S-1/A 1 d117777ds1a.htm AMENDMENT NO. 9 TO FORM S-1 Amendment No. 9 to Form S-1
Table of Contents

As filed with the Securities and Exchange Commission on March 9, 2012

Registration No. 333-170640

 

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

Amendment No. 9

TO

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)

Class A Common Stock, $0.001 par value per share

  $50,000,000   $5,730

 

 

(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)   Previously paid.

 

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 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 are not soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

PROSPECTUS (Subject to Completion)

Issued March 9, 2012

 

             SHARES

 

LOGO

KAYAK Software Corporation

 

CLASS A COMMON STOCK

 

 

 

KAYAK Software Corporation is offering              shares of its Class A common stock. 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.

 

Upon the completion of this offering, we will have two classes of authorized common stock, Class A common stock and Class B common stock. The rights of the holders of Class A common stock and Class B common stock are identical, except with respect to voting and conversion. Each share of Class A common stock is entitled to one vote per share. Each share of Class B common stock is entitled to ten votes per share and is convertible at any time into one share of Class A common stock. Upon completion of this offering, the holders of our Class B common stock shall be able to exercise not less than     % of the voting power of KAYAK Software Corporation.

 

Moreover, all shares of our common stock and preferred stock outstanding immediately prior to completion of this offering will automatically be converted into shares of our Class B common stock and all outstanding options and warrants exercisable for shares of our common stock and preferred stock will automatically become options and warrants exercisable for shares of our Class B common stock upon completion of this offering.

 

 

 

We applied to list our Class A common stock on The NASDAQ Stock Market under the symbol “KYAK.”

 

 

 

Investing in our Class A common stock involves risks. See “Risk Factors” beginning on page 10.

 

 

 

PRICE $              A SHARE

 

 

 

    

Price to

Public

   Underwriting
Discounts
and
Commissions
   Proceeds to
Company

Per share

   $                        $                        $                    

Total

   $                        $                        $                    

 

KAYAK Software Corporation has granted the underwriters the right to purchase an additional              shares of Class A 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 Class A common stock to purchasers on                      , 2012.

 

 

 

MORGAN STANLEY

   DEUTSCHE BANK SECURITIES

 

 

 

PIPER JAFFRAY

   STIFEL NICOLAUS WEISEL    PACIFIC CREST SECURITIES

 

                      , 2012


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LOGO


Table of Contents

TABLE OF CONTENTS

 

     Page  

Prospectus Summary

     1   

Risk Factors

     10   

Special Note Regarding Forward-Looking Statements

     26   

Use of Proceeds

     28   

Dividend Policy

     28   

Capitalization

     29   

Dilution

     31   

Selected Consolidated Financial and Operating Data

     33   

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

     36   

Business

     54   

Management

     67   
 

 

 

 

We 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 take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. We are offering to sell, and seeking offers to buy, shares of our Class A 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 Class A common stock. Our business, financial condition, results of operations and prospects may have changed since that date.

 

Until                     , 2012 (25 days after the commencement of this offering), all dealers that buy, sell or trade shares of our Class A 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 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 Class A common stock and the distribution of this prospectus outside of the U.S.

 

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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 Class A 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 better approach to finding travel online. 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 multiple filtering and sorting options, 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 website to complete their purchase, and in many cases, users may now complete hotel bookings directly through our websites and mobile applications.

 

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

 

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

 

   

For the year ended December 31, 2011, we generated $224.5 million of revenues, representing growth of 32% over the year ended December 31, 2010;

 

   

For the year ended December 31, 2011, we generated income from operations of $14.3 million as compared to income from operations of $16.8 million for the year ended December 31, 2010. After adjusting for a $15.0 million impairment charge related to our decision to stop supporting the SideStep brand name, operating income for the year ended December 31, 2011 was $29.2 million, a 74% increase over the same period in 2010;

 

   

For the year ended December 31, 2011, we had Adjusted EBITDA of $50.2 million representing growth of 56.2% over the year ended December 31, 2010. Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization, or Adjusted EBITDA, is a non-generally accepted accounting principle metric used by management to measure our operating performance. See “—Summary Consolidated Historical Operating Data” for an additional description of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to income (loss) from operations.

 

   

For the year ended December 31, 2011, we processed 899 million user queries for travel information, representing growth of 42% over the year ended December 31, 2010; and

 

   

KAYAK mobile applications have been downloaded over 13 million times since their introduction in March 2009. For the year ended December 31, 2011, we had 7 million downloads, representing growth of 78% over the year ended December 31, 2010.

 

 

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As of January 31, 2012, we had 162 employees, and we had local websites in 14 countries outside the U.S., including the United Kingdom, Germany, France, Spain, Italy and Austria.

 

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 $803 billion in global expenditures in 2010, and is projected to increase at a 6% compound annual growth rate, or CAGR, through 2012. Of this amount, approximately $247 billion, or 31% was purchased online in 2010 representing a 16% CAGR between 2005 and 2010. 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 2010, airline ticket sales represented 53% of total online travel purchases, followed by hotel bookings at 27%. Hotel bookings are the fastest growing online travel category and are projected to grow at an 11% CAGR from 2010 through 2012. 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 $31 billion globally on travel-related advertising in 2010. Of this amount, only $4 billion, or 14%, was spent online with the remainder being spent primarily on traditional media. We believe that travel advertising will continue to 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 $9 billion by 2015, a CAGR of 15% between 2010 and 2015.

 

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.

 

 

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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, and in some cases, they can complete their bookings directly through our websites and mobile applications.

 

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 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 2011 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.” In 2011, 78% of our query volume was generated from people who directly visited our websites or used our mobile applications, and only 5% 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, or in many cases, users may now complete hotel bookings directly through our websites and mobile applications. 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 query 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, public domain technologies and tiered pricing arrangements with third-party software providers so that as queries continue to grow, we do not incur proportionately higher software costs. Since all travel products are purchased by our users directly on the travel supplier’s or OTA’s website or through relationships with third party booking and fulfillment providers, 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.

 

 

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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, making the booking path easier for travelers 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 31% for the month of January 2012 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 recently opened an office in Zurich, Switzerland to serve as headquarters for our European operations. We operate websites in 14 countries outside of the U.S., including Germany, the United Kingdom, France, Spain, Italy and Austria. We believe that the international opportunity for our services is sizable, and we intend to continue to invest in both head count and marketing in 2012 and 2013.

 

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 and content, increasing our hotel-related marketing and search engine spending, improving cross-promotion of hotels in flight query results and increasing the number of hotels that can be booked directly through our websites and mobile applications.

 

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 10 of this prospectus, before investing in our Class A 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;

 

   

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

 

   

as a result of our dual class stock, our management and other affiliates will have significant control over our common stock and could control our actions in a manner that conflicts with the interests of other stockholders.

 

 

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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 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 and to KAYAK Software Corporation in December 2011.

 

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 checkfelix.com. We refer to these websites collectively as the KAYAK websites.

 

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.

 

Trademarks

 

KAYAK®, swoodooTM, checkfelix.com® 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, including logos, artwork and other visual displays, 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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THE OFFERING

 

Class A common stock offered by KAYAK Software Corporation

  

             shares

Total Class A common stock to be outstanding after this offering

  

             shares

Total Class B common stock to be outstanding after this offering

  

             shares

Total common stock outstanding after this offering

  

             shares

Voting rights

   The holders of Class A common stock generally have rights, including as to dividends, identical to those of holders of Class B common stock, except that holders of Class A common stock are entitled to one vote per share, representing in the aggregate             % of the combined voting power of all classes of voting stock, and holders of Class B common stock are generally entitled to ten votes per share, representing in the aggregate             % of the combined voting power of all classes of voting stock. Holders of the Class A common stock and the Class B common stock generally vote together as a single class, except when amending or altering any provision of our amended and restated certificate of incorporation or by-laws so as to adversely affect the rights of one class. See “Description of Capital Stock—Common Stock—Voting Rights.” The Class B common stock may be converted into Class A common stock at the option of the holder at any time and shall convert automatically upon certain specified transfers. See “Description of Capital Stock—Common Stock—Conversion.”

Use of proceeds

   While we do not have any current specific plans for the net proceeds resulting from this offering, 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.

Risk Factors

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

Proposed NASDAQ Stock Market symbol

  

KYAK.

 

 

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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 common stock, 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 33,793,123 shares of our Class B common stock and conversion of all outstanding options and warrants into options and warrants to purchase an aggregate of 9,190,490 shares of our Class B common stock; such conversions of preferred stock and preferred stock warrants will occur upon completion of this offering in accordance with the pre-existing terms of our convertible preferred stock and preferred stock warrants, and we will not be repurchasing any of such outstanding shares in connection with this offering;

 

   

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 of Class B common stock issuable upon the exercise of warrants outstanding as of December 31, 2011 with a weighted average exercise price of $13.57 per share;

 

   

excludes 9,086,586 shares of Class B common stock issuable upon the exercise of options outstanding as of December 31, 2011 with a weighted average exercise price of $10.79 per share; and

 

   

excludes 159,946 shares of Class B common stock reserved for issuance pursuant to future grants of awards under our Third Amended and Restated 2005 Equity Incentive Plan and 2012 Equity Incentive Plan as of December 31, 2011.

 

Unless indicated otherwise all references to “common stock” for periods after completion of this offering refer to our Class A common stock and Class B common stock on an aggregate basis.

 

 

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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, 2009, 2010, and 2011, have been derived from our audited financial statements included elsewhere in this prospectus. The historical results presented below are not necessarily indicative of the results to be expected for any future period.

 

    Years ended December 31,  

Consolidated Statements of Operating Data:

  2009     2010     2011  
(in thousands except share and per share amounts)                  

Revenues

  $ 112,698      $ 170,698      $ 224,534   
 

 

 

   

 

 

   

 

 

 

Cost of revenues (excludes depreciation and amortization)

    15,362        15,630        18,598   
 

 

 

   

 

 

   

 

 

 

Selling, general and administrative expenses:

     

Marketing

    57,389        91,721        111,018   

Personnel

    22,638        29,764        40,785   

Other general and administrative expenses

    6,568        9,967        16,400   
 

 

 

   

 

 

   

 

 

 

Total selling, general and administrative expenses (excludes depreciation and amortization)

    86,595        131,452        168,203   
 

 

 

   

 

 

   

 

 

 

Depreciation and amortization

    5,380        6,821        8,486   

Impairment of intangible assets(1)

    —          —          14,980   
 

 

 

   

 

 

   

 

 

 

Income from operations

    5,361        16,795        14,267   

Other income (expense)

    (1,225     3,357        2,115   

Income tax expense (benefit)

    (2,776     12,120        6,681   
 

 

 

   

 

 

   

 

 

 

Net income

  $ 6,912      $ 8,032      $ 9,701   
 

 

 

   

 

 

   

 

 

 

Net loss per common share (after redeemable convertible preferred stock dividends)

     

Basic

  $ (0.92   $ (0.57   $ (0.28

Diluted

  $ (0.92   $ (0.57   $ (0.28

Weighted average shares outstanding:

     

Basic

    5,223,187        6,463,639        7,309,202   

Diluted

    5,223,187        6,463,639        7,309,202   

Unaudited pro forma:(2)

     

Net income per common share:

     

Basic

      $ 0.28   

Diluted

      $ 0.26   

Weighted average common shares:

     

Basic

        34,076,858   

Diluted

        37,740,386   

Other Data:

     

Adjusted EBITDA (3)

  $ 16,188      $ 32,119      $ 50,160   

Capital expenditures

  $ 2,269      $ 2,273      $ 4,260   

Queries (4)

    458,594        634,319        898,573   

 

 

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Consolidated Balance Sheet Data:

     
    December 31,
2011
    Pro Forma at
December 31,
2011(2)
    Pro Forma
as  Adjusted(5)
    (unaudited)

Cash and cash equivalents

  $ 35,127      $ 35,127     

Working capital

    65,560        65,560     

Total assets

    277,948        277,948     

Total liabilities

    32,178        32,178     

Redeemable convertible preferred stock

    247,494        —       

Total stockholders’ (deficit) equity

    (1,724     245,770     

 

  (1)   In January 2011, we determined that we would not support two brand names and URLs in the United States and decided that we would migrate all traffic from sidestep.com to KAYAK.com. As a result, our SideStep brand name and URL intangible assets were impaired, and we incurred a related write-down of $15.0 million in the first three months of 2011.
  (2)   The pro forma balances give effect to the conversion of all outstanding shares of our common stock and our redeemable convertible preferred stock into 33,793,123 shares of our Class B common stock.
  (3)   Earnings Before Interest, Taxes, Depreciation and Amortization, or EBITDA, is a metric used by management to measure operating performance. Adjusted EBITDA represents EBITDA excluding the impact of stock-based compensation expense and other income (expense), net. 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 income (loss) from operations to Adjusted EBITDA for the periods presented and is unaudited:

 

     Years ended December 31,  
     2009     2010     2011  

Income from operations

   $ 5,361      $ 16,795      $ 14,267   

Other income (expense), net

     (1,346     3,250        2,004   

Depreciation and amortization

     5,380        6,821        8,486   

Impairment of intangible assets(1)

     —          —          14,980   
  

 

 

   

 

 

   

 

 

 

EBITDA

     9,395        26,866        39,737   

Stock-based compensation expense

     5,447        8,503        12,427   

Other (income) expense, net

     1,346        (3,250     (2,004
  

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 16,188      $ 32,119      $ 50,160   
  

 

 

   

 

 

   

 

 

 
  (4)   Queries refer to user requests for travel information we process through our websites and mobile applications.
  (5)   Pro forma as adjusted basis reflects: (i) pro forma basis conversions as described above, (ii) the sale by us of                  shares of Class A 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.

 

 

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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, which could limit the information we are able to provide to travelers.

 

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 2011 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 10% 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, and a loss of this provider could limit our ability, or make it more difficult for us, to provide travelers with accurate flight information.

 

We license faring engine software from ITA Software, Inc., or ITA, under an agreement which expires on December 31, 2013. This faring engine software directly provided approximately 61% of our overall airfare query results for the year ended December 31, 2011. Additionally, 25% of our overall airfare query results during such period were obtained from other sources which, in turn, utilized the ITA faring engine software. 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. In addition, we believe that alternative faring engine solutions currently do not provide the level of comprehensiveness and accuracy that ITA’s software provides.

 

Airline travel queries accounted for approximately 86% of the queries performed on our websites and mobile applications for the year ended December 31, 2011, and distribution revenues from airline queries represented approximately 25% of our revenues for the year ended December 31, 2011. We anticipate domestic

 

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airfare 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 enhancements or improvements to the software, or an adverse change in our costs associated with use of the ITA software, could have a significant negative effect on the comprehensiveness and/or speed of our query results, and on our revenues and operating results. Moreover, we believe that a significant number of 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.

 

In the event we are not offered access to Google’s enhancements of or replacements to ITA software at competitive prices or at all, our ability to compete and operate our business effectively, and our financial performance, may be materially adversely affected.

 

On April 8, 2011, Google, Inc., or Google, entered into a consent decree agreeing to conditions on Google’s acquisition of ITA, and Google subsequently completed its acquisition of ITA. The consent decree stated Google’s intent to offer an online travel search product and Google has since launched hotel and flight search tools and services that directly compete with the tools and services we offer. Google’s flight search offering includes significantly increased speed on return of search results and, in the future, may include other enhancements or improvements in performance of the ITA software which may not be made available to us. Although the consent decree will provide us with the right to renew our existing ITA agreement on the same terms for up to five years from the date the court approves the decree, if ITA or Google limit our access to the ITA software or any improvements to the software, separately develop replacement software to which they claim we are not entitled or increase the price we pay for any improvements or replacement software and we are unable to replace ITA’s software 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 by reducing traffic to our website and mobile applications and by creating a competitive product that people choose over KAYAK when searching for travel online.

 

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 its acquisition of ITA, Google has launched a travel search offering that displays hotel and airfare 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, Google has launched the ability for users of its website to search for hotel and airfare pricing and availability, and as Google integrates 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. According to Experian Hitwise, in September 2010, approximately 30% of traffic to travel-related websites began with Google. 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.

 

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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, or elimination of, our compensation.

 

During the year ended December 31, 2011, our top ten travel suppliers and OTAs accounted for approximately 61% of our total revenues. In particular, for the year ended December 31, 2011, Expedia and its affiliates, including its Hotels.com and Hotwire subsidiaries, accounted for 24% of our total revenues. Also during this period, Orbitz and its affiliates, including its CheapTickets, HotelClub and ebookers subsidiaries, accounted for 12% 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.

 

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 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 brand awareness and preference, which could limit our ability to maintain our current financial performance or achieve additional growth.

 

We rely heavily on the KAYAK brand. In our international markets we also rely on swoodoo and our other brands. Awareness, perceived quality and perceived differentiated attributes of our brands 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 continued 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, or if we discontinue our broad-reach campaign, 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 checkfelix.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

 

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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 result in a decrease in the amount and types of travel information we display, a loss of travelers using our products and services and a decrease in our financial performance.

 

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;

 

   

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.

 

Changes in general search engine algorithms and dynamics or termination of traffic-generating arrangements could result in a decrease in the number of people directed to our websites.

 

We use Internet search engines, principally through the purchase of travel-related keywords, to generate traffic to our websites. The purchase of travel-related keywords consists of anticipating what words and terms consumers will use to search for travel on general search engines and then bidding on those words and terms in the applicable search engine’s auction system. We bid against other advertisers for preferred placement on the applicable general search engine’s results page. Approximately 5% of our user queries during the year ended December 31, 2011 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. We also rely to a certain extent on advertisements that we place on other travel search engines. Approximately 6% of our user queries during the year ended December 31, 2011 resulted from these 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.

 

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We have limited international experience and may be limited in our ability to expand into international markets, which could result in significant costs to us and a limitation on our ability to achieve future financial growth.

 

We operate websites in 14 countries outside of the U.S., and we generated approximately 18% of our net revenues for the year ended December 31, 2011 from our international operations. With the exception of our managing director for Europe, 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.

 

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 ability to attract and retain key personnel and adversely impact our 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. Our workforce worldwide has grown from fewer than 35 employees in 2006 to 162 employees and approximately 49 contractors as of January 31, 2012. 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.

 

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We may not be able to expand our business model beyond providing travelers with travel query results and our attempts to do so could result in significant additional costs to us without a corresponding increase in our revenues.

 

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 and declines in leisure travel or discretionary spending generally could reduce the demand for our services.

 

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 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, including senior management and our technology professionals, 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, including our software engineers. 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. Our software engineers and technology professionals are key to designing code and algorithms necessary to our business. If we do not succeed in attracting well-qualified employees or retaining and motivating existing employees, our business would be adversely affected.

 

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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.

 

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 provide users with the option to complete certain hotel bookings directly through our websites and mobile applications. We also currently facilitate the purchase of airlines tickets through our mobile applications and assist users in completing transactions directly with travel suppliers. 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

 

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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 several patent infringement claims 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, swoodoo AG, or swoodoo, and JaBo Software Vertrieb-und Entwicklung GmbH, or JaBo Software. We expect to continue to evaluate and enter into discussions regarding 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.

 

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The requirements of being a public company may strain our resources and distract our management, which could make it difficult to manage our business.

 

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, which could make it difficult to manage our business.

 

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 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.

 

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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 could limit our ability to expand our product offerings or enter into new markets and could require us to expend significant resources, including the attention of senior management, to review and comply with such regulations.

 

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 particular, the Department of Transportation, or DOT, regulates the advertising and sale of air transportation. The DOT actively enforces its regulations and recently made significant changes to the regulations and standards that apply to air carriers and ticket agents. While we are neither an air carrier nor a ticket agent, to the extent we expand our business model in the air transportation area to facilitate bookings, we could become subject to DOT oversight, which would require us to incur significant compliance costs and may require us to change our business practices with respect to the display of airfare and airfare advertising.

 

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.

 

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.

 

If we are not successful in our ongoing arbitration disputes with Orbitz Worldwide, Inc., we may be required to pay money damages and cease offering certain advertising products.

 

We are currently a party to two arbitration disputes with Orbitz Worldwide, Inc., or Orbitz. In these disputes, Orbitz contends that we have violated our 2009 Promotion Agreement by failing to abide by certain

 

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exclusivity provisions relating to the display of certain core query results and hotel booking functionality on our websites. Orbitz also contends that we owe it in excess of $2.5 million as a result of overpayments that Orbitz allegedly made to us over the past few years. If we are not successful in defending against these claims, we may be forced to pay money damages to Orbitz, we may be required to stop offering certain advertising products to our advertisers, and we may be required to stop using certain third-party booking and fulfillment providers, which could adversely impact our total revenues.

 

Fluctuations in foreign currency exchange rates affect financial results in U.S. dollar terms and could negatively impact our financial results.

 

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 various patent infringement claims. These claims allege, among other things, that our website technology infringes upon owned patent technology. If we are not successful in defending ourselves against these claims, we may be required to pay money damages, which could have an adverse effect

 

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on our results of operations. In addition, the costs associated with the loss of these claims could have an adverse effect on our results of operations. Please see the discussion regarding these claims 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 intellectual property 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. 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 Class A Common Stock

 

Our securities have no prior market and an active trading market may not develop, which may cause our Class A 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 Class A common stock. The initial public offering price for our Class A 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 Class A common stock

 

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after this offering. If you purchase shares of our Class A 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 The NASDAQ Stock Market or otherwise or how liquid that market might become. An active public market for our Class A 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 Class A common stock at a price that is attractive to you, or at all.

 

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 Class A common stock may fluctuate significantly.

 

After this offering, the market price for our Class A common stock is likely to be volatile, in part because our shares have not been traded publicly. In addition, the market price of our Class A 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 Class A common stock, our failure to meet these estimates or failure of those analysts to initiate or maintain coverage of our Class A common stock;

 

   

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

 

   

future sales of our Class A 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 Class A common stock, regardless of our actual operating performance. As a result, our Class A common stock may trade at prices significantly below the initial public offering price.

 

The stock markets, including The NASDAQ Stock Market, 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.

 

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Future sales of our Class A 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 Class A common stock in the public market after this offering, or the perception that these sales could occur, could adversely affect the price of our Class A 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          shares of Class A common stock and approximately          shares of Class B common stock outstanding, and there will be approximately          shares of Class A common stock issuable upon conversion of outstanding shares of Class B common stock. Our shares of Class A common stock offered in this offering will be freely tradable without restriction under the Securities Act, except for any shares of our Class A 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 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. Collectively, the holders of our securities subject to these restrictions own approximately 33,520,954 shares of our Class B common stock, representing approximately             % of our outstanding capital stock, assuming conversion into Class B common stock of all capital stock held by those holders upon completion of this offering, and after giving effect to the offering. See “Underwriters” for a more detailed description of the terms of these “lock-up” arrangements. All of our shares of Class A common stock outstanding as of the date of this prospectus, and all of our shares of Class A common stock issuable upon conversion of the shares of Class B common stock outstanding as of the completion of this offering, 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. As a result, assuming that we issue and sell              shares of our Class A common stock in this offering and there are no further issuances of our securities, the holders of our securities subject to these restrictions will be entitled to sell approximately     % of our total common stock 180 days after the date of this prospectus. 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 Class A 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 Class A common stock issued in connection with an investment or acquisition could constitute a material portion of our then-outstanding shares of our Class A 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 Class A 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 Class A 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 Class A 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 Class A common stock could decrease, which could cause our stock price and trading volume to decline.

 

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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, 2013 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 Section 404 in a timely manner or with adequate compliance, our independent registered public accounting firm may issue an adverse opinion due to ineffective internal controls 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 Class B common stock will have ten votes per share and our Class A common stock, which is the stock we are selling in this offering, will have one vote per share. We anticipate that our executive officers, directors and their affiliated entities together will beneficially own approximately           % of our Class B common stock, representing approximately           % of the voting power 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. In addition, because of this dual class structure, our executive officers, directors and their affiliated entities will continue to be able to control all matters submitted to our stockholders for approval even if they come to own less than 50% of the outstanding shares of our common stock. 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 Class A 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 Class A common stock, which may never occur. Investors seeking cash dividends in the foreseeable future should not purchase our Class A common stock.

 

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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 our advertising arrangements with other travel-related websites;

 

   

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. 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.

 

While we do not have any current specific plans for the net proceeds resulting from this offering, 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.

 

The primary purposes of this offering are to raise additional working capital, create a public market for our Class A 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.

 

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.

 

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 December 31, 2011:

 

   

on an actual basis;

 

   

on a pro forma basis to give effect to the conversion of all outstanding shares of our common stock and our redeemable convertible preferred stock into 33,793,123 shares of our Class B 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 Class A 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

   $ 35,127       $ 35,127      
  

 

 

    

 

 

    

Redeemable Convertible Preferred Stock(1):

        

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

   $ 9,702       $ —        

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

     2,355      

 

—  

  

  

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

     9,888      

 

—  

  

  

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

     4,026      

 

—  

  

  

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

     15,372         —        

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

     206,151         —        
  

 

 

    

 

 

    

Total redeemable convertible preferred stock

   $ 247,494       $ —        
  

 

 

    

 

 

    

 

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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, 7,025,467 shares issued and outstanding, actual; no shares authorized, issued and outstanding, on a pro forma and pro forma as adjusted basis

   $ 7      $     

Class A common stock, $0.001 par value: no shares authorized, issued and outstanding, actual;              shares authorized, issued and outstanding, on a pro forma and pro forma as adjusted basis

                

Class B common stock, $0.001 par value: no shares authorized, issued and outstanding, actual; 45,000,000 shares authorized, 33,793,123 issued and outstanding, on a pro forma and pro forma as adjusted basis

            34     

Additional paid-in capital

     3,296        250,763     

Accumulated other comprehensive income

     (977     (977  

Accumulated deficit

     (4,050     (4,050  
  

 

 

   

 

 

   

 

Total stockholders’ (deficit) equity

     (1,724     245,770     
  

 

 

   

 

 

   

 

Total capitalization

     245,770        245,770     
  

 

 

   

 

 

   

 

 

(1)   All redeemable 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 December 31, 2011 does not include:

 

   

103,904 shares of Class B common stock issuable upon the exercise of outstanding warrants at a weighted average exercise price of $13.57 per share;

 

   

9,086,586 shares of Class B common stock issuable upon the exercise of options outstanding with a weighted average exercise price of $10.79 per share; and

 

   

159,946 shares of Class B common stock reserved for issuance pursuant to future grants of awards under our Third Amended and Restated 2005 Equity Incentive Plan and 2012 Equity Incentive Plan.

 

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 Class A common stock in this offering exceeds the net tangible book value per share of our Class A common stock after the offering.

 

If you invest in our Class A common stock, you will be diluted to the extent the initial public offering price per share of our Class A common stock exceeds the net tangible book value per share of our Class A common stock and Class B common stock immediately after this offering. Our net tangible book value as of December 31, 2011 was approximately $72.4 million, or $10.31 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 7,025,467 shares of our common stock issued and outstanding as of that date.

 

The pro forma net tangible book value of our Class A common stock and Class B common stock as of December 31, 2011 was approximately $72.4 million, or $2.14 per share. Pro forma net tangible book value per share represents our total pro forma tangible assets less total pro forma liabilities, divided by 33,793,123 shares, the pro forma number of shares of Class A common stock and Class B common stock outstanding as of December 31, 2011, in each case after giving effect to the conversion of all outstanding convertible preferred stock into Class B common stock.

 

The above information assumes no exercise of stock options or conversion of warrants outstanding as of December 31, 2011.

 

After giving effect to the issuance and sale of             shares of our Class A 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 December 31, 2011 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 December 31, 2011, before giving effect to this offering

   $ 10.31     

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

   $ (8.17  
  

 

 

   

Pro forma net tangible book value before this offering

   $ 2.14     

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 December 31, 2011, after giving effect to this offering:

 

   

the total number of shares of Class A 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 Class A 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 options outstanding under our stock option plans or stock options to be granted after the offering. Following the offering, there will be 9,086,586 options outstanding with an average exercise price of $10.79 per share and 103,904 warrants outstanding with an average exercise price of $13.57 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, 2007 and 2008 and the consolidated balance sheet data as of December 31, 2007, 2008, and 2009 have been derived from consolidated financial statements not included in this prospectus. 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)

 

    Years ended December 31,  
     2007     2008     2009     2010     2011  

Revenues

  $ 48,444      $ 112,018      $ 112,698      $ 170,698      $ 224,534   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of revenues (excludes depreciation and amortization)

    7,497        17,985        15,362        15,630        18,598   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Selling, general and administrative expenses:

         

Marketing

    33,624        56,841        57,389        91,721        111,018   

Personnel

    8,131        19,150        22,638        29,764        40,785   

Other general and administrative expenses

    2,346        5,743        6,568        9,967        16,400   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total selling, general and administrative expenses (excludes depreciation and amortization)

    44,101        81,734        86,595        131,452        168,203   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Depreciation and amortization

    1,485        5,214        5,380        6,821        8,486   

Impairment of intangible assets(1)

    —          —          —          —          14,980   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

    (4,639     7,085        5,361        16,795        14,267   

Other income (expense)

    271        (1,569     (1,225     3,357        2,115   

Income tax expense (benefit)

    —          415        (2,776     12,120        6,681   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ (4,368   $ 5,101      $ 6,912      $ 8,032      $ 9,701   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per common share (after redeemable convertible preferred stock dividends):

         

Basic

  $ (1.67   $ (1.37   $ (0.92   $ (0.57   $ (0.28

Diluted

  $ (1.67   $ (1.37   $ (0.92   $ (0.57   $ (0.28

Weighted average shares outstanding:

         

Basic

    3,860,114        4,831,777        5,223,187        6,463,639       
7,309,202
  

Diluted

    3,860,114        4,831,777        5,223,187        6,463,639        7,309,202   

Unaudited pro forma:(2)

         

Net income per common share:

         

Basic

          $ 0.28   

Diluted

          $ 0.26   

Weighted average common shares:

         

Basic

           
34,076,858
  

Diluted

            37,740,386   

Other Data:

         

Adjusted EBITDA(3)

  $ (1,415   $ 18,699      $ 16,188      $ 32,119      $ 50,160   

Capital expenditures

  $ 1,043      $ 1,092      $ 2,269      $ 2,273      $
4,260
  

Queries(4)

    238,449        434,540        458,594        634,319        898,573   

 

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Table of Contents

Consolidated Balance Sheet Data:

(in thousands)

 

    December 31,  
    2007     2008     2009     2010     2011  

Cash and cash equivalents

  $ 25,061      $ 23,609      $ 15,950      $ 34,966      $ 35,127   

Working capital

    27,984        38,453        36,019        58,629        65,560   

Total assets

    221,494        232,544        222,823        269,907        277,948   

Long-term obligations(5) and redeemable convertible preferred stock

    230,330        237,218        225,085        238,246        248,644   

Total stockholders’ (deficit)

    (23,609     (22,940     (21,780     (450     (1,724

 

(1)   In January 2011, we determined that we would not support two brand names and URLs in the United States and decided that we would migrate all traffic from sidestep.com to KAYAK.com. As a result, our SideStep brand name and URL intangible assets were impaired and we incurred a related write-down of $15.0 million in the first three months of 2011.

 

(2)   Pro forma information gives effect to the conversion of all outstanding shares of our common stock and our redeemable convertible preferred stock into 33,793,123 shares of our Class B common stock.

 

(3)   Earnings Before Interest, Taxes, Depreciation and Amortization, or EBITDA, is a metric used by management to measure operating performance. Adjusted EBITDA represents EBITDA excluding the impact of stock-based compensation expense and other income (expense), net. 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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Table of Contents

The following table reconciles income (loss) from operations to EBITDA and Adjusted EBITDA for the periods presented and is unaudited:

 

    Years ended December 31,  
    2007     2008     2009     2010     2011  

Income (loss) from operations

  $ (4,639   $ 7,085      $ 5,361      $ 16,795      $ 14,267   

Other income (expense), net

    62        594        (1,346     3,250        2,004   

Depreciation and amortization

    1,485        5,214        5,380        6,821        8,486   

Impairment of intangible assets(1)

    —          —          —          —          14,980   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

    (3,092     12,893        9,395        26,866        39,737   

Stock-based compensation

    1,739        6,400        5,447        8,503        12,427   

Other (income) expense, net

    (62     (594     1,346        (3,250     (2,004
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

  $ (1,415   $ 18,699      $ 16,188      $ 32,119      $ 50,160   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

 

(5)   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 better approach to online travel. Our websites and mobile applications enable people to easily research and compare accurate and relevant information, including pricing and availability, in one comprehensive, fast and intuitive display. Our software gathers information from multiple sources, including third party providers, travel suppliers and OTAs, and allows users to compare travel information from hundreds of websites. We request information from our data sources based on a user’s travel criteria, and display query results with the broadest set of websites that are relevant to such travel criteria. 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, and in many cases, users may now complete hotel bookings directly through our websites and mobile applications. 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 distribution revenues by sending referrals to travel suppliers and OTAs and by facilitating bookings through our websites and mobile applications, and we earn advertising revenues from advertising placements on our websites and mobile applications. On the distribution side, travel suppliers and OTAs either pay us at the time of referral on a set cost per click, or CPC, basis or after a user completes a transaction on a supplier or OTA website or through the KAYAK booking feature on a fixed cost per acquisition, or CPA, basis or as a percentage of the transaction value.

 

Advertising revenues primarily come from payments for text-based sponsored links, graphical display advertisements and compare units. A “compare unit” is an advertising placement that, if selected by a KAYAK user, launches the advertiser’s website and initiates a query based on the same travel parameters provided on the KAYAK website. The major types of advertisers on our websites consist of OTAs, third party sponsored link providers, hotels, airlines and vacation package providers. Generally, our advertisers pay us on a CPC basis, which means advertisers pay us only when someone clicks on one of their advertisements, or on a cost per thousand impression basis, or CPM. Paying on a CPM basis means that advertisers pay us based on the number of times their advertisements appear on our websites. We believe that offering advertisers the ability to pay on a CPC or CPM basis provides advertisers the ability to choose the method of payment that best suits their needs and ultimately results in more advertisers choosing to advertise with us.

 

We generate a significant portion of our revenues from a few large customers. Expedia and its affiliated brands, including Hotels.com and Hotwire, together accounted for 23.9% of our total revenues for the year ended December 31, 2011. We have separate contracts with respect to Expedia and each of its affiliated brands, each of which have varying terms and expiration dates. Orbitz accounted for 12.3% of total revenues for the year ended December 31, 2011. Our contract with Orbitz expires on December 31, 2013.

 

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Table of Contents

Highlights and Trends

 

Revenue Growth

 

Our revenue for the year ended December 31, 2011 was $224.5 million, a 31.5% increase over the year ended December 31, 2010. This increase in revenue is primarily due to increased travel queries on our websites and mobile applications, which increased 41.7% in 2011, over the comparable period in 2010. We believe that traffic and queries on our websites and mobile applications will continue to increase as more people learn about our websites and our brand.

 

Brand Marketing

 

We began investing in brand advertising, including TV advertisements and billboards, in late 2009. For the year ended December 31, 2011 and for the year ended December 31, 2010, we spent $57.7 million and $43.7 million on these activities, respectively. 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 for the foreseeable future.

 

Hotel Growth

 

We intend to expand our hotel offerings. For the year ended December 31, 2011, hotel revenue increased by $9.8 million or 40.0% as compared to the year ended December 31, 2010. We believe that the number of consumer choices, combined with the predominantly 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 18% of our total revenue for the year ended December 31, 2011. We acquired swoodoo in May 2010 and checkfelix.com in April 2011. As a result of these acquisitions, and organic growth of the KAYAK brand, our international revenues grew to approximately $40.1 million during 2011 from approximately $16.1 million during 2010. We believe that these strategic acquisitions, along with the establishment of our European headquarters in Zurich, Switzerland, have strengthened our presence and team in Europe, and we plan to continue to invest in our international team and brands. We expect our revenues from international operations to increase at a rate faster than revenues from our U.S. operations.

 

Mobile Products

 

We offer several mobile applications that allow people to use our services from smart phones such as the iPhone, Blackberry and phones running on the Android operating system and tablet devices such as the iPad. These applications extend the availability of our services beyond traditional computers and allow users greater access to KAYAK’s services. Queries conducted on our mobile applications accounted for 14.1% of our total queries for the year ended December 31, 2011. However, we estimate mobile applications accounted for approximately 2% of total revenues during the year. We believe mobile applications will continue to gain popularity, and we expect to continue to commit resources to improve the features, functionality and commercialization of our mobile applications. We also believe that over time mobile applications will begin to contribute meaningful revenue to our business.

 

Cash and Debt

 

We had cash and cash equivalents and marketable securities of $46.3 million as of December 31, 2011 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.

 

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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 and Revenue per Thousand Queries

 

Queries refer to user queries for travel information we process through our websites and mobile applications. We count a separate query each time a user requests travel information through one of our websites or mobile applications. Therefore, a user visit to one of our websites may result in no queries being counted, or in multiple queries being counted, depending on the activity of the user during that visit. On average, approximately 1.1 queries have historically been conducted during a typical user visit to our websites.

 

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.

 

We use query metrics to understand historical revenue performance, and to help in forecasting future revenues. In particular, RPM is a key operating statistic that we use in our analysis of past performance and in connection with our evaluation of potential changes to our business model and operating activities.

 

Revenues

 

     Year ended December 31,      %  increase
(decrease)
2009 to 2010
    % increase
2010 to 2011
 
     (Amounts in thousands (except RPM))       
     2009      2010      2011       

Revenues

   $ 112,698       $ 170,698       $ 224,534         51.5     31.5

Queries

     458,594         634,319         898,573         38.3     41.7

RPM

   $ 246       $ 269       $ 250         9.3     (7.1 )% 

 

 

Revenues for the year ended December 31, 2011 increased $53.8 million over the same period in 2010 primarily due to a 41.7% increase in query volume. We attribute the increase in query volume to a variety of factors including our investment in marketing activities, the acquisition of swoodoo in May 2010 and checkfelix.com in April 2011, and our partnership with Bing Travel which began in March 2011. The increase in query volume was partially offset by a reduction in RPM due to an increase in mobile queries, for which we earn revenue at a lower rate. Mobile queries were 14.1% of total queries in 2011, as compared to 8.2% in 2010.

 

Revenues for the year ended December 31, 2010 increased over the same period in 2009 primarily due to a 38.3% increase in website queries. These additional queries accounted for $43.2 million of the $58.0 million increase. During the same period average revenue per thousand queries increased 9.3%, primarily as a result of improved advertising sales. Our acquisition of swoodoo contributed $8.0 million to our revenues in 2010.

 

Cost of revenues (excludes depreciation and amortization)

 

Cost of revenues consists of fees we pay to third parties to process airfare queries and expenses associated with operating and maintaining our data centers. Additionally in 2009, these costs included advertising syndication expenses. Our syndication activities consisted of placing text-based advertisements on other websites

 

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in exchange for a portion of the total revenues that we receive from those advertisements. We included the portion of revenues remitted to our syndication partners in cost of revenues. We cancelled the majority of our advertising syndication contracts in April 2009 to focus on our core business, resulting in decreased cost as a percentage of revenues from 2009 to 2010.

 

     Year ended December 31,                
     (Dollar amounts in thousands)      % increase
2009 to 2010
     % increase
2010 to 2011
 
     2009      2010      2011        

Cost of revenues

   $ 15,362       $ 15,630       $ 18,598         1.7%         19.0%   

% of total revenues

     13.6%         9.2%         8.3%         

 

Our cost of revenues increased $3.0 million in 2011 as compared to 2010, due to higher data center costs and air query fees. Data center costs increased $1.6 million for the year ended December 31, 2011 as compared to the same period in 2010 due to expenses incurred to process and improve overall query speed and efficiency. Additionally, our air query fees increased $1.3 million in 2011 compared to 2010 due to increased query volume, partially offset by a lower cost per query. Our air query fees have a tiered pricing structure whereby increased volume results in a lower overall cost per query.

 

Our cost of revenues were relatively flat for the year ended December 31, 2010 compared to the same period in 2009 due primarily to higher volume-driven air query fees of $1.6 million and data center costs of $0.7 million, partially offset by the elimination of advertising syndication costs of $2.2 million discussed above.

 

Selling, general and administrative expenses (excludes depreciation and amortization)

 

Selling, general and administrative expenses consist of marketing, technology, personnel and other costs, which are more fully described below.

 

Marketing

 

Marketing consists of online marketing, brand marketing and other marketing expenses. Online marketing includes search engine fees and contextual advertising placements. Search engine fees are fees we pay to Google and Yahoo for our advertisements to appear on their result pages when users search certain travel-related keywords on the search engine’s website. We pay contextual advertisement fees to advertise on other travel-related websites. These advertisements generally consist of the placement of a KAYAK logo or a check-box next to the KAYAK name and often allow users who click on our contextual advertisements to launch a query on KAYAK using previously entered search parameters. Brand marketing expense includes TV, billboards and display advertisements, and creative development fees. Other marketing includes affiliate marketing, public relations, and other general marketing costs. Affiliate marketing refers to revenue sharing fees we pay to other travel-related websites that drive traffic to KAYAK through use of their own marketing resources. Under our affiliate marketing program, we provide our services through third party websites and pay them a percentage of any revenues received from these services.

 

     Year ended December 31,                
     (Dollar amounts in thousands)      % increase
2009 to 2010
     % increase
2010 to 2011
 
     2009      2010      2011        

Brand marketing

   $ 15,418       $ 43,702       $ 57,715         183.4%         32.1%   

% of total revenues

     13.7%         25.6%         25.7%         

Online marketing fees

   $ 35,813       $ 41,663       $ 45,648         16.3%         9.6%   

% of total revenues

     31.8%         24.4%         20.3%         

Other marketing

   $ 6,158       $ 6,356       $ 7,655         3.2%         20.4%   

% of total revenues

     5.5%         3.7%         3.4%         

Total marketing expense

   $ 57,389       $ 91,721       $ 111,018         59.8%         21.0%   

% of total revenues

     50.9%         53.7%         49.4%         

 

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Marketing expenses for the year ended December 31, 2011 increased $19.3 million compared to the same period in 2010. The $14.0 million increase in brand marketing relates primarily to a $17.4 million incremental investment in swoodoo, KAYAK Europe and checkfelix.com. Additionally, our online marketing expense increased by $4.0 million. As a percentage of revenue, marketing expenses decreased to 49.4% from 53.7% primarily due to efficiencies achieved in US marketing spend during 2011, as compared to the same period in 2010. We believe these marketing investments were the primary contributor to our 41.7% increase in query growth in 2011 as compared to 2010.

 

Marketing expense for the year ended December 31, 2010 increased $34.3 million compared to the same period in 2009 primarily due to the initial launch of our KAYAK brand marketing campaign. We initiated a brand marketing campaign in November 2009, and for the year ended December 31, 2010, we incurred $39.0 million in KAYAK brand marketing expense. 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.

 

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.

 

     Year ended December 31,     

% increase

        
      (Dollar amounts in thousands)         % increase
2010 to 2011
 
     2009      2010      2011      2009 to 2010     

Salaries, benefits and taxes

   $ 17,473       $ 21,261       $ 28,358         21.7%         33.4%   

% of total revenues

     15.5%         12.5%         12.6%         

Stock-based compensation

   $ 5,165       $ 8,503       $ 12,427         64.6%         46.1%   

% of total revenues

     4.6%         5.0%         5.5%         

Total personnel

   $ 22,638       $ 29,764       $ 40,785         31.5%         37.0%   

% of total revenues

     20.1%         17.4%         18.2%         

 

Our salaries, benefits and taxes increased primarily due to wage increases for existing employees and a headcount increase of 11 employees as of December 31, 2011 compared to December 31, 2010. In 2011 we also awarded bonuses totaling $1.3 million to our cofounders as discussed in “Executive Compensation”. Stock compensation expense increased in 2011 compared to 2010 due to the additional grant of options to purchase 1,165,000 shares of our common stock and the increase in the fair market value of our common stock.

 

Salaries, benefits and taxes increased primarily due to a headcount increase of 40 employees between December 2009 and December 2010. Stock-based compensation increased in 2010 compared to 2009, due to the grant of 4,199,590 additional common stock.

 

Other general and administrative expenses

 

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

 

     Year ended December 31,      % increase
2009 to 2010
    % increase
2010 to 2011
 
     (Dollar amounts in thousands)       
     2009      2010      2011       

Other general and administrative expenses

   $ 6,568       $ 9,967       $ 16,400         51.8     64.5

% of total revenues

     5.8%         5.8%         7.3%        

 

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Other general and administrative expenses increased $6.4 million for the year ended December 31, 2011 compared to the same period in 2010 primarily due to a $2.9 million increase in legal and accounting fees, a $1.2 million increase in technology costs, and a $0.8 million increase in travel expenses. Legal and accounting fees increased due to activities associated with the formation of our European entity and litigation matters described in “Business — Legal Proceedings”.

 

Other general and administrative expenses increased $3.4 million from 2009 to 2010 primarily due to $1.5 million in acquisition-related and other legal and accounting fees, $1.2 million from the inclusion of swoodoo results beginning May 2010, and a $0.4 million increase in the provision for doubtful accounts.

 

Depreciation and amortization

 

Depreciation and amortization consists primarily of depreciation of computer equipment, software and website development and amortization of our trade names, customer relationships and other intangible assets.

 

     Years ended December 31,      % increase
2009  to 2010
     %  increase
(decrease)
2010 to 2011
 
     (Dollar amounts in thousands)        
     2009      2010      2011        

Amortization

   $ 3,328       $ 4,619       $ 6,566         38.8%         42.2 %   

% of total revenues

     3.0%         2.7%         2.9%         

Depreciation

   $ 2,052       $ 2,202       $ 1,920         7.3%         (12.8)%   

% of total revenues

     1.8%         1.3%         0.9%         

Total depreciation and amortization

   $ 5,380       $ 6,821       $ 8,486         26.8%         24.4 %   

% of total revenues

     4.8%         4.0%         3.8%         

 

Depreciation and amortization increased $1.7 million during the year ended December 31, 2011, compared to the same period in 2010. The increase is primarily due to a $2.2 million increase in amortization and depreciation from acquired entities, partially offset by a $0.6 million decrease from SideStep assets that are now fully depreciated.

 

The inclusion of swoodoo in our results from May 2010 accounted for the $1.4 million increase in depreciation and amortization for the year ended December 31, 2010, compared to the same period in 2009.

 

Impairment of intangible assets

 

In January 2011, we determined that we would no longer support two brand names and URLs in the United States and decided to migrate all traffic from sidestep.com to KAYAK.com, resulting in a $15.0 million impairment charge.

 

Other income (expense)

 

For the year ended December 31, 2011, we recorded a gain of $1.1 million related to our obligation to buy back shares of our common stock issued in connection with our acquisition of swoodoo in May 2010. We also recorded a $0.8 million gain related to the re-measurement of intercompany balances denominated in foreign currencies.

 

During 2010, we recorded a gain of $2.9 million related to our obligation to buy back shares of our common stock issued in connection with our acquisition of swoodoo in May 2010. In addition, we realized a gain of $0.5 million related to the sale of the TravelPost assets.

 

In 2009, we incurred a $1.0 million loss on the early extinguishment of debt.

 

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Income tax expense (benefit)

 

Prior to December 31, 2009, we recorded a full valuation allowance against our net deferred 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. In 2010, we incurred income tax expense of $12.1 million, including a $1.6 million increase to the valuation allowance, giving us an effective tax rate of 60.1%. In 2010, we incurred income tax expense of $12.1 million, resulting in an effective tax rate of 60.1%. Key effective tax rate drivers specific to 2010 were the sale of Travelpost, Inc., and an increase to the valuation allowance for state net operating losses incurred when we reduced our presence in California. In 2011, we incurred income tax expense of $6.7 million giving us an effective tax rate of 40.8%. The primary differences between the statutory rate and our effective tax rate include stock compensation from incentive stock options, state tax expense and differences in jurisdictional tax rates, as shown in the table below.

 

Provisions for income taxes compared with income taxes based on the federal statutory tax rate of 35% were as follows:

 

       December 31,  
       2009     2010     2011  

U.S. Statutory federal income tax rate

       35.0     35.0     35.0

State income taxes, net of federal benefits

       15.8     8.3     7.2

Compensation related to incentive stock options

       27.0     7.1     6.0

Gain on sale of TravelPost

       —          4.4     —     

Mark-to-market adjustments

       5.7     (4.8 )%      (2.6 )% 

Change to valuation allowance

       (149.1 )%      8.0     —     

Foreign rate differential

       —          —          (2.7 )% 

Other

       (1.5 )%      2.1     (2.1 )% 
    

 

 

   

 

 

   

 

 

 

Effective income tax rate

       (67.1 )%      60.1     40.8
    

 

 

   

 

 

   

 

 

 

 

Quarterly Financial Data/Seasonality

 

The following table presents unaudited consolidated financial data for the trailing eight quarters ended December 31, 2011. The operating results are not necessarily indicative of the results for any subsequent quarter.

 

    2010
Quarters ended
    2011
Quarters ended
 
   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 
    Mar 31     June 30     Sept 30     Dec 31    

  Mar 31  

   

June 30

   

Sept 30

   

Dec 31

 

Revenues

  $ 36,745      $ 43,721      $ 47,814      $ 42,418      $ 52,674      $ 56,753      $ 61,160      $ 53,947   

Cost of revenues (excludes depreciation and amortization)

    4,048        3,772        3,810        4,000        4,945        4,684        4,151        4,818   

Selling, general, and administrative

               

Marketing

    23,809        21,962        23,368        22,582        28,457        30,025        28,935        23,601   

Personnel

    6,615        7,101        7,271        8,777        10,039        9,800        10,286        10,660   

Other general and administrative expenses

    1,543        2,260        2,728        3,436        4,217        4,164        3,196        4,823   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total selling, general and administrative expenses (excludes depreciation and amortization)

    31,967        31,323        33,367        34,795        42,713        43,989        42,417        39,084   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Depreciation and amortization

    1,367        1,660        1,896        1,898        2,061        2,341        1,935        2,149   

Impairment of intangible assets

    —          —          —          —          14,980        —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

  $ (637   $ 6,966      $ 8,741      $ 1,725      $ (12,025   $ 5,739      $ 12,657      $ 7,896   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Seasonal factors cause our profitability to fluctuate from quarter to quarter. Typically, our highest revenue quarters are the second and third quarters due to the fact that high travel seasons fall in these quarters. 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.

 

In January 2011, we determined that we would not support two brand names and URLs in the United States and decided that we would migrate all traffic from sidestep.com to KAYAK.com. As a result, our SideStep brand name and URL intangible assets were impaired and we incurred a related impairment charge of $15.0 million in the first three months of 2011.

 

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 $6.8 million in cash, net, and 825,000 shares of our common stock. Pursuant to an option agreed to with the former swoodoo stockholders, in August 2011 we repurchased 685,219 of these shares at a price of €13.33 per share for a total of $13.1 million. We are no longer obligated to repurchase any additional shares.

 

In April 2011, we acquired all of the outstanding shares of JaBo Vertrieb-und Entwicklung GmbH, or JaBo Software, for $9.2 million in cash, net. JaBo Software operates checkfelix.com, a leading travel metasearch website in Austria.

 

Liquidity and Capital Resources

 

We have primarily funded our operations through the issuance of equity securities and cash flows from operations. Early in our history, we relied on cash provided from the sale of shares of our redeemable 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 and entered into $30.0 million of term loans to fund our acquisition of SideStep.

 

We began to generate cash flows from operations in late 2007 and have not required any additional financing to fund our operations. We repaid all outstanding principal and interest on the term loans in early 2009. We use our cash to fund operations, make capital expenditures and acquire complementary businesses from time to time. We also have not recorded U.S. income and foreign withholding taxes on the earnings of our foreign subsidiaries at December 31, 2011, because we intend to permanently reinvest those earnings.

 

As of December 31, 2011, we had cash and cash equivalents and marketable securities of $46.3 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. Our known material liquidity needs for periods beyond the next twelve months are described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Contractual Obligations”. We believe that cash from operations, together with our cash and short-term investment balance are sufficient to meet our ongoing capital expenditures, working capital requirements and other capital needs for at least the next twelve months.

 

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.

 

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The following table presents cash flow information for the stated periods:

 

     Year ended December 31,  
     2009     2010     2011  
    

(Dollar amounts in
thousands)

       
              

Cash flows from operating activities

   $ 12,616      $ 21,932      $ 32,899   

Cash flows from investing activities

     6,964        (8,375     (33,848

Cash flows from financing activities

     (27,239     5,737        1,809   

 

Cash flows from operating activities

 

Cash flows from operating activities were $32.9 million for the year ended December 31, 2011 as compared to cash flows from operating activities of $21.9 million for the year ended December 31, 2010, an increase of $11.0 million. The increase in operating cash flows is primarily related to cash from working capital of $2.6 million as of December 31, 2011 as compared to cash used for working capital of $5.4 million as of December 31, 2010. The change in cash from working capital relates primarily to an increase in payables. Non-cash charges increased to $20.6 million for the year ended December 31, 2011 from $19.3 million for the year ended December 31, 2010, primarily due to a decrease in SideStep deferred tax liabilities. Net income also increased to $9.7 million in 2011 from $8.0 million in 2010.

 

Cash flows from operating activities were $21.9 million and $12.6 million in 2010 and 2009, including net income of $8.0 million and $6.9 million, respectively. The difference in net income was offset by non-cash charges, which were $10.7 million higher in 2010 than in 2009, primarily due to changes in net deferred tax assets, stock based compensation, and amortization from swoodoo intangible assets acquired in May 2010. Cash used for working capital was $5.4 million for 2010 as compared to $2.9 million in 2009, due to an increase in our accounts receivable, partially offset by accrued expenses. As of December 31, 2010 and 2009, accounts receivable, net were $30.2 million and $18.7 million, respectively, and the majority of this increase was due to an increase in sales over the same period. The increase in accrued expenses is primarily attributable to increases in tax, marketing, and technology related accruals for the year ended December 31, 2010.

 

Cash flows from investing activities

 

Cash used in investing activities was $33.8 million and $8.4 million for the years ended December 31, 2011 and 2010, respectively. The year ended December 31, 2011 included $13.2 million in cash used to repurchase shares related to the acquisition of swoodoo in 2010. Cash used in investing activities included the net purchase of $7.2 million in marketable securities in 2011, an increase of $4.3 million from 2010. Cash used for business combinations was $9.2 million in 2011 as compared to $6.8 million in 2010 as discussed in “—Acquisitions” and the notes to our consolidated financial statements.

 

Cash used in investing activities was $8.4 million for the year ended December 31, 2010 compared to cash provided by investing activities of $7.0 million in 2009. Capital expenditures were $2.3 million in 2010 and 2009. During 2010, we had net purchases of marketable securities of $2.9 million, while in 2009 we had net sales of marketable securities of $9.2 million. In 2009, we sold marketable securities to generate cash used to pay down our term debt. During 2010, we acquired swoodoo for $6.8 million in cash, net, and received $3.6 million in cash from our sale of TravelPost.

 

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Cash flows from financing activities

 

Cash provided by financing activities was $1.8 million for the year ended December 31, 2011 as compared to $5.7 million for the year ended December 31, 2010. Proceeds and tax benefits from the exercise of stock options increased to $3.3 million in 2011 from $0.7 million in 2010. Cash used in connection with the initial public offering during 2011 was $1.5 million. The year December 31, 2010 included proceeds of $3.7 million from the repayment of shareholder loans and proceeds of $1.4 million from the exercise of common stock warrants.

 

Cash provided by financing activities was $5.7 million for the year ended December 31, 2010 compared to cash used for financing activities of $27.2 million for the same period in 2009. The difference was due primarily to $25.3 million used to pay off term loans in 2009. Additionally, in 2009, we provided loans to our shareholders of $2.5 million. These loans, plus earlier loans, were repaid in 2010, resulting in cash proceeds of $3.7 million.

 

Contractual Obligations

 

Our contractual obligations as of December 31, 2011 were as follows:

 

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

Operating lease obligations

   $ 6,301       $ 1,697       $ 2,228       $ 1,841       $ 535   

Content licensing and technology agreements

   $ 7,000       $ 7,000       $ —         $ —         $    —     

Total contractual cash obligations

   $ 13,306       $ 8,697       $ 2,228       $ 1,841       $ 535   

 

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 December 31, 2011.

 

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 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 and by facilitating transactions through our websites and mobile applications. 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

 

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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 in the period in which the travel was consumed. Generally, we receive travel consumption reports from travel suppliers and OTAs on a monthly basis which report in detail travel consumed in the immediately prior month.

 

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 advertisement, 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 13 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.

 

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.

 

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The following sets forth our option grants between January 1, 2009 and July 31, 2011, 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. This group of comparable public companies includes companies in four categories: online travel, e-commerce, advertising and recent IPOs. We select companies from these categories that are similar to us in at least one of the following areas: size, growth, liquidity, profitability and leverage.

 

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.

 

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

 

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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       $ 17.60       $ 2.78   

October 20, 2010

     2,079,590       $ 14.82       $ 17.60       $ 2.78   

October 21, 2010

     40,000       $ 15.50       $ 17.60       $ 2.10   

November 15, 2010

     110,000       $ 16.50       $ 17.60       $ 1.10   

December 8, 2010

     235,000       $ 16.50       $ 17.60       $ 1.10   

 

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.

 

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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 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 prepare a revised appraisal as of the grant date, which was completed in January 2011.

 

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This valuation was performed using the same methodology as described above for our July 31, 2010 valuation; however, given our preparations for a potential initial public offering, the likelihood of an initial public offering scenario increased to 60%, while the probabilities of a strategic sale or remaining as a private company were each assumed to be 20%. We calculated values under each scenario using financial projections as of October 31, 2010 as follows:

 

Initial Public Offering:

 

   

utilized the market approach, but expanded the peer group to include more companies in e-commerce and media, along with technology companies that recently completed initial public offerings;

 

   

applied a 1.5 year forward multiple of EBITDA determined as of the valuation date;

 

   

arrived at an implied share price of $25.69 assuming conversion of all convertible preferred stock to common stock; and

 

   

applied a discount for lack of marketability of shares of 13% and discounted the value back to present value using a discount rate of 19% to arrive at a per share price of $20.34.

 

Strategic Sale:

 

   

utilized the market approach and 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 19% to arrive at a price per common share of $15.76.

 

Remain as a Private Company:

 

   

utilized the income approach and a discount rate of 19% 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 59.45% and applied a discount for lack of marketability of 33% to arrive at a price per common share of $11.22.

 

We then applied the probabilities of each scenario to their respective price per common share to arrive at a value per common share of $17.60.

 

For the period from January 1, 2011 through July 31, 2011, we have 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  

January 25, 2011

     10,000       $ 17.60       $ 17.60       $ —     

March 2, 2011

     70,000       $ 20.00       $ 20.00       $ —     

June 7, 2011

     690,000       $ 21.00       $ 21.00       $ —     

 

We estimated the fair value of our stock at January 25, 2011 using the valuation prepared as of October 31, 2010. There were no significant transactions involving our stock between October 31, 2010 and January 25, 2011 that caused us to believe that this valuation was not still accurate.

 

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Concurrent with the grant of options on March 2, 2011, we prepared a revised valuation of our common stock. The valuation was performed using the same methodology as at October 31, 2010; however, given our preparations for a potential IPO we increased the likelihood of an IPO scenario to 85%, while the probabilities of a strategic sale or remaining as a private company were assumed to be 10% and 5%, respectively. We calculated values under each scenario using financial projections as of January 31, 2011 as follows:

 

Initial Public Offering:

 

   

utilized the market approach, with a peer group that included companies in travel and advertising, e-commerce and media, along with technology companies that recently completed IPOs;

 

   

applied a 1.5-year forward multiple of EBITDA determined as of the valuation date;

 

   

arrived at a marketable, minority value of $22.96 per share; and

 

   

applied a discount for lack of marketability of shares of 8% and discounted the value back to present value using a discount rate of 17% to arrive at a per share price of $20.44.

 

Strategic Sale:

 

   

utilized the market approach and 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 17% to arrive at a price per common share of $18.75.

 

Remain as a Private Company:

 

   

utilized the income approach and a discount rate of 17% 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 55.4% and applied a discount for lack of marketability of 29% to arrive at a price per common share of $12.24.

 

We then applied the probabilities of each scenario to their respective price per common share to arrive at a value per common share of $19.86.

 

When determining the fair value of our common stock, management and the board of directors considered not only the valuation analysis, but also an offer from one of our investors to purchase a significant number of shares of common stock from another of our shareholders at a price of $20.00. Although the sale was not ultimately consummated, management and the board of directors considered the offer price to be representative of the fair value of our stock as validated by the valuation.

 

Prior to the grant of options on June 7, 2011, we prepared a revised valuation of our common stock. The valuation was performed using the same methodology as was used previously; however, given various uncertainties surrounding our IPO, we decreased the likelihood of the IPO scenario to 50%, while the probabilities of a strategic sale or remaining as a private company were assumed to be 20% and 30%, respectively. We calculated values under each scenario using financial projections as of April 30, 2011 as follows:

 

Initial Public Offering:

 

   

Utilized the market approach, with a peer group that included companies in travel and advertising, ecommerce and media, along with technology companies that recently completed IPOs;

 

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Applied a 1.5 year forward multiple of EBITDA determined as of the valuation date;

 

   

Arrived at a marketable, minority value of $27.97 per share; and

 

   

Applied a discount for lack of marketability of shares of 7% and discounted the value back to present value using a discount rate of 16% to arrive at a per share price of $24.30.

 

Strategic Sale:

 

   

Utilized the market approach and 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 19% and discounted the value back to present value using a discount rate of 16% to arrive at a price per common share of $20.24.

 

Remain as a Private Company:

 

   

Utilized the income approach and a discount rate of 16% 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 56.7% and applied a discount for lack of marketability of 23% to arrive at a price per common share of $15.71.

 

We then applied the probabilities of each scenario to their respective price per common share to arrive at a value per common share of $20.91.

 

When determining the fair value of our common stock, management and the Board of Directors considered not only the valuation analysis, but also recent sales of our stock to current investors. On April 20, 2011, an individual who was not an employee of the Company sold 201,409 shares of common stock, 173,591 shares of Series A Preferred Stock and 225,000 shares of Series B-1 Preferred Stock to an existing investor at $17.75 per share. On May 13 and May 20, 2011, two Company executives sold a total of 400,000 shares of Series A Preferred Stock for $21.00 per share to an existing investor.

 

Based on the valuation, recent significant sales of stock and knowledge of our financial performance and condition, the Board of Directors determined the value of our common stock to be $21.00 per share.

 

Income Taxes

 

We are subject to income taxes in the U.S. and some foreign jurisdictions. We use estimates and exercise significant judgment to calculate our deferred taxes, tax from uncertain tax positions, and the overall income tax provision/(benefit). As a result, ultimate settlement of our tax positions may differ from the amounts accrued and may result in an increase or decrease to income tax expense in our results of operations in the future.

 

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. In 2010, we recorded a valuation allowance against certain state deferred tax assets attributable to net operating losses as a result of a change in our state allocation. There was no significant change to the valuation allowance in 2011.

 

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Our effective tax rate has differed from the statutory rate primarily due to the impact of state taxes, nondeductible stock compensation expense and lower tax rates outside the United States. Our 2011 effective tax rate was 40.8%.

 

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. 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. Based on our most recent annual analysis, we believed that the fair values of our reporting units exceeded their carrying values by a significant amount and therefore no impairment of goodwill was recorded. 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 “General and Administrative” line of our statement of operations, and larger cumulative translation adjustments in the “Accumulated Other Comprehensive Income” category of our consolidated balance sheet. 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 better approach to finding travel online. 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 multiple filtering and sorting options, 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, and in many cases, users may now complete hotel bookings directly through our websites and mobile applications.

 

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

 

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

 

   

For the year ended December 31, 2011, we generated $224.5 million of revenues, representing growth of 32% over the year ended December 31, 2010;

 

   

For the year ended December 31, 2011, we generated income from operations of $14.3 million as compared to income from operations of $16.8 million for the year ended December 31, 2010. After adjusting for a $15.0 million impairment charge related to our decision to stop supporting the SideStep brand name, operating income for the year ended December 31, 2011 was $29.2 million, a 74% increase over the same period in 2010.

 

   

For the year ended December 31, 2011, we had Adjusted EBITDA of $50.2 million representing growth of 56.2% over the year ended December 31, 2010. Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization, or Adjusted EBITDA, is a non-generally accepted accounting principle metric used by management to measure our operating performance. See “—Summary Consolidated Historical Operating Data” for an additional description of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to income (loss) from operations.

 

   

For the year ended December 31, 2011, we processed 899 million user queries for travel information, representing growth of 42% over the year ended December 31, 2010; and

 

   

KAYAK mobile applications have been downloaded over 13 million times since their introduction in March 2009. For the year ended December 31, 2011, we had 7 million downloads, representing growth of 78% over the year ended December 31, 2010.

 

As of January 31, 2012, we had 162 employees, and we had local websites in 14 countries outside the U.S., including the United Kingdom, Germany, France, Spain, Italy and Austria.

 

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 $803 billion in global expenditures in 2010, and is projected to increase at a 6% CAGR through 2012. Online leisure and unmanaged business travel

 

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spend, or online travel spend, was approximately $247 billion of this amount, or 31%, with this category increasing at a 16% CAGR between 2005 and 2010. 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 2010 through 2012, growing to represent 33% of total travel purchases in 2012.

 

The online travel industry is composed of thousands of travel supplier and OTA websites, which compete for travel bookings. In 2010, travel supplier websites accounted for 63% of total online travel bookings, and the remaining 37% was provided by OTAs.

 

The Global Opportunity

 

In the U.S., the online travel market increased at a 9% CAGR from 2005 through 2010, reaching $97 billion in 2010, which was 38% of total U.S. travel spend. The U.S. online travel market is projected to grow at an 8% CAGR from 2010 through 2012.

 

In Europe, the online travel market grew at a 22% CAGR from 2005 through 2010, reaching $97 billion in 2010, which was 33% of total European travel spend. The European online travel market is projected to grow at a 9% CAGR from 2010 through 2012. 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 27% CAGR from 2005 through 2010, reaching $53 billion in 2010, which represented 21% 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 a 15% CAGR from 2010 through 2012.

 

Key Online Travel Products

 

The two largest categories of online travel are airline ticket sales and hotel bookings. In 2010, airline ticket sales represented 53% of total online travel purchases, followed by hotel bookings at 27%.

 

Airline tickets are the most common travel product researched and purchased online, with global online sales reaching 38% of overall global airline ticket sales in 2010. Online airfare sales are projected to grow at a 10% CAGR from 2010 through 2012. 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 11% CAGR from 2010 through 2012. Additionally, only 23% of 2010 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.

 

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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 2010 was $588 billion. Of this amount, $70 billion, or 12%, was spent online. Furthermore, for the period from 2010 through 2015, online advertising is projected to grow at a 15% CAGR, as compared to the 6% CAGR projected for combined online and offline advertising.

 

Travel represents one of the largest advertising categories, with advertisers spending $31 billion globally on travel-related advertising in 2010. Of this amount, only $4 billion, or 14%, 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 26% CAGR in online travel advertising spend between 2005 and 2010. We believe that travel advertising will continue to 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 $9 billion by 2015, a CAGR of 15% between 2010 and 2015.

 

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, in March 2009 they projected this number to grow by at least 1 billion in the next few years. 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% 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,

 

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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 2011, 899 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, and in some cases, they can complete their bookings directly through our websites and mobile applications.

 

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

 

We dedicate the majority of our attention to developing high performance technology. This technology 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 technology detects and removes inaccurate prices or results in this data. Our ranking software algorithm also determines 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 examples 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 2011 study conducted by TNS Custom Research, Inc. 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.” In 2011, 78% of our query volume was generated from people who directly visited our websites, and only 5% 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, OTAs and technology providers. We query and display information in direct response to a KAYAK user’s query parameters. 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 or in many cases, users may complete hotel bookings directly through our websites or mobile applications.

 

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

 

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parameters. As examples, an airline can limit its advertisements to appear only for the cities 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, public domain technologies and tiered pricing arrangements with third-party software providers so that as queries continue to grow, we do not incur proportionately higher software costs. Since all travel products are purchased by our users directly on the travel supplier’s or OTA’s website or through third-party booking and fulfillment providers, 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 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, enhance the relevance of the results and make the booking path easier for travelers. 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 enhancements to our offering include the introduction of KAYAK on multiple mobile platforms, a trip management tool, KAYAK Explore, a map-based search feature and the ability for users to complete bookings directly through us.

 

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 TNS Custom Research, Inc. 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 31% for the month of January 2012. By comparison, the four highest rated travel brands in this category had an average unaided awareness of 47%, according to this survey. We will continue to invest in broad reach marketing to increase our unaided awareness.

 

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Grow Our Business Internationally

 

We operate websites in 14 countries outside of the U.S., including Germany, the United Kingdom, France, Spain, Italy and Austria. We believe that the international opportunity for our services is sizable, and we intend to continue to invest in both headcount and marketing in 2012. As part of this strategy, we acquired swoodoo, a leading German travel search company, in May 2010 and checkfelix.com, a leading Austrian travel search company, in April 2011. Furthermore, we established 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 and content, increasing our hotel-related marketing and search engine spending, improving cross-promotion of hotels in flight query results, and increasing the number of hotels that can be booked directly through our websites and mobile applications. Hotel query volume more than doubled from 2009 to 2011.

 

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 over 13 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.

 

Our Brands – KAYAK, swoodoo, and checkfelix.com

 

We operate our websites and mobile applications under three brands: KAYAK, swoodoo and checkfelix.com. 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: 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 and growing the swoodoo brand in Germany.

 

The SideStep brand, which we acquired in December 2007, was used for our sidestep.com website. In January 2011, we determined that we would not support two brand names and URLs in the United States and began redirecting traffic from sidestep.com to KAYAK.com. The swoodoo brand, which we acquired in May 2010, is used for our swoodoo.com website and the related mobile travel application, which is a leading travel search platform in Germany. We acquired JaBo Vertrieb-und Entwicklung GmbH, which supported the checkfelix.com brand, in April 2011. Checkfelix.com is a leading travel search platform in Austria.

 

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 also provide our services on a co-branded, revenue sharing basis through certain third party websites, such as Bing Travel. We are continuing the development of a distribution and advertising platform for our mobile applications.

 

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Distribution Revenues

 

We generate distribution revenues by sending qualified leads to travel suppliers and OTAs and by facilitating hotel bookings directly through our websites and mobile applications. 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, and in many cases, users may now complete hotel bookings directly through our websites and mobile applications. 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. Booking and fulfillment providers pay us after a user completes a booking through the KAYAK websites or mobile applications. We separately negotiate and enter into our distribution agreements, and these agreements set forth the negotiated payment terms for the applicable travel supplier, OTA or booking and fulfillment providers. Travel suppliers and OTAs are generally able to select the payment terms in these agreements based on what best suit their needs.

 

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 the likelihood of a purchase on their website.

 

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.

 

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 2011, we received and processed 899 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 software then detects and eliminates inaccurate prices or results in this data, and our ranking software then determines 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.

 

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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 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 use of multiple secured hosting facilities provides us 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 and tablets. 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.

 

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 assisted input based on the user’s location.

 

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 comparison testing of new features. We release new code to our websites on a nearly weekly basis. Some examples of our past innovations include a user interface capable of updating page elements without reloading the entire page and “sliding bars” and other tools to filter query results based on relevant criteria, such as specific departure and arrival times for flights.

 

Certain costs to develop internal use computer software are capitalized because these costs are expected to be recoverable, while costs incurred during the preliminary project stage, as well as maintenance and training costs, are expensed as incurred. We capitalized software and website development costs of $0.6 million, $1.4 million and $1.0 million during the years ended December 31, 2009, 2010 and 2011, respectively.

 

Avoid Unnecessary Complexity

 

As technology 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

 

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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, checkfelix.com and swoodoo. All of these trademarks, other than swoodoo and checkfelix.com, are registered in the U.S. and many of them are also registered in other jurisdictions.

 

We have ten issued U.S. patents and eleven 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 brand marketing campaigns designed to grow brand awareness and online marketing investments designed to generate additional query volume.

 

Brand Marketing

 

To grow brand awareness, we advertise in broad reach media, including television, outdoor and online display media. During 2011, we spent $57.7 million on KAYAK, swoodoo and checkfelix brand marketing. We measure the return on investment of our brand marketing through online brand tracking studies and overall query growth. 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.

 

Online Marketing

 

We also market our services and acquire traffic to our websites by purchasing travel-related keywords from general search engines and through other online marketing channels. The purchase of travel-related keywords consists of anticipating what words and terms consumers will use to search for travel on general search engines and then bidding on those words and terms in the applicable search engine’s auction system. As a result, we bid against other advertisers for preferred placement on the applicable general search engine’s results page. We spent $45.6 million on online marketing in 2011.

 

We plan to continue both broad reach advertising and online advertising for the foreseeable future.

 

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 Orbitz, since 2004. Under the terms of our current long-term agreement, which we entered into in April 2009 and have subsequently amended,

 

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Orbitz provides us with access to their travel information and pays us for any transactions we send to one of their websites. In return, we provide exclusivity to Orbitz 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 websites at locations we determine. Google and KAYAK share the revenues that are generated from these advertisements. Our agreement with Google expires October 31, 2012.

 

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 December 31, 2013.

 

Other Relationships

 

In addition, our 2011 commercial relationships have included agreements with over 300 travel suppliers, OTAs and technology providers. These relationships provide us with access to travel information, booking, fulfillment and customer service solutions as well as distribution and advertising revenue, and are established and managed by our Business Development, Advertising Sales and Account Management teams. Our Business Development team negotiates agreements with travel suppliers, OTAs and technology providers for access to their travel content, for payment from distribution-related referrals and for content delivery, booking, fulfillment and customer service solutions. 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.

 

These other significant relationships 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.

 

Technology Providers: Amadeus, DoubleClick, Pegasus, World Choice Travel, IAN, TRX, SynXis and TravelClick.

 

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.

 

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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. 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 January 31, 2012, we had 162 employees, consisting of 136 in the U.S., 14 in Zurich, 6 in Germany and 6 in England. Of those employees, 95 are on our engineering and development team. As of January 31, 2012, we also had an arrangement with an outsourced engineering team in Lithuania that provides us with approximately 20 contractors for engineering and development functions, a team of 27 contractors in Pakistan who provide engineering, data analysis and data operator functions, and two contractors in the U.S. that assist with engineering activities.

 

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 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. To the extent we expand our business model in the air transportation area, we could be subject to DOT oversight.

 

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

 

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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. The case was set for trial on September 10, 2012. The court has since stayed proceedings in the district court pending resolution of plaintiff’s appeal of certain rulings by the court, which granted summary judgment on several claims in favor of us and other defendants.

 

In August 2010, Orbitz initiated arbitration with us through the American Arbitration Association in the state of New York. Orbitz contends that we have violated the parties’ 2009 Promotion Agreement by failing to abide by certain exclusivity provisions relating to the display of certain advertising placements on our websites. It also contends that we owe it in excess of $2.5 million as a result of overpayments that Orbitz allegedly made to us over the past few years when Orbitz 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 Orbitz for failing to accurately report and account for net revenues under the agreement. We denied Orbitz’s allegations, asserted a number of affirmative defenses in response to both claims, and continue to stand on our position that Orbitz materially breached the agreement by failing to accurately report and pay net revenue. A three-day evidentiary hearing took place in New York on May 24, 2011. On December 31, 2011, the arbitration panel issued an interim order that, with limited exceptions, found in our favor regarding the exclusivity provisions of the agreement. The arbitration panel previously ordered the parties to engage in an audit on the net revenue claim. This audit is pending, and we expect a final decision of the arbitration panel after its completion.

 

On March 22, 2011, Orbitz filed a lawsuit against us in the Circuit Court of Cook County in Chicago, Illinois alleging that we violated the 2009 Promotion Agreement by failing to abide by certain exclusivity provisions because of our use of certain third party technology providers in connection with our hotel booking functionality. Orbitz sought a temporary restraining order to restrain our use of this booking feature. On March 25, 2011, the judge denied Orbitz’s request for a temporary restraining order, finding that Orbitz did not sustain its burden of showing a likelihood of success on the merits. On May 9, 2011, Orbitz initiated an arbitration asserting these same claims. On May 11, 2011, Orbitz voluntarily dismissed the court case in favor of continuing to arbitrate the matter. The parties are now in the process of finalizing the designation of the arbitration panel. No other deadlines have been set. We intend to vigorously defend ourselves in this matter.

 

On June 13, 2011, Source Search Technologies LLC filed a complaint against us for patent infringement in the U.S. District Court of New Jersey. The complaint alleges, among other things, that our website infringes a patent owned by Source Search entitled, a “Computerized Quotation System and Method.” According to the complaint, the patent allegedly allows a central computer to filter requests for quotes, and to interface to various vendor computers to obtain and forward these quotes to potential buyers of goods and services. We were served with the complaint on June 17, 2011. We filed a response on August 5, 2011, denying the allegations of patent infringement and asserting a counterclaim for declaratory judgment of non-infringement and invalidity. On November 3, 2011, the court terminated the case, pending the conclusion of the U.S. Patent Office’s reexamination of Source Search’s patent.

 

On September 15, 2011, LVL Patent Group, LLC (now known as CyberFone Systems, LLC, or CyberFone) filed a complaint against us for patent infringement in the U.S. District Court for the District of Delaware. The complaint alleges, among other things, that our technology infringes a patent owned by CyberFone purporting to cover a “Telephone/Transaction Entry Device and System for Entering Transaction Data in Databases” and seeks injunctive relief, monetary damages, costs and attorneys fees. More specifically, the complaint alleges infringement by providers who make, use, sell, offer to sell, or import a method of obtaining data transaction information entered on a telephone, forming a plurality of exploded data transactions for the single transaction, and sending different exploded data transactions to different destinations, using its mobile services network platform. We subsequently filed two motions to dismiss with the court and anticipate a ruling on these motions in early 2012. We intend to vigorously defend ourselves in this matter.

 

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On December 29, 2011, Data Distribution Technologies LLC, or DDT, filed a complaint against us for patent infringement in the U.S. District Court for the Southern District of New York. The complaint alleges, among other things, that our website infringes a patent owned by DDT entitled, a “Web-Updated Database with Record Distribution by Email.” According to the complaint, the patent covers a system for maintaining, updating and distributing by email flight information records corresponding to desired flights on a subscribing traveler’s “Price Alerts” list, and a method of maintaining, updating and distributing by email flight information records to travelers. We were served with the complaint on January 11, 2012. Our response to the complaint is due on March 23, 2012.

 

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 7,375 square feet in Norwalk, Connecticut for our corporate headquarters. We maintain an office of approximately 29,381 square feet in Concord, which is used primarily by our technology team. In addition, we lease office space for our foreign subsidiaries in London, England, Munich, Germany and Zurich, Switzerland. Our leases are set to expire at varying dates between May 2013 and August 2017.

 

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 March 7, 2012 and a brief account of their business experience.

 

Name

   Age     

Position

Daniel Stephen Hafner

     43      

Chief Executive Officer, Cofounder and Director

Paul M. English

     48      

Chief Technology Officer, Cofounder and Director

Willard H. Smith

     45      

Chief Financial Officer

Melissa H. Reiter

     43      

Senior Vice President of Finance and Investor Relations

Robert M. Birge

     41      

Chief Marketing Officer

Karen Ruzic Klein

     42      

General Counsel and Corporate Secretary

Keith D. Melnick

     42      

Chief Commercial Officer

Paul D. Schwenk

     45      

Senior Vice President of Engineering

William T. O’Donnell, Jr.

     44      

Chief Architect

Dr. Giorgos Zacharia

     38      

Chief Scientist

Dr. Christian W. Saller

     40      

Managing Director for Europe

Terrell B. Jones (1)

     63      

Director

Joel E. Cutler

     53      

Director

Michael Moritz

     57      

Director

Hendrik W. Nelis

     48      

Director

Brian H. Sharples

     51      

Director

Gregory S. Stanger

     47      

Director

 

  (1)   Chairman of our board of directors.

 

Executive Officers

 

Daniel Stephen Hafner, 43, 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, 48, 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

 

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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 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.

 

Willard H. Smith, 45, was appointed our Chief Financial Officer and assumed responsibilities in June 2011. As of October 24, 2011, Mr. Smith also manages all human resource functions for KAYAK. Prior to his appointment as our Chief Financial Officer, from August 1998 until April 2011, he held various positions with Novell, Inc., a publicly-traded manufacturer of software, most recently as its Vice President - Global Finance from July 2006 until April 2011. Prior to that, Mr. Smith worked with various financial advisory services firms, including Cowen & Co., where he was Vice President from 1996 until 1998 and raised private equity financing for clients in the technology and healthcare sectors, The Bridgeford Group, Inc. and Merrill Lynch & Co. Mr. Smith received a B.A. in history from Dartmouth College and an M.B.A. from The Wharton School, University of Pennsylvania.

 

Melissa H. Reiter, 43, has served as our Senior Vice President of Finance and Investor Relations 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, 41, 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, 42, has served as our General Counsel since November 2007 and our Corporate Secretary since February 2008. 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, 42, 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, 45, 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.

 

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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., 44, 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.

 

Dr. Giorgos Zacharia, 38, 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, Dr. 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, 40, 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.

 

Terrell B. Jones, 63, has been the Chairman of our board of directors since March 2004 and also serves as the Chairman of our nominating and governance committee and as a member of 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 which he helped found and which is currently 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, Smart Destinations, a privately held

 

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provider of pre-paid access to sightseeing destinations, since July 2009 and recently joined the board of Luxury Link, LLC, an online luxury travel information provider. 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, the board of directors of Travelocity.com Inc. from March 2000 until May 2002 and the board of directors of Entrust, Inc. from November 1998 until 2004, where he also served on the compensation committee. 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.

 

Joel E. Cutler, 53, has served as a member of our board of directors since March 2004 and also serves on our compensation committee. 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, 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 ITA Software, Inc., a provider of airfare pricing and shopping, 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 were privately held companies during the periods of his service. 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.

 

Michael Moritz, 57, has served as a member of our board of directors since December 2007 and also serves on our nominating and governance committee. 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, and of LinkedIn Corporation, a publicly-traded online professional network, since January 2011. He has previously served on the boards of directors of Flextronics Ltd., Google Inc., PayPal, 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, 48, has served as a member of our board of directors since May 2006 and also serves as the Chairman of our compensation committee and as a member of our audit committee. 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.

 

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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.

 

Brian H. Sharples, 51, has served as a member of our board of directors since December 2011. Mr. Sharples is one of the co-founders of HomeAway, Inc. and has served as its President, Chief Executive Officer and as a member of its board of directors since its inception in April 2004. Prior to that, Mr. Sharples was an angel investor from 2001 until 2004 and also served as Chief Executive Officer of Elysium Partners, Inc., a company in the vacation club ownership market, from 2002 until 2003. Mr. Sharples served as President and Chief Executive Officer of IntelliQuest Information Group, Inc., a supplier of marketing data and research to Fortune 500 technology companies, from 1996 to 2001, as President from 1991 to 1996, and as Senior Vice President from 1989 to 1991. Prior to IntelliQuest, Mr. Sharples was Chief Executive Officer of Practical Productions, Inc., an event-based automotive distribution business, from 1988 to 1989 and a consultant with Bain & Co. from 1986 to 1988. Mr. Sharples has served on the board of directors and compensation committee of Whaleshark Media, Inc., an online coupon site aggregator, since June 2011. He received a B.S. in math and economics from Colby College and an M.B.A. from the Stanford University Graduate School of Business. The specific experience, qualifications, attributes and skills that Mr. Sharples brings to our board of directors are his previous tenures in executive positions at various public and private technology companies and his experience in the vacation rental industry.

 

Gregory S. Stanger, 47, has served as a member of our board of directors since March 2011 and also serves as the Chairman of our audit committee and as a member of our compensation committee and our nominating and governance committee. Mr. Stanger served as the Chief Financial Officer of Chegg, Inc., a textbook rental service, from March 2010 to October 2011. From June 2005 to June 2009, Mr. Stanger served as a venture partner at Technology Crossover Ventures, a private equity and venture capital firm, and was an executive in residence from December 2003 to June 2005. Prior to that, Mr. Stanger served as Senior Vice President, Chief Financial Officer and director of Expedia, Inc., an online travel company, from February 2002 to December 2003 and as its Chief Financial Officer from October 1999 to December 2003. Before joining Expedia, he served as Senior Director, Corporate Development of Microsoft Corporation and held various positions within Microsoft’s finance and corporate development departments since 1991. Mr. Stanger has previously served on the boards of directors of Netflix, Inc., drugstore.com, Inc. and numerous private companies. He served as audit committee chair on most of these boards, including Netflix and drugstore.com. Additionally, he has served on the board of the Yosemite Conservancy since 2010. He received a B.A. from Williams College and an M.B.A. from the University of California at Berkeley. Mr. Stanger brings to our board of directors significant financial and accounting experience from his service as the former chief financial officer of a publicly-traded corporation and the current chief financial officer of Chegg, Inc. His managerial experience and his prior service on numerous boards make him a valuable source of strategic, operational, and corporate governance guidance.

 

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 eight 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.

 

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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, 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 and the holders of Series A convertible preferred stock, Series C convertible preferred stock and Series D convertible preferred stock, voting together an on as converted basis, the right to designate one member to the board of directors. In furtherance of those provisions, under our Stockholders’ Agreement and our Sixth 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 two additional directors are 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 Seventh 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. Stanger and Mr. Sharples are the joint appointees of the three designators.

 

Corporate Governance and Director Independence

 

Under Rule 5605(b)(1) of the NASDAQ Marketplace Rules, independent directors must comprise a majority of a listed company’s board of directors within one year of listing. In addition, the NASDAQ Marketplace 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 NASDAQ Marketplace Rule 5605(a)(2), 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. Cutler, Jones, Moritz, Nelis, Stanger and Sharples each qualify as an independent director under the corporate governance rules of the NASDAQ Stock Market. In making this determination, our board of directors affirmatively determined that none of Messrs. Cutler, Jones, Moritz, Nelis and Stanger have a relationship with us that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. Our board of directors has also determined that Messrs. Hafner and English are not independent under the NASDAQ Marketplace Rules because they are executive officers of KAYAK.

 

Board Committees

 

Our board of directors has established an audit committee, a compensation committee and a nominating and governance committee. 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.

 

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Audit Committee

 

Our audit committee currently consists of Messrs. Jones, Nelis and Stanger, with Mr. Stanger serving as Chairman. Our audit committee has 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.

 

Our board of directors has affirmatively determined that each of Messrs. Jones, Nelis and Stanger meets the definition of “independent director” for purposes of serving on an audit committee under Rule 10A-3 of the Exchange Act and the NASDAQ Marketplace Rules. We believe that each member of our audit committee meets the requirements for financial literacy. In addition, Mr. Stanger qualifies as our “audit committee financial expert.”

 

Our board of directors has adopted a written charter for our audit committee, which will be available on our website at KAYAK.com, the contents of which are not incorporated herein.

 

Compensation Committee

 

Our compensation committee currently consists of Messrs. Cutler, Nelis, and Stanger, with Mr. Nelis serving as Chairman. The compensation committee is 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;

 

   

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.

 

Our board of directors has affirmatively determined that each of Messrs. Cutler, Nelis and Stanger meets the definition of “independent director” for purposes of serving on a compensation committee under the applicable rules and regulations of the SEC and the NASDAQ Stock Market.

 

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Our board of directors has adopted a written charter for our compensation committee, which will be available on our website at KAYAK.com, the contents of which are not incorporated herein.

 

Nominating and Governance Committee

 

Our nominating and governance committee consists of Messrs. Jones, Moritz and Stanger, with Mr. Jones serving as Chairman.

 

The nominating and governance committee is 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.

 

Our board of directors has affirmatively determined that each of Messrs. Jones, Moritz and Stanger meets the definition of “independent director” for purposes of serving on a corporate governance and nominating committee under the applicable rules and regulations of the SEC and the NASDAQ Stock Market.

 

Our board of directors has adopted a written charter for our nominating and governance committee, which will be available on our website at KAYAK.com, the contents of which are not incorporated herein.

 

Compensation Committee Interlocks and Insider Participation

 

During the last fiscal year, Messrs. Cutler, Nelis and Mr. Gregory E. Slyngstad, one of our directors at the time, 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. These relationships consist of the following:

 

Sale of Travelpost.com

 

On March 5, 2010, we sold certain of our assets related to the website travelpost.com and its travel information business to The New Travelco, Inc., a Delaware corporation, which subsequently changed its name to TravelPost, Inc., and later changed its name to Trove, Inc. These assets consisted primarily of TravelPost-specific web content, software components, customer information, web domain names, trademarks and trademark applications, contracts and goodwill associated with TravelPost. Mr. Slyngstad was the Chief Executive Officer and is a director of TravelPost, Inc. and General Catalyst Group V, L.P. and GC Entrepreneurs Fund V, L.P., both of which are affiliated with General Catalyst Partners, of which Joel E. Cutler, one of our directors, is managing director and cofounder, are stockholders of TravelPost, Inc. On March 5, 2010, we entered into the following agreements with The New Travelco, Inc. in connection with the transaction:

 

   

Asset Purchase Agreement, which provides for the sale to The New Travelco, Inc. of certain assets in exchange for $3.6 million in cash, 800,000 shares of The New Travelco, Inc. common stock and the assumption by The New Travelco, Inc. of certain of our obligations. The purchase price was established through a combination of third-party appraisal efforts and negotiations between us and The New Travelco, Inc.

 

   

Commercial Agreement, pursuant to which we granted to The New Travelco, Inc. a three-year license to reproduce and publicly display hotel reviews and hotel-related information in exchange for a monthly license fee of $50,000 for the term of the license.

 

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Common Stock Purchase Agreement, providing for the transfer to us of 800,000 shares of The New Travelco, Inc. common stock referred to above and under which we agreed to a lock-up period of 180 days following The New Travelco, Inc.’s first firm commitment underwritten public offering of its common stock.

 

   

Patent License Agreement, pursuant to which we granted The New Travelco, Inc. a royalty-free and perpetual license to use certain processes for the operation of the travelpost.com website and associated domain names.

 

   

Software License Agreement, pursuant to which we granted The New Travelco, Inc. a royalty-free and perpetual license to use certain computer programs in connection with the operation of the travelpost.com website and related domain names.

 

   

Right of First Refusal and Co-Sale Agreement, pursuant to which we agreed to certain preemptive rights in favor of The New Travelco, Inc. with respect to its shares of common stock held by us. Mr. Slyngstad, General Catalyst Group V, L.P., GC Entrepreneurs Fund V, L.P. and certain other stockholders of The New Travelco, Inc. were additional parties to the agreement.

 

   

Voting Agreement, under which we agreed to vote shares of The New Travelco, Inc.’s capital stock held by us in favor of the election of certain individuals as directors of The New Travelco, Inc. in accordance with the provisions of the agreement. Mr. Slyngstad, General Catalyst Group V, L.P., GC Entrepreneurs Fund V, L.P. and certain other stockholders of The New Travelco, Inc. were additional parties to the agreement.

 

Stockholders’ Agreement

 

On May 6, 2010, in connection with our acquisition of swoodoo, we entered into a Stockholders’ Agreement with certain holders of our convertible preferred stock and our common stock, including funds affiliated with General Catalyst Partners, funds affiliated with Sequoia Capital, of which Michael Moritz, one of our directors, is a partner, funds affiliated with Accel Partners, of which Hendrik W. Nelis, another of our directors, is a partner, Oak Investment Partners, one of our stockholders, Mr. Hafner, Mr. English and Dr. Christian W. Saller, our Managing Director for Europe. Among other things, the agreement provides for the following:

 

   

it gives us and certain of our stockholders the right of first refusal with respect to a sale of any of the shares of our common stock issued to Dr. Saller and other former swoodoo stockholders in connection with the acquisition, which shares of common stock will be automatically converted into shares of our Class B common stock upon completion of this offering;

 

   

it obligates Dr. Saller and other holders of the shares of our common stock issued in connection with the acquisition, which shares of common stock will be automatically converted into shares of our Class B common stock upon completion of this offering, to vote their shares for the election of the members of our board of directors consistent with the terms of our Fifth Amended and Restated Stock Restriction and Co-Sale Agreement; and

 

   

it provides that, in the event of an approved sale of us, Dr. Saller and other holders of the shares of our common stock issued in connection with the acquisition, which shares of common stock will be automatically converted into shares of our Class B common stock upon completion of this offering, shall be required to vote their shares in favor of the sale.

 

Stock Restriction and Co-Sale Agreement

 

On December 20, 2007, we entered into the Fifth Amended and Restated Stock Restriction and Co-Sale Agreement with certain holders of our convertible preferred stock and our common stock, including America Online, Inc., certain funds affiliated with General Catalyst Partners, Sequoia Capital and Accel Partners, respectively, Oak Investment Partners, Mr. Slyngstad, Mr. Hafner, trusts of which Mr. Hafner is a trustee,

 

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Mr. English and trusts of which Mr. English is a trustee. The requisite stockholder parties to this agreement have agreed that this agreement will terminate upon the effectiveness of the registration statement of which this prospectus is a part. Among other things, the agreement provides for the following:

 

   

it gives us and the preferred stockholders party to the agreement a right of first refusal with respect to proposed sales by certain holders of shares of KAYAK common stock listed in the agreement, which shares of common stock will be automatically converted into shares of our Class B common stock upon completion of this offering, to third parties;

 

   

it establishes the composition of our board of directors;

 

   

it provides that, in the event of an approved sale of our company, the parties to the agreement shall also be obligated to vote in favor of the sale; and

 

   

it gives Oak Investment Partners the right to designate a board observer.

 

Investor Rights Agreement

 

On March 22, 2010, we entered into the Sixth Amended and Restated Investor Rights Agreement with certain of our investors referred to therein and our founders group, consisting of Mr. Hafner and trusts of which Mr. Hafner is a trustee and Mr. English and trusts of which Mr. English is a trustee. The investors include funds affiliated with General Catalyst Partners, funds affiliated with Sequoia Capital, funds affiliated with Accel Partners, Oak Investment Partners, Messrs. Slyngstad, Hafner and English. Among other things, the agreement provides for the following:

 

   

it establishes certain restrictions with respect to the transfer and issuance of our capital stock, including a right of first refusal in favor of certain investors and our founders group with respect to the issuance of certain securities by us; however, the requisite stockholder parties to this agreement have agreed that such provisions will terminate upon the effectiveness of the registration statement of which this prospectus is a part;

 

   

it provides certain holders of shares of our convertible preferred stock and common stock, which shares of common stock will be automatically converted into shares of our Class B common stock upon completion of this offering, with certain demand, “piggyback” and short-form registration rights, subject to lock-up arrangements;

 

   

it provides for indemnification for certain liabilities in connection with a registration of our securities; and

 

   

it limits our ability to incur debt, except for indebtedness under certain specified loan arrangements.

 

Services Agreement with ITA Software, Inc.

 

On March 3, 2005, we entered into a Services Agreement with ITA Software, Inc., or ITA, of which Mr. Cutler was a director and funds affiliated with General Catalyst Partners are 10% stockholders, for the licensing to us of airline faring engine software. The agreement was subsequently amended on July 18, 2007, March 11, 2008 and January 1, 2009. We paid ITA an initial payment of $166,666 followed by a monthly service fee based on the number of queries performed, subject to a minimum of $83,333 per month, a software maintenance and operation fee of $225 per hour and a hardware fee per month of $1,450 per dual processor server used.

 

On March 11, 2008, in addition to our arrangement with ITA, we agreed to assume payment obligations of SideStep to ITA following our acquisition of SideStep. On January 1, 2009, we agreed to amend the fee schedule as follows: to increase the monthly service fee to a minimum of $500,000 for the period until January 1, 2010, and a minimum of $583,333 per month thereafter until our aggregate payments for 2012 equal certain agreed-upon amounts, following which we would cease such monthly minimum payments until January 1, 2013,

 

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whereupon we have agreed to pay a minimum monthly fee to be calculated based upon the number of queries performed in 2012. For the period from January 1, 2012 through December 31, 2012, we have an estimated minimum commitment of approximately $7 million related to this agreement. We are unable to estimate our calendar year 2013 minimum commitment at this time.

 

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 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

 

Mr. Jones, a non-employee, independent director, serves 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. During fiscal year 2011, we did not grant any stock options to our non-employee directors. 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.

 

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, those directors who are non-employees receive compensation for their service on our board of directors. Our executives who are members of our board of directors do not receive compensation for their service on our board of directors. Effective as of March 3, 2011, the nonemployee directors are paid:

 

   

a base annual retainer of $50,000 in cash;

 

   

an additional annual retainer of $10,000 in cash to members of the audit committee (other than the chairperson) and an annual retainer of $5,000 in cash to members of the compensation and nominating and governance committees (other than the chairpersons);

 

   

an additional annual retainer of $25,000 in cash to the chair of the audit committee;

 

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an additional annual retainer of $10,000 in cash to the chair of the compensation committee and to the chair of the nominating and governance committee; and

 

   

an additional annual retainer of $25,000 in cash to the chairperson of our board of directors.

 

Upon completion of this offering, we intend to provide each nonemployee director with equity compensation for service on our board of directors and committees. This compensation will consist of $175,000 in the form of restricted stock units of Class A common stock, based on the per share price of the Class A common stock sold in this offering, which shall vest quarterly over a two-year period from March 3, 2011. In addition, we will also continue to reimburse directors for reasonable expenses incurred to attend meetings of our board of directors or committees.

 

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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 2011, our named executive officers, were:

 

   

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

 

   

Willard H. Smith, Chief Financial Officer;

 

   

Melissa H. Reiter, Senior Vice President, Finance and Investor Relations;

 

   

Paul M. English, Chief Technology Officer and Director;

 

   

Karen Ruzic Klein, General Counsel and Secretary; and

 

   

Robert M. Birge, Chief Marketing Officer.

 

Mr. Smith was hired as our Chief Financial Officer on June 6, 2011.

 

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 2011, 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 2011 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.

 

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

 

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available resources, our need for a particular position to be filled and the compensation levels of our other executive officers. 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.

 

Executive compensation includes both fixed compensation (base salary and benefits) 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 have 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 2012 Equity Incentive Plan, which will be in effect upon completion of this offering.

 

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

 

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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 2011, our named executive officers received the following in base salary: $300,000 for Mr. Hafner; $275,000 for Mr. Smith; $260,000 for Ms. Reiter; $300,000 for Mr. English; $260,000 for Ms. Klein; and $320,000 for Mr. Birge.

 

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 pool available for awards to employees, including our named executive officers. The annual cash bonuses are intended to reward the achievement of corporate objectives linked to our financial results. Prior to fiscal year 2011, we offered employees, including named executive officers the choice to take bonuses 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 employees and reward and motivate those 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 or a maximum dollar amount, are set forth in the employment contract of each named executive officer. Actual bonus awards may differ from 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 2009, which were paid in fiscal year 2010, the board of directors determined the bonus amounts for Mr. Hafner and Mr. English and established the bonus pool for all other employees, including the other named executive officers. In setting these amounts the following financial and corporate achievements, among other items, were considered:

 

   

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

 

   

we substantially met our commercialization goals for the year, including our targets for revenues and adjusted earnings.

 

In particular, our target goals for number of queries and visits was 496 million and 473 million, respectively, and we achieved approximately 93% and 91% of these targets, respectively. Our target goals for revenues and adjusted earnings were $140 million and $28 million, respectively, and based on projected results evaluated by the board of directors in December 2009, we achieved approximately 82% and 79% of these targets, respectively. Adjusted earnings for this purpose represented Adjusted EBITDA plus bonus expense, bad-debt expense and miscellaneous other expenses incurred in 2010. These performance targets, which were used for compensation purposes only, were developed to incentivize management and were based on certain primary objectives of our internal business plan. They were not used by management or the board of directors for other purposes. All named executive officers were subject to the same performance goals for the year.

 

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We failed to fully meet our target financial and corporate goals for the year, and as a result, the bonuses paid for fiscal year 2009 were 90% of the targets set in each named executive officer’s employment agreement. In setting this bonus amount our board of directors evaluated the degree to which bonus targets were not achieved. In making this evaluation the board of directors estimated that bonus targets were generally achieved at approximately a 79% to 93% level, and therefore determined that paying bonuses to Messrs. Hafner and English and funding the bonus pool at the 90% level would be appropriate. Based on this assessment, Mr. Hafner received $405,000; Mr. English received $405,000; Ms. Klein received $200,000 and Mr. Birge received $184,998. Of such amounts, Mr. Hafner elected to receive $112,663 of this amount in 9,979 shares of restricted common stock, Mr. English elected to receive $116,626 of this amount in 10,330 shares of restricted common stock, Ms. Klein elected to receive $24,996 of this amount in 2,214 shares of restricted common stock and Mr. Birge elected to receive $184,998 of this amount in 16,386 shares of restricted common stock. In each of these cases, the dollar amount of bonuses forgone by the named executive officer was equal to the fair market value of the shares of restricted stock they received in exchange for the foregone amount. Ms. Reiter started with us in November 2009 and as such was not subject to the bonus plan. However, Ms. Reiter’s employment agreement with us provided for a fixed bonus amount of $50,000.

 

In determining bonuses for fiscal year 2010, which are paid in fiscal year 2011, the board of directors determined the bonus amounts for Mr. Hafner and Mr. English and established the bonus pool for all other employees, including the other named executive officers. In setting these amounts the following financial and corporate achievements, among other items, were considered:

 

   

we substantially met our goal for number of queries for the year; and

 

   

we substantially met our commercialization goals for the year, including our targets for revenues and adjusted earnings.

 

During 2010, in an effort to more directly align Mr. Hafner’s and Mr. English’s bonus awards to our financial performance, the board of directors established different performance goals for Mr. Hafner and Mr. English compared to our other employees.

 

Specifically, the board of directors, in establishing the bonus pool for all employees other than Mr. Hafner and Mr. English, set a target goal for number of queries of 595 million. We achieved approximately 107% of this target goal. Our target goals for revenues and adjusted earnings (representing Adjusted EBITDA plus bonus expense accrued in 2010) were $147 million and $37 million, respectively. We achieved 116% of our revenue goal and 96% of our adjusted earnings target in 2010. The board of directors approved an additional investment in brand marketing expense during the fourth quarter of 2010, which was factored into their decision to consider our adjusted earnings target as met for the year ended December 31, 2010.

 

For Mr. Hafner and Mr. English, the board of directors set 2010 target goals of $147 million and $37 million for revenue and Adjusted EBITDA, respectively. In addition, the board of directors set threshold targets of $140 million and $25 million for revenue and Adjusted EBITDA, respectively, for Mr. Hafner and Mr. English, at which point they would be entitled to at least 75% of their bonus targets. Our board of directors has determined that we substantially met or exceeded these goals at the higher target levels.

 

The 2010 compensation performance targets were used solely for determining compensation of our named executive officers and were not used by management or the board of directors for other purposes.

 

As a result of our financial performance and the level at which we met our corporate operating goals for the year, our board of directors awarded the following cash bonus amounts for fiscal year 2010, which were paid in 2011: Ms. Reiter received $150,000; Ms. Klein received $280,000; and Mr. Birge received $350,000. Our board of directors also determined that, at the time of payment, each of the named executive officers would be entitled to exchange some or all of their bonus amounts for shares of our common stock having a fair value equal to the bonus amount foregone. Of the bonus amounts awarded for fiscal year 2010, Mr. Birge elected to receive $149,600 of this amount in 8,500 shares of restricted stock and Ms. Klein elected to receive $24,992 of this amount in 1,420 shares of restricted stock.

 

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In fiscal year 2010, the board of directors revised the maximum bonus amounts Mr. Hafner and Mr. English could receive. As a result Messrs. Hafner and English were entitled to earn a bonus amount of up to $345,000 each. Subsequent to our 2010 fiscal year end, each of Messrs. Hafner and English elected not to receive any such bonus amounts.

 

In determining bonuses for fiscal year 2011, which were paid in fiscal year 2012, the board of directors established the bonus pool for all employees other than Mr. Hafner and Mr. English. In setting these amounts the following financial and corporate achievements, among other items, were considered:

 

   

We exceeded our goal for total number of queries for the year;

 

   

We substantially met our goal for number of hotel queries during the year; and

 

   

We substantially met our commercialization goals for the year.

 

In general, the same primary objectives used for establishing our 2010 bonus awards were used to establish bonus awards in 2011. However, during 2011, the board of directors did not establish performance goals for Mr. Hafner and Mr. English. During the beginning of fiscal year 2011, the board of directors determined that Mr. Hafner and Mr. English, in accordance with their employment agreements, would each be eligible to receive a bonus up to $345,000. The board of directors further determined that the bonus amount awarded to Mr. Hafner and Mr. English, if any, would be established after fiscal year 2011. The board of directors adopted this approach with respect to Mr. Hafner’s and Mr. English’s potential bonus amounts in and effort to award each officer’s performance in consideration of our overall success and performance during the year.

 

With respect to all employees other than Mr. Hafner and Mr. English, the board of directors set a target goal for total number of queries of 853 million and number of hotel queries of 97 million. We achieved approximately 105% and 98%, respectively, of these target goals. Our target goals for revenues and adjusted earnings (representing Adjusted EBITDA plus bonus expense accrued in 2011) were $242 million and $56 million, respectively. We achieved 93% of our revenue goal and 100% of our adjusted earnings target in 2011.

 

As in 2010, the 2011 compensation performance targets were used solely for determining compensation of our named executive officers and were not used by management or the board of directors for other purposes.

 

As a result of our financial performance and the level at which we substantially met or exceeded our corporate operating goals for the year, our board of directors awarded the following cash bonus amounts for fiscal year 2011, which were paid in 2012: Mr. Smith received $84,000; Ms. Reiter received $175,000; Ms. Klein received $275,000; and Mr. Birge received $375,000. Unlike in previous years, our employees, including our named executive offers were not provided an opportunity to exchange all or a portion of their bonus awards for shares of our common stock.

 

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

 

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the form of options to purchase shares of our common stock, which will automatically become options to purchase shares of our Class B common stock upon the completion of this offering, 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 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, the fair value of the common stock underlying our stock option grants was determined by our board of directors, with the assistance of management. See “Management’s Discussion and Analysis of Financial Conditions and Results of Operations—Critical Accounting Policies and Estimates—Common Stock Valuations” for additional discussion on how we value our common stock.

 

After the completion of this offering, fair value will be based on the closing price of our Class A common stock on The NASDAQ Stock Market 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 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 2011 Stock Option and Restricted Stock Awards

 

In fiscal year 2011, we approved grants of restricted stock awards to Mr. Birge and Ms. Klein. These restricted stock grants represent the portion of the 2010 merit-based bonuses of those named executive officers who elected to receive restricted stock in lieu of cash. The shares of restricted stock awards representing such grants were issued to the recipients in January 2011. In addition to these restricted stock grants, we also awarded an option to Mr. Smith to acquire 200,000 shares of our common stock. This option award was made to Mr. Smith in connection with commencement of his employment as our Chief Financial Officer on June 6, 2011.

 

 

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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)
     Number of Shares
of Restricted Stock
Received in Lieu  of
Non-Equity
Incentive Plan
Compensation(1)
     Value per Share of
Restricted Stock
Received in Lieu of
Non-Equity Incentive
Plan Compensation(1)
 

Willard H. Smith

     6/7/2011         200,000       $ 21.00         —           —     

Karen Ruzic Klein

     —           —           —           —           —     
     1/31/2011         —           —           1,420       $ 17.60   

Robert M. Birge

     —           —           —           —           —     
     1/31/2011         —           —           8,500       $ 17.60   

 

  (1)   With regard to fiscal year 2010 bonuses paid in 2011, employees were given the opportunity to take some or all of their non-equity incentive compensation or bonuses in shares of our restricted common stock in lieu of a cash payment. Employees were not able to receive restricted stock in lieu of fiscal year 2011 cash bonuses paid in 2012.

 

The number of shares of common stock underlying each stock option grant, which will automatically become shares of Class B common stock underlying each such stock option grant upon the completion of this offering, 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 2010 merit-based 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 in the form of restricted stock.

 

Other Executive Benefits

 

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.

 

With the exception of our directors’ and officers’ liability insurance, which we view as integrally and directly related to the performance of the applicable officer’s duties, all benefits available to our named executive officers are generally available to all of our employees.

 

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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.

 

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 years 2009, 2010 and 2011 awarded to or paid to our named executive officers.

 

Name and Principal Position

  Year     Salary
($)
    Bonus(4)
($)
     Option
Awards(1)
($)
    Non-Equity
Incentive Plan
Compensation(3)
($)
    All Other
Compensation

($)
    Total
($)
 

Daniel Stephen Hafner

    2011      $ 300,000      $ 650,000       $ —        $ —        $ —        $ 950,000   

Chief Executive Officer & Cofounder

    2010      $ 300,000      $ —         $ 1,317,060      $ —   (2)    $ —        $ 1,617,060   
    2009      $ 225,000      $ —         $ —        $ 405,000 (9)      $ 630,000   

Willard H. Smith(6)

    2011      $ 157,466      $ 822       $ 1,918,200      $ 83,178      $ 13,766 (7)    $ 2,173,432   

Chief Financial Officer

              

Melissa H. Reiter

    2011      $ 260,000      $ 45,000       $ —        $ 130,000      $ —        $ 435,000   

Senior Vice President Finance and Investor Relations

    2010      $ 222,500      $ 20,000       $ 1,117,752      $ 130,000      $ —        $ 1,490,252   
    2009      $ 36,660      $ 70,000       $ —        $ —        $ 16,284 (8)    $ 122,944   

Paul M. English

    2011      $ 300,000      $ 650,000       $ —        $ —        $ —        $ 950,000   

Chief Technology Officer & Cofounder

    2010      $ 300,000      $ —         $ 1,317,060      $ —   (2)    $ —        $ 1,617,060   
    2009      $ 225,000      $ —         $ —        $ 405,000 (9)    $ —        $ 630,000   

Karen Ruzic Klein

    2011      $ 260,000      $ 15,000       $ —        $ 260,000      $ —        $ 535,000