual compensation packages of our named executive officers other than our Chief Executive Officer and Chief Technology Officer. The compensation committee, or the full board of directors upon recommendation of the compensation committee, will also annually analyze the performance of our Chief Executive Officer and Chief Technology Officer and approve their annual compensation packages based on its assessment of their performance.

 

Elements of Compensation

 

Our current executive compensation approach, which was set by our compensation committee and board of directors, consists of the following components:

 

   

base salary;

 

   

annual bonus awards consisting of cash or restricted stock awards, linked to corporate and individual performance;

 

   

periodic grants of stock options and restricted stock awards; and

 

   

other executive benefits and perquisites.

 

Executive compensation includes both fixed compensation (base salary, benefits and executive perquisites) and variable compensation (annual bonus and equity grants). Each component is linked to one or more of the compensation philosophy objectives listed above.

 

Fixed compensation is designed to induce talented executives to join or remain with us, while variable cash incentive awards are tied specifically to the achievement of our annual financial objectives and individual performance. Bonus amounts generally relate to the scope of responsibility for each named executive officer. Our bonus awards are designed to align each executive’s annual goals for his or her respective area of responsibility with the financial goals of the entire business.

 

The other element to variable compensation is equity awards, including stock option awards and restricted stock awards. Our Third Amended and Restated 2005 Equity Incentive Plan was adopted by our board of directors to award equity-based compensation, including stock options and restricted stock to executive officers and other key employees. The grants awarded under our Third Amended and Restated 2005 Equity Incentive Plan had no public market and no certain opportunity for liquidity until the completion of this offering, making them inherently long-term compensation. We expect to discontinue granting new awards under our Third Amended and Restated 2005 Equity Incentive Plan and adopt a 2011 Equity Incentive Plan, which will be in effect upon completion of this offering.

 

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In the future, the compensation committee and the board of directors may engage and seek the input of consultants to evaluate our compensation packages and may formally benchmark executive compensation against a peer group of comparable companies.

 

Base Salary

 

Historically, base salary has been the primary component of our compensation packages as it provides a constant and consistent source of income to our named executive officers. The initial base salary for each of our named executive officers was set in his or her employment agreement when the named executive officer commenced employment with us. Typically, base salaries are reviewed annually by our compensation committee and board of directors with input from our Chief Executive Officer and Chief Technology Officer, for base salaries other than the Chief Executive Officer and Chief Technology Officer, and may be increased depending on business circumstances and individual situations. Base salary also affects bonus awards as bonus awards for most employees, including named executive officers, are typically based on a percentage of base salary. Upon the completion of this offering, in determining base salaries of our named executive officers, the compensation committee and board of directors may also consider recommendations by compensation consultants, formal benchmarking against a particular set of comparable companies or survey data, or a combination of these factors.

 

In fiscal year 2009, our named executive officers received the following in annual base salary: $             for Mr. Hafner; $             for Ms. Reiter; $             for Mr. English; $             for Ms. Klein; and $             for Mr. Birge.

 

In fiscal year 2009, as part of the review process of the board of directors, Ms. Klein received a salary increase from $             to $             to align Ms. Klein’s base salary with that of similarly situated executives. There were no other salary increases for our named executive officers in 2009. There were no salary decreases for our named executive officers in 2009.

 

Bonus Awards

 

Our board of directors, with input from our compensation committee and our Chief Executive Officer and Chief Technology Officer, other than for their own bonuses, determines annual cash bonus awards to our named executive officers. The annual cash bonuses are intended to reward the achievement of corporate objectives linked to our financial results. Historically, we have typically offered named executive officers the choice to take any bonus actually awarded either in cash or in a comparable number of shares of restricted common stock. We believe that our bonus awards help us attract and retain qualified and highly skilled executives and reward and motivate named executive officers who have had a positive impact on corporate results.

 

Historically, on an annual basis, our board of directors typically sets aside a bonus pool for executive officers and key employees with bonuses paid out, if at all, at the discretion of the board of directors, for Mr. Hafner and Mr. English, or by Mr. Hafner and Mr. English, for most other employees. Bonuses are typically based on positive performance and our achievement of certain financial and commercial targets determined by the board of directors prior to the beginning of each fiscal year. For our named executive officers, bonus targets, as a percentage of base salary, are set forth in the employment contract of each named executive officer. Actual bonus awards represent a portion of such target percentages, based on KAYAK’s achievement of corporate targets and the individual’s contribution to such achievement of corporate performance.

 

In determining bonuses for fiscal year 2008 and fiscal year 2009, the board of directors, for Mr. Hafner and Mr. English, and Mr. Hafner and Mr. English, for the other named executive officers, determined that each named executive officer made positive contributions to our financial performance. In fiscal year 2008, the following financial and corporate achievements, among other items, were noted:

 

   

we met or exceeded our customer satisfaction targets for the year;

 

   

we met or exceeded our revenue targets for the year;

 

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we met or exceeded our cash flow targets for the year; and

 

   

we met or exceeded our targeted number of visitors to our websites and queries for the year.

 

As a result of our financial performance, our board of directors awarded the following cash bonus amounts for fiscal year 2008, which were paid in 2009:                     received $            ;                     received $            ; and                    received $            . Of such amounts,                     elected to receive                     share of restricted common stock,              elected to receive              shares of restricted common stock and              elected to receive              shares of restricted common stock.

 

In fiscal year 2009, the following financial and corporate achievements, among other items, were noted:

 

   

we substantially met our target goals for number of visits and queries for the year; and

 

   

we substantially met our commercialization goals for the year including our target revenues and target EBITDA amounts.

 

Since we failed to fully meet our target financial and corporate goals for the year, the bonuses paid for fiscal year 2009 were only         % of the targets set in each named executive officer’s employment agreement, and Mr. Hafner and Mr. English did not receive a bonus award. As a result our financial performance, our board of directors awarded the following cash bonus amounts for fiscal year 2009, which were paid in 2010:              received $            ;              received $            ; and              received $            . Of such amounts,              elected to receive              shares of restricted common stock,              elected to receive              shares of restricted common stock and              elected to receive              shares of restricted common stock.

 

In fiscal year 2010, the board of directors revised the maximum bonus amounts Mr. Hafner and Mr. English could receive as a percentage of their respective salaries, retroactive to January 1, 2009. As a result, Mr. Hafner is entitled to earn a bonus of up to         % of his base salary, and Mr. English is entitled to earn a bonus up to         % of his base salary.

 

Upon completion of this offering, we expect our board of directors or compensation committee to establish a bonus plan comparable to other public companies in our industry. We may use formal bench-marking efforts to establish such a bonus plan.

 

Equity-Based Compensation

 

Our board of directors believes that equity-based compensation is an important component of our executive compensation approach and that providing a significant portion of our named executive officers’ total compensation package in equity-based compensation aligns the incentives of our named executive officers with the interests of our stockholders and with our long-term corporate success. Additionally, our compensation committee and board of directors believe that equity-based compensation awards enable us to attract, motivate, retain and adequately compensate executive talent. To that end, we have awarded equity-based compensation in the form of options to purchase shares of our common stock and shares of restricted stock. Our compensation committee and board of directors believe these forms of equity-based compensation provide our named executive officers with a significant long-term interest in our success by rewarding the creation of stockholder value over time.

 

Stock Options

 

Generally, each named executive officer is provided with a stock option grant when he or she joins KAYAK based upon his or her position with us. Each such initial stock option grant generally vests over the course of four years with 25% of the shares vesting on the first anniversary of the grant date or employment date, as applicable, and the remainder of the shares vesting in 36 equal monthly installments. In addition to stock options granted upon commencement of employment with us, our compensation committee or board of directors may grant

 

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additional stock options from time to time to retain our executives and to recognize the achievement of corporate and individual goals. Stock options awarded as retention grants or in recognition of special achievements generally vest in 48 equal monthly installments. The term of stock options issued under our Third Amended and Restated 2005 Equity Incentive Plan is generally ten years from the date of grant.

 

Stock options are granted with an exercise price equal to or greater than the fair value of our stock on the applicable date of grant. To date, our board of directors has determined fair value for purposes of stock option pricing based on appraisals performed by independent consultants retained for this purpose and through the board of directors’ own good-faith analysis at the time the options were granted after review of all factors deemed relevant by the board of directors, including among others:

 

   

the value of our tangible and intangible assets, the present value of our projected future cash-flows and other elements of our financial performance and position;

 

   

any recently completed arm’s-length transactions in our capital stock;

 

   

the competitive landscape;

 

   

the market value of stock or equity interests in comparable companies;

 

   

the liquidation preferences and other preferential rights of our convertible preferred stock;

 

   

the lack of a control premium in the our common stock; and

 

   

the lack of marketability of our common stock.

 

After the completion of this offering, fair value will be based on the closing price of our common stock on                     the date of grant.

 

In general, stock option grants to our named executive officers have been determined at the discretion of our board of directors. In addition, our board of directors has also considered a named executive officer’s current position with us, the size of his or her total compensation package and the amount of existing vested and unvested stock options, if any, then held by the executive officer. Upon completion of this offering, the compensation committee intends to undertake primary responsibility for this function and to formalize this process with annual grants and may use formal bench-marking efforts to determine grant amounts.

 

Restricted Stock

 

In addition to grants of stock options, we have also awarded shares of restricted stock to our executive officers and key employees in lieu of all or a portion of their annual merit-based cash bonus and stock option awards, and in recognition of special contributions and achievements. We believe that the use of restricted stock awards as a portion of our long-term equity-based compensation program may have the benefit of incentivizing our executive officers and key employees to remain with us and to continue performing at a high level even during periods in which our stock price is down and previously granted stock options may have little or no realizable value.

 

Fiscal Year 2009 Stock Option and Restricted Stock Awards

 

In fiscal year 2009, we approved stock option awards to Ms. Reiter and Mr. Birge in connection with their commencement of employment with KAYAK. In fiscal year 2009, we also approved grants of restricted stock awards to Messrs. Hafner, English and Birge and Ms. Klein. These restricted stock grants represent a portion of the 2009 merit-based bonuses of certain named executive officers who elected to receive restricted stock in lieu of cash, up to the maximum value of the cash bonus amount awarded to such executive by the board of directors. The shares of restricted stock awards representing such grants were issued to the recipients in February 2010.

 

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The stock options and restricted stock awards were granted in accordance with our Third Amended and Restated 2005 Equity Incentive Plan as follows:

 

Name    Grant Date      Number of Securities
Underlying Options

(#)
     Exercise Price of
Option Awards

($/Sh)
 
        
        
        
        
        

 

The number of shares of common stock underlying each stock option grant was determined by our board of directors based upon the outstanding equity grants held both by the individual and by our named executive officers as a group, total compensation, performance, the vesting dates of outstanding grants, tax and accounting costs, potential dilution and other factors. The exercise price of the stock options equals at least 100% of the fair market value on the grant date in accordance with the terms of the Third Amended and Restated 2005 Equity Incentive Plan. The number of shares underlying each restricted stock grant to executives electing to receive restricted stock in lieu of part or all of their 2009 merit bonus was determined based on the fair market value of our common stock on the grant date and the dollar amount of the executive’s cash bonus that the executive elected to receive instead in the form of restricted stock.

 

Other Executive Benefits and Perquisites

 

We provide the following benefits to our named executive officers to attract and retain qualified and highly skilled executives:

 

   

health and dental insurance;

 

   

long-term disability, life insurance and accidental death and dismemberment insurance plans;

 

   

participation in our flexible spending plan;

 

   

participation in the our 401(k) plan;

 

   

paid vacation as provided in each named executive officer’s employment contract; and

 

   

directors’ and officers’ liability insurance.

 

We also provide for the reimbursement of certain business and travel expenses to our named executive officers. In addition, in 2009, we provided $             in expenses to Ms. Reiter in connection with her relocation to the New York City area in connection with the commencement of her employment with us.

 

Severance and Change-in-Control Benefits

 

We have entered into employment agreements with the named executive officers that contain severance benefits, the terms of which are described under the heading “—Employment Agreements and Potential Payments Upon Termination or Change-in-Control.” We believe these severance benefits are essential elements of our executive compensation package by assisting in recruiting and retaining talented executives.

 

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Section 162(m) Compliance

 

Section 162(m) of the U.S. Internal Revenue Code of 1986, as amended, or the Code, limits us to a deduction for federal income tax purposes of no more than $1.0 million of compensation paid to certain executive officers in a taxable year. Compensation above $1.0 million may be deducted if it is “performance-based compensation” within the meaning of section 162(m) of the Code. Our board of directors believes that we should be able to continue to manage our executive compensation for our named executive officers so as to preserve the related federal income tax deductions, although individual exceptions may occur.

 

Summary Compensation table

 

The following table sets forth certain information regarding compensation for fiscal year 2009 awarded to or paid to our named executive officers.

 

Name and Principal Position

   Year      Salary
($)
     Bonus
($)
     Stock
Awards
($)
     Option
Awards
($)
     All Other
Compensation
($)
     Total
($)
 

Daniel Stephen Hafner

     2009                     

Chief Executive Officer & Cofounder

                    

Melissa H. Reiter

     2009                     

Vice President of Finance

                    

Paul M. English

     2009                     

Chief Technology Officer & Cofounder

                    

Karen Ruzic Klein

     2009                     

General Counsel

                    

Robert M. Birge

     2009                     

Chief Marketing Officer

                    
                    

 

2009 Grants of Plan-Based Awards

 

The following table sets forth certain information regarding grants of plan-based awards to our named executive officers for fiscal year 2009.

 

Name

  Grant
Date
  Approval
Date
  Estimated Future
Payouts  Under
Non-Equity Incentive
Plan Awards
  Estimated Future
Payouts  Under
Equity Incentive
Plan Awards
  All
Other
Stock
Awards:
Number
of
Shares
of Stock

(#)
  All Other
Option
Awards:
Number of
Securities
Underlying
Options

(#)
  Exercise
or Base
Price of
Option
Awards

($/Sh)
  Grant
Date
Fair
Value
of
Stock
and
Option
Awards
      Threshold
($)
  Target
($)
  Maximum
($)
  Threshold
(#)
  Target
(#)
  Maximum
(#)
       

Daniel Stephen Hafner

                       

Melissa H. Reiter

                       

Paul M. English

                       

Karen Ruzic Klein

                       

Robert M. Birge

                       

 

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Outstanding Equity Awards at 2009 Fiscal Year-End

 

The following table sets forth certain information regarding outstanding equity awards for each of our named executive officers as of end of fiscal year 2009.

 

    Option Awards   Stock Awards

Name

  Number of
Securities
Underlying
Unexercised
Options

(#)
Exercisable
  Number of
Securities
Underlying
Unexercised
Options

(#)
Unexercisable
  Equity
Incentive
Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options

(#)
  Option
Exercise
Price

($)
  Option
Expiration
Date
  Number
of
Shares
of Stock
That
Have
Not
Vested

(#)
  Market
Value
of
Shares
of
Stock
That
Have
Not
Vested

($)
  Equity
Incentive
Plan
Awards:
Number
of
Unearned
Shares or
Other
Rights
That
Have Not
Vested

(#)
  Equity
Incentive
Plan
Awards:
Market
or Payout
Value of
Unearned
Shares or
Other
Rights
That
Have Not
Vested

($)

Daniel Stephen Hafner

                 

Melissa H. Reiter

                 

Paul M. English

                 

Karen Ruzic Klein

                 

Robert M. Birge

                 

 

Options Exercised and Stock Vested

 

The following table sets forth stock vested pursuant to awards of restricted stock for each of our named executive officers during the fiscal year 2009. None of our named executive officers exercised stock options during the fiscal year 2009.

 

     Stock Awards  

Name

   Number of Shares Acquired on
Vesting

(#)
     Value Realized  on
Vesting
($)
 

Daniel Stephen Hafner

     

Melissa H. Reiter

     

Paul M. English

     

Karen Ruzic Klein

     

Robert M. Birge

     

 

Pension Benefits

 

We do not sponsor defined benefit plans. Consequently, our named executive officers did not participate in, or have account balances in, qualified or nonqualified defined benefit plans. Our board of directors or compensation committee may elect to adopt qualified or nonqualified defined benefit plans in the future if it determines that doing so is in our best interest.

 

Nonqualified Deferred Compensation

 

We do not maintain nonqualified defined contribution plans or other deferred compensation plans. Consequently, our named executive officers did not participate in, or have account balances in, nonqualified defined contribution plans or other nonqualified deferred compensation plans. Our board of directors or compensation committee may elect to provide our executive officers and other employees with nonqualified defined contribution or other nonqualified deferred compensation benefits in the future if it determines that doing so is in our best interest.

 

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Employment Agreements and Potential Payments Upon Termination or Change-in-Control

 

Employment Agreements

 

We have entered into employment agreements with each of our named executive officers as described below.

 

Daniel Stephen Hafner. On March 2, 2004, we entered into an executive employment agreement with Mr. Hafner, which was amended on March 1, 2007 and June 26, 2008. The agreement provides for an annual base salary of $            , subject to adjustment by the board of directors, and a bonus of up to     % of his annual base salary, payable in either cash or restricted common stock, at the election of Mr. Hafner. The agreement also provides for four weeks of paid vacation per year, reimbursement of reasonable business expenses, and participation in such other benefits programs as are provided to our executives generally.

 

Melissa H. Reiter. On September 30, 2009, we entered into an employment agreement with Ms. Reiter. The agreement provides for Ms. Reiter to receive an annual base salary of $            , subject to periodic review and adjustment by management, and an annual bonus of up to     % of her annual base salary, payable in either cash or restricted stock, at the election of KAYAK. Under the agreement, Ms. Reiter received a signing bonus of $             and a guaranteed 2009 bonus of $             , which was paid in 2010. The agreement provides for three weeks of paid vacation per year, reimbursement of reasonable business expenses, and participation in such other benefits programs as are provided to our executives generally. In addition, the terms of the agreement permitted Ms. Reiter to be reimbursed for up to $             for expenses incurred in connection with her relocation in connection with the commencement of her employment with KAYAK.

 

Paul M. English. On March 2, 2004, we entered into an executive employment agreement with Mr. English, which was amended on March 1, 2007 and June 26, 2008. The agreement provides for an annual base salary of $            , subject to adjustment by the board of directors, and a bonus of up to     % of his annual base salary, payable in either cash or restricted common stock, at the election of Mr. English. The agreement also provides for four weeks of paid vacation per year, reimbursement of reasonable business expenses and participation in such other benefits programs as are provided to our executives generally.

 

Karen Ruzic Klein. On October 22, 2007, we entered into an employment agreement with Ms. Klein, which provides for an annual base salary of $            , subject to periodic review and adjustment by management, and an annual bonus of up to     % of her annual base salary, payable in either cash or restricted stock, at the election of KAYAK. The agreement provides for three weeks of paid vacation per year, reimbursement of reasonable business expenses, and participation in such other benefits programs as are provided to our executives generally.

 

Robert M. Birge. On April 9, 2009, we entered into an employment agreement with Mr. Birge, which provides for an annual base salary of $            , subject to periodic review and adjustment by management, and an annual bonus of up to     % of his annual base salary, payable in either cash or restricted stock, at the election of KAYAK. The agreement provides for three weeks of paid vacation per year, reimbursement of reasonable business expenses, and participation in such other benefits programs as are provided to our executives generally.

 

Termination of Employment Agreements and Change-in-Control Arrangements

 

The information below describes and quantifies certain compensation that would become payable under each named executive officer’s employment agreement if, as of December 31, 2009, their employment agreements were in effect and their employment with us had been terminated. Due to the number of factors that affect the nature and amount of any benefits provided upon the events discussed below, any actual amounts paid or distributed may be different. Factors that could affect these amounts include the timing during the year of any such event.

 

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The employment agreements for Mr. Hafner and Mr. English provide for compensation in the event of termination of their employment due to death or disability, without cause, and by the executive for good reason. Both Mr. Hafner’s and Mr. English’s employment agreements contain the following termination-related provisions:

 

   

Termination Due to Death or Disability. Severance payments equal to any unpaid portion of the executive’s base salary through the date of death or disability, any accrued but unused vacation time through the date of termination, and reimbursement of business expenses incurred through such date. In addition, the executive would be entitled to any unpaid bonuses from prior years, and the pro rata portion of any bonus earned but unpaid for the year during which the agreement is terminated.

 

   

Termination Without Cause or for Good Reason. Severance payments equal to the executive’s base salary through the date of termination, and for six months thereafter, to be paid in accordance with our standard payroll practices, any accrued but unused vacation time through the date of termination, and reimbursement of business expenses incurred through such date. If the employee elects to continue medical insurance coverage after termination, KAYAK would pay COBRA payments during the six-month severance period, or until the employee accepted other employment, if sooner. In addition, the executive would be entitled to any unpaid bonuses from prior years, and the pro rata portion of any bonus earned but unpaid for the year during which the agreement is terminated.

 

   

Termination by the Employee other than for Good Reason. Any salary earned but unpaid through the date of termination, any earned but unpaid bonuses from prior years, any accrued by unused vacation time through the date of termination, and reimbursement of business expenses incurred through such date.

 

   

Conditions to Severance. Receipt of any severance and benefits upon termination without cause or for good reason is conditioned on the executive signing a release and waiver of claims in a form satisfactory to us.

 

   

Noncompetition. Mr. Hafner’s and Mr. English’s executive employment agreements also require each of them to enter into our standard employee noncompetition, nondisclosure and developments agreement, which generally prohibit employees from disclosing confidential information and trade secrets, soliciting any employee, vendor or customer for one year following termination of their employment and working with or for any competing companies during their employment and for one year thereafter. In addition to Mr. Hafner and Mr. English, our other named executive offers have also entered into our standard employee noncompetition, nondisclosure and developments agreement.

 

   

“For Cause.” Under these employment agreements, “cause” generally means (i) failure or refusal of the employee to perform his reasonably assigned duties to KAYAK; (ii) a material breach of the employment agreement or the employee noncompetition, nondisclosure and developments agreement described above, or any other agreement between the employee and KAYAK relating to the employee’s employment with KAYAK; (iii) embezzlement or misappropriation of KAYAK’s assets or property; (iv) gross negligence, misconduct, neglect of duties, theft dishonesty or fraud with respect to KAYAK, or a breach of fiduciary duties to KAYAK; or (v) indictment or conviction of felony or any crime involving moral turpitude, including a plea of guilty or nolo contendere.

 

   

“Good Reason.” Under these employment agreements, “good reason” generally means (i) mutual agreement between us and the employee that good reason exists; (ii) a material violation by us of the employee’s executive employment agreement; (iii) demotion of the executive, without his prior consent, to a position that does not include significant managerial responsibilities; or (iv) reduction in base salary, other than in connection with and substantially proportionate to a general salary reduction that applies to our executive officers generally.

 

The employment agreements for Mss. Reiter and Klein and Mr. Birge each provide for compensation in the event of involuntary termination of their employment other than for cause. Under these employment agreements,

 

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in the event of involuntary termination of their employment other than for cause, each would be entitled to receive six months base salary plus bonus and payment of COBRA insurance coverage for the duration of the six month severance term. In addition, Ms. Reiter would be entitled to receive six months base salary as severance if we were to hire a Chief Financial Officer and she were to elect to terminate her employment during the six month period immediately following the hiring of such Chief Financial Officer.

 

Under both our Third Amended and Restated 2005 Equity Incentive Plan and our 2004 Stock Incentive Plan, in the event of a merger or consolidation, other than a merger or consolidation in which our stockholders will hold more than 50% of the equity interests of the surviving entity immediately following such merger or consolidation, the sale of all or substantially all of our assets, or the acquisition by any person of securities representing more than 50% of the total combined voting power of KAYAK, all of which are referred to in this prospectus as a change of control, (i) 50% of the unvested portion of all options outstanding as of the date of the change of control will vest and become exercisable as of such date and (ii) the risk of forfeiture (as defined in the plans) or repurchase right applicable to 50% of any restricted stock grant will lapse, and 50% of the stock relating to such awards will become free of all restrictions and become fully vested and transferable, as of the date of the change in control. The remaining outstanding options and restricted stock subject to a risk of forfeiture or repurchase right will vest and become exercisable upon:

 

   

the termination of the participant’s employment or other association with us and our affiliates by us without cause (as defined in the plans) or by the plan participant for good reason (as defined in the plans) or upon the plan participant’s position, duties, authority or responsibilities being materially diminished, other than on a temporary basis, within one year after the date of such change of control; or

 

   

the date a change of control occurred if such termination or diminution occurs within 60 days prior to the date on which the change of control occurred, and the affected plan participant demonstrates that such termination or diminution was at the request of a third party that took actions to effect the change of control or otherwise arose in connection with or anticipation of the change of control.

 

In the event of a change of control, outstanding awards under both plans will be subject to the terms of any agreement of merger or reorganization that effects the change of control.

 

Under certain of the individual stock option agreements and restricted stock agreements entered into with each of our named executive officers, we have the right to repurchase any shares of common stock acquired by the executive pursuant to the exercise of stock options for a period of 90 days following the later of the termination of the executive’s employment and the receipt by the executive of the shares upon exercise of the stock option. Our right of repurchase with respect to the stock options subject to any stock option agreement will lapse to the extent the shares subject to such stock option agreement become readily tradable on a nationally recognized securities exchange or market.

 

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The following table sets forth the amounts of compensation payable by us to our named executive officers, including cash severance, benefits and perquisites and long-term incentives. The amounts shown assume that the specified event was effective as of December 31, 2009 under their employment agreements. The actual amounts to be paid can only be determined at the time of the termination of employment or change-in-control, as applicable.

 

Element

   Benefits and
Payments
   Termination by
KAYAK
Without Cause

($)
   Employee
Resignation for
Good Reason

($)
   Termination
Due to Death or
Disability

($)
   Change of
Control

($)
   Change of
Control and
Termination

($)

Daniel Stephen Hafner

   Base Salary               
   Bonus               
   Other               

Melissa H. Reiter

   Base Salary               
   Bonus               
   Other               

Paul M. English

   Base Salary               
   Bonus               
   Other               

Karen Ruzic Klein

   Base Salary               
   Bonus               
   Other               

Robert M. Birge

   Base Salary               
   Bonus               
   Other               

 

2011 Equity Incentive Plan

 

The following is a summary of the material terms of the 2011 Equity Incentive Plan, which will be in effect upon completion of this offering, but does not include all of the provisions of the 2011 Equity Incentive Plan. For further information about the 2011 Equity Incentive Plan, we refer you to the complete copy of the 2011 Equity Incentive Plan, which we will file as an exhibit to our registration statement of which this prospectus is a part.

 

The 2011 Equity Incentive Plan provides for the grant of incentive stock option and nonstatutory stock options, stock appreciation rights, restricted stock and stock unit awards, performance units, stock grants and qualified performance-based awards, which we collectively refer to as “awards” in connection with the 2011 Equity Incentive Plan. Directors, officers and other employees of us and our subsidiaries, as well as others performing consulting or advisory services for us, are eligible for grants under the 2011 Equity Incentive Plan. The purpose of the 2011 Equity Incentive Plan is to provide incentives that will attract, retain and motivate highly competent officers, directors, employees and consultants to promote the success of our business.

 

Administration

 

Under its terms, the compensation committee of the board of directors administers the 2011 Equity Incentive Plan. The board of directors itself may exercise any of the powers and responsibilities under the 2011 Equity Incentive Plan. Subject to the terms of the 2011 Equity Incentive Plan, the plan administrator (the board or its compensation committee) will select the recipients of awards and determine, among other things, the:

 

   

number of shares of common stock covered by the awards and the dates upon which such awards become exercisable or any restrictions lapse, as applicable;

 

   

type of award and the exercise or purchase price and method of payment for each such award;

 

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vesting period for awards, risks of forfeiture and any potential acceleration of vesting or lapses in risks of forfeiture; and

 

   

duration of awards.

 

All decisions, determinations and interpretations by the compensation committee, and any rules and regulations under the 2011 Equity Incentive Plan and the terms and conditions of or operation of any award, are final and binding on all participants, beneficiaries, heirs, assigns or other persons holding or claiming rights under the 2011 Equity Incentive Plan or any award.

 

Available Shares

 

The aggregate number of shares of our common stock which may be issued or used for reference purposes under the 2011 Equity Incentive Plan or with respect to which awards may be granted may not exceed shares, which may be either authorized and unissued shares of our common stock or shares of common stock held in or acquired for our treasury. In general, if awards under the 2011 Equity Incentive Plan are for any reason cancelled, or expire or terminate unexercised, the number of shares covered by such awards will again be available for the grant of awards under the 2011 Equity Incentive Plan. In addition, (i) shares that were subject to a stock-settled stock appreciation right and were not issued upon the net settlement or net exercise of such stock appreciation right, (ii) shares used to pay the exercise price of a stock option, (iii) shares delivered to or withheld by us to pay the withholding taxes related to an award, and (iv) shares repurchased on the open market with the proceeds of an option exercise do not count as shares issued under the 2011 Equity Incentive Plan.

 

Eligibility for Participation

 

Members of our board of directors, as well as employees of, and consultants to, us or any of our subsidiaries and affiliates are eligible to receive awards under the 2011 Equity Incentive Plan. The selection of participants is within the sole discretion of the compensation committee.

 

Incentive Stock Options

 

Incentive stock options are intended to qualify as incentive stock options under Section 422 of the Code and will be granted pursuant to incentive stock option agreements. The plan administrator will determine the exercise price for an incentive stock option, which may not be less than 100% of the fair market value of the stock underlying the option determined on the date of grant. In addition, incentive options granted to employees who own, or are deemed to own, more than 10% of our voting stock, must have an exercise price not less than 110% of the fair market value of the stock underlying the option determined on the date of grant.

 

Nonstatutory Stock Options

 

Nonstatutory stock options are not intended to qualify as incentive stock options under Section 422 of the Code and will be granted pursuant to nonstatutory stock option agreements. The plan administrator will determine the exercise price for a nonstatutory stock option, which may not be less than the fair market value of the stock underlying the option determined on the date of grant.

 

Stock Appreciation Rights

 

A stock appreciation right, or a SAR, entitles a participant to receive a payment equal in value to the difference between the fair market value of a share of stock on the date of exercise of the SAR over the grant price of the SAR. The administrator may pay that amount in cash, in shares of our common stock, or a combination. The terms, methods of exercise, methods of settlement, form of consideration payable in settlement, and any other terms and conditions of any SAR will be determined by the administrator at the time of the grant of award and will be reflected in the award agreement. In the event a SAR is awarded together with an option, the exercise price shall equal the exercise price of the related option.