10-K 1 oww1231201310k.htm 10-K OWW 12.31.2013 10K

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
þ
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2013
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from          to                     
Commission File Number 001-33599
ORBITZ WORLDWIDE, INC.
(Exact name of registrant as specified in its charter)
Delaware
 
20-5337455
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
500 W. Madison Street, Suite 1000
 
 
Chicago, Illinois
 
60661
(Address of principal executive offices)
 
(Zip Code)
(312) 894-5000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
 
Name of Each Exchange on Which Registered
Common Stock, $0.01 par value
 
New York Stock Exchange
Securities registered pursuant to section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   Yes o     No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o     No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x     No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x     No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
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 o
Accelerated filer x
Non-accelerated filer o
Smaller reporting company o
 
 
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o     No x
The aggregate market value of the registrant’s common stock held by non-affiliates as of June 30, 2013 was approximately $444.9 million based on the closing price of the registrant’s common stock as reported on the New York Stock Exchange for such date.
As of March 3, 2014, 109,062,384 shares of Common Stock, par value $0.01 per share, of Orbitz Worldwide, Inc. were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Annual Report on Form 10-K incorporates by reference certain information from the definitive proxy statement for the registrant’s Annual Meeting of Shareholders to be held on or about June 10, 2014 (the “2014 Proxy Statement”). The registrant intends to file the proxy statement with the Securities and Exchange Commission within 120 days of December 31, 2013.
 





Table of Contents
 
 
Page
 
 
 
 
PART I
 
 
Item 1.
 
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
 
 
 
PART II
 
 
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
 
 
 
PART III
 
 
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
 
 
 
PART IV
 
 
Item 15.
 
 


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Forward-Looking Statements

This Annual Report on Form 10-K and its exhibits contain forward-looking statements that are subject to risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different than the results, performance or achievements expressed or implied by the forward-looking statements. Forward-looking statements include statements about our expectations, beliefs, plans, objectives, intentions, assumptions and other statements that are not historical facts. Forward-looking statements can generally be identified by phrases such as “believes,” “expects,” “potential,” “continues,” “may,” “should,” “seeks,” “predicts,” “anticipates,” “intends,” “projects,” “estimates,” “plans,” “could,” “designed,” “should be” and other similar expressions that denote expectations of future or conditional events rather than statements of fact. Forward-looking statements contained in this report include, but are not limited to, statements relating to: the potential impact of improvements in the general economy and the travel industry on our business; our ability to gain market share in international markets, including the global hotel marketplace; our ability to increase our brand awareness; our expectations of future air capacity and fares; our expectations for future average daily rates for hotel and car bookings; and our expectation for international growth rates for online travel sales.

Our actual results could differ materially from those anticipated in forward-looking statements for many reasons, including, but not limited to, the company's ability to effectively compete in the travel industry; trends, declines, or disruptions affecting the travel industry or the level of travel activity, particularly air travel; the termination of any major supplier's participation on the company's websites; the company's ability to renegotiate supplier agreements on acceptable terms; change in airline distribution economics; the company's ability to maintain and protect its information technology and intellectual property; Travelport's ownership in and influence over the operation of our business in light of the potential diverging interests of the company and Travelport; the outcome of pending litigation; system-related failures, interruptions, or security breaches; risks related to the company's level of indebtedness; risks associated with doing business in multiple currencies and multiple markets; and general economic and business conditions, as well as the factors described in Item 1A, “Risk Factors,” and in Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” in this Annual Report on Form 10-K. Accordingly, you should not unduly rely on these forward-looking statements, which speak only as of the date on which they were made. We undertake no obligation to update any forward-looking statements in this Annual Report on Form 10-K.

The use of the words “we,” “us,” “our” and “the Company” in this Annual Report on Form 10-K refers to Orbitz Worldwide, Inc. and its subsidiaries, except where the context otherwise requires or indicates.



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PART I

Item 1.
Business

General Description of Our Business

Orbitz Worldwide, Inc. is a global online travel company (“OTC”) that uses innovative technology to enable leisure and business travelers to research, plan and book a broad range of travel products and services. Our brand portfolio includes Orbitz and CheapTickets in the Americas; ebookers in Europe; and HotelClub and RatesToGo based in Australia, which have operations globally (collectively referred to as “HotelClub”). We also own and operate Orbitz for Business, a corporate travel company, and Orbitz Partner Network group, which delivers private label travel solutions to a broad range of partners. We provide customers with the ability to book a wide array of travel products and services from suppliers worldwide, including air travel, hotels, vacation packages, car rentals, cruises, rail tickets, travel insurance and destination services such as ground transportation, event tickets and tours.

History

Orbitz, Inc. was established in early 2000 through a partnership of major airlines, which included American Airlines, Inc., Continental Airlines, Inc., Delta Air Lines, Inc., Northwest Airlines, Inc. and United Air Lines, Inc. Orbitz.com officially launched in June 2001. In 2004, Orbitz was acquired by Cendant Corporation (“Cendant”), which already owned and operated the HotelClub and CheapTickets brands, and the next year Cendant acquired ebookers Limited.

In 2006, affiliates of The Blackstone Group (“The Blackstone Group”) and Technology Crossover Ventures acquired Travelport Limited (“Travelport”), a unit of Cendant that included the businesses we now own and operate as well as other travel distribution businesses. In 2007, our businesses were separated from the rest of the Travelport businesses and placed in a newly formed company, Orbitz Worldwide, Inc. Orbitz Worldwide, Inc. was incorporated in Delaware on June 18, 2007, and became a public company in July 2007. Our common stock trades on the New York Stock Exchange under the symbol “OWW.”

At December 31, 2013 and 2012, there were 108,372,390 and 105,093,807 shares of our common stock outstanding, respectively, of which approximately 48% and 53% were beneficially owned by Travelport and the investment funds that indirectly control Travelport, respectively.

Brand Portfolio

Our brand portfolio is composed of Orbitz, CheapTickets and Orbitz for Business (U.S. domestic), and ebookers and HotelClub (international).

Orbitz

Orbitz.com is our most well-known brand and sells a full suite of travel products and services, including flights, hotels, car rentals, cruises, and vacation packages. Since launching its website in June 2001, Orbitz.com has led the industry with innovations including the Orbitz Matrix Display and Orbitz Rewards. The Orbitz Matrix Display revolutionized the way the travel industry displayed fares and makes it quick and easy for consumers to compare flights, hotels, rental cars and vacation packages. The Orbitz Matrix Display has since been emulated across e-commerce sites as an efficient way for consumers to comparison shop and transact. As consumers move from desktops to tablets and smartphones for their computing needs, Orbitz has maintained its technology leadership by offering a suite of mobile apps and solutions that now drive approximately 30% of its hotel transactions. Our mobile apps are available for free at www.orbitz.com/mobile or through our smartphone-optimized website (m.orbitz.com). In 2013, Orbitz.com launched its Orbitz Rewards loyalty program, which lets customers earn rewards immediately on flights, hotels and packages and redeem instantly on tens of thousands of hotels worldwide. Customers can earn rewards towards future hotel stays when booking hotels, flights or eligible vacation packages on desktop or mobile, including up to 5% towards future hotel stays when booking hotels on mobile apps. Orbitz members also get exclusive access to “Insider Steals,” a weekly, members-only flash sale that provides exclusive deals on handpicked hotels in top destinations around the world, as well as “Mobile Steals,” which are exclusive hotel deals in the most popular destinations around the world, available to mobile consumers.

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CheapTickets

CheapTickets (www.cheaptickets.com) is a U.S. travel website that targets value-conscious customers. CheapTickets offers customers the ability to search for and book a broad range of travel products and services, including air travel, hotels, car rentals, cruises, travel insurance, destination services and event tickets from suppliers worldwide on a stand-alone basis or as part of a vacation package. Customers can also book travel products from their mobile devices through a mobile website (m.cheaptickets.com). In addition, CheapTickets offers value-oriented promotions such as “Cheap of the Week” which provide customers with special travel offers on a weekly basis.

Orbitz for Business

Orbitz for Business (www.orbitzforbusiness.com) leverages and customizes our technology expertise for corporate travelers, offering a complete portfolio of travel products and services that help corporate customers plan, search and book business travel. In addition to its leading technology, Orbitz for Business delivers full service, cost-effective travel products and travel management solutions, including 24/7 support along with expense reporting and policy management tools. Orbitz for Business also offers an end-to-end mobile solution that allows business travelers to search for and book flights, hotels and car rentals directly from any web-enabled smartphone through its mobile website (m.orbitzforbusiness.net). Through partnerships with leading regional corporate travel agencies, Orbitz for Business offers its services in over 75 countries across Europe, Latin America, Africa, Asia (including China and India) and the Pacific Rim. In the first quarter of 2012, Orbitz for Business launched Orbitz for Business Express to offer savings, convenience and professional travel services to small businesses with travel needs, including those currently without a managed travel program.

ebookers

ebookers (www.ebookers.com) is a leading pan-European online travel agency that offers customers the ability to search for and book a broad range of global travel products and services through websites in Austria, Belgium, Denmark, Finland, France, Germany, Ireland, the Netherlands, Norway, Sweden, Switzerland and the United Kingdom. Customers can book travel products and services, including airline tickets, hotel rooms, car rentals, rail tickets and travel insurance, on a stand-alone basis or as part of a vacation package. ebookers also offers customers the ability to book a full range of travel products from their mobile phones through the ebookers App for iPhone, Android and iPad and our mobile website (m.ebookers.com).

HotelClub

HotelClub is a global hotel booking website offering members a worldwide selection of hotel properties across more than 140 countries. Through its unique loyalty program, HotelClub Rewards, members earn rewards of up to 7% of the value of every booking made, which can then be redeemed on future hotel bookings. The company operates two websites, HotelClub.com and RatesToGo.com, and offers services in 35 currencies and 17 languages, including Simplified Chinese, Traditional Chinese, Dutch, English, French, German, Italian, Japanese, Korean, Polish, Portuguese, Russian, Spanish, Swedish and Thai, among others. HotelClub also offers its customers the ability to book via mobile devices through an iPhone and iPad App.

In addition to our customer-facing brands and services, we also generate revenue through other sources, including:

Orbitz Partner Network

We offer third parties, including many of the world’s largest airlines, travel agencies and financial institutions, and thousands of partners globally, a full range of private label travel solutions, ranging from hosted HTML services that can be launched in a matter of weeks to custom developed solutions that are fully tailored to meet the needs of more complex partners. We license our technology and business services to these partners, who are then able to provide a wide range of travel products on their websites under their own brands. We receive commissions based on the revenue generated by their websites. We continue to pursue the expansion of our private label channel through the addition of new partners. For example, in the third quarter of 2012, we launched a partnership with American Express to provide a variety of private label solutions for air, car, hotel and vacation packages for the American Express Consumer Travel Network. In the fourth quarter of 2013, we began powering the desktop and mobile sites for helloworld.com, the second largest travel agent network in Australia.

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Partner Marketing

The Partner Marketing team is responsible for building innovative online marketing and advertising partnerships across our global portfolio of leading consumer and business travel brands. We generate advertising revenue by providing our partners access to our customer base through a combination of display advertising, performance-based advertising, video production and other marketing programs. Travel companies, convention and visitor bureaus, credit card partners, media, packaged goods and other non-travel advertisers advertise on our websites.

Supplier Relationships and Global Distribution Systems

Supplier Relationships

We work with suppliers to provide our customers with a broad and deep range of highly competitive travel products and services on our websites. We have teams that manage relationships and negotiate agreements with air, hotel, car rental, cruise, travel insurance and destination services suppliers. Our supplier teams negotiate contracts regarding access to the supplier’s travel inventory and payment for our services, manage supplier relationships, and obtain supplier-sponsored promotions.

For hotels, we are focused on offering our customers the ability to book the most relevant hotels at the most competitive prices. To do this, we focus on infrastructure to ensure we have appropriate connectivity with our suppliers, sophisticated sort order algorithms and robust promotional capabilities. Our global hotel services team works closely with hotel chains and independent hotels to increase the number of properties that participate on our websites and to ensure that our customers have access to their best available prices, including prices exclusive to our brands, where possible.

For airlines, we have long-standing relationships with hundreds of airlines, including most major U.S. and international carriers. We work with our suppliers to provide our customers with a highly competitive product offering.

Our suppliers continue to look for ways to decrease their overall distribution costs, which could significantly reduce the net revenue OTCs earn from travel and other travel-related products. We have encountered, and expect to continue to encounter, pressure on supplier economics and positive and negative effects of a competitive market environment. As a result, the revenue we and other OTCs earn in the form of incentive payments from global distribution system providers or in the form of mark-ups and commissions from our suppliers is likely to be impacted over the long term as supplier contracts are extended, renegotiated or as we add new suppliers.

Global Distribution Systems

Global distribution systems (“GDS”) provide us access to a comprehensive set of supplier content through a single source. Suppliers, such as airlines and hotels, utilize GDSs to connect their product and service offerings with travel providers, who in turn make these products and services available to travelers for booking. Certain of our businesses utilize GDS services provided by Galileo, Worldspan (both units of Travelport) and Amadeus IT Group (“Amadeus”). Under our GDS service agreements, we receive revenue in the form of an incentive payment for air, car and hotel segments processed through a GDS. These GDS service agreements may contain minimum segment volume commitments and require us to make shortfall payments if we do not process the required minimum number of segments for a given year. As a result, a significant portion of our GDS services are processed by these providers. For the year ended December 31, 2013, we recognized $98.7 million of incentive revenue from GDS providers, which accounted for more than 10% of our net revenue. In February 2014, Orbitz announced that it had entered into new multi-year GDS service agreements with Amadeus, Sabre Inc. and Travelport for the provision of technology and travel management solutions. The ability to use multiple GDSs across our business will provide us greater operational flexibility to take advantage of the strengths of each of the providers starting in 2015 as certain exclusivity provisions with Travelport lapse.

Merchant and Retail Models

We generate revenue primarily from the booking of travel products and services on our websites. We provide customers the ability to book travel products and services on both a stand-alone basis and as part of a vacation package, primarily through our merchant and retail business models.


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Merchant Model

Our merchant model provides customers the ability to book air travel, hotels, car rentals, destination services and vacation packages. Hotel transactions comprise the majority of our merchant bookings. We generate revenue for our services based on the difference between the total amount the customer pays for the travel product and the negotiated net rate plus estimated taxes that the supplier charges us for that product. Depending upon the brand and the product, we may also earn revenue by charging our customers a service fee for booking their travel reservation. Generally, our net revenue per transaction is higher under the merchant model compared with the retail model. Customers generally pay us for reservations at the time of booking and we pay our suppliers at a later date, which is generally when the customer uses the reservation. However, in the case of merchant air, payment often occurs prior to the consumption date. Initially, we record these customer receipts as accrued merchant payables and either deferred income or net revenue, depending upon the travel product. The timing difference between when we collect money from our customers and when we pay our suppliers increases our operating cash flow and represents a source of liquidity for us.

We recognize net revenue under the merchant model when we have no further obligations to the customer. For merchant air transactions, this is at the time of booking. For merchant hotel transactions and merchant car transactions, net revenue is recognized at the time of check-in or customer pick-up, respectively. The timing of revenue recognition is different for merchant air travel because our primary service to the customer is fulfilled at the time of booking. In the merchant model, we do not take on credit risk with the customer since we are paid via a credit card processor while the cardholder's issuing bank collects funds from the customer. However we are subject to charge-backs and fraud risk, which we actively monitor; we are not responsible for the actual delivery of the flight, hotel room or car rental; we take no inventory risk; we have no ability to determine or change the products or services delivered; and the customer chooses the supplier. The Company is subject to fraud risk because it may be charged by payment providers for fraudulent charges after the Company has remitted funds to the supplier. In other instances, the customer may be dissatisfied with some aspect of their travel and contest the transaction with the credit card vendor, which could result in a chargeback.

Retail Model

Our retail model provides customers the ability to book air travel, hotels, car rentals and cruises. Air transactions comprise the majority of our retail bookings. Under the retail model, we earn commissions from suppliers for airline tickets, hotel rooms, car rentals and other travel products and services booked on our websites. We generally receive these commissions from suppliers after the customer uses the travel reservation. Depending upon the brand and the product, we may also earn revenue by charging customers a service fee for booking their travel reservation. Generally, our net revenue per transaction is lower under the retail model compared with the merchant model. Airline tickets booked under the retail model contribute substantially to our overall gross bookings and net revenue due to the high volume of airline tickets booked on our websites. We recognize net revenue under the retail model when the reservation is made, is secured by a customer with a credit card, and we have no further obligations to the customer. For air transactions, this is at the time of booking. For hotel transactions and car transactions, net revenue is recognized at the time of check-in or customer pick-up respectively, net of an allowance for cancelled reservations. In the retail model, we do not take on credit risk with the customer; we are not the primary obligor with the customer; we have no latitude in determining pricing; we take no inventory risk; we have no ability to determine or change the products or services delivered; and the customer chooses the supplier.

When customers assemble vacation packages, we may offer the customer the ability to book a combination of travel products that use both the merchant model and the retail model. Vacation packages allow us to make products available to our customers at prices that are generally lower than booking each travel product separately.

Operations and Technology

Systems Infrastructure and Web and Database Servers

We use SAVVIS and Verizon Business co-location services in the United States to host our systems infrastructure and web and database servers for Orbitz, CheapTickets, Orbitz for Business, HotelClub and ebookers. The majority of our hardware and other equipment is located in both the SAVVIS and Verizon facilities. SAVVIS and Verizon provide data center management services as well as emergency hands-on support. In addition, we have our own dedicated staff on-site at the facility.

We use Global Switch services in the United Kingdom to host our systems infrastructure and web and database servers for ebookers legacy systems and for HotelClub. The arrangement with Global Switch is similar to the arrangement described above with SAVVIS.

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Systems Platform

Our systems platform enables us to deconstruct the segment feeds from our GDS partners for air flight searches and then reassemble these segments for cost-effective and flexible multi-leg itineraries. We also have the ability to connect to and book air travel directly on certain airlines’ internal reservation systems through our supplier link technology. Our easy-to-use Orbitz Matrix Display allows customers to simultaneously view these various travel options so that they can select the price and supplier that best meet their travel needs. In addition, our vacation packaging technology enables travelers to view multiple combinations of airlines, hotels and other travel products and allows them to assemble a customized vacation package that is generally less expensive than booking each travel product separately.

We have technology operations teams dedicated to ensuring that our websites operate efficiently. These teams monitor our websites, our private label customer websites and the performance and availability of our third party service providers, as well as coordinate releases of new functionality on our websites. We have product development teams focused on creating new and enhancing existing website functionality. These teams also developed and implemented our global technology platform that supports our global consumer brands.

Customer Support

Our customer support platform includes customer self-service, chat, email and call center services to provide our customers with multiple options to enhance the travel experience. We utilize intelligent voice routing and intelligent call management technology to connect customers with the appropriate agent who can best assist them with their particular needs. We utilize third party vendors domestically and internationally to manage these call centers and customer service centers.

Fraud Prevention System

We have an internally-developed fraud prevention system that we believe enables us to efficiently detect fraudulent bookings. The system automates many functions and prioritizes suspicious transactions for review by fraud analysts within our fraud prevention team.

Marketing

We use a combination of online and traditional offline marketing. Our sales and marketing efforts primarily focus on increasing brand awareness and driving visitors to our websites. Our long-term success will depend on our ability to continue to increase the overall number of booked transactions in a cost-effective manner.

We use various forms of online marketing to drive traffic to our websites including search engine marketing (“SEM”), travel research websites, meta-search travel websites, display advertising, affiliate programs and email marketing. We continue to pursue strategies to improve our online marketing efficiency and have utilized our advanced analytics capabilities to support development, testing and verification of new strategies. These strategies include increasing the amount of traffic coming to our websites through search engine optimization (“SEO”) and customer relationship management (“CRM”), and improving the efficiency of our SEM and travel research spending. We also use traditional broadcast advertising to focus on brand differentiation and to emphasize distinct features of our businesses that we believe are valuable to our customers.

We have dedicated marketing teams that focus on generating leads and building relationships with corporate travel managers and potential private label partners. Our Orbitz for Business sales team includes experienced corporate travel managers who are qualified to assist organizations in choosing between the variety of corporate booking products that we offer.

Intellectual Property

We regard our technology and other intellectual property, including our brands, as a critical part of our business. We protect our intellectual property rights through a combination of copyright, trademark and patent laws and trade secret and confidentiality procedures. We have a number of trademarks, service marks and trade names that are registered or for which we have pending registration applications or common law rights. We currently hold numerous issued United States patents and pending United States patent applications. We file additional patent applications on new inventions, as appropriate.

Despite these efforts and precautions, we cannot be certain that any of these patent applications will result in issued patents, or that we will receive any effective protection from competition from any trademarks and issued patents. It may be possible for a third party to copy or otherwise obtain and use our trade secrets or our intellectual property without authorization.

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In that case, legal remedies may not adequately compensate us for the damages caused by unauthorized use. Further, others may independently and lawfully develop substantially similar trade secrets.

From time to time, we may be subject to legal proceedings and claims in the ordinary course of our business, including claims of alleged infringement by us of the trademarks, copyrights, patents and other intellectual property rights of third parties. In addition, we may have to initiate lawsuits in the future to enforce our intellectual property rights, protect our trade secrets or determine the validity and scope of proprietary rights claimed by others. Any such litigation, regardless of outcome or merit, could consume a significant amount of financial resources or management time. It could also invalidate or impair our intellectual property rights, or result in significant damages or onerous license terms and restrictions for us. We may even lose our right to use certain intellectual property or business processes. These outcomes could materially harm our business. See Item 3, “Legal Proceedings.”

At the time of the IPO, we entered into a Master License Agreement with Travelport, which grants Travelport licenses to use certain of our intellectual property going forward, including:

our supplier link technology;
portions of ebookers' booking, search and vacation packaging technologies;
certain of our products and online booking tools for corporate travel;
portions of our private label vacation packaging technology; and
our extranet supplier connectivity functionality.

The Master License Agreement granted us the right to use a corporate online booking product developed by Travelport. We have entered into a value added reseller license with Travelport for this product.

The Master License Agreement generally includes the right to create derivative works and other improvements. Other than the unrestricted use of our supplier link technology, Travelport is generally prohibited from sublicensing these technologies to any third party for competitive use. However, Travelport and its affiliates are not restricted from using the technologies to compete directly with us.

Regulation

Our business is subject to laws and regulations relating to our revenue generating and marketing activities, including those prohibiting unfair and deceptive advertising or practices, consumer protection and data privacy. Our travel services are subject to regulation and laws governing the offer of travel products and services, including laws requiring us to register as a “seller of travel” in various jurisdictions and to comply with certain disclosure requirements. As an OTC that offers customers the ability to book air travel in the United States, we are also subject to regulation by the Department of Transportation, which has authority to enforce economic regulations and may assess civil penalties or challenge our operating authority. Our services are also subject to federal, foreign, state and local regulations and we may be required to comply with bonding regulations in certain foreign jurisdictions. See Item 1A “Risk Factors - Our businesses are regulated and any failure to comply with applicable regulations or any changes in those regulations could adversely affect us.

Information about Segments and Geographic Areas

We operate and manage our business as a single operating segment. For geographic related information, see Note 17 - Segment Information of the Notes to Consolidated Financial Statements.


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Industry Conditions

General

The worldwide travel industry is a large and dynamic industry that has been characterized by rapid and significant change. We compete in various geographic markets, with our primary markets being the United States, Europe and Asia Pacific. We are one of the market leaders within the United States, which is the most mature of the global travel markets. Internationally, a relatively low percentage of travel sales are transacted online and the market is highly fragmented, which presents a significant growth opportunity for us and our competitors. In Europe, OTCs represent just 38% of the online market, but OTCs are growing faster than online supplier direct bookings (PhoCusWright, European Online Travel Overview, 9th ed.). While OTCs account for only a third of the Asia Pacific online travel market, OTC gross bookings surpassed $30 billion in 2013 and we expect that mobile will be the fastest growing travel distribution channel in the region through 2015 (PhoCusWright, Pacific Online Travel Overview, 6th ed.).

Competition

The general market for travel products and services is highly competitive, and the competitive intensity is increasing as the market rapidly evolves. The online travel industry generally has low barriers to entry and competitors can launch new websites at a relatively low cost. Our competition includes: online and offline travel companies; travel suppliers, such as airline, hotel and rental car companies, many of which have their own branded websites and call centers; travel research companies; search engines; and meta-search websites.

Our competition may offer more favorable terms and/or improved interfaces to suppliers and travelers. Travel suppliers have increasingly focused on distributing their products through their own websites, or through joint efforts, in lieu of using third parties. Suppliers who sell on their own websites offer advantages such as their own bonus miles or loyalty points not available on our sites, which may make their offerings more attractive than our offerings to some consumers. Travel research companies, search engines and meta-search websites are capable of sending customers to the websites of suppliers and our direct competitors.

Factors affecting our competitive success include price, availability of travel products, ability to package travel products across multiple suppliers, brand recognition, customer service and customer care, fees charged to customers, ease of use, accessibility, reliability and innovation such as offering our own custom loyalty programs.

Seasonality

Our businesses experience seasonal fluctuations in the demand for the products and services we offer. The majority of our customers book leisure travel rather than business travel. Gross bookings for leisure travel are generally highest in the first half of the year as customers plan and book their spring and summer vacations. However, net revenue generated under the merchant model is generally recognized when the travel takes place and typically lags bookings by several weeks or longer. As a result, our cash receipts are generally highest in the first half of the year and our net revenue is typically highest in the second and third calendar quarters. Our seasonality may also be affected by fluctuations in the travel products our suppliers make available to us for booking, the growth of our international operations or a change in our product mix.

Company Strategy
We take advantage of our deep roots in technology and innovation to offer consumers the premier way to book online travel, whether via personal computer, tablet or smartphone. We completed the migration of our global consumer brands to one common technology platform in 2012. We believe the global platform is the cornerstone of our ability to rapidly and efficiently innovate and expand into new markets with new products and services. Our mission is to make our brands the world's most rewarding places to plan and purchase travel on touch devices.
Loyalty
We believe that well-architected loyalty offerings have significant potential to enhance the financial performance of our consumer brands. HotelClub has a long-standing and well-established loyalty program that helps drive repeat transactions.

We launched a loyalty program for our Orbitz.com brand in October 2013 that is patterned after our HotelClub loyalty rewards program. We believe the Orbitz Rewards program can drive long-term room night growth through its impact on driving repeat and cross-sell purchases.

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Mobile
Orbitz Worldwide is a recognized leader in the rapidly growing mobile channel. This is a core part of our strategy to drive growth across all of our global brands. For example, in the fourth quarter 2013, approximately 30% of Orbitz Worldwide stand-alone hotel bookings came via a mobile device. By virtue of the common technology platform shared by all of the Company’s consumer brands, the benefits of the Company’s mobile investments are available to the ebookers, HotelClub and CheapTickets brands. We continue to build on our strengths in mobile to drive growth across all of our global brands and product offerings.
International Expansion
We are focused on expanding our international presence through both product innovation and new market expansion. For example, in February 2013, we launched the ebookers rail product, becoming the first OTC to offer booking functionality for the UK domestic rail network. We also expect our HotelClub brand will play a significant role in new market expansion. Room night growth rates at HotelClub have improved substantially in 2013. We believe Hotel Club’s hotel-only offering and strong loyalty program represents an extensible model that enables low-cost new market entry, allowing us to expand our footprint into new and fast growing regions.

Employees

As of December 31, 2013, we had approximately 1,300 full-time employees, more than half of whom were based in the United States and the remaining were based primarily in the United Kingdom and Australia, with whom we believe we have a good relationship. We outsource some of our technology support, development, customer service and administrative functions to third parties. Additionally, we utilize independent contractors to supplement our workforce.

Iran Sanctions Related Disclosure

Under the Iran Threat Reduction and Syrian Human Rights Act of 2012, which added Section 13(r) of the Exchange Act, we are required to include certain disclosures in our periodic reports if we or any of our “affiliates” knowingly engaged in certain specified activities during the period covered by the report. Because the Securities and Exchange Commission (“SEC”) defines the term “affiliate” broadly, it includes any entity controlled by us as well as any person or entity that controls us or is under common control with us (“control” is also construed broadly by the SEC). We are not presently aware that we and our consolidated subsidiaries have knowingly engaged in any transaction or dealing reportable under Section 13(r) of the Exchange Act during the year ended December 31, 2013. In addition, we sought confirmation from companies that may be considered our affiliates as to whether they have knowingly engaged in any such reportable transactions or dealings during such period and, except as described below, are not presently aware of any such reportable transactions or dealings by such companies.

Travelport, which “controls” us and is therefore an “affiliate” of ours (as each term is interpreted by the SEC for purposes of Section 13(r) of the Exchange Act), provided the disclosure reproduced below. We have not independently verified or participated in the preparation of this disclosure.
 
“As part of our global business in the travel industry, we provide certain passenger travel-related GDS and airline IT services to Iran Air. We also provide certain airline IT services to Iran Air Tours. All of these services are either exempt from applicable sanctions prohibitions pursuant to a statutory exemption permitting transactions ordinarily incident to travel or, to the extent not otherwise exempt, specifically licensed by the U.S. Office of Foreign Assets Control. Subject to any changes in the exempt/licensed status of such activities, we intend to continue these business activities, which are directly related to and promote the arrangement of travel for individuals.”

Travelport has not provided us with gross revenues and net profits attributable to the activities described above.

Company Website and Public Filings

We maintain a corporate website at corp.orbitz.com. The content of our website is not incorporated by reference into this Annual Report on Form 10-K or other reports we file with or furnish to the SEC. Our filings with the SEC are provided to the public on our Investor Relations website (investors.orbitz.com), free of charge, as soon as reasonably practicable after they are electronically filed with, or furnished to, the SEC. Other information regarding our corporate governance, such as our code of conduct, governance guidelines and charters for our board committees, is also available on our Investor Relations website. In addition, the SEC maintains an internet website that contains reports, proxy and information statements, and other information

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regarding issuers, including us, that file electronically with the SEC at www.sec.gov. We also use our Investor Relations website to make information available to our investors and the public. Investors and other interested persons can sign up to receive email alerts whenever we post new information to the website.



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Executive Officers of the Registrant

Our executive officers as of February 1, 2014, were as follows:

Barney Harford, age 42, has served as our Chief Executive Officer and as a member of our Board of Directors since January 2009. Prior to joining the Company in January 2009, Mr. Harford served in a variety of roles at Expedia, Inc. from 1999 to 2006. From 2004 to 2006, he served as President of Expedia Asia Pacific. Prior to 2004, Mr. Harford served as Senior Vice President of Air, Car & Private Label and led Expedia’s corporate development, strategic planning and investor relations functions. He joined Expedia in 1999 as a product planner. Mr. Harford currently serves on the Board of Directors of LiquidPlanner, Inc. He previously served on the Board of Directors of GlobalEnglish Corporation, Orange Hotel Group and eLong, Inc. He holds an MBA from INSEAD and an MA degree in Natural Sciences from Clare College, Cambridge University.

Sam Fulton, age 43, has served as Senior Vice President, Global Product Management and Customer Experience since March 2013. Mr. Fulton also has responsibility for User Experience and Product Operations. Prior to his current role, from March 2010 to March 2013, Mr. Fulton held several key positions within the Company including Senior Vice President of Product Strategy and Senior Vice President of Retail. From January 2008 to February 2010, Mr. Fulton was the Group Vice President of Product Management. Prior to joining the Company in 2002, Mr. Fulton worked for Budget Rent A Car as the Director of Travel Industry Sales focusing on preferred travel agency relationships. Mr. Fulton has a BS degree in Finance and Marketing from the University of Denver.

Tom Kram, age 54, has served as our Group Vice President, Chief Accounting Officer, since joining the Company in May 2011. From 2004 to 2011, Mr. Kram served in a variety of roles at Chicago Newspaper Liquidation Corp., formerly known as Sun-Times Media Group, Inc. Mr. Kram was elected Chief Executive Officer, President and Treasurer in October 2009 and served as Chief Financial Officer from March 2009 to October 2009. From 2004 to 2009, he was the Corporate Controller and, in addition, served as Chief Accounting Officer from 2006 to 2009. Mr. Kram served as the Chief Financial Officer of Sun-Times Media Group, Inc. when it filed for bankruptcy protection under Chapter 11 of the United States Bankruptcy Code in March 2009. Mr. Kram was formerly the Vice President, Controller of Budget Group, Inc. from 1997 to 2003. Mr. Kram is a CPA and has a BS degree in Accountancy from the University of Illinois at Urbana-Champaign.

Roger Liew, age 41, has served as Senior Vice President, Chief Technology Officer, since November 2010. Mr. Liew was Vice President of Technology of the Company and Group Manager of the Company’s Intelligent Marketplace Group from July 2009 to November 2010, and previously served as Vice President of Technology of Orbitz, LLC from May 2000 to May 2004. Prior to his return to the Company in July 2009, Mr. Liew served as Chief Technology Officer of Milestro, a leisure, travel and tourism company, from May 2008 to December 2008 and Chief Technology Officer of G2 Switchworks, a startup in the travel technology space, from May 2004 to April 2008, when it was acquired by Travelport. Prior to joining Orbitz, LLC, Mr. Liew worked as a lead developer for Neoglyphics Media Corporation and as a software engineer for Motorola's Cellular Subscriber Group. Mr. Liew studied Mathematics and Computer Science at the University of Chicago.

Chris Orton, age 40, has served as our Chief Operating Officer since February 2014. Mr. Orton previously served as Senior Vice President of Orbitz.com and President of CheapTickets since August 2011. Previously, Mr. Orton served as Senior Vice President, Chief Marketing Officer, from July 2010 to August 2011. Prior to joining the Company, Mr. Orton worked for eBay, Inc. from June 2003 to June 2010 and held various positions in data warehousing and internet marketing. Most recently, Mr. Orton was Senior Director of Internet Marketing at eBay, responsible for its paid search, shopping comparison, search engine optimization, affiliates and display marketing channels. Prior to joining eBay, he spent eight years doing customer relationship management and enterprise resource planning consulting at Kana Software, PricewaterhouseCoopers and Andersen Consulting (Accenture). Mr. Orton has an MBA from the University of California, Berkeley and a BA degree in Economics and International Relations from the University of California, Davis.

Mike Randolfi, age 41, has served as Chief Financial Officer since March 2013 with global responsibility for the Company’s accounting, financial planning and analysis, investor relations, tax, procurement, and treasury functions. Prior to joining the Company, Mr. Randolfi served as Vice President and then as Senior Vice President and Controller at Delta Air Lines from October 2009 to February 2013. From June 1999 to October 2009, Mr. Randolfi held various executive positions in financial planning, financial analysis, controllership and treasury. Prior to his 14-year career at Delta, Mr. Randolfi held positions with Continental Airlines and Raymond James and Associates. Mr. Randolfi is a CPA and a certified management accountant and holds an MBA from Emory University and a BA in accounting and finance from the University of South Florida.


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Jim Rogers, age 61, has served as Senior Vice President, General Counsel and Corporate Secretary since August 2012 and is responsible for leading the Company’s global legal team as well as its compliance, corporate affairs and government relations functions. Mr. Rogers previously served from June 2010 to July 2012 as General Counsel of TLC Vision, a private-equity backed eye-care services provider. Before that, Mr. Rogers had practiced corporate and communications law from 1981 to 2009 at Latham & Watkins LLP in Washington, DC, the last 21 years as a partner. Mr. Rogers is a graduate of Columbia Law School, holds an MPA in Economics and Public Affairs from Princeton University, and received his BA from Yale University in Economics. Mr. Rogers serves on the Board of Directors of The Appleseed Foundation, and he previously served as co-chairman of the board.
Tamer Tamar, age 39, has served as Senior Vice President of International since March 2011 and President of ebookers since July 2009. Previously, Mr. Tamar served as Vice President of Europe and Middle East (“EMEA”) distribution for Expedia from February 2008 to July 2009. From 2004 to 2008, Mr. Tamar served in a variety of roles at Expedia, including managing Expedia’s EMEA car businesses, leading the strategy and corporate development function for the EMEA region, and heading up the Expedia UK business. Prior to joining Expedia, Mr. Tamar worked as a Management Consultant for A.T. Kearney in Chicago and London. Mr. Tamar holds an MBA from MIT and a BA in Mathematics and Economics from Franklin & Marshall College. Mr. Tamar will be resigning from the Company effective March 12, 2014 to accept a senior executive position outside of the travel industry.

Item 1A.    Risk Factors

Travelport may have interests that differ from our interests or the interests of our other stockholders and because Travelport has a significant ownership stake in Orbitz and significant rights under our certificate of incorporation, it may be able to exert significant influence and control over us.

At December 31, 2013, Travelport beneficially owned approximately 44.8% of our outstanding common stock and therefore is able to exert significant influence over us. Our certificate of incorporation (the “Charter”) provides Travelport with a greater degree of control and influence in the operation of our business and the management of our affairs than is typically available to a stockholder of a publicly-traded company. Under our Charter, until Travelport ceases to beneficially own shares entitled to 33% or more of the votes entitled to be cast by the holders of our then-outstanding common stock, the prior consent of Travelport is required before the Company can act or engage in certain situations, including: (i) the nomination or appointment of members of the Board of Directors or to any committee of the Board; (ii) transactions, including consolidations, mergers, sales, leases, dispositions or acquisitions over a certain amount; (iii) financing arrangements; and (iv) changes to our capital structure. Because the Company is prohibited from taking these actions without the prior consent of Travelport, we lack flexibility and could be prevented from being able to pursue transactions or other arrangements that would be in the best interests of our stockholders. We also may be prevented from nominating or appointing directors who we believe are best suited to serve on our Board of Directors.

In addition to these charter provisions, Travelport owns sufficient shares to significantly influence any actions requiring the approval of our stockholders, including adopting most amendments to our certificate of incorporation and approving or rejecting proposed mergers or sales of all or substantially all of our assets. Travelport’s interests may differ from those of our other stockholders in material respects and, as a practical matter, Travelport will be able to exert significant influence and potential control over matters put to a vote of our stockholders so long as it continues to own a significant amount of our outstanding voting stock, even though that amount is currently less than 50%. This could also limit stockholder value by preventing a change of control that our stockholders might consider favorable.

To varying extents, travel suppliers use global distribution systems to connect their products and services with travel companies, who in turn make these products and services available to travelers for booking. We entered into a new GDS service agreement with Travelport on February 4, 2014 (the “New Travelport GDS Service Agreement”). Under this agreement, we are required to use only Travelport GDSs for all air and car segments booked on domestic agencies and are subject to certain other exclusivity obligations for segments booked in Europe and other markets through December 31, 2014. Our contractual obligations to Travelport for GDS services limit our ability to use alternative GDS options before December 31, 2014 and as a result, if Travelport became unwilling or was unable to provide these services to us, we may not be able to transition to alternative providers and our business could be materially and adversely affected. After December 31, 2014, we are subject to certain minimum segment volume thresholds, but have significantly more flexibility to use alternate connectivity options. While the New Travelport GDS Service Agreement provides the Company significant flexibility than our prior arrangement with Travelport for GDS services, it is possible that the Company will negotiate with Travelport over the course of the agreement for modifications and amendments to the agreement. Because of our relationship with Travelport and the significant influence Travelport has over the Company, we may have a weakened negotiating position in discussions where

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Travelport has a divergent interest from us. In recognition of the fact that Travelport’s interests may differ from ours, our Audit Committee, in accordance with applicable listing and regulatory requirements and principles of good corporate governance, takes an active role in reviewing and approving any agreement involving more than $120,000 of payments or receipts in which Travelport (or any other related party) has an interest, including the New Travelport GDS Service Agreement entered into on February 4, 2014.

Disruptions or prolonged declines in travel volume, particularly air travel, could adversely affect our business, financial condition and results of operations.

Our revenue is derived from the worldwide travel industry and is directly related to the overall level of travel activity, particularly air travel and hotel volume. Therefore, our revenue is significantly impacted by declines in or disruptions to travel in the United States, Europe and the Asia Pacific region due to factors entirely outside of our control. Factors that could affect travel activity and materially adversely impact our results of operations, business and revenue include:

deterioration, weakness or uncertainty in the global economy;
global security issues, political instability, acts or threats of terrorism, regional hostilities or war, and other political issues that could adversely affect travel volume in our key regions;
health-related concerns, such as epidemics or pandemics;
natural disasters, such as hurricanes, volcanic eruptions, earthquakes, tsunamis, floods and droughts;
severe weather conditions, or unusual or unpredictable weather patterns;
the financial condition of suppliers, particularly those in the airline and hotel industry, and the impact of their financial condition on the cost and availability of air travel and hotel rooms;
changes in airline distribution policies or increases in airfares;
changes to regulations governing the airline and travel industry or the imposition of taxes or surcharges by regulatory authorities;
an increase in fuel prices affecting travel;
work stoppages or labor unrest at any of the major airlines, airports or major hotel chains;
travel-related accidents or safety concerns;
increased airport security that could reduce the convenience of air travel;
changes in occupancy and room rates achieved by hotels; and
travelers’ perceptions of the occurrence of or the scope, severity and timing of the factors described above.

If there is a prolonged substantial decrease in travel volumes, particularly for air travel and hotel stays, for these or any other reasons, it would have an adverse impact on our business, financial condition and results of operations.

The travel industry is highly competitive and we may not be able to effectively compete in the future.

We operate in the highly competitive travel industry. Our success depends upon our ability to compete effectively against numerous established and emerging competitors, including other OTCs, traditional offline travel companies, suppliers, travel research companies, search engines and meta-search companies, which may have significantly greater financial, marketing, personnel and other resources than we have. Factors affecting our competitive success include price, availability of travel products, ability to package travel products across multiple suppliers, brand recognition, customer service and customer care, fees charged to customers, ease of use, accessibility, reliability and innovation. If we are not able to compete effectively against our competitors, our business and results of operations may be adversely affected.

Online travel agencies: We face significant competition from other online travel agencies, such as Priceline, Expedia, Travelocity, and their related brands, as well as other regional competitors such as Ctrip in China and Odigeo in Europe. We compete with offline travel agencies for both travelers and the acquisition and retention of supply.

Travel suppliers: Suppliers have increasingly focused on distributing their products through their own websites and driving consumers away from OTCs. Suppliers may offer advantages for customers to book directly, such as member-only fares, bonus miles or loyalty points, which could make their offerings more attractive to customers. Some low-cost airlines distribute their online supply exclusively through their own website and other carriers have attempted to drive customers to book directly on their websites by eliminating or limiting sales of certain airline tickets through third-party distributors. Our results of operations could be negatively affected by such increased competitive pressure from suppliers.

Search engines: We also face increasing competition from search engines like Google, Bing and Yahoo!. Search engines have grown in popularity and may offer comprehensive travel planning or shopping capabilities, which may drive more traffic directly to the websites of suppliers or competitors. Google has increased its focus on appealing to travel customers through its

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launches of Google Places, Google Flights, and Google Hotel Price Ads (HPA). Google’s efforts around these products, as well as possible future developments, may change or undermine our ability to obtain prominent placement in paid or unpaid search results at a reasonable cost or at all. In addition, we currently license our search functionality, QPX Software, from ITA Software, Inc., a subsidiary of Google.

Travel meta-search engines and content aggregators: Travel meta-search websites and travel research sites that have search functionality, including Kayak.com (a subsidiary of our competitor Priceline), Trivago.com (a subsidiary of our competitor Expedia), and TripAdvisor, aggregate travel search results for a specific itinerary across supplier, travel agent and other websites. If these competitors limit our participation within their results, it could affect our traffic-generating arrangements in a negative manner. In addition, some meta-search sites, such as Kayak.com, offer users the ability to make reservations directly on their websites, which may reduce the amount of traffic and transactions available to us through referrals from these sites.

Other competitors in the broader travel space: We also will continue to face competition from new channels of distribution in the travel industry. Additional sources of competition could include “daily deal” websites, such as Groupon Getaways, or peer-to-peer inventory sources, such as AirBnB. AirBnB and similar websites facilitate the short-term rental of homes and apartments from owners, thereby providing an alternative to hotel rooms. The growth of peer-to-peer inventory sources could affect the demand for our services in facilitating reservations at hotels.

There can be no assurance that we will be able to compete successfully against any current and future competitors or on emerging platforms, or provide differentiated products and services to our customer base. Increasing competition from current and emerging competitors, the introduction of new technologies and the continued expansion of existing technologies, such as meta-search and other search engine technologies, may force us to make changes to our business models, which could affect our financial performance and liquidity. Increased competition has resulted in and may continue to result in reduced margins, as well as loss of customer, transactions and brand recognition.

Our business depends on our supplier and distribution partner relationships. Adverse changes in these relationships or our inability to enter into new relationships could negatively affect our access to travel offerings and reduce our revenue.

We rely significantly on our relationships with hotels, airlines and other suppliers and travel partners. We enter into agreements with these suppliers and travel partners at varying times and of varying duration. As a result, at any given point in time, one or more of these agreements may be approaching expiration or renewal. Moreover, in order to enhance the competitiveness of our offerings, we are constantly seeking to add new suppliers and travel partners. Adverse changes in any of these relationships (whether upon expiration of an agreement or otherwise) or the inability to enter into new relationships could negatively impact the availability and competitiveness of the travel products we offer on our websites and therefore could adversely affect our revenue. If any of our major suppliers or travel partners significantly reduces their business with us for a sustained period of time or completely withdraws from doing business with us, in favor of one of our competitors or to require consumers to purchase services directly from them, it could have a material adverse effect on our business and ability to retain customers.
In particular, airlines continue to look for ways to decrease their overall costs, including the cost of distributing airline tickets through OTCs and GDSs, and to increase their control over distribution. The airlines have negotiated, and we expect they will continue to attempt to negotiate, terms more favorable to themselves when the opportunity presents itself, such as upon expiration of an agreement or in the case where the Company is distributing an airline’s services without a formal agreement in place (which is currently the case with American Airlines). If airlines are successful in obtaining more favorable terms in their agreements with us or in their agreements with the GDSs, or if an airline actually terminates an agreement with us, the net revenue we earn from the distribution of airline tickets would be negatively impacted, which could have a material adverse effect on our business, results of operations or financial condition.
For example, the Company temporarily discontinued its distribution of American Airlines (“AA”) tickets in 2010 after the Company and AA were unable to agree to terms under which the AA tickets would be offered on our websites. If similar situations were to occur with other airlines, it could reduce our access to air inventory, thereby putting us at a competitive disadvantage and reducing our revenues.
Because we depend on a relatively small number of airlines and car rental companies for a significant portion of our revenue in those areas, our business and results of operations could be adversely affected if suppliers consolidate in either of these industries. If there is consolidation in either of these industries, the Company would be forced to negotiate with a fewer number of total suppliers for the same number of segments, which would weaken our negotiating position and reduce our ability to negotiate favorable rates on segments. Additionally, consolidation of one or more of the major airlines, including the

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merger of American Airlines and US Airways, could result in a reduction in the number of airline tickets available for booking on our websites and increased air fares, which may have a negative impact on demand for travel.
Our business has significant liquidity requirements.
    
Our business has significant liquidity requirements. Certain events could have a negative impact on our liquidity, which in turn could affect our ability to take advantage of potential business opportunities, respond to competitive pressures or operate our business as it currently exists, including the following:
termination of a major supplier’s participation on our websites;
decline in merchant gross bookings due to deteriorating economic conditions or other factors;
decline in stand-alone hotel merchant gross bookings due to a shift from the merchant model to the retail model;
credit card processors could impose holdbacks or reserves;
changes to payment terms or other requirements imposed by vendors, suppliers, payment processors, consumer protection organizations, taxing authorities or regulatory agencies, such as requiring us to provide letters of credit, cash reserves, deposits or other forms of financial security or increases in such requirements; and
lower than anticipated operating cash flows from our operations or other unanticipated events, such as unfavorable outcomes in legal proceedings (including, in the case of hotel occupancy proceedings, certain jurisdictions’ requirements that we provide financial security or pay a deposit to the municipality in order to challenge the assessment in court).

If any of these events occurs in the future, individually or in the aggregate, they could have a material adverse effect on our results of operations, our liquidity and the value of our common stock.
We have a significant amount of indebtedness, which could limit the manner in which we operate our business.

As of December 31, 2013, we had approximately $443.3 million of outstanding borrowings under our senior secured credit agreement. Our substantial level of indebtedness could:

impair our ability to obtain additional financing or to obtain such financing on terms acceptable to us for working capital, capital expenditures, acquisitions or general corporate purposes;
reduce the funds available to us for purposes such as potential acquisitions, capital expenditures, working capital and general corporate purposes because we are required to use a portion of our cash flows from operations to make debt service payments;
put us at a competitive disadvantage because we have a higher level of indebtedness than some of our competitors and reduce our flexibility in planning for, or responding to, changing conditions in the economy or our industry, including increased competition; and
make us more vulnerable to general economic downturns and adverse developments in our business.

The credit agreement requires us to maintain a minimum interest coverage ratio and not to exceed a maximum first lien leverage ratio. If we fail to comply with these covenants and we are unable to obtain a waiver or amendment, our lenders could accelerate the maturity of all amounts outstanding under our term loan and revolving credit facility and could proceed against the collateral securing this indebtedness. If this were to occur, there is no assurance that alternative financing would be available to us or at favorable terms.

In addition, restrictive covenants in our credit agreement specifically limit our ability to, among other things:

incur additional indebtedness or enter into guarantees;
enter into sale and leaseback transactions;
make new investments, loans or acquisitions;
grant or incur liens on our assets;
sell our assets;
engage in mergers, consolidations, liquidations or dissolutions;
engage in transactions with affiliates; and
make any distribution or dividend payment or redeem or repurchase our capital stock.

As a result, we may operate our business differently than if we were not subject to these covenants and restrictions.

We face risks associated with online security and credit card fraud and data privacy breaches.

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The secure transmission of confidential information over the Internet is essential in maintaining customer and supplier confidence in our services. Substantial or ongoing security breaches, whether instigated internally or externally on our system or on other Internet-based systems, could significantly harm our business. We currently require customers to guarantee transactions with their credit cards online. We rely on licensed encryption and authentication technology to effect secure transmission of confidential customer information, including credit card numbers.

It is possible that our security measures may not prevent security breaches and that we may be unsuccessful in implementing our remediation plan to address potential exposures. A party (whether internal, external, an affiliate or unrelated third party) that is able to circumvent our security systems could steal proprietary information or cause significant interruptions in our operations. Security breaches could damage our reputation and expose us to a risk of loss or litigation and possible liability. Security breaches could also cause customers and potential customers to lose confidence in our security, which would have a negative effect on the demand for our products and services. Additionally, certain of our third party providers, including our GDS providers, receive our customers’ credit card information in order to process transactions. If there is a security breach on such third party provider that causes our customers’ credit card information to be compromised, we would face the same risks as we would to a breach on our own system, including damage to our reputation, risk of loss or litigation.

Moreover, public perception concerning security and privacy on the Internet generally could adversely affect customers’ willingness to use our websites. Publicized breaches of security affecting other companies that conduct business over the Internet could cause consumers to be reluctant to use the Internet as a means of conducting commercial transactions and therefore reduce the number of consumers using our websites to book travel.

Additionally, we may be held liable for accepting fraudulent credit cards as payment for transactions and we have established an allowance for such fraudulent purchases. If we are unable to control the amount of fraudulent chargebacks for which we are liable, our results of operations and financial condition may be adversely affected.

We rely on search engines and content providers, who may change their business models in ways that could have a negative impact on our business.

We use Google and other internet search engines to generate traffic to our websites, principally through the purchase of travel-related keywords. Google and other search engines frequently update and change the logic that determines the placement and display of results of a user’s search. These changes could negatively affect the purchased or algorithmic placement of links to our websites. In addition, a significant amount of traffic is directed to our websites through our participation in pay-per-click and display advertising campaigns on search engines, meta-search sites and content properties. Pricing and operating dynamics for these traffic sources can experience rapid change, both technically and competitively. Moreover, any of these providers could, for competitive or other purposes, alter their search algorithms or results, causing our websites to place lower in search query results. If a major search engine changes its algorithms in a manner that negatively affects the search engine ranking, paid or unpaid, of our websites or that of our third-party distribution partners, or if competitive dynamics impact the costs or effectiveness of search engine optimization, search engine marketing or other traffic generating arrangements in a negative manner, our business and financial performance would be adversely affected, potentially to a material extent.

We are dependent upon third-party systems and service providers and any disruption or adverse change in their businesses could have a material adverse effect on our business.

We rely on certain third-party computer systems, service providers and software companies, including the electronic central reservation systems and GDSs. In particular, our businesses rely on third parties to:

conduct searches for airfares;
process hotel room transactions;
process credit card and other payments; and
provide computer infrastructure critical to our business.

We currently utilize GDSs, including Worldspan, Galileo and Amadeus to process a significant portion of our bookings. In addition, we rely on a group of business process outsourcing companies located in various countries to provide us with call center and telesales services, back office administrative services such as ticketing fulfillment, hotel rate loading and quality control, information technology services, and financial services. Any interruption in these third-party services could prevent us from operating certain aspects of our business and damage our reputation. For instance, interruption or deterioration in our GDS partners’ products or services could prevent us from searching and booking airline and car rental reservations.


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Our success is dependent on our ability to maintain relationships with our technology partners. In the event our arrangements with any of these third parties are impaired or terminated, we may not be able to find an alternative source of systems support on a timely basis or on commercially reasonable terms, which could result in significant additional costs or disruptions to our business. In addition, some of our agreements with third-party service providers can be terminated by those parties on short notice and, in many cases, provide no recourse for service interruptions. A termination or disruption of these services could have a material adverse effect on our business, financial condition and results of operations.

Certain of our international subsidiaries have a history of significant operating losses and our inability to improve their scale and profitability could adversely affect our business and results of operations.

We have historically incurred significant operating losses at our international subsidiaries and may continue to experience operating losses in the future. As a result, we have made, and may continue to make, significant investments in our international operations by using a portion of the cash flow generated from our domestic operations or funds from other borrowings under our other credit facilities. There can be no assurance that our international subsidiaries will be profitable in the future or that any profits generated by them will be sufficient to recover our investments in them.

The profitability of our international subsidiaries depends to a large extent on the scale of their operations. If we fail to achieve the desired scale, we may not be able to effectively compete in the global marketplace and our business and results of operations may be adversely affected.

Our international operations are subject to additional risks not encountered when doing business in the United States, including foreign exchange risk. We expect that our exposure to these risks will increase as we expand our international operations.

We generated 27% of our net revenue for the year ended December 31, 2013 from our international operations and had employees in over 20 countries. We are subject to certain risks as a result of having international operations and operations in multiple countries generally, including:

currency exchange rate fluctuations;
difficulties in staffing and managing operations due to distance, time zones, language and cultural differences, including issues associated with establishing management infrastructure in various countries;
differences and unexpected changes in local regulatory requirements and exposure to local economic conditions;
limits on our ability to enforce our intellectual property rights and increased risk of piracy;
preference of local populations for local providers;
restrictions on the repatriation of non-U.S. investments and earnings back to the United States, including withholding taxes imposed by certain foreign jurisdictions; and
diminished ability to legally enforce our contractual rights.

To the extent we are not able to effectively mitigate or eliminate these risks, our results of operations could be adversely affected.

Further, our international operations require us to comply with a number of U.S. and international regulations, including, among others, the Foreign Corrupt Practices Act (“FCPA”) and the U.K.'s Bribery Act 2010. Any failure by us to adopt and continue to practice appropriate compliance procedures to ensure that our employees and agents comply with the FCPA and applicable laws and regulations in foreign jurisdictions could result in substantial penalties or restrictions on our ability to conduct business in certain foreign jurisdictions.

We rely on information technology to operate our businesses and maintain our competitiveness, and any failure to adapt to technological developments or industry trends could affect our ability to compete and harm our business.

We depend upon the use of sophisticated information technologies and systems, including technologies and systems utilized for reservations, communications, procurement and administrative systems. Certain of our businesses also utilize third-party fare search solutions and GDSs or other technologies. As our operations grow in both size and scope, we must continuously improve and upgrade our systems and infrastructure to offer our customers enhanced products, services, features and functionality, while maintaining the reliability and integrity of our systems and infrastructure. Our future success depends on our ability to adapt our services and infrastructure to meet rapidly evolving industry standards while continuing to improve the performance and features of our service in response to competitive service and product offerings and the changing demands of the marketplace. In particular, we will need to commit additional financial, operational and technical resources in order to expand our systems and infrastructure to meet any potential increases in business volume.

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In addition, we may not be able to maintain our existing systems, obtain new technologies and systems, or replace or introduce new technologies and systems as quickly as our competitors or in a cost-effective manner. We may fail to achieve the benefits anticipated or required from any new technology or system, or we may be unable to devote financial resources to new technologies and systems in the future. Furthermore, our use of this technology could be challenged by claims that we have infringed upon the patents, copyrights or other intellectual property rights of others. If any of these events occur, our business could suffer.

System interruptions and the lack of redundancy may cause us to lose customers or business opportunities.

We rely on computer and information technology systems to operate our business and process transactions. If we are unable to maintain and improve our information technology systems and infrastructure, we may experience system interruptions. System interruptions and slow delivery times, unreliable service levels, prolonged or frequent service outages, or insufficient capacity in our systems or the systems of the third parties on which we rely may prevent us from efficiently providing services to our customers, which could result in our losing customers and revenue or incurring liabilities. In addition to the risks associated with inadequate maintenance or upgrading, our information technologies and systems are vulnerable to damage or interruption from various causes, including:

power losses, computer systems failure, Internet and telecommunications or data network failures, operator error, losses and corruption of data, and similar events;
computer viruses, penetration by individuals seeking to disrupt operations or misappropriate information and other physical or electronic breaches of security; 
the failure of third-party systems or services that we rely upon to maintain our own operations; and
natural disasters, war and acts of terrorism.

We do not have backup systems for certain critical aspects of our operations. For example, if we were unable to connect to certain third-party systems, such as GDSs, due to failure of our systems, our ability to process bookings could be significantly or completely impaired. Many other systems are not fully redundant and our disaster recovery planning may not be sufficient. In addition, we may have inadequate insurance coverage or insurance limits to compensate for losses from a major interruption, and remediation may be costly and have a material adverse effect on our operating results and financial condition. Any extended interruption in our technologies or systems could significantly curtail our ability to conduct our businesses and generate revenue.

Our businesses are regulated and any failure to comply with applicable regulations or any changes in those regulations could adversely affect us.

We operate in a regulated industry both in the United States and internationally. Our business, financial condition and results of operations could be adversely affected by unfavorable changes in or the enactment of new laws, rules and regulations applicable to us, which could decrease demand for our products and services, increase costs or subject us to additional liabilities. Moreover, regulatory authorities have relatively broad discretion to grant, renew and revoke licenses and approvals and to implement regulations. Accordingly, these regulatory authorities could prevent or temporarily suspend us from carrying on some or all of our activities or otherwise penalize us if our practices were found not to comply with the then current regulatory or licensing requirements or any interpretation of such requirements by the regulatory authority. Our failure to comply with any of these requirements or interpretations could have a material adverse effect on our operations. In addition, the various regulatory regimes to which we are subject may conflict so that compliance with the regulatory requirements in one jurisdiction may create regulatory issues in another.

Because we process, store and use customer information, we are subject to additional risks as a result of governmental regulation and conflicting legal requirements regarding customer information. In the processing of customer transactions, we receive and store a large volume of personally identifiable information. This information is increasingly subject to legislation and regulations in numerous jurisdictions around the world. This legislation and regulation is generally intended to protect the privacy and security of personal information, including credit card information that is collected, processed and transmitted in or from the governing jurisdiction. If domestic or international legislation or regulations are expanded to require changes in our business practices, or if governing jurisdictions interpret or implement their legislation or regulations in ways that negatively affect our business, we could be adversely affected. Travel companies have also been subjected to investigations, lawsuits and adverse publicity due to allegedly improper disclosure of passenger information. As privacy and data protection have become more sensitive issues, we may also become exposed to potential liabilities as a result of differing views on the privacy of travel data. These and other privacy concerns could adversely impact our business, financial condition and results of operations.


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Our business is also subject to laws and regulations relating to our revenue generating and marketing activities, including those prohibiting unfair and deceptive advertising or practices. Our travel services are subject to regulation and laws governing the offer of travel products and services, including laws requiring us to register as a “seller of travel” in various jurisdictions and to comply with certain disclosure requirements. As an OTC that offers customers the ability to book air travel in the United States, we are also subject to regulation by the Department of Transportation, which has authority to enforce economic regulations and may assess civil penalties or challenge our operating authority.

We are involved in various legal proceedings and may experience unfavorable outcomes, which could affect our financial position.

We are involved in various legal proceedings, including, but not limited to, actions relating to intellectual property, in particular patent infringement claims against us, tax, antitrust, employment law and other negligence, breach of contract and fraud claims, which involve claims for substantial amounts of money or for other relief or that might necessitate changes to our business or operations. The defense of these actions may be both time consuming and expensive. If any of these legal proceedings were to result in an unfavorable outcome, it could have a material adverse effect on our business, financial position and results of operations. In addition, historically, our insurers have reimbursed us for a significant portion of costs we incurred to defend cases related to use or occupancy tax of hotel accommodations that some states and localities impose (“hotel occupancy tax”). We will not receive any additional insurance reimbursements in future periods as our insurance coverage has now been exhausted.

We may not be effectively protecting our intellectual property, which would allow competitors to duplicate our products and services. This could make it more difficult for us to compete with them.

Our success and ability to compete depend, in part, upon our technology and other intellectual property, including our brands. Among our significant assets are our software and other proprietary information and intellectual property rights. We rely on a combination of copyright, trademark and patent laws, trade secrets, confidentiality procedures and contractual provisions to protect these assets. However, we have a limited number of patents, and our software and related documentation are protected principally under trade secret and copyright laws, which afford only limited protection, and the laws of some jurisdictions provide less protection for our proprietary rights than the laws of the United States. We have granted Travelport an exclusive license to our supplier link technology, including our patents related to that technology. Under the exclusive license, Travelport has the first right to enforce those patents, and so we will only be able to bring actions to enforce those patents if Travelport declines to do so. Unauthorized use and misuse of our intellectual property could have a material adverse effect on our business, financial condition and results of operations, and the legal remedies available to us may not adequately compensate us for the damages caused by unauthorized use.

Further, intellectual property challenges have been increasingly brought against members of the travel industry. These legal actions have in the past, and might in the future, result in substantial costs and diversion of resources and management attention. In addition, we may need to take legal action in the future to enforce our intellectual property rights, to protect our trade secrets or to determine the validity and scope of the proprietary rights of others, and these enforcement actions could result in the invalidation or other impairment of intellectual property rights we assert.

Our ability to attract, train and retain executives and other qualified employees is critical to our results of operations and future growth.

We depend substantially on the continued services and performance of our key executives, senior management and skilled personnel, particularly our professionals with experience in our industry and our information technology and systems. Any of these individuals may choose to terminate their employment with us at any time. The specialized skills we require can be difficult and time-consuming to acquire and, as a result, these skills are often in short supply. A significant period of time and expense may be required to hire and train replacement personnel when skilled personnel depart the Company. Our inability to hire, train and retain a sufficient number of qualified employees could materially hinder our business by, for example, delaying our ability to bring new products and services to market or impairing the success of our operations or prospects for future growth.


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We have granted Travelport perpetual licenses to use certain of our intellectual property, which could facilitate Travelport's ability to compete with us.

We are party to a Master License Agreement with Travelport under which we and Travelport each have rights to use certain of the other’s intellectual property. The Master License Agreement permits Travelport and its affiliates to use and, in some cases, to sublicense to third parties certain of our intellectual property, including:

our supplier link technology;
portions of ebookers’ booking, search and vacation package technologies;
certain of our products and online booking tools for corporate travel;
portions of our private label vacation package technology; and
our extranet supplier connectivity functionality.

Travelport and its affiliates may use these technologies as part of, or in support of, their own products or services, including in some cases to compete directly with us.

The Master License Agreement permits Travelport to sublicense our intellectual property (other than our supplier link technology) to a party that is not an affiliate of Travelport, except that Travelport may not sublicense our intellectual property to a third party for a use that competes with our business, unless Travelport incorporates or uses our intellectual property with Travelport products or services to enhance or improve Travelport products or services (other than to provide our intellectual property to third parties on a stand-alone basis). Travelport and its affiliates are permitted to use our intellectual property to provide their own products and services to third parties that compete with us. With respect to our supplier link technology, Travelport has an unrestricted license. These Travelport rights could facilitate Travelport’s, its affiliates’ and third parties’ ability to compete with us, which could have a material adverse effect on our business, financial condition and operating results.

Our business and financial performance could be negatively impacted by adverse tax events.

New sales, use, occupancy or other tax laws, statutes, rules, regulations or ordinances could be enacted at any time. Such enactments could adversely affect our domestic and international business operations and our business and financial performance. Further, existing tax laws, statutes, rules, regulations or ordinances could be interpreted, changed, modified or applied adversely to us. These events could require us to pay additional tax amounts on a prospective or retroactive basis, as well as require us to pay fees, penalties and/or interest for past amounts deemed to be due. In addition, our revenue may decline because we may have to charge more for our products and services.

New, changed, modified or newly interpreted or applied tax laws could also increase our compliance, operating and other costs, as well as the costs of our products or services. Further, these events could decrease the capital we have available to operate our business. Any or all of these events could adversely impact our business and financial performance.

We and other providers of travel in the online travel industry are currently subject to various lawsuits related to hotel occupancy tax in numerous jurisdictions in the United States, and other jurisdictions may be considering similar lawsuits. An adverse ruling in the existing hotel occupancy tax cases could require us to pay tax retroactively and prospectively, and possibly penalties, interest and/or fees. We have also been contacted by several municipalities or other taxing bodies concerning our possible obligation with respect to local hotel occupancy or related taxes, and certain municipalities have begun audit proceedings and some have issued assessments against us. If we are found to be subject to the hotel occupancy tax ordinance by a taxing authority and we appeal the decision in court, certain jurisdictions may attempt to require us to provide financial security or pay the assessment to the municipality in order to challenge the tax assessment in court. The proliferation of new hotel occupancy tax cases or audit proceedings could result in substantial additional defense costs. These events could also adversely impact our business and financial performance. See Item 3, “Legal Proceedings.”

Item 1B.
Unresolved Staff Comments

None.



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Item 2.
Properties

Our corporate headquarters are located in leased office space in Chicago, Illinois. We also lease office space for our ebookers brand portfolio in various countries, including the United Kingdom, Finland, France, Germany, India, Ireland, Sweden and Switzerland. In addition, we lease office space for our HotelClub brand portfolio, primarily in Sydney, Australia. We believe that our existing facilities are adequate to meet our current requirements and that additional space will be available as needed to accommodate any further expansion of our business.

Item 3.
Legal Proceedings

We are involved in various claims, legal proceedings and governmental inquiries related to contract disputes, business practices, antitrust, intellectual property and other commercial, employment and tax matters. We will not receive any additional insurance reimbursements in defending hotel occupancy tax proceedings in future periods as our related insurance coverage has now been exhausted. The following list identifies all litigation matters for which we believe that an adverse outcome could be material to our financial position or results of operations, as well as other matters that may be of particular interest to our stockholders. See Note 9 - Commitments and Contingencies of the Notes to Consolidated Financial Statements.

Litigation Relating to Hotel Occupancy Taxes

Orbitz Worldwide, Inc. and certain of its current and former subsidiaries and affiliates, including Orbitz, Inc., Orbitz, LLC, Trip Network, Inc. (d/b/a Cheaptickets.com), Travelport Inc. (f/k/a Cendant Travel Distribution Services Group, Inc.), and Internetwork Publishing Corp. (d/b/a Lodging.com), are parties to various cases brought by consumers and municipalities and other governmental entities in the U.S. involving hotel occupancy taxes and our merchant hotel business model. Some of the cases are purported class actions, and most of the cases were brought simultaneously against other OTCs, including Expedia, Travelocity and Priceline. The cases allege, among other things, that we violated the jurisdictions' hotel occupancy tax ordinances, as well as related sales and use taxes. While not identical in their allegations, the cases generally assert similar claims, including violations of local or state occupancy tax ordinances, failure to pay sales or use taxes, and in some cases, violations of consumer protection ordinances, conversion, unjust enrichment, imposition of a constructive trust, demand for a legal or equitable accounting, injunctive relief, declaratory judgment, and civil conspiracy. The plaintiffs seek relief in a variety of forms, including: declaratory judgment, full accounting of monies owed, imposition of a constructive trust, compensatory and punitive damages, disgorgement, restitution, interest, penalties and costs, attorneys' fees, and where a class action has been claimed, an order certifying the action as a class action. Adverse rulings in these cases could require us to pay tax retroactively and prospectively and possibly pay interest, penalties, and fines. The proliferation of additional cases could result in substantial additional defense costs. The following table reflects the hotel tax cases in which we are currently a defendant.

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City or County Filing Litigation
 
Date Litigation Instituted
 
Court Where Litigation is Pending
 
 
 
 
 
City of Chicago, Illinois
 
November 1, 2005
 
Circuit Court of Cook County, Illinois
City of Atlanta, Georgia
 
March 29, 2006
 
Superior Court of Georgia
City of San Antonio, Texas**
 
May 8, 2006
 
United States District Court for the Western District of Texas
Wake County, North Carolina
 
November 3, 2006
 
Court of Appeals of North Carolina
Dare County, North Carolina
 
January 26, 2007
 
Court of Appeals for North Carolina
(consolidated with Wake County)
Buncombe County, North Carolina
 
February 1, 2007
 
Court of Appeals for North Carolina (consolidated with Wake County)

City of Gallup, New Mexico**
 
July 6, 2007
 
United States District Court for the District of New Mexico
Mecklenburg County, North Carolina
 
January 10, 2008
 
Court of Appeals for North Carolina (Consolidated with Wake County)

Jefferson County, Arkansas**
 
September 25, 2009
 
Circuit Court of Jefferson County, Arkansas
Leon County, Florida (TRT)

 
November 5, 2009
 
Florida Supreme Court

Leon County, Florida (TDT)

 
December 14, 2009
 
Florida Supreme Court

County of Lawrence, Pennsylvania*

 
January 14, 2010
 
Commonwealth Court of Pennsylvania
Montana Department of Revenue

 
November 8, 2010

 
Montana First Judicial District, Louis and Clark County

McAllister et al. (Consumer Action)
 
February 22, 2011
 
Circuit Court of Saline County, Arkansas
Washington, D.C.
 
April 22, 2011
 
Superior Court for the District of Columbia
Volusia County, Florida
 
May 11, 2011
 
Circuit Court for the Seventh Judicial Circuit in and for Volusia County, Florida
Breckenridge, Colorado*
 
July 25, 2011
 
District Court for Summit County, Colorado
Nassau County, New York*
 
September 26, 2011
 
Supreme Court of New York, Nassau County
State of Mississippi
 
January 6, 2012
 
Chancery Court of the First Judicial District of Hinds County, Mississippi
County of Kalamazoo, Michigan
 
August 28, 2012
 
Ninth Judicial Circuit for the County of Kalamazoo
City of Fargo, North Dakota
 
February 27, 2013
 
District Court for the County of Cass, North Dakota
Village of Bedford Park, Illinois*

 
July 8, 2013

 
United States District Court for the Northern District of Illinois

Kentucky Department of Revenue

 
July 15, 2013

 
Franklin Circuit Court, Kentucky

Columbia, South Carolina*

 
July 26, 2013

 
Court of Common Pleas, Ninth Judicial Circuit, South Carolina

*
Indicates purported class action filed on behalf of named City or County and other (unnamed) cities, counties, governments or other taxing authorities with similar tax ordinances.
**
Indicates court certified class action on behalf of named City or County and other (unnamed) cities, counties, governments or other taxing authorities with similar tax ordinances.

Procedurally, the cases listed above are at different stages. Ten of these cases are pending before their respective trial courts and have not advanced beyond the discovery phase. The following cases have reached more advanced stages, as described below:

City of Chicago, Illinois: On June 23, 2013, the Circuit Court for Cook County granted the City’s motion for partial summary judgment on liability.

City of Atlanta, Georgia: On September 30, 2013, the trial court granted the OTCs' motion for summary judgment on remaining issues. On November 1, 2013, the court entered final judgment. On November 25, 2013, Atlanta filed a Notice of Appeal with the Georgia Supreme Court.


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City of San Antonio, Texas: On April 4, 2013, the U.S. District Court for the Western District of Texas entered final judgment in favor of plaintiffs. On May 2, 2013, the OTCs filed their renewed motion for judgment as a matter of law, and alternatively, motion for a new trial. On February 21, 2014, the District Court denied the OTCs' motions for judgment as a matter of law, and motion for new trial. Both parties have sought reconsideration on the issue of penalties in post-judgment motions. Once the District Court enters judgment on the parties' post-judgment motions concerning penalties, the parties will have 30 days to appeal the case to the Fifth Circuit.

North Carolina Consolidated Cases: On January 17, 2013, Wake, Dare, Buncombe and Mecklenburg Counties filed their notice of appeal of the General Court of Justice, Superior Court Division for the State of North Carolina’s decision granting summary judgment in favor of the OTCs. On November 19, 2013, the North Carolina Court of Appeals heard oral argument on the counties’ appeal.

City of Gallup, New Mexico: On March 29, 2013, the District Court granted the OTCs’ motion for summary judgment. On April 22, 2013, plaintiffs filed their notice of appeal to the U.S. Court of Appeals for the Tenth Circuit. On May 31, 2013, the parties reached a preliminary settlement agreement. On August 8, 2013, the parties filed a joint motion for stipulation to dismiss the appeal and the U.S. Court of Appeals for the Tenth Circuit granted the motion and issued the mandate to the U.S. District Court. On October 4, 2013, the District Court granted preliminary approval of the settlement. On March 4, 2014, the District Court granted final approval of the settlement.
 
Jefferson County, Arkansas: On March 8, 2013, the OTCs filed their notice of appeal to the Arkansas Supreme Court the circuit court’s February 18, 2013 order granting class certification. On October 9, 2013, the Arkansas Supreme Court denied the OTCs' appeal of the circuit court’s February 18, 2013 order granting class certification.

Leon County, Florida (Transient Rental Tax): On August 16, 2013, the Florida Court of Appeal for the First District affirmed the trial court’s grant of summary judgment in favor of the OTCs and the Florida Department of Revenue. On August 30, 2013, the County filed a motion for rehearing, rehearing en banc, or certification to the Florida Supreme Court of a Question of Great Public Importance. On October 9, 2013, the Florida Court of Appeal for the First District denied the motion. On October 24, 2013, the County filed a notice to invoke the discretionary jurisdiction of the Florida Supreme Court. The parties have filed jurisdictional briefs, and on December 31, 2013, the Florida Supreme Court issued an order staying the Transient Rental Tax statute case pending the outcome of Tourist Development Tax case.

Leon County, Florida (Tourist Development Tax): On February 28, 2013, the First District Court of Appeal affirmed the trial court’s summary judgment ruling in favor of the OTCs. On March 15, 2013, the County filed a motion for rehearing en banc, or in the alternative Requesting Certification to the Florida Supreme Court of a Question of Great Public Importance. On April 16, 2013, the Florida Court of Appeals, First District denied plaintiffs’ motion for rehearing en banc, but granted plaintiffs’ request for certification to the Florida Supreme Court. On May 13, 2013, the plaintiffs filed their Petition for Review with the Florida Supreme Court seeking review of the First District Court of Appeal’s opinion affirming the trial court’s summary judgment in favor of the OTCs. On September 10, 2013, the Florida Supreme Court granted plaintiffs’ Petition for Review. Oral argument is scheduled for April 30, 2014

Montana Department of Revenue: On December 5, 2013, the Montana First Judicial District Court heard oral argument on the OTCs’ motions for partial summary judgment on the lodging tax and rental vehicle tax.

McAllister et al. (Consumer Action): On April 30, 2013, Circuit Court of Saline County, Arkansas granted the OTCs’ motion for reconsideration and dismissed the complaint. On June 19, 2013, plaintiffs filed their notice of appeal. On January 9, 2014, the Circuit Court of Saline County granted plaintiff’s motion to voluntarily dismiss the case.

Washington D.C.: On December 6, 2013, the Superior Court of the District of Columbia granted the OTCs’ motion for partial summary judgment on the calculation of sales tax, and denied the District’s motion for partial summary judgment on the same issue. On February 21, 2014, Orbitz entered into a stipulation agreement with the District of Columbia. On February 24, 2014 the Superior Court entered final judgment in favor of the District of Columbia.

The following legal proceedings relating to hotel occupancy taxes we previously reported were concluded since October 1, 2013:

Baltimore County, Maryland: On October 23, 2013, Orbitz and Baltimore County entered into a settlement agreement. On November 7, 2013, the parties filed a stipulation of dismissal, with prejudice, ending the case.


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Montgomery County, Maryland: On October 25, 2013, Orbitz and Montgomery County executed a Settlement Agreement. On November 15, 2013, the parties filed a stipulation of dismissal, with prejudice, ending the case.

City of Rome, Georgia: On December 13, 2013, the Eleventh Circuit affirmed the district court's grant of summary judgment in favor of the OTCs. On January 3, 2014, the City of Rome filed a petition for rehearing and petition for rehearing en banc following the Eleventh Circuit’s decision affirming summary judgment in favor of the OTCs. On February 6, 2014, the Eleventh Circuit denied the City of Rome’s petition for rehearing.

Audit Related Proceedings Related To Hotel Occupancy (and Related) Taxes

We have also been contacted by several municipalities or other taxing bodies concerning our possible obligations with respect to state or local hotel occupancy or related taxes. The following taxing authorities have issued assessments that are subject to further review by the taxing authorities: the Colorado Department of Revenue; the City of Aurora, Colorado; the Maryland Comptroller; the Texas Comptroller; the West Virginia Department of Revenue; Osceola, Florida, and Lake County, Indiana. We dispute that any hotel occupancy or related tax is owed under these ordinances and are challenging the assessments made against us. These assessments range from approximately $20,000 to approximately $58 million, and total approximately $94 million. Some of these assessments, including a $58 million assessment from the Hawaii Department of Taxation, are not based on historical transaction data. On several occasions, where we have received an assessment, we have been required to provide financial security or pay the assessment to the municipality in order to seek judicial review.

Certain assessments made in these audit proceedings are administratively final and subject to judicial review. The following is a description of the lawsuits brought by the Company challenging such final assessments.

Orbitz, LLC v. Broward County, Florida, No. 2009 CA 000126 (Circuit Court of the Second Judicial Circuit, Leon County, Florida): On May 20, 2008, Broward County, Florida issued an estimated assessment of approximately $0.4 million against Orbitz, LLC and $0.08 million against Internetwork Publishing Corp. On November 13, 2008, the County finalized the assessments. On January 12, 2009, Orbitz, LLC and Internetwork Publishing Corp. filed a complaint in the Circuit Court, Second Judicial Circuit, Leon County, Florida, against Broward County and the Florida Department of Revenue asserting that they are not subject to the tourist development tax. On February 2, 2009, the County filed its Answer and Counterclaim. On March 31, 2009, the County issued additional assessments of approximately $0.05 million against Orbitz, LLC and approximately $0.03 million against Internetwork Publishing Corp. On February 28, 2011, the County issued additional assessments of approximately $0.2 million against Orbitz, LLC and approximately $0.04 million against Internetwork Publishing Corp. On July 13, 2012, the Circuit Court granted partial summary judgment in favor of the OTCs on their affirmative claims and all of Broward County's Counterclaims. On November 12, 2012, Broward County filed a motion for reconsideration, which was denied on January 11, 2013. On February 4, 2013, Broward County filed a notice of appeal. On February 12, 2014, the Florida Court of Appeals affirmed the grant of summary judgment in favor of the OTCs. On February 14, 2014, Broward County filed a motion with the Court of Appeals in which it sought certification of question of great public importance. On February 20, 2014, the Court of Appeals denied Broward County's motion. On February 24, 2014, Broward County filed a motion to stay pending review, to stay the issuance of mandate, and to enlarge the time to file a motion for rehearing pending ruling by the Florida Supreme Court. Broward County also filed notice to invoke the discretionary jurisdiction of the Florida Supreme Court.

Orbitz, LLC v. Indiana Department of Revenue, No. 49T10-0903-TA-00010 (Indiana Tax Court): On May 5, 2008, the Indiana Department of Revenue issued estimated assessments of approximately $0.2 million against Orbitz, LLC. On November 24, 2008, the Department of Revenue confirmed the estimated assessments as its final administrative assessment. On March 3, 2009, Orbitz, LLC filed a petition with the Indiana Tax Court seeking to set aside the Department of Revenue's final determination. In August 2013, the parties filed cross motions for summary judgment. On January 17, 2014, the Indiana Tax Court heard oral argument on the parties’ motions for summary judgment.

Orbitz, LLC v. Miami-Dade, Florida, No. 2009 CA 4977 (Circuit Court of the Second Judicial Circuit, in and for Leon County, Florida): On December 21, 2009, the OTCs filed a complaint in the Circuit Court, Second Judicial Circuit, Leon County, Florida against Miami-Dade County and the Florida Department of Revenue asserting that they are not subject to the tourist development tax and the convention development tax. On June 2, 2010, the Circuit Court granted the parties motion to stay the action pending final determination of the Monroe County, Florida matter. On February 11, 2011, the Circuit Court granted the parties joint motion to lift the stay and entered the parties' joint stipulation for partial dismissal of claims in accordance with the class action settlement in the Monroe County, Florida matter. The only issue remaining is liability on the Convention Development Tax. On September 25, 2012, the Circuit Court stayed the litigation pending a final determination in Leon County, et al. v. Expedia, Inc., et al.


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Orbitz, LLC v. Osceola, Florida (Circuit Court of the Second Judicial Circuit, Leon County, Florida): On August 27, 2010, Osceola County, Florida issued estimated assessments against various Orbitz entities. On October 27, 2010, the County denied the Company's appeal and finalized assessments of approximately $1.0 million against Orbitz, Inc. and Orbitz, LLC and approximately $0.2 million against Trip Network, Inc. and Internetwork Publishing Corp. On January 24, 2011, the OTCs filed a complaint in the Circuit Court, Second Judicial Circuit, Leon County, Florida against Osceola County and the Florida Department of Revenue asserting that they are not subject to the tourist development tax.

Orbitz, LLC v. Hawaii Department of Taxation (Hawaii Tax Appeal Court). On December 30, 2010, the State of Hawaii Department of Taxation issued a series of “proposed” assessments for the transient accommodations tax and general excise tax totaling approximately $10.2 million against various Orbitz entities. On January 31, 2011, the Department of Revenue issued its Final Notices of Assessments for those same amounts. On March 1, 2011, the OTCs filed their Notice of Appeal to the Tax Appeal Court. On May 8, 2012, the Hawaii Department of Taxation issued additional proposed assessments for the period of January 1, 2000 to December 31, 2011 totaling approximately $48.6 million against the Orbitz entities bringing the total amount of assessments to approximately $58.8 million. On October 22, 2012, the Tax Appeal Court orally denied the Department of Taxation's motion for partial summary judgment and granted the OTCs motion for partial summary judgment on the transient accommodations tax. On January 11, 2013, the Tax Court of Appeal orally granted in part the Department of Taxation's motion for summary judgment and denied the OTCs motion as it relates to application of the general excise tax. On February 8, 2013, the OTCs filed a motion for reconsideration. On March 27, 2013, the OTCs filed a mandamus petition and motion to stay the action in the Tax Court pending resolution of the mandamus petition. On May 20, 2013, the Hawaii Department of Taxation issued estimated assessments for the 2012 tax year for merchant model hotel reservations against various Orbitz entities collectively amounting to $16.9 million. On August 15, 2013, the Hawaii Tax Appeal Court entered final judgment disposing of all issues and claims of all parties. On September 11, 2013, the OTCs filed their notice of appeal seeking review of the Hawaii Tax Appeal Court finding that the OTCs are subject to Hawaii’s general excise tax (“GET”). The Department filed a notice of appeal seeking review of the Hawaii Tax Appeal Court finding that the OTCs are not subject to Hawaii’s transient accommodations tax. On December 9, 2013, the Hawaii Department of Taxation issued Notices of Final Assessments collectively totaling $10,254,669.60 on Orbitz, LLC, Trip Network, Inc. and Internetwork Publishing Corp. for General Excise Tax, penalties and interest for rental car transactions during the period of January 1, 2002, through December 31, 2012. On December 16, 2013, the Tax Appeal Court granted the OTCs’ motion to stay their consolidated tax appeals for 2012 GET and TAT Tax Assessments. On December 24, 2013, the Hawaii Supreme Court granted the parties’ application to transfer the matter to the Hawaii Supreme Court.

Expedia, Inc. v. City and County of Denver, Colorado, (District Court, Denver Colorado): On February 8, 2012, the City's appointed hearing officer issued his final administrative decision finding the OTCs are subject to Denver's Lodger's Tax, and approved an assessment against Orbitz in the amount of $0.6 million. On February 13, 2012, the OTCs filed their notice of intent to appeal the hearing officer's final administrative decision. On March 30, 2012, the City filed a motion to dismiss the first claim for relief of the OTCs complaint. On July 26, 2012, the District Court denied the City's motion to dismiss. On October 2, 2012, the OTCs filed their brief supporting their claim for relief. On March 12, 2013, the District Court, Denver, Colorado affirmed in part and reversed in part the Hearing Officer’s February 8, 2012 ruling. The District Court found the Hearing Office did not abuse his discretion in finding that the OTCs fall within the scope of the Lodging Tax statute; however, the District Court found the three year statute of limitations period applied to Denver’s assessments. On April 26, 2013, the OTCs appealed. On May 10, 2013, the City filed its notice of appeal regarding the District Court’s ruling that the three year statute of limitations period applied to Denver’s assessments.

In Re Transient Occupancy Tax Cases, Coordination Proceeding No. 4472 (Superior Court of the State of California for the County of Los Angeles).

City of San Francisco

On March 3, 2010, the City of San Francisco issued a final assessment of approximately $3.2 million for the period of January 1, 2000 to September 30, 2008, against various Orbitz entities. On March 31, 2010, we paid the final assessment pursuant to the City's “pay to play” requirement. On April 2, 2010, we filed a refund request with the City. On May 14, 2010, the OTCs filed a Complaint for Tax Refund and Declaratory Relief against the City and County of San Francisco seeking a tax refund and declaratory relief. On December 18, 2012, the City of San Francisco issued supplemental final assessments of approximately $1.4 million against Orbitz LLC, Trip Network, Inc. and Internetwork Publishing Corp. On January 2, 2013, these entities paid this assessment pursuant to the City's “pay to play” requirement. On February 6, 2013, the Superior Court for the County of Los Angeles granted the OTCs motion for summary judgment. On October 10, 2013, the Superior Court for the County of Los Angeles entered final judgment in favor of the OTCs, ordering San Francisco to issue a refund of $4.0 million to the Orbitz Entities on the first assessment, representing a refund of the principle amount ($3.2 million) and $0.8 million in interest. On November 5, 2013, the

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Orbitz entities filed a Complaint in the Superior Court for the County of Los Angeles for a tax refund and declaratory relief relating to the supplemental final assessment of $1.4 million. On December 9, 2013, the City and County of San Francisco filed a Notice of Appeal.

City of San Diego

On February 9, 2006, the City of San Diego, California filed an action in Court for the County of San Diego, California against a number of current and former Internet travel companies, including Orbitz, Inc., Orbitz, LLC, Trip Network, Inc. and Internetwork Publishing Corp. The complaint alleges, among other things, that the defendants violated the jurisdiction's hotel occupancy tax ordinance with respect to the charges and remittance of amounts to cover taxes under the ordinance. On July 26, 2007, the court stayed the case pending plaintiff's exhaustion of administrative remedies. On March 19, 2009, the City issued an “Amended Audit Deficiency Invoice” of approximately $1.9 million for taxes, interest and penalties for transient occupancy taxes. On May 28, 2010, a hearing officer appointed by the City approved assessments of approximately $1.4 million, against the Company. On September 6, 2011, the Superior Court for the State of California for Los Angeles County issued a peremptory writ of mandamus remanding the proceedings to the City's hearing officer directing him to withdraw his decision ruling that the OTCs are not “operators” of hotels, and thus, not liable for transient occupancy tax on the amount each received as payment for its online travel related services. On July 10, 2012, the Court entered judgment on the OTCs consolidated writ of mandate and an order for consent judgment in favor of the OTCs on the City's Third Amended Complaint. On August 21, 2012, the City filed a notice of appeal. On January 30, 2014, the Court of Appeal of the State of California heard oral argument on San Diego’s appeal. On March 5, 2014, the Court of Appeal affirmed the judgment in favor of the OTCs.

Los Angeles, California

On December 30, 2004, the City of Los Angeles, California filed an action in the Superior Court, Los Angeles County against a number of defendants, including Orbitz, Inc., Orbitz, LLC, Trip Network, Inc. and Internetwork Publishing Corp. The complaint alleges, among other things, that defendants violated the jurisdiction's hotel occupancy tax ordinance with respect to the charges and remittance of amounts to cover taxes under the ordinance. On July 27, 2007, the court stayed the case pending the City's exhaustion of administrative remedies. On September 9, 2009, the City issued estimated assessments against Orbitz, LLC and Trip Network, Inc. On August 31, 2011, the City issued an estimated assessment of approximately $0.9 million against Internetwork Publishing Corp. (d/b/a Lodging.com). On September 21, 2011, the City's board of review confirmed assessments of approximately $1.8 million against Orbitz, LLC and approximately $0.3 million against Trip Network, Inc. On November 19, 2011, the OTCs filed a verified petition for writ of mandate seeking to vacate the board of review's final determination. On November 13, 2012, the City's board of review issued its notice of assessment against Internetwork Publishing Corp. (d/b/a Lodging.com) for approximately $0.2 million. On December 10, 2012, Internetwork Publishing Corp. (d/b/a Lodging.com) filed a verified petition for the writ of mandate. On January 17, 2013, the OTCs and the County filed cross motions for judgment on the writ of mandate. On April 18, 2013, the Superior Court for the County of Los Angeles granted the OTCs motion for judgment granting writ of administrative mandamus and denied the City’s cross- motion. On January 21, 2014, the Superior Court entered final judgment on behalf of the OTCs.

Other Actions Filed by the Company

New York City Litigation: On December 22, 2009, we and other OTCs brought an action in the Supreme Court of the State of New York, New York County against the city of New York Department of Finance and the City of New York. Expedia, Inc. v. City of New York Department of Finance, No. 650761/2009 (Supreme Court, New York County, New York). The complaint asserts two claims for declaratory judgment challenging the constitutionality and legality of the law relating to New York City hotel room occupancy taxes passed on June 29, 2009. On October 22, 2010, the court granted defendants' motion to dismiss. On November 29, 2011, the Supreme Court, Appellate Division, First Department reversed the lower court's decision, finding that the City's tax law exceeded the grant of authority provided by the New York State Enabling Act that was in place at the time New York City passed its law. On April 26, 2012, the Appellate Division of the Supreme Court for the First Judicial Department in the County of New York denied the New York Department of Finance and the City of New York's motion for reargument, or in the alternative, for leave to appeal to the Court of Appeals the November 29, 2011 order. The City appealed this decision. On November 21, 2013, the Court of Appeals reversed the Appellate Division’s decision, finding that the New York City was authorized to enact the June 2009 law at issue in the appeal.

North Carolina Litigation: On February 24, 2011, we and other OTCs brought an action in the Superior Court of Wake County, North Carolina against David Hoyle, Secretary of Revenue of the State of North Carolina, the North Carolina Department of Revenue and Durham County challenging the state of North Carolina's amended sales tax statute that seeks to

28




tax the revenue generated from the services provided by OTCs. Orbitz LLC v. Hoyle, No. 11 CV 001857 (General Court of Justice, Superior Court Division, Wake County, North Carolina). The complaint asserted claims for violation of the Internet Tax Freedom Act, unconstitutional impairment of contracts, violation of the Commerce Clause, violation of state uniformity clause and federal equal protection, and void for vagueness. On April 18, 2011, defendants filed a motion to dismiss. On May 28, 2013 (amended June 21, 2013) the Court granted the defendants’ motion to dismiss in part, and denied it in part. On June 26, 2013, the state defendants appealed, and on June 27, 2013, the OTCs appealed. On November 22, 2013, Orbitz entered into a settlement with defendants.

Portland, Oregon: On February 17, 2012, we and other OTCs brought an action in the Circuit Court of the State of Oregon, County of Multnomah, against the City of Portland, Oregon and Multnomah County. Expedia, Inc. et al. v. City of Portland, et al., No. 1202-02223 (Cir. Ct. Oregon, Multnomah County.). The complaint asserts four claims for declaratory judgment challenging the constitutionality and legality of the law relating to the Portland City and Multnomah County's transient lodging taxes and one claim for injunctive relief enjoining enforcement of the taxes against the OTCs. On March 22, 2012, the court entered a temporary restraining order against the City of Portland, Oregon and Multnomah County, enjoining the enforcement of previously issued assessments. On June 15, 2012, the Court denied the City of Portland, Oregon and Multnomah County's motion to dismiss for failure to exhaust administrative remedies, finding the court had jurisdiction over the matter. On November 30, 2012, the Court granted the OTCs motion to dismiss the City of Portland, Oregon and Multnomah County's common law counterclaims, finding that the tax ordinances provided the exclusive remedy for the City of Portland, Oregon and Multnomah County's alleged damage.

Oregon Department of Revenue: On September 27, 2013, Orbitz and several other OTCs filed a declaratory judgment against the Oregon Department of Revenue in the Oregon Tax Court, seeking a declaration that they compensation that they received for their services is not subject to transient lodging taxes under Oregon’s recently amended law.

Consumer Class Actions

On-Line Travel Company (OTC) Hotel Booking Antitrust Litigation:  On August 20, 2012, a putative consumer class action was filed in the United States District Court for the Northern District of California against certain hotel chains and the major OTCs, including Orbitz. The complaint alleges that the hotel chains and several major OTCs, including Orbitz, violated the antitrust and consumer protection laws by entering into agreements in which OTCs agree not to facilitate the reservation of hotel rooms at prices that are less than what the hotel chain offers on its own website. Following the filing of the initial complaint, several dozen additional putative consumer class action complaints were filed in federal courts across the country. On December 11, 2012, the Judicial Panel on Multidistrict Litigation issued an order consolidating these cases in the United States District Court for the Northern District of Texas. On May 1, 2013, the plaintiffs filed a consolidated amended complaint. On July 1, 2013, the defendants moved to dismiss the Complaint. On December 17, 2013, the District Court heard oral argument on Defendants’ motion to dismiss. On February 16, 2014, the District Court granted the Defendants' motion to dismiss on all claims without prejudice.    

Litigation related to Intellectual Property

TQP Development, LLC v. Caterpillar Inc. et al.:  On September 9, 2011, TQP Development, LLC filed a patent infringement suit against Orbitz, LLC and several other defendants in the United States District Court for the Eastern District of Texas, alleging infringement of U.S. Patent No. 5,412,730. In November 2013, Orbitz reached a settlement agreement with TQP. On November 12, 2013, the Court entered an Order dismissing the case against Orbitz, LLC.

LVL Patent Group LLC v. Amazon.com, Inc. et al.: On September 15, 2011, LVL Patent Group LLC (“LVL”) filed a patent infringement suit in the United States District Court for the District of Delaware against a group of defendants, including Orbitz Worldwide, Inc. The plaintiff alleges that Orbitz Worldwide, Inc. and the other defendants are infringing U.S. Patent No. 8,019,060. On August 16, 2012, the Court granted Defendants' motion for summary judgment that the asserted patent is invalid. LVL (now proceeding as “Cyberfone Systems, LLC”) has appealed the decision.

Unified Messaging Solutions LLC v. Orbitz, LLC: On March 1, 2012, Unified Messaging Solutions LLC (“UMS”) filed a suit for patent infringement against Orbitz, LLC in the United States District Court for Northern District of Illinois alleging infringement of U.S. Patent Nos. 6,857,074; 7,836,141; 7,895,306; 7,895,313; and 7,934,148. On April 23, 2012, UMS filed an Amended Complaint in which it alleged infringement of only one of the five originally asserted patents (U.S. Patent No. 7,934,148).

Ameranth, Inc. v. Orbitz, LLC: On June 29, 2012, Ameranth, Inc. filed a lawsuit against Orbitz, LLC in the United States District Court for the Southern District of California alleging infringement of U.S. Patent Nos. 6,384,850; 6,871,325; and

29




8,146,077. On October 15, 2013, Orbitz filed petitions with the Patent Trial and Appeal Board (“PTAB”) of the United States Patent and Trademark Office seeking review of the validity of Ameranth’s, asserted patents under the Transitional Program for Covered Business Method (“CBM”) Patents. On November 27, 2013 the Court entered an Order which stayed the case pending a final decision from the PTAB.
  
Parallel Iron, LLC v. Orbitz, LLC: On December 10, 2013, Orbitz reached a settlement agreement with plaintiff. On December 16, 2013, the Court entered an Order dismissing the case against Orbitz, LLC.

CEATS, Inc. v. Orbitz Worldwide, Inc.: On August 5, 2013, CEATS, Inc. filed a patent infringement suit against Orbitz, Worldwide, Inc. in the United States District Court for the District of Nevada. The plaintiff alleges that Orbitz infringes U.S. Patent Nos. 7,548,867; 7,640,178; 7,660,727; 8,219,448; 8,229,774; and 8,244,561.

Metasearch Systems, LLC v. Orbitz Worldwide, Inc.: On September 21, 2012, Metasearch Systems, LLC filed a suit for patent infringement against Orbitz Worldwide, Inc. in the United States District Court for the District of Delaware alleging that Orbitz infringes U.S. Patent Nos. 8,239,451; 8,171,079; 8.073,904; 7,490,091; 7,421,468; and 7,277,918. On December 19, 2012, Metasearch filed an Amended Complaint adding allegations of infringement for U.S. Patent No. 8,326,924. Orbitz filed petitions with the Patent Trial and Appeal Board (“PTAB”) of the United States Patent and Trademark Office seeking review of the validity of certain of Metasearch’s, asserted patents under the Transitional Program for Covered Business Method (“CBM”) Patents, and the parties filed a Stipulation to stay the case pending the outcome of the CBM proceedings. On December 3, 2013, the Court entered an Order staying the case pending a decision from the PTAB.

Execware LLC v. Orbitz Worldwide, Inc.: On February 21, 2014, Execware LLC filed a patent infringement suit in the United States District Court for the District of Delaware. The plaintiff alleges that Orbitz infringes U.S. patent No. 6,216,139.

Other Litigation

Trilegiant Corporation v. Orbitz, LLC v. and Trip Network, Inc.: On July 7, 2011, Trilegiant Corporation filed an action for breach of contract and declaratory judgment in the Supreme Court of New York against Orbitz, LLC and Trip Network, Inc. Trilegiant alleges that the defendants are obligated to make a series of termination payments arising out of a promotion agreement that defendants terminated at the end of 2007. On December 3, 2012, Trilegiant moved to dismiss certain of Orbitz's affirmative defenses. On January 14, 2013, Orbitz moved for summary judgment and filed an opposition to Trilegiant's motion to dismiss. On October 2, 2013, the Supreme Court of the State of New York denied the defendants’ motion for summary judgment on one of its affirmative defenses. On December 24, 2013, the Supreme Court rejected the majority of Orbitz’s remaining defenses.
    
We intend to defend ourselves vigorously against the claims described above. Litigation is inherently unpredictable and, although we believe we have valid defenses in these matters, unfavorable resolutions could occur. Although we believe it is unlikely that an adverse outcome will result from these proceedings, an adverse outcome could be material to use with respect to earnings or cash flows in any given reporting period.


Item 4.
Mine Safety Disclosure

Not Applicable.



30




PART II

Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information

Our common stock trades on the New York Stock Exchange under the symbol “OWW.” The following table sets forth the high and low sales prices for our common stock for each of the periods presented:
 
 
2013
 
2012
 
 
High
 
Low
 
High
 
Low
Fourth Quarter
 
$
9.86

 
$
6.40

 
$
2.80

 
$
2.07

Third Quarter
 
$
13.26

 
$
8.05

 
$
4.75

 
$
2.33

Second Quarter
 
$
8.75

 
$
5.45

 
$
4.24

 
$
3.00

First Quarter
 
$
5.99

 
$
2.60

 
$
4.15

 
$
2.91


Holders

As of February 25, 2014, there were approximately 40 holders of record of our common stock. Several brokerage firms, banks and other institutions (“nominees”) are listed once on the stockholders of record listing. However, in most cases, the nominees' holdings represent blocks of our common stock held in brokerage accounts for a number of individual stockholders. Accordingly, the number of beneficial owners of our stock is higher than the number of registered stockholders of record.

Dividends

We did not declare or pay any cash dividends on our common stock during the years ended December 31, 2013 and 2012, and we do not intend to in the foreseeable future. Any future determination to pay dividends will be at the discretion of our Board of Directors, may require the consent of Travelport and will depend on several factors, including our financial condition, results of operations, capital requirements, restrictions contained in existing and future financing instruments and other factors that our Board of Directors may deem relevant.
Securities Authorized for Issuance under Equity Compensation Plans
The following table provides information as of December 31, 2013 with respect to shares of our common stock that may be issued under our equity compensation plans.
Plan Category
 
Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights
 
Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights
 
Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in First Column)
Equity compensation plans approved by
    security holders
 
 
 
 
 
 
Stock options
 
1,227,719

 
$
4.84

 
 
Restricted stock units
 
4,857,840

 
 
 
 
Performance-based restricted stock units
 
3,089,250

 
 
 
 
Deferred stock units
 
923,306

 
 
 
 
Equity compensation plans not approved by
    security holders
 

 

 

Total
 
10,098,115

 


 
5,955,307



31




Performance Graph

The following graph shows the total shareholder return through December 31, 2013 of an investment of $100 in cash on December 31, 2008 for our common stock and an investment of $100 in cash on December 31, 2008 for (i) the S&P SmallCap 600 Index and (ii) the Research Data Group (“RDG”) Internet Composite Index.

The RDG Internet Composite Index is an index of stocks representing the Internet industry, including Internet software and services companies and e-commerce companies. Historic stock performance is not necessarily indicative of future stock price performance. All values assume reinvestment of the full amount of all dividends and are calculated as of the last day of each month.


32




Item 6.     Selected Financial Data

The selected financial data presented in the table below is derived from our audited consolidated financial statements. This data is not necessarily indicative of future results and should be read in conjunction with Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” and our consolidated financial statements and notes thereto included in Item 8, “Financial Statements and Supplementary Data,” of this Annual Report on Form 10-K.
 
 
Years Ended December 31,
 
 
2013
 
2012
 
2011
 
2010
 
2009
 
 
(in millions, except share and per share data)
Statements of Operations Data:
 
 
 
 
 
 
 
 
 
 
Net revenue
 
$
847

 
$
779

 
$
767

 
$
757

 
$
738

Cost and expenses:
 
 
 
 
 
 
 
 
 
 
Cost of revenue (a)
 
154

 
148

 
139

 
138

 
128

Selling, general and administrative
 
281

 
261

 
271

 
244

 
257

Marketing (a)
 
292

 
253

 
242

 
233

 
225

Depreciation and amortization
 
55

 
57

 
60

 
73

 
69

Impairment of goodwill and intangible assets
 

 
321

 
50

 
70

 
332

Impairment of property and equipment and
     other assets
 
3

 
1

 

 
11

 

Total operating expenses
 
785

 
1,041

 
762

 
769

 
1,011

Operating income/(loss)
 
62

 
(262
)
 
5

 
(12
)
 
(273
)
Other income/(expense):
 
 
 
 
 
 
 
 
 
 
Net interest expense
 
(44
)
 
(37
)
 
(41
)
 
(44
)
 
(57
)
Other income (expense)
 
(18
)
 

 
1

 

 
2

Total other expense
 
(62
)
 
(37
)
 
(40
)
 
(44
)
 
(55
)
Loss before income taxes
 

 
(299
)
 
(35
)
 
(56
)
 
(328
)
Provision/(benefit) for income taxes
 
(165
)
 
3

 
2

 
2

 
9

Net income/(loss)
 
$
165

 
$
(302
)
 
$
(37
)
 
$
(58
)
 
$
(337
)
 
 
 
 
 
 
 
 
 
 
 
Net income/(loss) per basic share (b)
 
$
1.53

 
$
(2.86
)
 
$
(0.36
)
 
$
(0.58
)
 
$
(4.01
)
Net income/(loss) per diluted share (b)
 
$
1.46

 
$
(2.86
)
 
$
(0.36
)
 
$
(0.58
)
 
$
(4.01
)
Weighted average shares used in calculating net earnings/(loss) per share:
 
 
 
 
 
 
 
 
 
 
Basic
 
107,952,327

 
105,582,736

 
104,118,983

 
101,269,274

 
84,073,593

Diluted
 
113,072,679

 
105,582,736

 
104,118,983

 
101,269,274

 
84,073,593

Cash dividends declared per common share
 
$

 
$

 
$

 
$

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
December 31,
 
 
2013
 
2012
 
2011
 
2010
 
2009
 
 
(in millions)
Balance Sheet Data:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
117

 
$
130

 
$
136

 
$
97

 
$
89

Working capital deficit (c)
 
(315
)
 
(248
)
 
(233
)
 
(234
)
 
(250
)
Total assets
 
1,108

 
834

 
1,146

 
1,217

 
1,294

Total long-term debt
 
430

 
415

 
440

 
472

 
598

Total shareholders’ equity/(deficit)
 
42

 
(143
)
 
161

 
190

 
130

(a)
During the first quarter of 2011, we changed the classification of expenses for commissions paid to private label partners (“affiliate commissions”) from cost of revenue to marketing expense in our consolidated statements of operations. Affiliate commissions were reclassified from cost of revenue to marketing expense for the years ended December 31, 2010 and 2009 in the amount of $16 million and $10 million, respectively.
(b)
Net income/(loss) per share may not recalculate due to rounding.
(c)
Defined as current assets less current liabilities.


33




Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations

EXECUTIVE OVERVIEW

General

Orbitz Worldwide, Inc. is a global online travel company that uses innovative technology to enable leisure and business travelers to research, plan and book a broad range of travel products and services. Our brand portfolio includes Orbitz and CheapTickets in the Americas; ebookers in Europe; and HotelClub based in Australia, which have operations globally. We also own and operate Orbitz for Business, a corporate travel company, and Orbitz Partner Network group, which delivers private label travel solutions to a broad range of partners. We provide customers with the ability to book a wide array of travel products and services from suppliers worldwide, including air travel, hotels, vacation packages, car rentals, cruises, rail tickets, travel insurance and destination services such as ground transportation, event tickets and tours.
Industry Trends
Our position in the industry is affected by the industry-wide trends discussed below, as well as a number of factors specific to our global operations and supplier relationships. In addition, the continued presence of relatively high unemployment rates and related pressure on consumer spending, as well as perceived uncertainty about the state of the global economy, cause uncertainty and volatility in the travel market.

The worldwide travel industry is a large and dynamic industry that has been characterized by rapid and significant change. We compete in various geographic markets, with our primary markets being the United States, Europe and Asia Pacific. We are one of the market leaders within the United States, which is the most mature of the global travel markets. Internationally, a relatively low percentage of travel sales are transacted online and the market is highly fragmented, which presents a significant growth opportunity for us and our competitors. In Europe, OTCs represent just 38% of the online market, but OTCs are growing faster than online supplier direct bookings. While OTCs account for only a third of the Asia Pacific online travel market, OTC gross bookings surpassed $30 billion in 2013 and mobile will likely be the fastest growing travel distribution channel in the region through 2015.
The online travel industry is highly competitive and competition has intensified in recent years. Airlines and hotels have increasingly focused on distributing their products through their own websites, and meta-search and travel research sites have gained in popularity and some of our competitors have acquired, or invested in meta-search companies. We have also seen technology companies, such as Google, increase their interest in online travel.
Intense competition in the travel industry has historically led OTCs and travel suppliers to aggressively spend on online marketing. Competition for search engine key words continues to be intense as certain OTCs and travel suppliers increase their marketing spending in this area. Competitive dynamics could cause the cost to acquire traffic to continue to increase.
Over the past few years, fundamentals in the global hotel industry have strengthened. In general, we have seen rising hotel occupancy rates and higher average daily rates for hotel rooms. In addition, we have seen a shift in the business model under which some of our competitors make hotel rooms available to consumers. Our hotel business operates predominantly under the merchant model, however some of our competitors have adopted a retail model, or a model where the traveler can choose to purchase a hotel room under either a retail or merchant model. This could put pressure on the economics of historical business models.
Demand in the air travel industry has strengthened over the past few years driven largely by increased corporate travel demand. The increased corporate travel demand combined with continued discipline by airlines around capacity have resulted in higher airfares. Higher airfares generally put pressure on leisure travel demand, which represents the majority of air bookings through OTCs. Further consolidation of the airline industry, such as the merger between American Airlines and US Airways, could put additional pressure on capacity and airfares in the future.

Suppliers continue to look for ways to decrease overall distribution costs, which could significantly reduce the net revenue OTCs earn from travel and other ancillary travel products. We have encountered, and expect to continue to encounter, pressure on supplier economics as certain supply agreements are renegotiated. We expect that our shift in mix towards hotels and dynamic packaging will positively impact our overall transaction economics over time.



34




RESULTS OF OPERATIONS
 
Years Ended
December 31,
 
Increase/ (Decrease)
 
Years Ended
December 31,
 
Increase/ (Decrease)
 
2013
 
2012
 
$
 
%
 
2012
 
2011
 
$
 
%
 
(in thousands)
 
 
 
(in thousands)
 
 
Net revenue
$
847,003

 
$
778,796

 
$
68,207

 
9
 %
 
$
778,796

 
$
766,819

 
$
11,977

 
2
 %
Cost and expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of revenue
154,403

 
147,840

 
6,563

 
4
 %
 
147,840

 
139,390

 
8,450

 
6
 %
Selling, general and administrative
280,418

 
260,253

 
20,165

 
8
 %
 
260,253

 
270,617

 
(10,364
)
 
(4
)%
Marketing
292,470

 
252,993

 
39,477

 
16
 %
 
252,993

 
241,670

 
11,323

 
5
 %
Depreciation and amortization
55,110

 
57,046

 
(1,936
)
 
(3
)%
 
57,046

 
60,540

 
(3,494
)
 
(6
)%
Impairment of goodwill and intangible
     assets

 
321,172

 
(321,172
)
 
(100
)%
 
321,172

 
49,891

 
271,281

 
**

Impairment of property and equipment
     and other assets
2,636

 
1,417

 
1,219

 
86
 %
 
1,417

 

 
1,417

 
**

Total operating expenses
785,037

 
1,040,721

 
(255,684
)
 
(25
)%
 
1,040,721

 
762,108

 
278,613

 
37
 %
Operating income/(loss)
61,966

 
(261,925
)
 
323,891

 
**

 
(261,925
)
 
4,711

 
(266,636
)
 
**

Other income/(expense):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest expense
(43,786
)
 
(36,599
)
 
(7,187
)
 
20
 %
 
(36,599
)
 
(40,488
)
 
3,889

 
(10
)%
Other income/(expense)
(18,100
)
 
(41
)
 
(18,059
)
 
**

 
(41
)
 
551

 
(592
)
 
**

Total other expense
(61,886
)
 
(36,640
)
 
(25,246
)
 
69
 %
 
(36,640
)
 
(39,937
)
 
3,297

 
(8
)%
Net income/(loss) before income taxes
80

 
(298,565
)
 
298,645

 
**

 
(298,565
)
 
(35,226
)
 
(263,339
)
 
**

Provision/(benefit) for income taxes
(165,005
)
 
3,173

 
(168,178
)
 
**

 
3,173

 
2,051

 
1,122

 
55
 %
Net income/(loss)
$
165,085

 
$
(301,738
)
 
$
466,823

 
**

 
$
(301,738
)
 
$
(37,277
)
 
$
(264,461
)
 
**


** Not meaningful.

Overall Financial Results
During the year ended December 31, 2013, we reported net income of $165.1 million, compared with a net loss of $301.7 million in 2012. During the year ended December 31, 2013 we recorded a tax benefit of $165.0 million reflecting the release of $174.4 million in valuation allowance related to our U.S. federal deferred tax assets and during the year ended December 31, 2012 we recorded a $321.2 million charge for the impairment of goodwill and intangible assets.

Domestically, hotel and vacation package transaction volume grew in 2013. However, air volume declined reflecting lower U.S. OTC channel volume.

Internationally, we continued to see growth in hotel and vacation package transaction volume at ebookers; however, overall growth was affected by declining air sales as a result of aggressive price competition in the market reflecting the ongoing challenging macroeconomic conditions in Europe. HotelClub experienced higher year-over year hotel transaction volume and higher revenue per room night.


35




Key Operating Metrics

The table below shows our gross bookings, net revenue, transaction growth and hotel room night growth for the years ended December 31, 2013, 2012 and 2011. Gross bookings, transactions and stayed hotel room nights not only impact our net revenue trends, but these metrics also provide insight to changes in overall travel demand, both industry-wide and on our websites. Air gross bookings are composed of stand-alone air gross bookings, while non-air gross bookings include gross bookings from hotels, car rentals, vacation packages, cruises, destination services and travel insurance.
 
 
Years Ended
December 31,
 
Increase/
(Decrease)
 
Years Ended
December 31,
 
Increase/
(Decrease)
 
 
2013
 
2012
 
$
 
%
 
2012
 
2011
 
$
 
%
 
 
(in thousands)
 
 
 
(in thousands)
 
 
Gross bookings:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Domestic
 
$
9,086,018

 
$
8,948,277

 
$
137,741

 
2
 %
 
$
8,948,277

 
$
9,097,885

 
$
(149,608
)
 
(2
)%
International
 
2,352,052

 
2,289,201

 
62,851

 
3
 %
 
2,289,201

 
2,242,633

 
46,568

 
2
 %
Total gross bookings
 
11,438,070

 
11,237,478

 
200,592

 
2
 %
 
11,237,478

 
11,340,518

 
(103,040
)
 
(1
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Stand-alone air
 
7,516,976

 
7,899,289

 
(382,313
)
 
(5
)%
 
7,899,289

 
8,196,984

 
(297,695
)
 
(4
)%
Non-air
 
3,921,094

 
3,338,189

 
582,905

 
17
 %
 
3,338,189

 
3,143,534

 
194,655

 
6
 %
Total gross bookings
 
11,438,070

 
11,237,478

 
200,592

 
2
 %
 
11,237,478

 
11,340,518

 
(103,040
)
 
(1
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net revenue:
 
 
 
 
 
 

 
 

 
 
 
 
 
 

 
 

Hotel
 
$
294,154

 
$
225,654

 
$
68,500

 
30
 %
 
$
225,654

 
$
209,589

 
$
16,065

 
8
 %
Air
 
249,698

 
261,538

 
(11,840
)
 
(5
)%
 
261,538

 
265,167

 
(3,629
)
 
(1
)%
Vacation package
 
142,522

 
130,098

 
12,424

 
10
 %
 
130,098

 
120,688

 
9,410

 
8
 %
Advertising and media
 
59,036

 
58,065

 
971

 
2
 %
 
58,065

 
54,599

 
3,466

 
6
 %
Other
 
101,593

 
103,441

 
(1,848
)
 
(2
)%
 
103,441

 
116,776

 
(13,335
)
 
(11
)%
Total net revenue (a)
 
$
847,003

 
$
778,796

 
$
68,207

 
9
 %
 
$
778,796

 
$
766,819

 
$
11,977

 
2
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net revenue:
 
 
 
 
 
 

 
 

 
 
 
 
 
 

 
 

Domestic
 
$
617,123

 
$
562,091

 
$
55,032

 
10
 %
 
$
562,091

 
$
547,120

 
$
14,971

 
3
 %
International
 
229,880

 
216,705

 
13,175

 
6
 %
 
216,705

 
219,699

 
(2,994
)
 
(1
)%
Total net revenue (a)
 
$
847,003

 
$
778,796

 
$
68,207

 
9
 %
 
$
778,796

 
$
766,819

 
$
11,977

 
2
 %
Transaction and hotel room night growth/(decline):
 
 
 
 
 
 
 
 
 
 
 
 
Booked transactions
 
(2
)%
 
 
 
 
 
 
 
(3
)%
 
 
 
 
 
 
Stayed hotel room nights
 
18
 %
 
 
 
 
 
 
 
3
 %
 
 
 
 
 
 

(a)
For the years ended December 31, 2013, 2012 and 2011, $98.7 million, $112.8 million and $122.8 million of our total net revenue, respectively, was from incentive payments earned for air, car and hotel segments processed through GDSs.

Gross Bookings

The increase in domestic gross bookings for the year ended December 31, 2013 was driven primarily by higher airfares, higher average booking values and higher volume for both hotels and vacation packages, and higher car rental booking values, partially offset by lower air volume. The increase in international gross bookings for the year ended December 31, 2013 was driven primarily by higher airfares, higher hotel and vacation package volume, and higher average booking values for hotels, partially offset by lower air volume.

For the year ended December 31, 2012 compared with the year ended December 31, 2011, the decrease in domestic gross bookings was driven primarily by lower air volume, partially offset by higher air fares and higher vacation package and hotel volume. The increase in international gross bookings for the year ended December 31, 2012 was due primarily to higher vacation package and hotel volume.


36




Net Revenue

Net revenue increased $68.2 million for the year ended December 31, 2013 as compared with the year ended December 31, 2012 on both a reported and constant currency basis.

Hotel.  Net revenue from hotel bookings increased $68.5 million or 30% for the year ended December 31, 2013 compared with the year ended December 31, 2012. Excluding the impact of foreign currency fluctuations, net revenue from hotel bookings increased $71.1 million compared with the year ended December 31, 2012. For the year ended December 31, 2013, domestic hotel net revenue increased $54.5 million as compared with the prior year. The increase was due primarily to higher volume and to a lesser extent, higher net revenue per room night. International hotel net revenue increased $14.0 million for the year ended December 31, 2013 as compared with the year ended December 31, 2012. Excluding the impact of foreign currency fluctuations, international hotel net revenue increased $16.6 million. The increase was due primarily to higher volume.

Net revenue from hotel bookings increased $16.1 million or 8% for the year ended December 31, 2012 compared with the year ended December 31, 2011. Excluding the impact of foreign currency fluctuations, net revenue from hotel bookings increased $17.5 million for the year ended December 31, 2012. Domestic hotel net revenue increased $18.4 million as compared with the year ended December 31, 2011. The increase was due primarily to higher volume and higher net revenue per room night. International hotel net revenue decreased $2.3 million for the year ended December 31, 2012 as compared with the year ended December 31, 2011. Excluding the impact of foreign currency fluctuations, international hotel net revenue decreased $0.9 million. The decrease was due to lower volume at HotelClub, partially offset by higher volume at ebookers and higher net revenue per room night.

Air.  Net revenue from air bookings decreased $11.8 million or 5% for the year ended December 31, 2013 as compared with the year ended December 31, 2012. Excluding the impact of foreign currency fluctuations, net revenue from air bookings decreased $13.6 million for the year ended December 31, 2013 as compared with the prior year. Domestic air net revenue decreased $5.1 million for the year ended December 31, 2013 as compared with the year ended December 31, 2012. The decrease was due primarily to lower transaction volume and the absence of $2.6 million in additional revenue resulting from a reduction of an unfavorable contract liability in 2012, partially offset by higher net revenue per airline ticket. The lower domestic transaction volume for the year ended December 31, 2013 was driven primarily by lower U.S. OTC channel volume. International air net revenue decreased by $6.7 million for the year ended December 31, 2013 as compared with the year ended December 31, 2012. Excluding the impact of foreign currency fluctuations, international air net revenue decreased $8.5 million. The decrease in international air net revenue was due primarily to lower transaction volume, slightly offset by higher net revenue per transaction.

Net revenue from air bookings decreased $3.6 million or 1% for the year ended December 31, 2012 as compared with the year ended December 31, 2011. Excluding the impact of foreign currency fluctuations, net revenue from air bookings increased $0.6 million for the year ended December 31, 2012 as compared with the prior year. Domestic air net revenue decreased $1.1 million for the year ended December 31, 2012 as compared with the year ended December 31, 2011. The decrease was due primarily to lower transaction volume and the absence in 2012 of the incremental incentive revenue earned per segment processed through Travelport GDSs from December 22, 2010 through June 1, 2011. The lower domestic transaction volume for the year ended December 31, 2012 was driven primarily by lower U.S. OTC channel volume and revenue management changes we made with respect to fees charged on certain transactions. The lower volume was partially offset by higher net revenue per airline ticket, primarily resulting from these fees, and the recognition of $2.6 million in additional revenue due to a reduction of an unfavorable contract liability resulting from the negotiation of a new agreement with one of our airline suppliers (see Note 8 - Unfavorable Contracts of the Notes to Consolidated Financial Statements). International air net revenue decreased by $2.5 million for the year ended December 31, 2012 as compared with the year ended December 31, 2011. Excluding the impact of foreign currency fluctuations, international air net revenue increased $1.7 million. The increase in international air net revenue was due primarily to higher transaction volume.

Vacation package.  For the year ended December 31, 2013 net revenue from vacation package bookings increased $12.4 million or 10% as compared with the year ended December 31, 2012. Excluding the impact of foreign currency fluctuations, net revenue from vacation package bookings increased $12.0 million for the year ended December 31, 2013, as compared with the year ended December 31, 2012. Domestic vacation package net revenue increased $7.8 million for the year ended December 31, 2013 as compared with the year ended December 31, 2012, driven primarily by higher transaction volume, and to a slightly lesser degree, an increase in revenue per transaction. International vacation package net revenue increased $4.6 million for the year ended December 31, 2013 as compared with the year ended December 31, 2012. Excluding the impact of foreign currency fluctuations, international vacation package net revenue increased $4.2 million. The increase was due to higher net revenue per package and higher transaction volume.


37




For the year ended December 31, 2012 net revenue from vacation package bookings increased $9.4 million or 8% as compared with the year ended December 31, 2011. Excluding the impact of foreign currency fluctuations, net revenue from vacation package bookings increased $11.4 million for the year ended December 31, 2012, as compared with the year ended December 31, 2011. Domestic vacation package net revenue increased $4.3 million for the year ended December 31, 2012 as compared with the year ended December 31, 2011, driven primarily by higher transaction volume, partially offset by a shift in package mix to lower margin packages. International vacation package net revenue increased $5.1 million for the year ended December 31, 2012 as compared with the year ended December 31, 2011. Excluding the impact of foreign currency fluctuations, international vacation package net revenue increased $7.1 million. The increase was due to higher net revenue per package and higher transaction volume.
 
Advertising and media.  Advertising and media net revenue increased $1.0 million or 2% on both a reported and constant currency basis, for the year ended December 31, 2013 compared with the year ended December 31, 2012. The increase of $1.0 million was driven by $4.6 million of higher display advertising, largely offset by a $3.6 million decrease due to the shutdown of the Away Network in the first quarter of 2013.

Advertising and media net revenue increased $3.5 million or 6% for the year ended December 31, 2012 compared with the year ended December 31, 2011. Excluding the impact of foreign currency fluctuations, advertising and media net revenue increased $3.8 million. The increase was driven by higher display advertising.

Other.  Other net revenue is composed primarily of net revenue from travel insurance, car bookings, cruise bookings, and attraction and services bookings. Other net revenue decreased $1.8 million or 2% for the year ended December 31, 2013 compared with the year ended December 31, 2012. Excluding the impact of foreign currency fluctuations, other net revenue decreased $2.3 million. The decrease was largely driven by lower attractions and services revenue and to a lesser extent, lower cruise revenue.

Other net revenue decreased $13.3 million or 11% for the year ended December 31, 2012 compared with the year ended December 31, 2011. Excluding the impact of foreign currency fluctuations, other net revenue decreased $11.5 million. The decrease was driven by lower insurance net revenue due primarily to a new Department of Transportation regulation that went into effect in January 2012 that no longer allows travel insurance options to be pre-selected. This regulatory change resulted in a reduced attachment rate for insurance products.

Costs and Expenses

Cost of Revenue

Our cost of revenue is composed of costs to operate our customer service call centers, credit card processing fees and other costs, which include customer refunds and charge-backs, hosting costs and connectivity and other processing costs.
 
 
Years Ended
December 31,
 
Increase/
(Decrease)
 
Years Ended
December 31,
 
Increase/
(Decrease)
 
 
2013
 
2012
 
$
 
%
 
2012
 
2011
 
$
 
%
Cost of revenue:
 
(in thousands)
 
 
 
(in thousands)
 
 
Customer service costs
 
$
58,324

 
$
58,316

 
$
8

 
 %
 
$
58,316

 
$
53,812

 
$
4,504

 
8
%
Credit card processing fees
 
61,421

 
47,946

 
13,475

 
28
 %
 
47,946

 
46,519

 
1,427

 
3
%
Other
 
34,658

 
41,578

 
(6,920
)
 
(17
)%
 
41,578

 
39,059

 
2,519

 
6
%
Total cost of revenue
 
$
154,403

 
$
147,840

 
$
6,563

 
4
 %
 
$
147,840

 
$
139,390

 
$
8,450

 
6
%

Cost of revenue increased $6.6 million on both a reported and constant currency basis for the year ended December 31, 2013 compared with the year ended December 31, 2012. The increase in cost of revenue was due primarily to a $13.5 million increase in credit card processing fees driven by higher global hotel volume, partially offset by lower customer refunds and fraud expense of $4.8 million due to efficiencies at the Company's customer service call centers and lower connectivity and processing costs of $2.3 million.

Cost of revenue increased $8.5 million (a $10.2 million increase excluding the impact of foreign currency fluctuations) for the year ended December 31, 2012 compared with the year ended December 31, 2011, due primarily to a $4.5 million increase in customer service costs largely driven by the growth in our private label distribution channel, a $1.4 million increase in credit card processing fees due primarily to the volume growth at ebookers, a $0.8 million increase in connectivity and processing costs, a $0.5 million increase in customer refunds and charge-backs, and an increase in hotel occupancy taxes.

38





Selling, General and Administrative

Our selling, general and administrative expense is composed of wages and benefits, contract labor costs, network communications, systems maintenance and equipment costs and other costs, which include professional fees, foreign currency transaction and hedging and other administrative costs.
 
 
Years Ended
December 31,
 
Increase/
(Decrease)
 
Years Ended
December 31,
 
Increase/
(Decrease)
 
 
2013
 
2012
 
$
 
%
 
2012
 
2011
 
$
 
%
Selling, general and
     administrative:
 
(in thousands)
 
 
 
(in thousands)
 
 
Wages and benefits (a)
 
$
168,709

 
$
142,531

 
$
26,178

 
18
 %
 
$
142,531

 
$
152,887

 
$
(10,356
)
 
(7
)%
Contract labor (a)
 
21,586

 
26,329

 
(4,743
)
 
(18
)%
 
26,329

 
27,002

 
(673
)
 
(2
)%
Network communications, systems
     maintenance and equipment
 
27,283

 
28,619

 
(1,336
)
 
(5
)%
 
28,619

 
25,760

 
2,859

 
11
 %
Other
 
62,840

 
62,774

 
66

 
 %
 
62,774

 
64,968

 
(2,194
)
 
(3
)%
Total selling, general, and
     administrative
 
$
280,418

 
$
260,253

 
$
20,165

 
8
 %
 
$
260,253

 
$
270,617

 
$
(10,364
)
 
(4
)%

(a)
The amounts presented above for wages and benefits and contract labor are net of amounts capitalized related to software development.

Selling, general and administrative expense increased $20.2 million (a $21.1 million increase excluding the impact of foreign currency fluctuations) for the year ended December 31, 2013 compared with the year ended December 31, 2012. The increase in expense was primarily driven by a $26.2 million increase in wages and benefits and the absence of an insurance reimbursement of $5.0 million received in 2012 for costs previously incurred to defend our hotel tax cases. The increase in selling, general, and administrative expense was partially offset by a $4.7 million decrease in contract labor costs, a $2.2 million decrease in legal fees, a $1.5 million decrease in employee travel expense, a $1.3 million decrease in network communications costs, and a decrease in other professional fees. Wages and benefits increased due largely to higher incentive-based compensation of $17.8 million, higher stock-based compensation of $3.7 million and lower capitalized wages and benefits of $3.5 million. In addition, lower wages of $6.2 million were largely offset by higher payroll taxes of $2.4 million, higher severance of $2.3 million and higher sales commissions of $1.1 million.

Selling, general and administrative expense decreased $10.4 million ($8.2 million excluding the impact of foreign currency fluctuations) for the year ended December 31, 2012 compared with the year ended December 31, 2011. The decrease in expense was primarily driven by a $10.4 million decrease in wages and benefits, a $1.4 million decrease in facilities expense, a $1.3 million decrease in travel expense, a $0.7 million decrease in foreign currency losses and hedging costs and a $0.7 million decrease in contract labor costs, partially offset by a $2.0 million increase in network communications costs, a $1.0 million increase in professional fees, and a $0.9 million increase in systems maintenance and equipment costs. Wages and benefits and contract labor costs decreased due to the annualized impact of the centralization of our finance function in Europe in 2011, cost savings achieved from the migration of HotelClub to the global platform, and lower incentive compensation. The increase in professional fees was due primarily to higher legal costs, primarily related to hotel occupancy tax and patent infringement cases, partially offset by a $2.5 million increase ($5.0 million in 2012 compared with $2.5 million in 2011) in insurance reimbursements received in 2012 for hotel occupancy tax litigation cases compared with 2011.


39




Marketing

Our marketing expense is primarily composed of online marketing costs, such as search engine marketing and travel research; offline marketing costs, such as television, radio and print advertising; and commissions to affiliates. Our online marketing spending is significantly greater than our offline marketing spending.

Marketing expense increased $39.5 million (a $39.9 million increase excluding the impact of foreign currency fluctuations) for the year ended December 31, 2013 compared with the year ended December 31, 2012 due largely to the growth of our private label distribution channel which increased affiliate commissions by $23.5 million and increased due to search engine and other online marketing of $32.7 million, partially offset by lower offline marketing spend of $16.7 million.

Marketing expense increased $11.3 million ($15.1 million excluding the impact of foreign currency fluctuations) for the year ended December 31, 2012 compared with the year ended December 31, 2011 due primarily to higher global online marketing spending as well as growth in our private label distribution channel, partially offset by a decline in offline marketing.

Depreciation and Amortization

Depreciation and amortization expense decreased $1.9 million (a $1.8 million decrease excluding the impact of foreign currency fluctuations) for the year ended December 31, 2013 compared with the year ended December 31, 2012. The decrease in depreciation and amortization expense was due primarily to certain fixed and other assets that were written off in 2012 and in the first quarter of 2013 (see Impairment discussion below).

Depreciation and amortization expense decreased $3.5 million on both a reported and constant currency basis, for the year ended December 31, 2012 compared with the year ended December 31, 2011. The decrease in depreciation and amortization expense was due primarily to certain fixed and other assets that became fully depreciated and amortized in 2011.

Impairment

As a result of our decision during the first quarter of 2013 to exit the Away Network business, we recorded a $2.6 million non-cash charge for the year ended December 31, 2013 to impair property and equipment associated with that business.

As of December 31, 2013, we performed our annual impairment test for goodwill and intangible assets and determined that no impairment existed as of that date.

For the year ended December 31, 2012, in connection with our annual impairment test for goodwill and intangible assets, and as a result of lower than expected performance and a decline in expected future cash flows for the Americas reporting unit, we recorded a non-cash impairment charge of $321.2 million, of which $301.9 million related to goodwill, $17.6 million related to trademarks and trade names associated with Orbitz and CheapTickets and $1.6 million related to finite-lived intangible assets. (See Note 4 - Goodwill and Intangible Assets of the Notes to Consolidated Financial Statements).

Also in 2012, we reduced the unfavorable contract liability by $1.2 million due to the negotiation of a new agreement with one of our airline suppliers, resulting in the termination of the former agreement with this airline. The $1.2 million reduction in the liability was composed of a $2.6 million non-cash increase to net revenue (see Air Net Revenue discussion above) and a $1.4 million non-cash charge related to the in-kind marketing and promotional support that we expected to receive under the old agreement (see Note 8 - Unfavorable Contracts of the Notes to Consolidated Financial Statements).

Net Interest Expense

Net interest expense increased $7.2 million for the year ended December 31, 2013 compared with the year ended December 31, 2012. The increase in net interest expense was due primarily to higher interest rates as a result of the refinancing of our debt that was completed in March 2013 and again in May 2013. See Note 6 - Term Loan and Revolving Credit Facility of the Notes to the Consolidated Financial Statements. Interest expense under our debt agreements increased by $9.4 million largely due to the higher interest rates. The increase in net interest expense was also driven by higher amortization expense for deferred financing costs of $2.2 million and the mark-to-market effect of derivative interest rate contracts of $0.9 million. These increases were partially offset by lower letter of credit fees of $3.7 million, and lower non-cash interest expense related to the tax sharing liability of $1.7 million
 
Net interest expense decreased $3.9 million for the year ended December 31, 2012 compared with the year ended December 31, 2011. The decrease in net interest expense was due primarily to lower effective interest rates on the Term Loan

40




(including related interest rate hedges) and, to a lesser extent, lower average debt outstanding during 2012, partially offset by higher letter of credit fees. The decrease was also driven by lower non-cash interest expense related to the tax sharing liability.

Other Income/(Expense)

Other income/(expense) increased $18.1 million for the year ended December 31, 2013 compared with the year ended December 31, 2012. Due to a favorable interest rate environment and the Company’s performance in the first quarter of 2013, on May 24, 2013 we refinanced the term loan portion of our debt at substantially lower rates than those in the agreement signed on March 25, 2013. The $18.1 million charge reflects the write-off of deferred financing costs related to the March 25, 2013 refinancing and prepayment penalties incurred when the term loans were refinanced on May 24, 2013 (see Note 6 - Term Loans and Revolving Credit Facility of the Notes to Consolidated Financial Statements).

Provision for Income Taxes

We recorded a tax benefit of $165.0 million and a tax provision of $3.2 million and $2.1 million for the years ended December 31, 2013, 2012 and 2011, respectively. The tax benefit was due primarily to a release of $174.4 million in valuation allowances related to our U.S. federal deferred tax assets and therefore the benefit was disproportionate to the amount of pretax book income. The release of our U.S. valuation allowance followed the completion of our long-term debt financing arrangement in the first quarter of 2013, which resolved a significant negative factor, and based on recent and expected future taxable income, we believe it is more likely than not our deferred tax assets will be realized. Specifically, the Company had expected that interest rates and interest expense on a debt financing would be significantly higher than the rates actually achieved.

The tax provisions in 2012 and 2011 were due primarily to taxes on the income of certain European-based subsidiaries and U.S. state and local income taxes. The increase of $0.9 million in tax expense for the year ended December 31, 2012 compared with 2011 was due to an increase in pretax earnings in certain foreign jurisdictions.

The tax provisions recorded for the years ended December 31, 2012 and 2011 were disproportionate to the amount of pre-tax net loss incurred during each respective period primarily because we were not able to realize any tax benefits on the goodwill and trademark and trade names impairment charges. The provision for income taxes only includes the tax effect of the net income or net loss of certain foreign subsidiaries that had not established a valuation allowance and U.S. state and local income taxes.

As of December 31, 2013, the valuation allowance for our deferred tax assets was $108.6 million, of which $105.5 million related to foreign jurisdictions. We will continue to assess the level of the valuation allowance required and if sufficient positive evidence exists in future periods to support a release of some or all of the valuation allowance, such a release may have a material impact on our results of operations.

Related Party Transactions

For a discussion of certain relationships and related party transactions, see Note 15 - Related Party Transactions of the Notes to Consolidated Financial Statements.

Seasonality

Our businesses experience seasonal fluctuations in the demand for the products and services we offer. The majority of our customers book leisure travel rather than business travel. Gross bookings for leisure travel are generally highest in the first half of the year as customers plan and book their spring and summer vacations. Cash is received upon booking for the majority of transactions booked on our websites, and net revenue for air transactions booked as part of a package is generally recognized when the travel takes place and typically lags bookings by several weeks or longer. As a result, our cash receipts are generally highest in the first half of the year and our net revenue is typically highest in the second and third quarters. Our seasonality may also be affected by fluctuations in the travel products our suppliers make available to us for booking, the growth of our international operations or a change in our product mix.


41




LIQUIDITY AND CAPITAL RESOURCES
Liquidity

Our principal sources of liquidity are our cash flows from operations, our cash and cash equivalents and availability under the Credit Agreement, which includes a $65.0 million revolving credit facility (the “Revolver”) through which our revolving lenders have agreed to issue up to $55.0 million in letters of credit (See Note 6 - Term Loans and Revolving Credit Facility of the Notes to Consolidated Financial Statements). At December 31, 2013, our cash and cash equivalents amounted to $117.4 million. At December 31, 2013, there were no outstanding borrowings or letters of credit issued under the Revolver. Letters of credit that are issued under the Revolver would reduce the amount available for borrowings. Total available liquidity from cash and cash equivalents and the Revolver was $182.4 million at December 31, 2013.

We require letters of credit and similar instruments to support certain supplier and commercial agreements, lease obligations and to comply with non-U.S. regulatory and governmental regulations. At December 31, 2013 and December 31, 2012, we had $112.9 million and $106.4 million, respectively, of outstanding letters of credit and similar instruments. For further details on our letters of credit, see Note 9 - Commitments and Contingencies of the Notes to Consolidated Financial Statements.

Currently, except for the availability under the Revolver, most of our letters of credit and similar instruments require cash collateral support, which is recorded as Restricted Cash on our Consolidated Balance Sheets. With Travelport no longer required to provide letters of credit on our behalf as of April 15, 2013, we have increased requirements for cash collateral to support letters of credit and similar instruments, which had a negative effect on our liquidity. We believe we have adequate letter of credit availability to support our expected requirements for the foreseeable future.

Under our merchant model, customers generally pay us for reservations at the time of booking, and we pay our suppliers at a later date, which is generally when the customer uses the reservation, except in the case of payment for merchant air which generally occurs prior to the consumption date. Initially, we record these customer receipts as accrued merchant payables and either deferred income or net revenue, depending upon the travel product. The timing difference between when cash is collected from our customers and when payments are made to our suppliers improves our operating cash flow and represents a source of liquidity for us.

Seasonal fluctuations in our business also affect the timing of our cash flows. Gross bookings are generally highest in the first half of the year as customers plan and book their spring and summer vacations. As a result, our cash receipts are generally highest in the first half of the year. We generally have net cash outflows during the second half of the year since cash payments to suppliers typically exceed the cash inflows from new merchant reservations. While we expect this seasonal cash flow pattern to continue, changes in our business model could affect the timing or seasonal nature of our cash flows.

As of December 31, 2013 we had a working capital deficit of $314.7 million compared with a deficit of $247.7 million as of December 31, 2012, an increase of $67.0 million. The increased deficit for the year ended December 31, 2013, as compared with December 31, 2012, was due largely to a net increase in restricted cash, and corresponding use of cash, of $44.3 million (excluding $50.0 million placed in restricted cash from Term Loans), an increase in accrued expenses of $27.5 million (See Note 5 - Accrued expenses), the payment of $27.5 million related to payment of certain disputed hotel taxes and a decrease of $11.2 million in current term loans payable, due to our debt refinancing in 2013. These decreases were partially offset by increases in accounts receivable, prepaid expenses, the amount due from Travelport and other current asset activity. The net increase in restricted cash is primarily due to the cash collateralization of letters of credit that were previously issued by Travelport and under the 2007 Revolver. The increase in Accrued Merchant Payable of $68.7 million largely relates to timing of cash receipts, which will be paid to suppliers.

We generated positive cash flow from operations for each of the years ended December 31, 2009 through December 31, 2013 despite experiencing net losses in most of these periods, and we expect annual cash flow from operations to remain positive in the foreseeable future. We generally use this cash flow to fund our operations, make principal and interest payments on our debt, finance capital expenditures, cash collateralize letters of credit and meet our other cash operating needs. For the year ending December 31, 2014, we expect our capital expenditures to be between $42 million and $47 million, a portion of which is discretionary in nature. We do not intend to declare or pay any cash dividends on our common stock.

With respect to both our short- and long-term liquidity needs, we currently believe that cash flow generated from operations, cash on hand, and borrowing availability under the Revolver will provide sufficient liquidity to fund our operating activities, capital expenditures and other obligations. See Note 6 - Term Loans and Revolving Credit Facility of the Notes to Consolidated Financial Statements. See Part I Item 1A. Risk Factors: “Our business has significant liquidity requirements” for

42




a discussion of certain events that could have a negative impact on our liquidity. In 2013, we paid $26.1 million to the Hawaii Department of Taxation (of which $22.0 million is included in Other Non-Current Assets in our December 31, 2013 Consolidated Balance Sheet) related to our appeal of excise taxes assessed in Hawaii. We may continue to be required to, or choose to, provide financial security or pay deposits to municipalities in order to challenge assessments in court for hotel tax proceedings, which could negatively affect our cash flow and liquidity.

Cash Flows

Our net cash flows from operating, investing and financing activities were as follows:
 
 
Years Ended December 31,
 
 
2013
 
2012
 
2011
 
 
(in thousands)
Beginning cash and cash equivalents
 
$
130,262

 
$
136,171

 
$
97,222

Cash provided by/(used in):
 
 

 
 

 
 
Operating activities
 
153,243

 
107,059

 
117,846

Investing activities
 
(133,267
)
 
(63,838
)
 
(47,530
)
Financing activities
 
(34,959
)
 
(50,001
)
 
(30,511
)
Effect of changes in exchange rates on cash and cash equivalents
 
2,106

 
871

 
(856
)
Net increase/ (decrease) in cash and cash equivalents
 
(12,877
)
 
(5,909
)
 
38,949

Ending cash and cash equivalents
 
$
117,385

 
$
130,262

 
$
136,171


Operating Activities

Cash provided by operating activities consists of our net income or loss, adjusted for non-cash items such as depreciation, amortization, impairment of goodwill and intangible assets, and stock-based compensation, and changes in various working capital accounts, principally accounts receivable, deferred income, accrued merchant payable, accounts payable and accrued expenses.

We generated cash flow from operations of $153.2 million for the year ended December 31, 2013 compared with $107.1 million for the year ended December 31, 2012. The increase in cash flow from operations was largely due to increased merchant payables of $38.7 million as a result of the growth in global merchant hotel transactions and an increase in accounts payable, accrued expenses and other current liabilities of $25.8 million, partially offset by the majority of the $18.1 million deferred financing fees paid and expensed in 2013 related to the financing of the term loans.

We generated cash flow from operations of $107.1 million for the year ended December 31, 2012 compared with $117.8 million for the year ended December 31, 2011. The decrease in cash flow from operations was primarily due to the timing of cash receipts and payments, (primarily a decrease in accounts payable, accrued expenses and other current liabilities of $26.3 million), an increase in accounts receivable of $20.1 million, including amounts due from Travelport, partially offset by increased merchant payables of $26.7 million and increased deferred income of $10.7 million.

Investing Activities

Cash flow used in investing activities increased to $133.3 million for the year ended December 31, 2013 from $63.8 million for the year ended December 31, 2012. This increase from the prior year was due to an increase in restricted cash balances of $94.0 million in the year ended December 31, 2013, partially offset by lower capital spending of $7.7 million, as compared with the prior year. The increase in restricted cash was due largely to additions to restricted cash to collateralize letters of credit and similar instruments primarily to replace letters of credit previously issued by Travelport and under the 2007 Revolver. These letters of credit are used to support certain supplier and commercial agreements, lease obligations and to comply with non-U.S. regulatory and governmental regulations.

Cash flow used in investing activities increased to $63.8 million for the year ended December 31, 2012 from $47.5 million for the year ended December 31, 2011. This increase in the year ended December 31, 2012 as compared with 2011 was due primarily to establishing higher restricted cash balances of $13.3 million due to requirements under a letter of credit facility.


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Financing Activities

Cash flow used in financing activities decreased to $35.0 million for the year ended December 31, 2013 from $50.0 million for the year ended December 31, 2012. This decrease was due primarily to lower net repayments on our term loans in the year ended December 31, 2013 compared with the prior year. Specifically, in the current period, we had a net cash outflow of $19.1 million for net principal reductions in connection with the refinancing of the term loan borrowings under our 2007 Credit Agreement, excess cash flow payment and and scheduled maturity payments of the senior secured credit agreement, while in the same period last year we had a $32.2 million excess cash flow payment on our term loan. In addition, we had a $3.0 million increase in net proceeds related to the exercise of employee stock options and employee tax withholdings for equity based awards in the year ended December 31, 2013 as compared with the prior year.

Cash flow used in financing activities increased to $50.0 million for the year ended December 31, 2012 from $30.5 million for the year ended December 31, 2011. The increase was due to a higher excess cash flow payment made on our term loans of $12.4 million and higher payments on the tax sharing liability of $6.6 million during the year ended December 31, 2012 as compared with the prior-year period.

Financing Arrangements

On March 25, 2013, we entered into a $515.0 million senior secured credit agreement composed of the Revolver maturing September 25, 2017 and $450.0 million in term loans. We used $400.0 million of proceeds from the term loans, along with cash on hand, to repay the balance outstanding under the 2007 Credit Agreement (as discussed in Note 6 - Term Loans and Revolving Credit Facility of the Consolidated Financial Statements) and to pay certain fees and expenses incurred in connection with the $515.0 million senior secured credit agreement. In addition, $50.0 million of proceeds from the term loans were placed in restricted accounts to cash collateralize letters of credit and similar instruments and are included in Restricted Cash on our Consolidated Balance Sheet. The term loans issued on March 25, 2013 were refinanced and amended on May 24, 2013 (the “Amendment”). The effects of the Amendment included a lower interest rate of 200 to 250 basis points.

Following the Amendment, the Credit Agreement consists of a $100.0 million term loan (“Tranche B Term Loan”) maturing September 25, 2017, a $350.0 million term loan (“Tranche C Term Loan”) maturing March 25, 2019 (collectively, the “Term Loans”) and the Revolver.

The Term Loans and the Revolver bear interest at a variable rate, at our option, of the Eurocurrency Rate or the Base Rate, plus a margin. The Credit Agreement requires us to maintain a minimum cash interest coverage ratio and not to exceed a maximum first lien leverage ratio, each as defined in the Credit Agreement. As of December 31, 2013, we were in compliance with all covenants and conditions of the Credit Agreement and expect to be in compliance for the foreseeable future.

The Term Loan and Revolver are both secured by substantially all of our and our domestic subsidiaries' tangible and intangible assets, including a pledge of 100% of the outstanding capital stock or other equity interests of substantially all of our direct and indirect domestic subsidiaries and 65% of the capital stock or other equity interests of certain of our foreign subsidiaries, subject to certain exceptions. The Term Loan and Revolver are also guaranteed by substantially all of our domestic subsidiaries.

The Credit Agreement contains various customary restrictive covenants that limit our ability to, among other things:

incur additional indebtedness or enter into guarantees;
enter into sale or leaseback transactions;
make investments, loans or acquisitions;
grant or incur liens on our assets;
sell our assets;
engage in mergers, consolidations, liquidations or dissolutions;
engage in transactions with affiliates; and
make any distribution or dividend payment, or redeem or repurchase our capital stock.

The Credit Agreement requires us to maintain a minimum cash interest coverage ratio and not to exceed a maximum first lien leverage ratio, each as defined in the Credit Agreement. The minimum cash interest coverage ratio that we are required to maintain for the term of the Credit Agreement is 2.5 to 1. The maximum first lien leverage ratio that we were required not to

44




exceed was 4.25 to 1 at December 31, 2013. As of December 31, 2013, we were in compliance with all covenants and conditions of the Credit Agreement.

The Term Loans are payable in quarterly installments of $3.375 million, beginning September 30, 2013, with the final installment of the remaining outstanding balance due at the applicable maturity date with respect to such Term Loan. In addition, we are required, subject to certain exceptions, to make payments on the Term Loans: (a) annually in the first quarter of each fiscal year in an amount of 50% (which percentage will be reduced to 25% and 0% subject to achieving certain leverage ratios) of the prior year’s excess cash flow, as defined in the Credit Agreement; (b) in an amount of 100% of net cash proceeds from asset sales subject to certain reinvestment rights; and (c) in an amount of 100% of net cash proceeds of any issuance of debt other than debt permitted to be incurred under the Credit Agreement. The first excess cash flow measurement was for the period from July 1, 2013 to December 31, 2013. Based on our cash flow for the six months ending December 31, 2013, we are not required to make a payment from excess cash flow in the first quarter of 2014.

As of April 15, 2013, Travelport and its affiliates no longer owned at least 50% of our voting stock (see Note 1 - Organization and Basis of Presentation of the Notes to the Consolidated Financial Statements) and therefore Travelport was no longer obligated to provide letters of credit on our behalf. At December 31, 2013 and December 31, 2012, there were $0 and $72.5 million, respectively, of outstanding letters of credit issued by Travelport on our behalf. We believe we have access to sufficient letter of credit availability to meet our short- and long-term requirements through a combination of restricted cash designated to be used to cash collateralize letters of credit or similar instruments, our Revolver, through which our revolving lenders have agreed to issue up to $55.0 million in letters of credit, our $25.0 million multi-currency letter of credit facility, and cash on hand which can be used to support letters of credit and similar instruments, if necessary.

Financial Obligations

Commitments and Contingencies

We are party to various cases brought by consumers and municipalities and other U.S. governmental entities involving hotel occupancy taxes and our merchant hotel business model. We believe that we have meritorious defenses, and we are vigorously defending against these claims, proceedings and inquiries (see Note 9 - Commitments and Contingencies of the Notes to Consolidated Financial Statements).

Litigation is inherently unpredictable and, although we believe we have valid defenses in these matters, unfavorable resolutions could occur. We generally cannot estimate our range of loss, except for tax matters. Although we believe it is unlikely that a materially adverse outcome will result from these proceedings, an adverse outcome could be material to us with respect to earnings or cash flows in any given reporting period.

Contractual Obligations

The following table summarizes our future contractual obligations as of December 31, 2013:
 
 
2014
 
2015
 
2016
 
2017
 
2018
 
Thereafter
 
Total
 
 
(in thousands)
Term Loan (a)
 
$
13,500

 
$
13,500

 
$
13,500

 
$
68,500

 
$
3,500

 
$
330,750

 
$
443,250

Interest (b)
 
24,962

 
24,794

 
22,696

 
21,567

 
19,409

 
4,121

 
117,549

Contract exit costs (c)
 
11,371


258


61







 
11,690

Operating leases
 
8,009


4,298


3,139


2,777


2,853


12,187

 
33,263

GDS contracts (d)
 


15,000


16,120


12,370


16,120


1,120

 
60,730

Tax sharing liability (e)
 
20,143

 
21,475

 
26,425

 
32,234

 
6,864

 

 
107,141

Other service and licensing contracts
 
14,956

 
4,850

 
4,325

 

 

 

 
24,131

Total contractual obligations (f)
 
$
92,941

 
$
84,175

 
$
86,266

 
$
137,448

 
$
48,746

 
$
348,178

 
$
797,754

(a)
The amounts shown in the table above represent future payments under the Term Loan, excluding any mandatory prepayments that could be required under the Term Loans. (see Note 6 - Term Loan and Revolving Credit Facility of the Notes to Consolidated Financial Statements).
(b)
Represents estimated interest payments on the variable portion of the Term Loan based on the one-month LIBOR as of December 31, 2013 and fixed interest payments under interest rate swaps.

45




(c)
Represents disputed costs due to the early termination of an agreement.
(d)
In February 2014, the Company announced that it entered into an agreement with Travelport for the provision of GDS services (“New Travelport GDS Service Agreement”), replacing our prior Travelport GDS service agreement. Under the New Travelport GDS Service Agreement, Orbitz is obligated in 2014 to use only Travelport GDSs for all air and car segments booked on its domestic agencies and is subject to certain other exclusivity obligations for its segments booked in Europe and other markets as defined in the New Travelport GDS Service Agreement. The Company is required to pay a fee for each segment that is not booked through Travelport GDSs in 2014 subject to exclusivity obligations discussed above. However beginning January 1, 2015, the Company will no longer be subject to exclusivity obligations. Under the GDS Agreement beginning in 2015, we are obligated to provide certain levels of volume over the contract period and may be subject to pay shortfall payments in certain cases if we fail to meet volume commitments. The agreement terminates on December 31, 2018.

In February 2014, the Company announced it has entered into an agreement with Amadeus IT Group, S.A. to provide GDS services. This contract requires the Company to meet certain minimum annual booking requirements beginning in 2016.

(e)
Represents payments in connection with the tax sharing agreement with the Founding Airlines (see Note 7 - Tax Sharing Liability of the Notes to Consolidated Financial Statements).
(f)
Excluded from the above table are $3.6 million of liabilities for uncertain tax positions for which the period of settlement is not currently determinable.

Other Commercial Commitments and Off-Balance Sheet Arrangements

In the ordinary course of business, we obtain surety bonds and bank guarantees, issued for the benefit of a third party, to secure performance of certain of our obligations (see Note 9 - Commitments and Contingencies of the Notes to Consolidated Financial Statements).

We are also required to issue letters of credit to certain suppliers and non-U.S. regulatory and government agencies. See “Financing Arrangements” above for further discussion of our outstanding letters of credit.


CRITICAL ACCOUNTING POLICIES

The preparation of our consolidated financial statements and related notes in conformity with generally accepted accounting principles requires us to make judgments, estimates and assumptions that affect the amounts reported therein. An accounting policy is considered to be critical if it meets the following two criteria:
the policy requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made; and
different estimates that reasonably could have been used or changes in the estimates that are reasonably likely to occur from period to period would have a material impact on our consolidated financial statements.

We believe that the estimates and assumptions used when preparing our consolidated financial statements were the most appropriate at that time. However, events that are outside of our control cannot be predicted and, as such, they cannot be contemplated in evaluating such estimates and assumptions. We have discussed these estimates with our Audit Committee of the Board of Directors.

Presented below are those accounting policies that we believe require subjective and complex judgments that could potentially affect our reported results. Although we believe these policies to be the most critical, other accounting policies also have a significant effect on our consolidated financial statements and certain of these policies may also require the use of estimates and assumptions (see Note 2 - Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements).

Revenue Recognition

Merchant revenues are from transactions where we are the merchant of record and have the ability to determine the price charged to the customer. We have agreements with suppliers that provide our customers the ability to book their supply (for example, air tickets or hotel rooms) that we sell through our sites. We present merchant revenues on a net basis in accordance

46




with Accounting Standards Codification 605-45, Revenue Recognition - Principal Agent Considerations. Based upon evaluation of our merchant transactions and in accordance with the various indicators identified in the ASC, we concluded that our suppliers assume the majority of the business risks, including the risk of unsold air tickets or hotel rooms. As such, we recognize revenues for merchant transactions at the net amount, which is the amount charged to the customer less the amount to be paid to the supplier.

We accrue for the cost of merchant hotel and merchant car transactions based on amounts we expect to be invoiced by suppliers. Based on our historical experience and contract terms, we reverse a portion of the accrued cost, which increases net revenue, when we determine it is not probable that we will be required to pay the supplier. Actual amounts could be greater or less than the amounts estimated due to changes in hotel billing practices or changes in traveler behavior.

The Company issues credits in the form of points related to its loyalty programs. The value of points earned by loyalty program members is included in accrued liabilities and recorded as a reduction of revenue at the time the points are earned, based on the percentage of points that are projected to be redeemed. The determination of the redemption rate of the loyalty program requires the use of assumptions and estimates.

Impairment of Long-Lived Assets, Goodwill and Indefinite-Lived Intangible Assets

Long-Lived Assets

We evaluate the recoverability of our long-lived assets, including property and equipment and finite-lived intangible assets, when circumstances indicate that the carrying value of those assets may not be recoverable. This analysis is performed by comparing the carrying values of the assets to the current and expected future cash flows to be generated from these assets, on an undiscounted basis. If this analysis indicates that the carrying value of an asset is not recoverable, the carrying value is reduced to fair value through an impairment charge in our consolidated statements of operations. The evaluation of long-lived assets for impairment requires assumptions about operating strategies and estimates of future cash flows. An estimate of future cash flows requires us to assess current and projected market conditions as well as operating performance. A variation of the assumptions used could lead to a different conclusion regarding the recoverability of an asset and could have a significant effect on our consolidated financial statements.

As a result of our decision during 2013 to exit the Away Network business, we recorded a $2.6 million non-cash charge to impair property and equipment associated with that business. This charge was included in impairment of property and equipment and other assets in our consolidated statement of operations.

In 2012, we recorded a $1.4 million non-cash charge due to the negotiation of a new agreement with one of our airline suppliers, which resulted in the termination of the former agreement with this airline. The $1.2 million net reduction in the liability of this agreement was composed of a $2.6 million non-cash increase to net revenue and a $1.4 million non-cash charge related to the in-kind marketing and promotional support that we expected to receive under the former agreement. The impairment charge was included in the impairment of property and equipment and other assets line item in our consolidated statements of operations.

In 2012, we recorded a non-cash impairment charge of $1.6 million related to finite-lived intangible assets. This charge was included in impairment of goodwill and intangible assets in our consolidated statements of operations. The remaining finite-lived intangible asset balance following this charge is not material.

Goodwill and Indefinite-Lived Intangible Assets

We assess the carrying value of goodwill and other indefinite-lived intangible assets for impairment annually or more frequently whenever events occur and circumstances change indicating potential impairment. We perform our annual impairment testing of goodwill and other indefinite-lived intangible assets as of December 31.

We assess goodwill for possible impairment using a two-step process. The first step identifies if there is potential goodwill impairment. If the step one analysis indicates that impairment may exist, a step two analysis is performed to measure the amount of the goodwill impairment, if any. Application of the goodwill impairment test requires management's judgment, including identifying reporting units, assigning assets and liabilities to reporting units and determining the fair value of each reporting unit. We estimate the fair value of our reporting units to which goodwill is allocated using generally accepted valuation methodologies, including market and income based approaches, and relevant data available through and as of the testing date. Under the market approach, the valuation process is essentially that of comparison and correlation between the subject asset and other similar assets. The income approach is a method in which fair value is estimated based on the cash flows

47




that an asset could be expected to generate over its useful life, including residual value cash flows. These cash flows are then discounted to their present value equivalents using a rate of return that accounts for the relative risk of not realizing the estimated annual cash flows and for the time value of money. Variations of the income approach are used to estimate certain of the intangible asset fair values.

Our trademarks and trade names are indefinite-lived intangible assets. We test these assets for impairment by comparing their carrying values to their estimated fair values. If the estimated fair values are less than the carrying amounts of the intangible assets, then the carrying values are reduced to fair value through an impairment charge recorded in our consolidated statements of operations. We use a market or income valuation approach, or a combination of both, to estimate fair values of the relevant trademarks and trade names.

Our testing for impairment involves estimates of our future cash flows, which requires us to assess current and projected market conditions as well as operating performance. Our estimates may differ from actual cash flows due to changes in our operating performance, capital structure or capital expenditure needs as well as changes to general economic and travel industry conditions. We must also make estimates and judgments in the selection of a discount rate that reflects the risk inherent in those future cash flows. The impairment analysis may also require certain assumptions about other businesses with limited financial histories. A variation of the assumptions used could lead to a different conclusion regarding the fair value of an asset and could have a significant effect on our consolidated financial statements. We use the income approach to estimate the fair value of all reporting units and use the market approach to corroborate this estimate. Pursuant to our policy, we performed the annual impairment test as of December 31, 2013 and determined that no impairment of goodwill or indefinite-lived intangible assets existed as of that date as the fair value of the reporting units exceeded the carrying value.

Occupancy Taxes

We are involved in a number of lawsuits brought by states, cities and counties over issues involving the payment of hotel occupancy or similar taxes. We do not believe that we are liable for these taxes, generally imposed on entities that own, operate or control hotels or provide hotel rooms or similar accommodations. We accrue for potential losses in those circumstances that we believe a loss is probable and for which we are able to develop a reasonable estimate of any such loss. The ultimate resolution of these lawsuits or contingencies may differ substantially from our estimates.

Income Taxes

Our provision for income taxes is determined using the asset and liability method. Under this method, deferred tax assets and liabilities are calculated based upon the temporary differences between the financial statement and income tax bases of assets and liabilities using the combined federal and state effective tax rates that are applicable to us in a given year. The deferred tax assets are recorded net of a valuation allowance when, based on the weight of available evidence, we believe it is more likely than not that some portion or all of the recorded deferred tax assets will not be realized in future periods. Increases to the valuation allowance are recorded as increases to the provision for income taxes. The realization of the deferred tax assets, net of a valuation allowance, is primarily dependent on estimated future taxable income, as well as the consideration of other factors. We currently have a valuation allowance for our deferred tax assets of $108.6 million, of which $105.5 million relates to foreign jurisdictions. On a quarterly basis, we assess the level of valuation allowance required; if sufficient positive evidence exists in future periods to support a release of some or all of the valuation allowance, such a release may have a material impact on our results of operations. Following completion of our long-term financing arrangement in the first quarter of 2013, which resolved a significant negative factor, and based on recent and expected future taxable income, we believe it is more likely than not that our deferred tax assets will be realized. Specifically, the Company had expected that interest rates and interest expense on a debt refinancing would be significantly higher than the rates actually achieved. See Note 10 - Income Taxes of the Notes to the Consolidated Financial Statements.

Tax Sharing Liability

We have a liability included in our consolidated balance sheets that relates to a tax sharing agreement between Orbitz and the Founding Airlines (see Note 7 - Tax Sharing Liability of the Notes to Consolidated Financial Statements for further details). We use discounted cash flows in calculating and recognizing the tax sharing liability. We review the calculation of the tax sharing liability on a quarterly basis and make revisions to our estimated timing of payments when appropriate. We also assess whether there are any significant changes, such as changes in the amount of payments and tax rates that could materially affect the present value of the tax sharing liability.

The valuation of the tax sharing liability requires us to make certain estimates in projecting the quarterly depreciation and amortization benefit we expect to receive, as well as the associated effective income tax rates. The estimates require certain

48