10-K 1 d444234d10k.htm FORM 10-K Form 10-K
Table of Contents

 

 

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, 2012
   Or                             
¨    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
   For the transition period from                  to                 
  
  
  
  
  
  
  

Commission File No. 333-141714

 

 

Travelport Limited

(Exact name of registrant as specified in its charter)

 

Bermuda   98-0505100

(State or other jurisdiction

of incorporation or organization)

 

(I.R.S. Employer

Identification Number)

300 Galleria Parkway

Atlanta, GA 30339

(Address of principal executive offices, including zip code)

(770) 563-7400

(Registrant’s telephone number, including area code)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None.

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  ¨      No  þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  þ      No  ¨

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

Indicate by check whether the registrant has submitted electronically and posted on its corporate website, if any, every interactive data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.    Yes  þ      No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K 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.    ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  ¨    Accelerated filer  ¨   Non-accelerated filer  þ    Smaller reporting company  ¨
   (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 Exchange Act).    Yes  ¨      No  þ

As of March 12, 2013, 12,000 shares of the Registrant’s common stock, par value $1.00 per share, were outstanding, all of which were held by Travelport Holdings Limited.

DOCUMENTS INCORPORATED BY REFERENCE

None

 

 

 


Table of Contents

TABLE OF CONTENTS

 

Item

 

Description

   Page  
  PART I   
Item 1  

Business

     3   
Item 1A  

Risk Factors

     15   
Item 1B  

Unresolved Staff Comments

     31   
Item 2  

Properties

     31   
Item 3  

Legal Proceedings

     32   
Item 4  

Mine Safety Disclosures

     33   
  PART II   
Item 5   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities      34   
Item 6  

Selected Financial Data

     34   
Item 7  

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

     38   
Item 7A  

Quantitative and Qualitative Disclosure about Market Risks

     63   
Item 8  

Financial Statements and Supplementary Data

     64   
Item 9  

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

     64   
Item 9A  

Controls and Procedures

     64   
Item 9B  

Other Information

     65   
  PART III   
Item 10  

Directors, Executive Officers and Corporate Governance

     66   
Item 11  

Executive Compensation

     70   
Item 12   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters      82   
Item 13  

Certain Relationships and Related Transactions and Director Independence

     84   
Item 14  

Principal Accountant Fees and Services

     87   
  PART IV   
Item 15  

Exhibits and Financial Statement Schedules

     88   
 

Signatures

     89   


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FORWARD-LOOKING STATEMENTS

The forward-looking statements contained herein involve risks and uncertainties. Many of the statements appear, in particular, in the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. Forward-looking statements identify prospective information. Important factors could cause actual results to differ, possibly materially, from those in the forward-looking statements. In some cases you can identify forward-looking statements by words such as “anticipate”, “believe”, “could”, “estimate”, “expect”, “intend”, “may”, “plan”, “predict”, “potential”, “should”, “will” and “would” or other similar words. You should read statements that contain these words carefully because they discuss our future priorities, goals, strategies, actions to improve business performance, market growth assumptions and expectations, new products, product pricing, changes to our business processes, future business opportunities, capital expenditures, financing needs, financial position and other information that is not historical information. References within this Annual Report on Form 10-K to “we”, “our” or “us” means Travelport Limited, a Bermuda company, and its subsidiaries.

The following list represents some, but not necessarily all, of the factors that could cause actual results to differ from historical results of continuing operations or those anticipated or predicted by these forward-looking statements:

 

   

factors affecting the level of travel activity, particularly air travel volume, including security concerns, general economic conditions, natural disasters and other disruptions;

 

   

the impact our outstanding indebtedness may have on the way we operate our business;

 

   

our ability to obtain travel supplier inventory from travel suppliers, such as airlines, hotels, car rental companies, cruise lines and other travel suppliers;

 

   

our ability to maintain existing relationships with travel agencies and to enter into new relationships on acceptable financial and other terms;

 

   

our ability to develop and deliver products and services that are valuable to travel agencies and travel suppliers and generate new revenue streams, including our new universal desktop product;

 

   

the impact on supplier capacity and inventory resulting from consolidation of the airline industry;

 

   

our ability to grow adjacencies, such as our acquisition of Sprice and our controlling interest in eNett;

 

   

general economic and business conditions in the markets in which we operate, including fluctuations in currencies and the economic conditions in the eurozone;

 

   

pricing, regulatory and other trends in the travel industry, including the direct connect efforts of American Airlines and our litigation with American Airlines related thereto;

 

   

risks associated with doing business in multiple countries and in multiple currencies;

 

   

our ability to achieve expected cost savings from our efforts to improve operational efficiency;

 

   

maintenance and protection of our information technology and intellectual property; and

 

   

financing plans and access to adequate capital on favorable terms.

We caution you that the foregoing list of important factors may not contain all of the factors that are important to you. In addition, in light of these risks and uncertainties, the matters referred to in the forward-looking statements contained in this report may not in fact occur.

Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by which, such performance or results will be achieved. Forward-looking information is based on information available at the time and/or management’s good faith belief with respect to future events and is subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in the statements. The factors listed in the section captioned “Risk Factors” in this Annual Report on Form 10-K, as well as any other cautionary language in this Annual

 

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Report on Form 10-K, provide examples of risks, uncertainties and events that may cause actual results to differ materially from the expectations described in the forward-looking statements. You should be aware that the occurrence of the events described in these risk factors and elsewhere in this report could have an adverse effect on our business, results of operations, financial position and cash flows.

Forward-looking statements speak only as of the date the statements are made. We assume no obligation to update forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking information except to the extent required by applicable securities laws. If we do update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect thereto or with respect to other forward-looking statements.

 

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PART I

 

ITEM 1.    BUSINESS

Overview

Travelport is a leading provider of critical transaction processing solutions and data to companies operating in the global travel industry. We believe that we are one of the most geographically diversified of such companies in the world.

Our global distribution systems (“GDS”) business provides aggregation, search and transaction processing services to travel suppliers and travel agencies, allowing travel agencies to search, compare, process and book tens of thousands of itinerary and pricing options across multiple travel suppliers within seconds. Our GDS business operates three systems, Galileo, Apollo and Worldspan, across over 170 countries to provide travel agencies with booking technology and access to considerable supplier inventory that we aggregate from airlines, hotels, car rental companies, rail networks, cruise and tour operators, and destination service providers. Our GDS business provides travel distribution services to approximately 810 active travel suppliers and approximately 67,000 online and offline travel agency locations, which in turn serve millions of end consumers globally. In 2012, approximately 162 million tickets were issued through our GDS business. Our GDS business processed up to 2.7 billion travel-related messages per day in 2012.

Within our GDS business, our Airline IT Solutions business provides hosting solutions and IT subscription services to airlines to enable them to focus on their core business competencies and reduce costs, as well as business intelligence services. Our Airline IT Solutions business manages the mission-critical reservations and related systems for Delta Air Lines, as well as five other airlines. Our Airline IT Solutions business also provides an array of leading-edge IT software subscription services and data business intelligence services, directly and indirectly, to over 400 airlines, airports and airline ground handlers globally.

Our payment services joint venture with eNett provides secure and cost effective automated payment solutions between suppliers and travel agencies, tailored to meet the needs of the travel industry, currently focusing on Asia, Europe and the United States.

Headquartered in Atlanta, Georgia, Travelport is a privately owned company. Our transaction processing business operational global headquarters are located in the United Kingdom.

Company History

Galileo, the cornerstone of our GDS business, began as the United Airlines Apollo computerized reservation system in 1971 in the United States. In 1997, Galileo International became a publicly listed company on the New York and Chicago Stock Exchanges. In October 2001, Galileo was acquired by Cendant Corporation. As part of Cendant from 2001 to 2006, Travelport completed a series of acquisitions, including Orbitz, Inc. in November 2004 and Gullivers Travel Associates (“GTA”) in April 2005.

Travelport Limited, a Bermuda company, was formed on July 13, 2006 to acquire the travel distribution services businesses of Cendant. On August 23, 2006, the acquisition was completed, and we were acquired by affiliates of The Blackstone Group (“Blackstone”), affiliates of Technology Crossover Ventures (“TCV”) and certain existing and former members of our management. One Equity Partners (“OEP”) acquired an economic interest in us in December 2006.

On July 25, 2007, we completed the initial public offering of common stock of our then subsidiary, Orbitz Worldwide, Inc. (“Orbitz Worldwide”), and listed such common stock on the New York Stock Exchange. On October 31, 2007, we transferred approximately 11% of the outstanding equity of Orbitz Worldwide to affiliates, leaving us with approximately 48% of Orbitz Worldwide’s outstanding equity which we recognize for accounting purposes using the equity method. On January 26, 2010, we purchased $50 million of newly issued common shares of Orbitz Worldwide pursuant to an agreement with Orbitz Worldwide. After this investment, a simultaneous exchange between Orbitz Worldwide and PAR Investment Partners, a third party investor, of approximately $49.68 million of Orbitz Worldwide debt for common shares of Orbitz Worldwide and the issuance of shares by Orbitz Worldwide under its equity plan, we currently own approximately 46% of Orbitz Worldwide’s outstanding common stock.

 

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On August 21, 2007, we completed the acquisition of Worldspan for $1.3 billion. Worldspan operated as an independent GDS based in the United States before becoming part of the Travelport GDS business in August 2007. The Worldspan system resulted from the combination of Delta, TWA and Northwest systems in the early 1990s.

On May 5, 2011, we completed the sale of our GTA business to Kuoni Travel Holdings Ltd. (“Kuoni”). Proceeds from the sale, together with existing cash, were used to repay indebtedness outstanding under our senior secured credit agreement.

In October 2011, in connection with the restructuring of senior unsecured payment-in-kind (“PIK”) term loans issued by our direct parent holding company, Travelport Holdings Limited (the “Restructuring”), the PIK term loan lenders (the “New Shareholders”) received, as partial consideration for the Restructuring, their pro rata share of 40% of the fully diluted issued and outstanding equity of Travelport Worldwide Limited, our indirect parent company (“Travelport Worldwide”).

We continually explore, prepare for and evaluate possible transactions, including acquisitions, divestitures, joint ventures and other arrangements, to ensure we have the most efficient and effective capital structure and/or to maximize the value of the enterprise. No assurance can be given with respect to the timing, likelihood or effect of any possible transactions.

Although we focus on organic growth, we may augment such growth through the select acquisition of (or possible joint venture with) complementary businesses in the travel and business services industries. We expect to fund the purchase price of any such acquisition with cash on hand or borrowings under our credit lines. In addition, we continually review and evaluate our portfolio of existing businesses to determine if they continue to meet our business objectives. As part of our ongoing evaluation of such businesses, we intend from time to time to explore and conduct discussions with regard to joint ventures, divestitures and related corporate transactions. However, we can give no assurance with respect to the magnitude, timing, likelihood or financial or business effect of any possible transaction. We also cannot predict whether any divestitures or other transactions will be consummated or, if consummated, will result in a financial or other benefit to us. We intend to use a portion of the proceeds from any such dispositions and cash from operations to retire indebtedness, make acquisitions and for other general corporate purposes.

Company Information

Our principal executive office is located at 300 Galleria Parkway, Atlanta, Georgia 30339 (telephone number: (770) 563-7400). We are subject to the informational requirements of the Securities Exchange Act of 1934, as amended, and in accordance therewith, we file reports, proxy and information statements and other information with the Securities and Exchange Commission (the “SEC”). Such reports (including our annual reports on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and any amendments to such reports) and other information can be accessed on our website at www.travelport.com as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. A copy of our Code of Conduct and Ethics, as defined under Item 406 of Regulation S-K, including any amendments thereto or waivers thereof, can also be accessed on our website. We will provide, free of charge, a copy of our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K and Code of Conduct and Ethics upon request by phone or in writing at the above phone number or address, attention: Investor Relations.

Our Business

Transaction Processing

Our transaction processing business is characterized by a balanced global footprint and a leading position in each of the four major world travel regions: the Americas, Europe, MEA and APAC, as measured by GDS-processed air segments booked for the year ended December 31, 2012. In 2012, our transaction processing business handled more than 300 million air segments, approximately 28 million hotel bookings, approximately 17 million car rental bookings and approximately two million rail bookings. In the year ended December 31, 2012, we accounted for approximately 26% of the global share of GDS-processed air segments, with a balanced

 

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split across regions. In 2012, approximately 162 million tickets were issued through our GDS business. Our GDS business processed up to 2.7 billion travel-related messages per day in 2012. In 2012, we earned approximately $1.8 billion in transaction processing revenue, consisting primarily of approximately $1.6 billion from airlines, approximately $129 million from hotels and approximately $79 million from car rental companies.

We provide transaction processing and a distribution vehicle for travel suppliers to facilitate efficient aggregation and distribution of travel inventory to travel agencies and ultimately to end customers globally. Our transaction processing business obtains content, including pricing, availability, reservations, ticketing and payment, from travel suppliers and distributes it to both online and traditional travel agencies. Travel agencies are given the ability to shop and book across hundreds of suppliers in real time, handle payment processing and other fulfillment services on behalf of clients and suppliers, perform customer service functions, such as changes, cancellations and re-issues, and efficiently manage activity through direct data feeds from the transaction processing business to the agency mid- and back-office systems. We typically earn a fee from travel suppliers for each segment booked, cancelled or changed. In connection with these bookings, we generally pay commissions or provide other financial incentives to travel agencies to encourage greater use of our transaction processing business. Travel agencies complete transactions through our systems to distribute the travel inventory to end customers.

We are balanced across the four major travel regions, which allows us to be well positioned to take advantage of growth in each major travel region and emerging countries, in particular, where the number of air passengers boarded are forecast to grow faster than the Americas and Europe. This geographic balance also helps to insulate us from downturns related to specific regional economies. In 2012, our balanced share of air segments processed through our GDS was 45%, 26%, 18% and 11% in Americas, Europe, APAC and MEA, respectively, based on industry global distribution of GDS-processed air segments of 42%, 32%, 16% and 10%, respectively, in each region.

Travel Suppliers.    Our relationships with travel suppliers extend to airlines, hotels, car rental companies, rail networks, cruise and tour operators and destination service providers. Travel suppliers’ process, store, display, manage and distribute their products and services to travel agencies through GDSs and other distribution channels. Through participating carrier agreements (for airlines) and various agreements for other travel suppliers, airlines and other travel suppliers are offered varying levels of services and functionality at which they can participate in our GDS. These levels of functionality generally depend upon the travel supplier’s preference as well as the type of communications and real-time access allowed with respect to the particular travel supplier’s host reservations systems.

We connect travel suppliers with travel agencies across over 170 countries to distribute supplier inventory that is aggregated from approximately 400 airlines, approximately 330 hotel chains covering more than 93,000 hotel properties, approximately 25 car rental companies covering more than 35,000 car rental locations and 10 major rail networks worldwide, as well as approximately 50 cruise and tour operators.

The table below lists alphabetically Travelport’s largest airline suppliers in the Americas, Europe, MEA and APAC for the year ended December 31, 2012, based on revenue:

 

Americas

 

Europe

 

MEA

 

APAC

American Airlines   Alitalia Airlines   Emirates Airlines   Emirates Airlines
Delta Air Lines   British Airways/Iberia   Qatar Airways   Jet Airways India
Frontier Airlines   Lufthansa Airlines   Saudi Arabian Airlines   Qantas Airways
United Airlines   TAP Air Portugal   South African Airways   Singapore Airlines
US Airways   Turkish Airlines   Turkish Airlines   Thai Airways

Our standard transaction processing distribution agreements with air, hotel and car rental suppliers are open-ended or roll over unless specifically terminated. The majority of our agreements remain in effect each year, with exceptions usually linked to airline mergers or insolvencies. Our contracts with a majority of our top fifteen airline suppliers, as measured by revenue for the year ended December 31, 2012, are in place until 2013 and beyond, unless earlier terminated pursuant to the specific terms of each contract. Our top 15 travel suppliers (by

 

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revenue), all of which are airlines, have been customers on average for more than ten years and, for the year ended December 31, 2012, represented approximately 40% of transaction processing revenue. We have a high renewal rate with our travel suppliers.

We have entered into a number of specific-term agreements with airlines in the larger and more mature geographic areas, including North America and Western Europe, as well as APAC, to secure full-content. Full-content agreements allow our travel agency customers to have access to the full range of our airline suppliers’ public content, including the ability to book the last available seat, as well as other functionality. The typical duration of these agreements ranges from two to five years. We have secured full-content agreements with approximately 80 airlines (including low cost carriers) worldwide, including all the major airlines in North America other than American Airlines, as well as European and Asian airlines such as British Airways, Air France, KLM, Lufthansa, Swiss, Alitalia, Qantas and Singapore Airlines. Bookings attributable to such full-content agreements comprised 67% of our air segments in the year ended December 31, 2012. Certain full content agreements expire, or may be terminated, during 2013. For example, though we have participation agreements with these airline suppliers in which they participate in our GDSs, full-content agreements with airlines representing approximately 18% of our transaction processing revenue for the year ended December 31, 2012 are up for renewal or are potentially terminable by such carriers in 2013. See Part IA — “Risk Factors.”

We have approximately 55 low cost carriers (“LCCs”) participating in our GDS, with our top 10 LCCs by revenue, accounting for approximately 5% of our air segments in the year ended December 31, 2012. Frontier Airlines, AirTran Airways and Air Berlin represented the largest number of segments attributable to LCCs during the period. Our segment volume from LCCs increased by 9% for the year ended December 31, 2012, in contrast to a 3% decline in segments attributable to traditional carriers compared to the prior year. We believe that our geographic breadth makes us a compelling source of value for most major LCCs, although LCC activity on the GDS relative to legacy airlines remains at an early stage of development in terms of the level of booking activity. In addition, the choice and level of participation is driven by the relevance of the GDS in the countries and regions in which the LCCs choose to distribute and sell. For example, our leading position with LCCs, including participation of both Jet Blue and Southwest Airlines in the United States, JetStar in APAC and easyJet and Jet2 in Europe, is indicative of the value that travel suppliers place on the scale and breadth of a GDS’s footprint. We believe that we are well positioned to capture growth from the LCCs due to our global footprint in the business travel arena in some of the prime areas where LCCs are strongest such as the United States, the United Kingdom and Australia.

We have relationships with approximately 330 hotel chains, representing more than 93,000 hotel properties, which provide us with live availability and instant confirmation for bookings, in addition to approximately 20 hotel aggregators resulting in 375,000 unique hotel properties bookable through Travelport Rooms and More. Our top hotel suppliers for the year ended December 31, 2012 were Hilton, Intercontinental Hotel Group and Marriott Hotels, which together accounted for approximately 40% of our hotel revenue in this period. We have a relationship with approximately 25 car rental companies, representing over 35,000 car rental locations, providing seamless availability and instant confirmation for virtually all customers. Our top five car rental company suppliers for the year ended December 31, 2012 were Avis, Budget, Enterprise, Hertz and National, which together accounted for approximately 67% of our car rental revenue in this period. We provide electronic ticketing solutions to 10 major international and national rail networks, including Société Nationale des Chemins de Fer France (SNCF) (France), Amtrak (United States), Eurostar Group (United Kingdom/France) and AccessRail (United States), which accounted for all of our rail revenue for the year ended December 31, 2012.

Travel Agencies.    Approximately 67,000 online and offline travel agency locations worldwide use us for travel information, booking and ticketing capabilities, travel purchases and management tools for travel information and travel agency operations. Access to our GDS enables travel agencies to electronically search travel-related data such as schedules, availability, services and prices offered by travel suppliers and to book travel for end customers.

Our transaction processing business also facilitates travel agencies’ internal business processes such as quality control, operations and financial information management. Increasingly, this includes the integration of

 

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products and services from independent parties that complement our core product and service offerings, including a wide array of mid- and back-office service providers. We also provide technical support, training and other assistance to travel agencies, including numerous customized access options, productivity tools, automation, training and customer support focusing on process automation, back-office efficiency, aggregation of content at the desktop and online booking solutions.

Our relationships with travel agencies typically are non-exclusive, with the majority of GDS-processed air segments booked through agencies which are dual automated, meaning they subscribe to and have the ability to use more than one GDS. In order to encourage greater use of our GDS, we pay commissions or provide other financial incentives to many travel agencies. Travel agencies or other GDS subscribers in some cases pay a fee for access to our GDS or to access specific services or travel content.

Our travel agency customers comprise online, offline, corporate and leisure travel agencies. Our top ten travel agency customers, as measured by booking fees, have, on average, been customers for over ten years, and booking fees attributable to their activities in the year ended December 31, 2012 represented approximately 30% of our transaction processing revenue. Our largest online travel agency customers, by booking fees, in 2012 were Orbitz Worldwide (which includes orbitz.com and cheaptickets.com in the United States and ebookers.com in Europe), Priceline and Expedia. In the year ended December 31, 2012, regional travel agencies (such as TrailFinders) accounted for approximately 64% of bookings, online travel agencies were the next largest category, representing approximately 22% of bookings, and global accounts (such as American Express) accounted for the remaining amount. Our largest corporate travel agency customers in 2012 were American Express, BCD Holdings, Carlson Wagonlit Travel, Flight Centre Limited and Hogg Robinson Group. Our largest leisure travel agency customers in 2012 include AAA Travel, Carlson Leisure Group, Kuoni and GTT Global/USA Gateway.

New Products and Products in Development.    We have a continuous pipeline of new products and enhancements to our transaction processing business as we aim to lead change in the global travel industry by delivering innovation and technology solutions to empower all travel businesses now and into the future. We categorize under four headings:

 

   

Content.    Our goal is to deliver unrivaled travel content by providing the broadest range of travel modes, fares, rates and other content to the widest possible audience through whatever medium they choose to access it. Central to this is our airline content ranging from LCCs to full service carriers, including airline ancillary services. A dramatic change in travel is the emergence of a new airline merchandising model – the growing shift to unbundled offerings, customized fare families and unique branded fares. Through constant advancements, we are developing the tools needed to efficiently access, arrange, book and process payment for these new airline services through Travelport, as well as customized offerings from travel providers in every sector. Our expanding hotel content includes the best rates at more than 346,000 properties (when we include Travelport Rooms and More), and we are continuing to grow our non-traditional core GDS content to include enhancements to our rail, cruise, tour and other content offerings.

 

   

Search.    We are committed to delivering the best informed choice, quickly and accurately. Travelport e-Pricing, the core of Travelport’s global fare distribution platform, delivers exceptional accuracy, diversity, speed and efficiency. Presenting related content beyond the core search enables enhanced selling opportunities with user-centric results based on nature of travel, personal preferences, supplier preferences and policies.

 

   

Points of Sale.    Our point of sale solutions enable travel suppliers and agencies to sell and access content the way they want. Through constant advancements, we are developing the tools needed to efficiently access, arrange, book and process payment for these new airline services – as well as customized offerings from travel providers in every sector. We’re providing access to unrivaled content through multiple points of access from green screen to newer GUI formats as seen in Travelport Smartpoint App, Travelport Smartpoint Go, Travelport Universal Desktop, Travelport Rooms and More and a wide and fast growing range of mobile tools and applications.

 

   

Open Platform.    Our open platform allows faster deployment of new capabilities, increased consistency, and overall better value for all participants in the travel distribution process. This enables others in the

 

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travel industry to capitalize on our innovative technology framework and seize the opportunity it presents to innovate and develop next generation travel tools and apps. Travelport Universal API enables the multi-channel experience and is being used not only by our next generation Travelport Universal Desktop but also by approximately 60 partners in the Travelport Developer Network.

In addition to the above, our majority-owned payment services joint venture, eNett, provides automated payment solutions between suppliers and travel agencies, tailored to meet the needs of the travel industry, currently focusing on Asia, Europe and the United States. eNett’s billing and settlement solutions via web-based technology can be integrated or accessed as an independent system.

Airline IT Solutions

We have been a pioneer in IT services for the airline industry, being the first GDS to provide e-ticketing to travel agencies in 1995 and the first GDS to offer an automated repricing solution in 2000. We provide hosting and application development solutions and IT subscription services to Delta and five other airlines and the technology companies that support them, IT subscription services to over 260 airlines and airline ground handlers and data business intelligence services to approximately 159 airlines and airports.

 

   

Hosting solutions.    These solutions encompass mission-critical systems for airlines such as internal reservation system services, seat and fare class inventory management, flight operations technology services and software development services. Our internal reservation system services include the operation, maintenance, development and hosting of an airline’s internal reservation system and include seat availability, reservations, fares and pricing, ticketing and baggage services. These services are integral to an airline’s operations as they are the means by which an airline sells tickets to passengers and also drive all the other key passenger-related services and revenue processes and systems within the airline. Flight operations technology services provide operational support to airlines, from pre-flight preparation through to departure and landing. Some of these services include weight and balance, flight planning and tracking, passenger boarding, flight crew management, passenger manifests and cargo. Software development services focus on creating innovative software for use in an airline’s internal reservation system and flight operations’ systems.

We operate the hosting platform for Delta and, until March 2012, we hosted the reservations system for United. The Delta contract, which accounts for substantially all of our hosting revenue after the United agreement termination, expires in 2018. We also provide five other airlines around the world with other reservation system products through our hosting solutions. In December 2010, United provided us with notice of termination of the master services agreement for the Apollo reservations system operated by Travelport for United. The integration of the United-Continental systems was completed in early March 2012, and we no longer service United’s reservation system. The loss of the master services agreement with United Airlines contributed approximately $69 million and $50 million to the decline in net revenue and EBITDA, respectively, for the year ended December 31, 2012.

 

   

IT subscription services.    While some airlines elect to have their internal reservation system run by a single IT services provider, others prefer to outsource selected functions to multiple IT services providers. We have developed an array of leading-edge IT subscription services for mission-critical applications in fares, pricing and e-ticketing. We provide these services to 263 airlines and airline ground handlers, of which 57 are direct customers and 206 are indirect customers that receive our services through an intermediary. Direct IT subscription customers include Emirates, KLM and SITA. Our IT subscription services include:

 

   

Fares and Pricing/e-pricing.    A fare-shopping tool that enables airlines to outsource fares and pricing functionality to us.

 

   

Electronic Ticketing.    A database and interchange that enables airlines to outsource electronic ticketing storage, maintenance and exchange to us.

 

   

Rapid Reprice.    An automated solution that enables airlines to recalculate fares when itineraries change.

 

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Fare Verified.    A comprehensive pre-ticketing fare audit tool that enables airlines to protect against errors or fraud caused by reservation and ticketing agents and incorrectly priced or reissued tickets.

 

   

Interchange.    A system that provides interactive message translation and switching for multiple functions, such as e-ticketing and check-in, between airline partners.

 

   

Business Intelligence.    We provide data to airlines, travel agencies, hotels, car rental companies and other travel industry participants. Our data sets are critical to these businesses in the management of our own operations and the optimization of our industry position and revenue-generating potential. Travelport Business Intelligence is a leader in providing businesses involved in all aspects of travel with access to both traditional and proprietary business intelligence data sets. We provide this data to 135 airlines, supporting processes such as GDS billing, airline revenue accounting and industry settlement. We also supply marketing-oriented raw data sets, data processing services, consulting services and web-based analytical tools to 44 airlines, travel agencies and other travel-related companies worldwide to support their business processes, such as airline network planning, revenue management, pricing, sales and partnership management. This combined offering of data and analytical capabilities delivers business intelligence to businesses that use the information to enhance their industry position. A primary data product supplies “raw” GDS booking data with details of routes, fares and prices. No personally identifiable data is provided. Our business intelligence tools include Beacon and Clarity, which analyze business specific data for sales planning, network planning, revenue management and channel management.

Sales and Marketing.    Our sales and marketing teams are responsible for developing existing and initiating new commercial relationships with travel suppliers and travel agencies worldwide. The sales and marketing teams include customer support, product strategy, management and marketing communications and sales teams working across the Americas, Europe, MEA and APAC. We also provide global account management services to certain large multi-national customers.

We employ a hybrid sales and marketing model consisting of direct sales and marketing organizations (“SMOs”), which we directly manage, and indirect, third-party national distribution companies (“NDCs”). We market, distribute and support our products and services primarily through SMOs. In certain countries and regions, however, we provide our products and services through our relationships with NDCs which are typically independently owned and operated by a local travel-related business in that country or region or otherwise by a major airline based locally. Our SMOs and NDCs are organized by country or region and are typically divided between the new account teams, which seek to add new travel agencies to our GDS, and account management teams, which service and expand existing business. In certain regions, smaller customers are managed by telemarketing teams.

Historically, we relied on NDCs owned by national airlines in various countries in Europe, MEA and APAC to distribute our products and services. However, in 1997, we acquired many of these NDCs from the airlines, including in the United States, the Netherlands, Switzerland and the United Kingdom, and, later, in Hungary, Ireland, Italy, Australia, New Zealand, Malaysia and Canada. This enabled us to directly control our distribution at a time when the airlines wished to divest the NDCs and concentrate on their core airline businesses.

We typically pay an NDC a fee based on the booking fees generated pursuant to the relationship that the NDC establishes with a subscriber, with the NDC retaining subscriber fees billed for these bookings. We regularly review our network of NDCs and periodically revise these relationships. In less developed regions, where airlines continue to exert strong influence over travel agencies, NDCs remain a viable and cost effective alternative to direct distribution. Although SMO margins are typically higher than NDC margins, an NDC structure is generally preferred in countries where we have the ability to rely upon a strong airline relationship or an NDC’s expertise in a local region or country. We also contract with new NDCs in countries and regions where doing so would be more cost effective than establishing an SMO.

GDS Competitive Landscape.    The marketplace for travel distribution is large, multi-faceted and highly competitive. We compete with a number of travel distributors, including other traditional GDSs, such as Amadeus IT Group SA and Sabre Holdings Corporation, several regional GDS competitors, such as Abacus,

 

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application programming interface-based (“API”) direct connections between travel suppliers and travel agencies, and also suppliers’ own websites and other forms of direct booking, such as metasearch engines and other third parties. The largest regional GDSs are based in Asia and include Abacus International Pte Ltd., which is primarily owned by Sabre and a group of Asian airlines; Axess International Network Inc., which is wholly owned by Japan Airlines International Co. Ltd., and INFINI Travel Information, Inc., which is majority owned All Nippon Airways, Co. Ltd.; TOPAS Co., Ltd., which is majority owned by Korean Air Lines Co. Ltd.; and TravelSky Technology Limited, which is majority owned by Chinese state-owned enterprises.

We routinely face new competitors and new methods of travel distribution. Suppliers and third parties seek to promote distribution systems that book directly with travel suppliers. Airlines and other travel suppliers are selectively looking to build API-based direct connectivity with travel agencies. In addition, established and start-up search engine companies, as well as metasearch companies, have entered the travel marketplace to offer end customers new ways to shop for and book travel by, for example, aggregating travel search results across travel suppliers, travel agencies and other websites. Furthermore, there is an emerging trend toward mobile applications that link directly with travel suppliers.

Each of the other traditional GDSs offers products and services substantially similar to ours. We believe that competition in the GDS industry is based on the following criteria:

 

   

the timeliness, reliability and scope of travel inventory and related information offered;

 

   

service, reliability and ease of use of the system;

 

   

the number and size of travel agencies utilizing our GDS and the fees charged and inducements paid to travel agencies;

 

   

travel supplier participation levels, inventory and the transaction fees charged to travel suppliers; and

 

   

the range of products and services available to travel suppliers and travel agencies.

For the year ended December 31, 2012, we accounted for 26% of global GDS-processed air segments. We believe we have process and strategies in place to support gains in share in the future, including our partnership with AXESS, a leading domestic GDS in Japan, anticipated to be fully operational by the end of 2013.

Airline IT Solutions Competitive Landscape.    The Airline IT Solutions sector of the travel industry is highly fragmented by service offering, including hosting solutions, such as internal reservation system services, as well as flight operations technology services and software development services. For example, our competitors with respect to internal reservation and other system services include Amadeus, HP Enterprise Services, ITA, Navitaire LLC, Sabre, SITA and Unisys Corporation, as well as airlines that provide the services and support for their own internal reservation system services and also host external airlines. The business intelligence services sector of the Airline IT Solutions business is highly competitive, with our ability to market our products dependent on our perceived competitive position and the value of the information obtained through our GDS business. Our primary competitors in this sector are IATA, through its PaxIS product, as well as Amadeus and Sabre.

Technology.    In September 2008, we consolidated our Galileo and Worldspan data centers into a single location in Atlanta, Georgia to support our GDS transaction processing and Airline IT Solutions businesses. Our data center offers a state-of-the-art facility that has completed comprehensive technology upgrades to the latest IBM processing and storage platforms. The combined facility features an industry-leading technology platform in terms of functionality, performance, reliability and security. The existing systems are certified compliant with the Payment Card Industry Data Security Standard, offering a secure environment for combined Galileo and Worldspan operations and have historically operated at a 99.99% core systems uptime. The combined data center comprises over eight mainframes, open systems servers and storage and network devices, with maximum peak message rates of more than 46,000 messages per second. The data center processes more than 65 billion transactions each month, averaging 25,000 messages per second. On peak message days, up to 2.7 billion travel-related messages are processed.

The consolidation of our primary data center operations in Atlanta, Georgia is an example of the significant benefits realized as a result of the integration of the Galileo, Apollo and Worldspan systems. By managing all

 

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three systems in a state-of-the-art, unified data center environment, our customers benefit from access to one of the industry’s most powerful, reliable and responsive travel distribution and hosting platforms. Running our business from one facility has allowed us to rationalize more rapidly the links required to connect suppliers to our GDS and to more readily share technology across the systems. This has resulted in reduced complexity for our suppliers. In addition, our balanced geographical presence contributes to efficiency in data center operations as travel agencies from various regions access the system at different times.

Continued modernization of our technical environment is an integral part of our aim to support growth by efficiently delivering transaction processing systems to our GDS customers. In November 2012, we announced a multi-year agreement with IBM under which IBM has delivered significant upgrades to our existing systems architecture and software infrastructure of our technology platform.

Material Agreements

On January 19, 2012, we entered into instruments of resignation, appointment and acceptance with The Bank of Nova Scotia Trust Company of New York, as resigning trustee, and Computershare Trust Company, N.A., as the successor trustee, relating to our 9% Notes Indenture, Senior Notes Indenture and Subordinated Notes Indenture.

On February 14, 2012, we entered into an agreement and general release with Jeff Clarke in connection with his transition from Executive Chairman to Non-Executive Chairman of our Board of Directors. On February 14, 2012, we entered into a letter agreement with Mr. Clarke in connection with his service as our Non-Executive Chairman. Summary descriptions of the agreement and general release and the letter agreement are included in our Current Report on Form 8-K filed with the SEC of February 15, 2012.

On May 8, 2012, we entered into a Credit Agreement, dated as of May 8, 2012, among Travelport LLC, Travelport Limited, Waltonville Limited, TDS Investor (Luxembourg) S.À R.L., the lenders from time to time party thereto and Credit Suisse AG, as administrative agent and collateral agent. A summary description of our 2012 Secured Credit Agreement is included in our Current Report on form 8-K filed with the SEC on May 14, 2012.

On May 8, 2012 and August 23, 2012, we entered into revolving credit loan modification agreements relating to our Fourth Amended and Restated Credit Agreement. Summary descriptions of the Revolving Credit Loan Modification Agreements are included in our Current Reports on Form 8-K filed with the SEC on May 14, 2012 and August 29, 2012, respectively.

In August 2012 and October 2012, we entered into two amendments to the Subscriber Services Agreement with Orbitz Worldwide, dated as of July 23, 2007.

On November 21, 2012, we entered into a new hardware and software agreement with International Business Machines Corporation. A summary description of Amendment 14 (“Amendment 14”) to the Asset Management Offering Agreement, effective as of July 1, 2002, as amended, among Travelport, LP, IBM and IBM Credit LLC is included in our Current Report on Form 8-K filed with the SEC on November 28, 2012.

On November 26, 2012, we entered into a compromise agreement with Lee Golding, our then Executive Vice President and Chief Human Resources Officer. A summary description of the compromise agreement is included in our Current Report on Form 8-K filed with the SEC on November 28, 2012.

On December 11, 2012, we amended and restated our senior secured credit agreement pursuant to the Fifth Amended and Restated Credit Agreement and entered into other agreements relating to collateral and guarantees in connection with our senior secured credit agreement, our 2012 secured credit agreement, our second priority secured notes and our unsecured notes. A summary description of the Fifth Amended and Restated Credit Agreement, and related agreements, is included in our Current Report on Form 8-K filed with the SEC on December 12, 2012.

Financial Data of Segments and Geographic Areas

We have one reportable segment. Segment data for our geographic areas is reported in Note 18 — Segment Information to our Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

 

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Intellectual Property

We regard our technology and other intellectual property as critical components and assets of our business. We protect our intellectual property rights through a combination of copyright, trademark and patent laws, and trade secret and confidentiality laws and procedures, as well as database rights, where applicable. We own and seek protection of key technology and business processes and rely on trade secret and copyright laws to protect proprietary software and processes. We also use confidentiality procedures and non-disclosure and other contractual provisions to protect our intellectual property assets. We rely on appropriate laws to protect the ownership of our data and databases.

Where appropriate, we seek statutory and common law protection of our material trade and service marks, which include TRAVELPORT®, GALILEO® and WORLDSPAN® and related logos. The laws of some foreign jurisdictions, however, vary and offer less protection than other jurisdictions for our proprietary rights. Unauthorized use of our intellectual property could have a material adverse effect on us, and there is no assurance that our legal remedies would adequately compensate us for the damages caused by such unauthorized use.

We rely on technology that we license or obtain from third parties to operate our business. Vendors that support our core GDS technology include IBM, CA, SAS, Cisco, EMC and RedHat. Certain agreements with these vendors are subject to renewal or negotiation within the next year. In 2010, we obtained licenses to our Transaction Processing Facility operating system from IBM. Associated maintenance, support and capacity are available through at least December 31, 2016 under an agreement with IBM.

Employees

As of December 31, 2012, we had over 3,500 employees worldwide. None of our employees in the United States are subject to collective bargaining agreements governing employment with us. In certain of the European countries in which we operate, we are subject to, and comply with, local law requirements in relation to the establishment of work councils. In addition, due to our presence across Europe and pursuant to a European Union (“E.U.”) Directive, we have a Travelport European Works Council (EWC) in which we address E.U. and enterprise-wide issues. We believe that our employee relations are good.

Government Regulations

In the countries in which we operate, we are subject to or affected by international, federal, state and local laws, regulations and policies, which are constantly subject to change. In addition, certain African and Middle East government trade sanctions affect our ability to operate in Cuba, Iran, Sudan and Syria. The descriptions of the laws, regulations and policies that follow are summaries and should be read in conjunction with the texts of the laws and regulations. The descriptions do not purport to describe all present and proposed laws, regulations and policies that affect our businesses.

We believe that we are in material compliance with these laws, regulations and policies. Although we cannot predict the effect of changes to the existing laws, regulations and policies or of the proposed laws, regulations and policies that are described below, we are not aware of proposed changes or proposed new laws, regulations and policies that will have a material adverse effect on our business.

GDS Regulations

Our business is subject to GDS industry specific regulations in the E.U., Canada, India and China.

Historically, regulations were adopted in Canada and the E.U. to guarantee consumers access to competitive information by requiring computerized reservation systems (“CRSs”) (then owned by individual airlines) to provide travel agencies with unbiased displays and rankings of flights. Under the current E.U. CRS Regulations, GDSs and airlines are free to negotiate booking fees charged by the GDSs and the information content provided by the airlines. The E.U. CRS Regulations include provisions to ensure a neutral and non-discriminatory presentation of travel options in the GDS displays and to prohibit the identification of travel agencies in MIDT data without their consent. The E.U. CRS Regulations also require GDSs to display rail or rail/air alternatives to air travel on the first screen of

 

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their principal displays in certain circumstances. In addition, to prevent parent carriers of GDSs from hindering competition from other GDSs, parent carriers will continue to be required to provide other GDSs with the same information on their transport services and to accept bookings from another GDS.

There are also GDS regulations in Canada, under the regulatory authority of the Canadian Department of Transport. Under the present regulations, Air Canada, the dominant Canadian airline, could choose distribution channels that it owns and controls or distribution through another GDS rather than through our GDS. Under its agreement with us, Air Canada may not renew its distribution in our GDS.

In 2010, new Civil Aviation Requirements were issued by the Government of India to regulate Computer Reservations Systems operating in India for the purpose of displaying or selling air services, to promote fair competition in the airline sector and to ensure that consumers do not receive inaccurate or misleading information on airline services.

On October 1, 2012, the Interim Regulations on Administering the Permit of Direct Access to and Use of Foreign Computer Reservation System by Foreign Airlines’ Agents in China were published by the Civil Aviation Administration of China (“CAAC”) and became effective on that date. The key element of the new regulations is the introduction of a permit scheme whereby foreign airlines are able to apply to CAAC for approval to allow Chinese-based travel agents to access their nominated foreign CRS provider’s system for the purpose of making international bookings.

We are also subject to regulations affecting issues such as telecommunications and exports of technology.

Privacy and Data Protection Regulations

Privacy regulations continue to evolve and on occasion may be inconsistent from one jurisdiction to another. Many states in the United States have introduced legislation or enacted laws and regulations that provide for penalties for failure to notify customers when security is breached, even by third parties.

Many countries have enacted or are considering legislation to regulate the protection of private information of consumers. In the United States, significant legislation is pending at the state and federal level. We cannot predict whether any of the proposed privacy legislation currently pending will be enacted and what effect, if any, it would have on our business.

A primary source of privacy regulations to which our operations are subject is the E.U. Data Protection Directive 95/46/EC of the European Parliament and Council (October 24, 1995). Pursuant to this Directive, individual countries within the E.U. have specific regulations related to the trans-border dataflow of personal information (i.e., sending personal information from one country to another). The E.U. Data Protection Directive requires companies doing business in E.U. member states to comply with its standards. It provides for, among other things, specific regulations requiring all non-E.U. countries doing business with E.U. member states to provide adequate data privacy protection when processing personal data from any of the E.U. member states. The E.U. has enabled several means for U.S.-based companies to comply with the E.U. Data Protection Directive, including a voluntary safe-harbor arrangement and a set of standard form contractual clauses for the transfer of personal data outside of Europe. We most recently completed self-certification for our GDS data processing under this safe-harbor arrangement on February 12, 2013. In January 2012, the European Commission issued a draft data protection regulation intended to replace this Directive, and we are monitoring developments in this rulemaking.

The CRS Regulations in force in Europe also incorporate personal data protection provisions that, among other things, classify GDSs as data controllers under the E.U. Data Protection Directive. The data protection provisions contained in the CRS Regulations are complementary to E.U. national and international data protection and privacy laws.

Many other countries have adopted data protection regimes. An example is Canada’s Personal Information and Protection of Electronic Documents Act (“PIPEDA”). PIPEDA provides Canadian residents with privacy protections with regard to transactions with businesses and organizations in the private sector. PIPEDA recognizes the need of organizations to collect, use and share personal information and establishes rules for handling personal information.

 

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Iran Sanctions Disclosure

The following activities are disclosed as required by Section 13(r)(1)(D)(iii) of the Exchange Act.

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.

The gross revenue and net profit attributable to these activities in 2012 were approximately $127,000 and $45,000, respectively.

TRW Automotive Holdings Corp. (“TRW”), which may be considered an affiliate of The Blackstone Group, has publicly filed the disclosure reproduced below in its annual report on Form 10-K filed with the SEC on February 15, 2013 as required by Section 13(r) of the Exchange Act. We have no involvement in, or control over, the activities of TRW, any of its predecessor companies or any of its subsidiaries; however, because both we and TRW are controlled by The Blackstone Group, we may be considered an “affiliate” of TRW for the purposes of Section 13(r) of the Exchange Act. We have not independently verified or participated in the preparation of the disclosure by TRW.

TRW Disclosure: “Pursuant to Section 13(r)(1)(D)(iii) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), we note that in 2012 certain of our non-U.S. subsidiaries sold products to customers that could be affiliated with, or deemed to be acting on behalf of, the Industrial Development and Renovation Organization, which has been designated as an agency of the Government of Iran. Gross revenue attributable to such sales was approximately $8,326,000, and net profit from such sales was approximately $377,000. Although these activities were not prohibited by U.S. law at the time they were conducted, our subsidiaries have discontinued their dealings with such customers, other than limited wind-down activities (which are permissible), and we do not otherwise intend to continue or enter into any Iran-related activity.”

 

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ITEM 1A.    RISK FACTORS

You should carefully consider the risks described below and other information set forth in this Annual Report on Form 10-K. Based on the information currently known to us, we believe that the following information identifies the most significant risk factors affecting us in each of these categories of risk. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also adversely affect our business. Past financial performance may not be a reliable indicator of future performance and historical trends should not be used to anticipate results or trends in future periods.

Risks Relating to Our Business

Market and Industry Risks

Our revenue is derived from the global travel industry and a prolonged or substantial decrease in global travel volume, particularly air travel, as well as other industry trends, could adversely affect us.

Our revenue is derived from the global travel industry. As a result, our revenue is directly related to the overall level of travel activity, particularly air travel volume, and is therefore significantly impacted by declines in, or disruptions to, travel in any region due to factors entirely outside of our control. Such factors include:

 

   

global security issues, political instability, acts or threats of terrorism, hostilities or war and other political issues that could adversely affect global air travel volume;

 

   

epidemics or pandemics, such as H1N1 “swine” flu, avian flu and Severe Acute Respiratory Syndrome (“SARS”);

 

   

natural disasters, such as hurricanes, volcanic activity and resulting ash clouds, earthquakes and tsunamis, such as the March 2011 disaster in Japan;

 

   

general economic conditions, particularly to the extent that adverse conditions may cause a decline in travel volume, such as the crisis in the global credit and financial markets, diminished liquidity and credit availability, declines in consumer confidence and discretionary income, declines in economic growth, increases in unemployment rates and uncertainty about economic stability;

 

   

the financial condition of travel suppliers, including airlines and hotels, and the impact of any changes such as airline bankruptcies, including of American Airlines, or consolidations on the cost and availability of air travel and hotel rooms;

 

   

changes to laws and regulations governing the airline and travel industry and the adoption of new laws and regulations detrimental to operations, including environmental and tax laws and regulations, including the recent carbon emissions reduction targets for flights to and from the European Union area in 2013;

 

   

fuel price escalation;

 

   

work stoppages or labor unrest at any of the major airlines or other travel suppliers or at airports;

 

   

increased security, particularly airport security that could reduce the convenience of air travel;

 

   

travelers’ perception of the occurrence of travel-related accidents, of the environmental impact of air travel, particularly in regards to CO2 emissions, or of the scope, severity and timing of the other factors described above; and

 

   

changes in occupancy achieved by hotels.

If there were to be a prolonged substantial decrease in travel volume, particularly air travel volume, for these or any other reason, it would have an adverse impact on our business, financial condition and results of operations.

 

 

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The travel industry may not recover from the recent global financial crisis and recession to the extent anticipated or may not grow in line with long-term historical trends following any recovery.

As a participant in the global travel industry, our business and operating results are impacted by global economic conditions, including the European debt crisis, a slowdown in growth of the Chinese economy, a prolonged slow economic recovery in Japan and a general reduction in net disposable income as a result of fiscal measures adopted by countries to address high levels of budgetary indebtedness, which may adversely affect our business, results of operations and financial condition. In our industry, the recent financial crisis and global recession have resulted in higher unemployment, a decline in consumer confidence, large-scale business failures and tightened credit markets. As a result, the global travel industry, which historically has grown at a rate in excess of global GDP growth during economic expansions, has experienced a cyclical downturn. A continuation of recent adverse economic developments in areas such as employment levels, business conditions, interest rates, tax rates, fuel and energy costs, particularly the expected rise in the price of crude oil, and other matters could reduce discretionary spending further and cause the travel industry to continue to contract. In addition, the global economy may not recover as quickly or to the extent anticipated, and consumer spending on leisure travel and business spending on corporate travel may not increase despite improvement in economic conditions. As a result, our business may not benefit from a broader macroeconomic recovery, which could adversely affect our business, financial condition or results of operations.

We have significant operations in Europe which may be adversely impacted by the eurozone crisis.

We own and operate subsidiaries in substantially all of the countries in the eurozone. Due to the deterioration of credit and economic conditions in the eurozone, the future of the euro is uncertain. Certain countries in which we operate, including Greece and Portugal, have received financial aid packages from the E.U. in the form of loans and restructuring of their sovereign debt and have introduced comprehensive fiscal austerity measures.

It is possible that certain eurozone countries could leave the euro currency in the future. The resulting macroeconomic impact of this remains unknown. For the year ended December 31, 2012, we recorded segments and revenue of 20 million and $143 million, respectively, within the southern eurozone countries, which are comprised of Greece, Italy, Spain and Portugal. This represents approximately 7% of our net revenue for the year ended December 31, 2012.

In addition, we have assets included in our balance sheet as of December 31, 2012 totaling $65 million for these countries, including amounts due from the Greek and Italian governments, in the form of value added tax refunds of approximately $37 million. This represents approximately 2% of our total asset value as of December 31, 2012.

Almost all of our accounts receivable balances resulting from our transaction processing revenue from these countries are settled in US dollars through the International Airline Clearing House and are usually received within four weeks after invoicing.

The travel industry is highly competitive, and we are subject to risks relating to competition that may adversely affect our performance.

Our business operates in highly competitive industries. If we cannot compete effectively, we may lose share to our competitors, which may adversely affect our financial performance. Our continued success depends, to a large extent, upon our ability to compete effectively in industries that contain numerous competitors, some of which may have significantly greater financial, marketing, personnel and other resources than us.

Our GDS has two different primary categories of customers, namely travel suppliers, which provide travel content to our GDS, and travel agencies, which shop for and book that content on behalf of end customers. The inter-dependence of effectively serving these customer groups, and the resulting network effects, may impact our ability to attract customers. If we are unable to attract a sufficient number of travel suppliers to provide comprehensive travel content, our ability to service travel agencies will be adversely impacted. Conversely, if we are unable to attract or retain a sufficient number of travel agencies, our ability to maintain our large base of travel suppliers and attract new travel suppliers will be impaired.

 

 

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In addition to supplying sufficient content, the ability of our GDS to attract travel agencies is dependent on the development of new products to enhance our GDS platform and on the provision of adequate financial incentives to travel agencies. Competition to attract travel agencies is particularly intense as travel agencies, particularly larger ones, are dual automated (meaning they subscribe to more than one GDS at any given time). We also have had to, and expect that it will continue in certain circumstances to be necessary to, increase financial assistance to travel agencies in connection with renewals of their contracts, which may in the future reduce margins. If travel agencies are dissatisfied with our GDS platforms or we do not pay adequate commissions or provide other incentives to travel agencies to remain competitive, our GDS may lose a number of travel agency customers.

Our GDS competes against other traditional GDSs operated by Amadeus, Sabre, regional participants such as Abacus, as well as against alternative distribution technologies. Our GDS also competes against direct distribution of travel content by travel suppliers, such as airlines, hotels and car rental companies, many of which distribute all or part of their inventory directly through their own travel distribution websites (known as “supplier.com websites”). In addition, our GDS competes against travel suppliers that supply content directly to travel agencies as well as new companies in the GDS industry that are developing distribution systems without the large technology investment and network costs of a traditional GDS. The revolutionary emergence of mobile applications that link directly to suppliers may create a vigorous source of new competition that bypasses the GDS industry.

For the year ended December 31, 2012, we accounted for 26% of global GDS-processed air segments. Our share of the GDS industry has been impacted by (i) our acquisition of Worldspan in 2006, (ii) growth in the online travel agent channel compared to traditional travel agencies, particularly in Europe, where our products and services for online travel agencies during the period were less competitive, and (iii) our strategic decision to transition from an NDC operating model in certain Middle Eastern countries to using SMOs, resulting in improved margins but reduced segment volumes. Although we have taken steps to address these developments, our GDS could continue to lose share or may fail to increase our share of GDS bookings.

The Airline IT Solutions sector of the travel industry is highly fragmented. We compete with airlines that run applications in-house and multiple external providers of IT services. Competition within the IT services industry is segmented by the type of service offering. For example, reservations and other system services competitors include Amadeus, HP Enterprise Services, Navitaire Inc., Sabre, Unisys Corporation, ITA and SITA, as well as airlines that provide the services and support for their own internal reservation system services and also host external airlines. Our ability to market business intelligence products is dependent on our perceived competitive position and the value of the information obtained through our GDS, particularly compared to PaxIS, an IATA product, and products distributed by Amadeus and Sabre.

Increased competition may result in reduced operating margins, as well as loss of share and brand recognition. We may not be able to compete successfully against current and future competitors, and competitive pressures we face could have a material adverse effect on our business, financial condition or results of operations.

If we fail to develop and deliver new innovative products or enhance our existing products and services in a timely and cost-effective manner in response to rapid technological change and customer demands, our business will suffer.

Our industry is subject to constant and rapid technological change and product obsolescence as customers and competitors create new and innovative products and technologies. Products or technologies developed by our competitors may render our products or technologies obsolete or noncompetitive. We must develop innovative products and services and enhance our existing products and services to meet rapidly evolving demands to attract travel agencies. The development process to design leading, sustainable and desirable products to generate new revenue streams and profits is lengthy and requires us to accurately anticipate technological changes and business trends. Developing and enhancing these products is uncertain and can be time-consuming, costly and complex. If we do not continue to develop innovative products that are in demand by our customers, we may be unable to maintain existing customers or attract new customers. Customer and business requirements can change during

 

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the development process. There is a risk that these developments and enhancements will be late, fail to meet customer or business specifications, not be competitive with products or services from our competitors that offer comparable or superior performance and functionality or fail to generate new revenue streams and profits. Our business will suffer if we fail to develop and introduce new innovative products and services or product and service enhancements on a timely and cost-effective basis.

Trends in pricing and other terms of agreements among airlines and travel agencies have become less favorable to us, and a further deterioration may occur in the future which could reduce our revenue and margins.

A significant portion of our revenue is derived from fees paid by airlines for bookings made through our GDS. Airlines have sought to reduce or eliminate these fees in an effort to reduce distribution costs. One manner in which they have done so is to differentiate the content, in this case, the fares and inventory, that they provide to us and to our GDS competitors from the content that they distribute directly themselves. In these cases, airlines provide some of their content to GDSs, while withholding other content, such as lower cost web fares, for distribution via their own supplier.com websites unless the GDSs agree to participate in a cost reduction program. Certain airlines have also threatened to withdraw content, in whole or in part, from an individual GDS as a means of obtaining lower booking fees or, alternatively, to charge the GDS to access their lower cost web fares or charge travel agencies for bookings generated in a GDS. Airlines also have aggressively expanded their use of the direct online distribution model for tickets in the United States and in Europe. There also has been an increase in the number of airlines which have introduced unbundled, “à la carte” sales and optional services, such as fees for checked baggage or premium seats, which threaten to further fragment content and disadvantage GDS by making it more difficult to deliver a platform that allows travel agencies to shop for a single, “all-inclusive” price for travel.

We have entered into full-content agreements with most major carriers in the Americas and Europe, and a growing number of carriers in the Middle East and Africa, which provides us with access to the full scope of public fares and inventory which the carriers generally make available through direct channels, such as their own supplier.com websites, with a contract duration usually ranging from three to seven years. In addition, we have entered into agreements with most major carriers in the Asia Pacific region which provide us with access to varying levels of their content. We may not be able to renew these agreements on a commercially reasonable basis or at all. If we are unable to renew these agreements, we may be disadvantaged compared to our competitors, and our financial results could be adversely impacted. The full-content agreements have required us to make significant price concessions to the participating airlines. If we are required to make additional concessions to renew or extend the agreements, it could result in an increase in our expenses and have a material adverse effect on our business, financial condition or results of operations. Moreover, as existing full-content agreements come up for renewal, there is no guarantee that the participating airlines will continue to provide their content to us to the same extent or on the same terms as they do now. For example, our full-content agreement with American Airlines expired in early 2013, and our full content agreements with other airlines representing approximately 18% of transaction processing revenue for the year ended December 31, 2012 are up for renewal or are potentially terminable by such carriers in 2013. In addition, certain full-content agreements may be terminated earlier pursuant to the specific terms of each agreement. A substantial reduction in the amount of content received from the participating airlines or changes in pricing options could also negatively affect our competitive positioning, revenue and financial condition. Although we continue to have participation agreements with these airline suppliers, in which they have agreed to participate in our GDSs, a material adverse impact on our business may occur if these agreements are terminated and we are unable to reach agreement with such carriers regarding new full content agreements.

In addition, GDSs have implemented, in some countries, an alternative business and financial model, generally referred to as the “opt-in” model, for travel agencies. Under the “opt-in” model, travel agencies are offered the opportunity to pay a fee to the GDS or to agree to a reduction in the financial incentives to be paid to them by the GDS in order to be assured of having access to full content from participating airlines or to avoid an airline-imposed surcharge on GDS-based bookings. There is pressure on GDSs to provide highly competitive terms for such “opt-in” models as many travel agencies are dual automated, subscribing to more than one GDS at any given time. The “opt-in” model has been introduced in a number of situations in parallel with full-content

 

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agreements between us and certain airlines to recoup certain fees from travel agencies and to offset some of the discounts provided to airlines in return for guaranteed access to full content. The rate of adoption by travel agencies, where “opt-in” has been implemented, has been very high. If airlines require further discounts in connection with guaranteeing access to full content and in response thereto the “opt-in” model becomes widely adopted, we could receive lower fees from the airlines. These lower fees are likely to be only partially offset by new fees paid by travel agencies and/or reduced inducement payments to travel agencies, which would adversely affect our results of operations. In addition, if travel agencies choose not to opt in, such travel agencies would not receive access to full content without making further payment, which could have an adverse effect on the number of segments booked through our GDS.

The level of fees and commissions we pay to travel agencies is subject to continuous competitive pressure as we renew our agreements with them. If we are required to pay higher rates of commissions, it will adversely affect our margins.

We may not be able to protect our technology effectively, which would allow competitors to duplicate our products and services and 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. Our software and related documentation are protected principally under trade secret and copyright laws, which afford only limited protection. Unauthorized use and misuse of our technology and other intellectual property could have a material adverse effect on our business, financial condition or results of operations, and there can be no assurance that our legal remedies would adequately compensate us for the damage caused by unauthorized use.

Intellectual property challenges have been increasingly brought against members of the travel industry. We have in the past, and may in the future, need to take legal action to enforce our intellectual property rights, to protect our intellectual property or to determine the validity and scope of the proprietary rights of others. Any future legal action might result in substantial costs and diversion of resources and the attention of our management.

We depend on our supplier relationships, and adverse changes in these relationships or our inability to enter into new relationships could negatively affect our access to travel offerings and reduce our revenue.

We rely significantly on our relationships with airlines, hotels and other travel suppliers to enable us to offer our customers comprehensive access to travel services and products. Adverse changes in any of our relationships with travel suppliers or the inability to enter into new relationships with travel suppliers could reduce the amount of inventory that we are able to offer through our GDS, and could negatively impact the availability and competitiveness of travel products we offer. Our arrangements with travel suppliers may not remain in effect on current or similar terms, and the net impact of future pricing options may adversely impact revenue. Our top fifteen air travel suppliers by revenue, combined, accounted for approximately 40% of our revenue from GDS transaction processing for the year ended December 31, 2012.

Travel suppliers are increasingly focused on driving online demand to their own supplier.com websites and may cease to supply us with the same level of access to travel inventory in the future. For example, in December 2010, Delta Air Lines decided to cease selling its tickets through certain online websites. In addition, some LCCs historically have not distributed content through us or other third-party intermediaries. If the airline industry continues to shift from a full-service carrier model to a low-cost one, this trend may result in more carriers moving ticket distribution systems in-house and a decrease in the demand for our products.

We are in continuous dialogue with our major hotel suppliers about the nature and extent of their participation in our GDS. If hotel occupancy rates improve to the point that our hotel suppliers no longer place the same value on our GDS, such suppliers may reduce the amount of inventory they make available through our GDS or the amount we are able to earn in connection with hotel transactions. A significant reduction on the part

 

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of any of our major suppliers of their participation in our GDS for a sustained period of time or a supplier’s complete withdrawal could have a material adverse effect on our business, financial condition or results of operations.

Our business is exposed to customer credit risk, against which we may not be able to protect ourselves fully.

Our business is subject to the risks of non-payment and non-performance by travel suppliers and travel agencies which may fail to make payments according to the terms of their agreements with us. For example, a small number of airlines that do not settle payment through IATA’s billing and settlement provider have, from time to time, not made timely payments for bookings made through our GDS. We manage our exposure to credit risk through credit analysis and monitoring procedures, and sometimes use credit agreements, prepayments, security deposits and bank guarantees. However, these procedures and policies cannot fully eliminate customer credit risk, and to the extent our policies and procedures prove to be inadequate, our business, financial condition or results of operations may be adversely affected.

Some of our customers, NDCs counterparties and suppliers may be highly leveraged, not well capitalized and subject to their own operating, legal and regulatory risks and, even if our credit review and analysis mechanisms work properly, we may experience financial losses in our dealings with such parties. A lack of liquidity in the capital markets or the continued weak performance in the economy may cause our customers to increase the time they take to pay or to default on their payment obligations, which could negatively affect our results. In addition, continued weakness in the economy could cause some of our customers to become illiquid, delay payments, or could adversely affect collection on their accounts, which could result in a higher level of bad debt expense.

Travel suppliers are seeking alternative distribution models, including those involving direct access to travelers, which may adversely affect our results of operations.

Travel suppliers are seeking to decrease their reliance on third-party distributors, including GDS, for distribution of their content. For example, some travel suppliers have created or expanded efforts to establish commercial relationships with online and traditional travel agencies to book travel with those suppliers directly, rather than through a GDS. Mobile applications that connect directly to suppliers are emerging at a rapid pace. Many airlines, hotels, car rental companies and cruise operators have also established or improved their own supplier.com websites, and may offer incentives such as bonus miles or loyalty points, lower or no transaction or processing fees, priority waitlist clearance or e-ticketing for sales through these channels. In addition, metasearch travel websites facilitate access to supplier.com websites by aggregating the content of those websites. Due to the combined impact of direct bookings with the airlines, supplier.com websites and other non-GDS distribution channels, the percentage of air bookings made without the use of a GDS at any stage in the chain between suppliers and end-customers may continue to increase. In addition, efforts by other major airlines to encourage our subscribers to book directly rather than through our GDS could adversely affect our results of operations.

Furthermore, recent trends towards disintermediation in the global travel industry could adversely affect our GDS business. For example, airlines have made some of their offerings unavailable to unrelated distributors, or made them available only in exchange for lower distribution fees. Some low cost carriers distribute exclusively through direct channels, bypassing GDS and other third-party distributors completely and, as a whole, have increased their share of bookings in recent years, particularly in short-haul travel. In addition, several travel suppliers have formed joint ventures or alliances that offer multi-supplier travel distribution websites. Finally, some airlines are exploring alternative global distribution methods developed by new entrants to the global distribution marketplace. Such new entrants propose technology that is purported to be efficient, which they claim enables the distribution of airline tickets in a manner that is more cost-effective to the airline suppliers because no or lower inducement payments are paid to travel agencies. If these trends lead to lower participation by airlines and other travel suppliers in our GDS, then our business, financial condition or results of operations could be materially adversely affected.

In addition, given the diverse and growing number of alternative travel distribution channels, such as supplier.com websites and direct connect channels between travel suppliers and travel agencies, as well as new

 

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technologies, such as mobile applications, that allow travel agencies and consumers to bypass a GDS, increases in travel volumes, particularly air travel, may not translate in the same proportion to increases in volume passing through our GDS, and we may therefore not benefit from a cyclical recovery in the travel industry to a similar extent as other industry participants.

We rely on third-party national distribution companies to market our GDS services in certain regions.

Our GDS utilizes third-party, independently owned and managed NDCs to market GDS products and distribute and provide GDS services in certain countries, including Austria, India, Kuwait, Lebanon, Pakistan, Syria, Turkey, Kazakhstan and Yemen, as well as many countries in Africa. In Asia, where many national carriers own one of our regional competitors, we often use local companies to act as NDCs. In the Middle East, in conjunction with the termination of an NDC agreement on December 31, 2008, we established our own sales and marketing organizations in the United Arab Emirates, Saudi Arabia and Egypt and entered into new NDC relationships with third parties in other countries.

We rely on our NDCs and the manner in which they operate their business to develop and promote our global business. Our top ten NDCs generated approximately $194 million (11%) of our revenue for the year ended December 31, 2012. We pay each of our NDCs a commission relative to the number of segments booked by subscribers with which the NDC has a relationship. The NDCs are independent business operators, are not our employees and we do not exercise management control over their day-to-day operations. We provide training and support to the NDCs, but the success of their marketing efforts and the quality of the services they provide is beyond our control. If they do not meet our standards for distribution, our image and reputation may suffer materially, and sales in those regions could decline significantly. In addition, any interruption in these third-party services or deterioration in their performance could have a material adverse effect on our business, financial condition or results of operations.

Consolidation in the travel industry may result in lost bookings and reduced revenue.

Consolidation among travel suppliers, including airline mergers and alliances, may increase competition from distribution channels related to those travel suppliers and place more negotiating leverage in the hands of those travel suppliers to attempt to lower booking fees further and to lower commissions. Examples include Delta Air Lines, Inc.’s acquisition of Northwest Airlines Corp., the merger of United and Continental Airlines, Lufthansa’s acquisition of Swiss International, Brussels Airlines and Austrian Airlines, Air France’s acquisition of KLM, the acquisition of AirTran Airways by Southwest Airlines and the merger of British Airways and Iberia and the proposed merger of American Airlines and US Airways. In addition, cooperation has increased within the Oneworld, SkyTeam and Star alliances. Changes in ownership of travel agencies may also cause them to direct less business towards us. If we are unable to compete effectively, competitors could divert travel suppliers and travel agencies away from our travel distribution channels, which could adversely affect our results of operations. Mergers and acquisitions of airlines may also result in a reduction in total flights and overall passenger capacity, which may adversely impact the ability of our business to generate revenue.

Consolidation among travel agencies and competition for travel agency customers may also adversely affect our results of operations, since we compete to attract and retain travel agency customers. Reductions in commissions paid by some travel suppliers, such as airlines, to travel agencies contribute to travel agencies having a greater dependency on traveler-paid service fees and GDS-paid inducements and may contribute to travel agencies consolidating. Consolidation of travel agencies increases competition for these travel agency customers and increases the ability of those travel agencies to negotiate higher GDS-paid inducements. In addition, a decision by airlines to surcharge the channel represented by travel agencies, for example, by surcharging fares booked through travel agencies or passing on charges to travel agencies, could have an adverse impact on our business, particularly in regions in which our GDS is a significant source of bookings for an airline choosing to impose such surcharges. To compete effectively, we may need to increase inducements, pre-pay inducements or increase spending on marketing or product development.

In addition, any consolidation among the airlines for which we provide IT hosting systems could impact our Airline IT Solutions business depending on the manner of any such consolidation and the hosting system on

 

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which the airlines choose to consolidate. For example, the integration of United and Continental resulted in United providing us with notice of termination of the master services agreement for the Apollo reservations system operated by us for United. The integration of the United-Continental systems was completed in early March 2012, and we no longer service United’s reservation system. The loss of the Master Services Agreement with United Airlines contributed approximately $69 million and $50 million to the decline in net revenue and EIBTDA, respectively, for the year ended December 31, 2012.

Operational Risks

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

We depend upon the use of sophisticated information technologies and systems, including technologies and systems utilized for reservation systems, communications, procurement and administrative systems. As our operations grow in both size and scope, we continuously need to improve and upgrade our systems and infrastructure to offer an increasing number of customers and travel suppliers enhanced products, services, features and functionality, while maintaining the reliability and integrity of our systems and infrastructure. Our future success also depends on our ability to adapt to rapidly changing technologies in our industry, particularly the increasing use of internet-based products and services, to change our services and infrastructure so they address evolving industry standards and to improve the performance, features and reliability of our services in response to competitive service and product offerings and the evolving demands of the marketplace. We have recently introduced a number of new products and services, such as Travelport Universal Desktop, Travelport Smartpoint App and next generation search and shopping functions. If there are technological impediments to introducing or maintaining these or other products and services, or if these products and services do not meet the requirements of our customers, our business, financial condition or results of operations may be adversely affected.

It is possible that, if we are not able to maintain 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, our business and operations could be materially adversely affected. Also, we may not achieve the benefits anticipated or required from any new technology or system, or be able to devote financial resources to new technologies and systems in the future.

We rely primarily on a single data center to conduct our business.

Our business, which utilizes a significant amount of our information technology, and the financial business systems rely on computer infrastructure primarily housed in our data center near Atlanta, Georgia, to conduct its business. In the event the operations of this data center suffer any significant interruptions or the GDS data center becomes significantly inoperable, such event would have a material adverse impact on our business and reputation and could result in a loss of customers. Although we have taken steps to strengthen physical and information security and add redundancy to this facility, the GDS data center could be exposed to damage or interruption from fire, natural disaster, power loss, war, acts of terrorism, plane crashes, telecommunications failure, computer malfunctions, unauthorized entry, IT hacking and computer viruses. The steps we have taken and continue to take to prevent system failure and unauthorized transaction activity may not be successful. Our limited use of backup and disaster recovery systems may not allow us to recover from a system failure fully, or on a timely basis, and our property and business insurance may not be adequate to compensate us for all losses that may occur.

We may not effectively integrate or realize anticipated benefits from future acquisitions.

In the future, we may enter into other acquisitions and investments, including NDCs or joint ventures, based on assumptions with respect to operations, profitability and other matters that could subsequently prove to be incorrect. Furthermore, we may fail to successfully integrate any acquired businesses or joint ventures into our operations. If future acquisitions, significant investments or joint ventures do not perform in accordance with our expectations or are not effectively integrated, our business, operations or profitability could be adversely affected.

 

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System interruptions, attacks and slowdowns may cause us to lose customers or business opportunities or to incur liabilities.

If we are unable to maintain and improve our IT systems and infrastructure, this might result in system interruptions and slowdowns. In the event of system interruptions and/or slow delivery times, prolonged or frequent service outages or insufficient capacity which impedes us from efficiently providing services to our customers, we may lose customers and revenue or incur liabilities. In addition, our information technologies and systems are vulnerable to damage, interruption or fraudulent activity 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, misappropriate information or perpetrate fraudulent activity and other physical or electronic breaches of security;

 

   

the failure of third-party software, systems or services that we rely upon to maintain our own operations; and

 

   

natural disasters, wars and acts of terrorism.

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 or degradation in our technologies or systems, or any substantial loss of data, could significantly curtail our ability to conduct our business and generate revenue. We could incur financial liability from fraudulent activity perpetrated on our systems.

We are dependent upon software, equipment and services provided by third parties.

We are dependent upon software, equipment and services provided and/or managed by third parties in the operation of our business. In the event that the performance of such software, equipment or services provided and/or managed by third parties deteriorates or our arrangements with any of these third parties related to the provision and/or management of software, equipment or services are terminated, we may not be able to find alternative services, equipment or software on a timely basis or on commercially reasonable terms, or at all, or be able to do so without significant cost or disruptions to our business, and our relationships with our customers may be adversely impacted. We have experienced occasional system outages arising from services that were provided by one of our key third-party providers. Our failure to secure agreements with such third parties, or of such third parties to perform under such agreements, may have a material adverse effect on our business, financial condition or results of operations.

We provide IT services to travel suppliers, primarily airlines, and any adverse changes in these relationships could adversely affect our business.

We provide hosting solutions and IT subscription services to airlines and the technology companies that support them. We host and manage the reservations systems of six airlines worldwide, including Delta, and provide IT subscription services for mission-critical applications in fares, pricing and e-ticketing, directly and indirectly, to 263 airlines and airline ground handlers. Adverse changes in our relationships with our IT and hosting customers or our inability to enter into new relationships with other customers could affect our business, financial condition and results of operations. Our arrangements with our customers may not remain in effect on current or similar terms and this may negatively impact revenue. In addition, if any of our key customers enters bankruptcy, liquidates or does not emerge from bankruptcy, our business, financial condition or results of operations may be adversely affected.

Delta, one of our largest IT services customers, completed its acquisition of Northwest, another of our largest IT services customers. As part of their integration, Delta and Northwest migrated to a common IT platform and have reduced needs for our IT services after the integration. As a result of the integration of Delta’s and Northwest’s operations, which we managed, in 2010, the revenue and EBITDA attributable to contracts with these airlines, which include Airline IT Solutions and transaction processing services, decreased for the year

 

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ended December 31, 2011 by approximately $22 million and $15 million, as compared to the year ended December 31, 2010 respectively.

In December 2010, United provided us with notice of termination of the master services agreement for the Apollo reservations system operated by us for United. The integration of the United-Continental systems was completed in early March 2012, and we no longer service United’s reservation system. The loss of the master services agreement with United Airlines contributed approximately $69 million and $50 million to the decline in net revenue and EBITDA, respectively, for the year ended December 31, 2012.

Our processing, storage, use and disclosure of personal data could give rise to liabilities as a result of governmental regulation, conflicting legal requirements, evolving security standards, differing views of personal privacy rights or security breaches.

In the processing of our travel 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, typically intended to protect the privacy and security of personal information. It is also subject to evolving security standards for credit card information that is collected, processed and transmitted.

We could be adversely affected if legislation or regulations are expanded to require changes in our business practices or if governing jurisdictions interpret or implement their legislation or regulations in ways that negatively affect our business. For example, government agencies in the United States have implemented initiatives to enhance national and aviation security in the United States, including the Transportation Security Administration’s Secure Flight program and the Advance Passenger Information System of U.S. Customs and Border Protection. These initiatives primarily affect airlines. However, to the extent that the airlines determine the need to define and implement standards for data that is either not structured in a format we use or is not currently supplied by our businesses, we could be adversely affected. In addition, the E.U. and other governments are considering the adoption of passenger screening and advance passenger systems similar to the U.S. programs. This may result in conflicting legal requirements with respect to data handling and, in turn, affect the type and format of data currently supplied by our business.

Travel businesses 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 in relation to our handling, use and disclosure of travel-related data, as it pertains to individuals, as a result of differing views on the privacy of such data. These and other privacy concerns, including security breaches, could adversely impact our business, financial condition and results of operations.

We are exposed to risks associated with online commerce security.

The secure transmission of confidential information over the internet is essential in maintaining travel supplier and travel agency confidence in our services. Substantial or ongoing data security breaches, whether instigated internally or externally on our system or other internet-based systems, could significantly harm our business. Our travel suppliers currently require end customers to guarantee their transactions with their credit card online. We rely on licensed encryption and authentication technology to effect secure transmission of confidential end customer information, including credit card numbers. It is possible that advances in computer capabilities, new discoveries or other developments could result in a compromise or breach of the technology that we use to protect customer transaction data.

We incur substantial expense to protect against security breaches and their consequences. However, our security measures may not prevent data security breaches. We may be unsuccessful in implementing remediation plans to address potential exposures. A party (whether internal, external, an affiliate or unrelated third party) that is able to circumvent our data security systems could also obtain proprietary information or cause significant interruptions in our operations. Security breaches could also damage our reputation and expose us to a risk of loss or litigation and possible liability. Security breaches could also cause our current and potential travel suppliers and travel agencies to lose confidence in our data security, which would have a negative effect on the demand for our products and services.

 

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We have been the target of data security attacks and may experience attacks in the future. Although we have managed to substantially counter these attacks and minimize our exposure, there can be no assurances that we will be able to successfully counter and limit any such attacks in the future.

We are subject to additional risks as a result of having global operations.

We have customers in over 170 countries. As a result of having global operations, we are subject to numerous risks. At any given time, one or more of the following principal risks may apply to any or all of countries in which are services are provided:

 

   

delays in the development, availability and use of the internet as a communication, advertising and commerce medium;

 

   

difficulties in staffing and managing operations due to distance, time zones, language and cultural differences, including issues associated with establishing management systems infrastructure;

 

   

differences and changes in regulatory requirements, including anti-bribery rules, data privacy requirements, labor laws and anti-competition regulations;

 

   

exposure to local economic and political conditions;

 

   

changes in tax laws and regulations, and interpretations thereof;

 

   

increased risk of piracy and limits on our ability to enforce our intellectual property rights, particularly in the MEA region and Asia;

 

   

diminished ability to enforce our contractual rights;

 

   

exchange rate fluctuations and cost and risks inherent in hedging such exposures; and

 

   

withholding and other taxes on remittances and other payments by subsidiaries.

Our ability to identify, hire and retain senior management and other qualified personnel is critical to our results of operations and future growth.

We depend significantly on the continued services and performance of our senior management, particularly our professionals with experience in the GDS industry. Any of these individuals may choose to terminate their employment with us at any time, subject to any notice periods. If unexpected leadership turnover occurs without adequate succession plans, the loss of the services of any of these individuals, or any negative perceptions of our business as a result of those losses, could damage our brand image and our business. The specialized skills we require are difficult and time-consuming to acquire and, as a result, such skills are and are expected to remain in limited supply. It requires a long time to hire and train replacement personnel. An inability to hire, train and retain a sufficient number of qualified employees or ensure effective succession plans for critical positions 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. Even if we are able to maintain our employee base, the resources needed to attract and retain such employees may adversely affect our business, financial condition or results of operations.

We are effectively controlled by The Blackstone Group L.P., our Sponsor, and certain actions by us require the approval of our New Shareholders, each of which may result in conflicts of interest with us or the holders of our bonds in the future.

Investment funds associated with, or designated by, the Sponsor together are the largest beneficial owner of the outstanding voting shares of our ultimate parent company. As a result of this ownership, the Sponsor is entitled to elect the majority of our directors, to appoint new management and to approve actions requiring the approval of the holders of its outstanding voting shares as a single class, subject to the approval of the New Shareholders for certain actions, including adopting most amendments to our bye-laws and approving or rejecting proposed mergers or sales of all or substantially all of our assets, regardless of whether noteholders

 

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believe that any such transactions are in their own best interests. Through its effective control of our ultimate parent company, the Sponsor effectively controls us and all of our subsidiaries.

The Shareholders’ Agreement, dated as of October 3, 2011, among us, the New Shareholders, certain investment funds associated with or designated by the Sponsor and others, also provides the New Shareholders with certain rights with respect to our governance. The Shareholders’ Agreement entitles the New Shareholders to designate two of our directors and also requires the approval of the New Shareholders before we can undertake certain actions, including certain issuances of equity securities, change of control transactions and certain amendments to our bye-laws.

The interests of the Sponsor and the New Shareholders may differ from those of our noteholders in material respects. For example, if we encounter financial difficulties or are unable to pay our debts as they mature, the interests of the Sponsor and its affiliates and the New Shareholders, as equity holders, might conflict with the interests of our noteholders. The Sponsor and its affiliates or some of the New Shareholders may also have an interest in pursuing acquisitions, divestitures, financings or other transactions that, in their judgment, could enhance their equity investments, even though such transactions might involve risks to our noteholders. Additionally, the indentures governing the notes permit us to pay advisory fees, dividends or make other restricted payments under certain circumstances, and the Sponsor or a New Shareholder may have an interest in our doing so.

The Sponsor and its affiliates and many of the New Shareholders are in the business of making investments in companies, and may from time to time in the future, acquire interests in businesses that directly or indirectly compete with certain portions of our business or are suppliers or customers of ours. The Sponsor or one or more of the New Shareholders may also pursue acquisition opportunities that may be complementary to our business and, as a result, those acquisition opportunities may not be available to us. So long as investment funds associated with or designated by the Sponsor continue to indirectly own a significant amount of the outstanding shares of our common stock, even if such amount is less than 50%, the Sponsor will continue to be able to strongly influence or effectively control our decisions.

We may not successfully realize our expected cost savings.

We may not be able to realize our expected cost savings, in whole or in part, or within the time frames anticipated. Our cost savings and efficiency improvements are subject to significant business, economic and competitive uncertainties, many of which are beyond our control. We are pursuing a number of initiatives to further reduce operating expenses, including converging our underlying operating platforms, migrating mainframe technology to open systems, tightening integration of applications development and the simplification of internal systems and processes. The outcome of these initiatives is uncertain and they may take several years to yield any efficiency gains, or not at all. Failure to generate anticipated cost savings from these initiatives may adversely affect our profitability.

Financial and Taxation Risks

We have a substantial level of indebtedness which may have an adverse impact on us.

We are highly leveraged. As of December 31, 2012, our total indebtedness was $3,430 million, including $1,485 million of term loans under our senior secured credit agreement, $171 million of term loans under our 2012 secured credit agreement, $225 million of second priority secured notes and approximately $1,433 million of senior and senior subordinated notes. Of these amounts, $1,485 million of term loans under our senior secured credit agreement are due August 2015, and $171 million of term loans are due November 2015. Senior notes of $752 million will mature in September 2014, and $250 million of senior notes will mature in March 2016. If the senior notes due in 2014 are not repaid or refinanced prior to May 2014, the term loans under our senior secured credit agreement and the term loans under our 2012 secured credit agreement will become due in May 2014 and August 2014, respectively. We may not have the ability to repay the debt when it becomes due.

We currently have an additional $98 million available for borrowing under our revolving credit facility. In addition, we currently maintain a $133 million letter of credit facility collateralized by $137 million of restricted

 

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cash, and a $13 million synthetic letter of credit facility. As of December 31, 2012, we had approximately $11 million of commitments outstanding under our synthetic letter of credit facility and $118 million of commitments outstanding under our cash collateralized letter of credit facility. Pursuant to our separation agreement with Orbitz Worldwide, we maintain letters of credit under our letter of credit facilities on behalf of Orbitz Worldwide. As of December 31, 2012, we had commitments of approximately $72 million in letters of credit outstanding on behalf of Orbitz Worldwide.

Our substantial level of indebtedness could have important consequences for us, including the following:

 

   

requiring a substantial portion of cash flow from operations to be dedicated to the payment of principal and interest on our indebtedness, therefore reducing our ability to use our cash flow to fund our capital expenditure and future business opportunities;

 

   

exposing us to the risk of higher interest rates because certain of our borrowings, including our secured borrowings and our senior notes due 2014, are at variable rates of interest;

 

   

restricting us from making strategic acquisitions or causing us to make non-strategic divestitures;

 

   

limiting our ability to obtain additional equity or debt financing for general corporate purposes, acquisitions, investments, capital expenditures or other strategic purposes;

 

   

limiting our ability to adjust to changing business conditions and placing us at a competitive disadvantage to our less highly leveraged competitors; and

 

   

making us more vulnerable to general economic downturns and adverse developments in our business.

In addition to our substantial level of indebtedness discussed above, on October 3, 2011, in connection with the completion of the Restructuring with respect to our direct parent holding company, Travelport Holdings Limited (“Holdings”), senior unsecured payment-in-kind (“PIK”) term loans due March 27, 2012, Holdings entered into an amended and restated credit agreement in respect of the PIK term loans (the “Holding Company Amended and Restated Credit Agreement”) with Wells Fargo Bank, National Association, as administrative agent, UBS Securities LLC and Lehman Commercial Paper Inc., as co-syndication agents, and certain lenders from time to time party thereto. As of December 31, 2012, approximately $480 million of the PIK term loans remained outstanding under the Holding Company Amended and Restated Credit Agreement. Pursuant to the Holding Company Amended and Restated Credit Agreement, the maturity date of a $135 million tranche (the “Tranche A Extended PIK Loans”) of the outstanding amount of the PIK term loans originally was extended to September 30, 2012 and then was automatically extended to December 1, 2016, as set forth in the Holding Company Amended and Restated Credit Agreement. The remaining $287.9 million tranche (the “Tranche B Extended PIK Loans”) was extended to December 1, 2016. Interest on the Tranche A Extended PIK Loans and Tranche B Extended PIK Loans is capitalized quarterly in arrears at a rate currently at LIBOR plus 6% and LIBOR plus 13.5%, respectively. Interest is paid-in-kind unless Holdings elects to pay the interest in cash, provided that any such cash payment is permitted under our senior secured credit agreement.

Holdings is a holding company with no direct operations. Its principal assets are the direct and indirect equity interests it holds in its subsidiaries, including us, and all of its operations are conducted through us and our subsidiaries. As a result, Holdings may be dependent upon dividends or distributions and other payments from us to generate the funds necessary to meet its outstanding debt service and other obligations under the Holding Company Amended and Restated Credit Agreement. If Holdings is unable to repay amounts outstanding under the Holding Company Amended and Restated Credit Agreement when they become due, Holdings’ failure to pay such amounts would not be a default under our existing senior secured credit agreement or the indentures governing our notes. However, if Holdings were to restructure or refinance its obligations under the Holding Company Amended and Restated Credit Agreement in a manner that would result in a change of control under the terms of our existing senior secured credit agreement and the indentures governing our notes or any future credit facilities and agreements governing our indebtedness as a result of restructuring or refinancing any of our existing indebtedness, or were to take other actions that result in such a change of control, we may be required to repay all amounts outstanding under such agreements governing our indebtedness or make an offer to purchase all outstanding notes at a price and under the terms and conditions specified under indentures governing such

 

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notes. We may not have the ability to repay such amounts and make such note purchases, which would result in a default under our senior secured credit agreement and the indentures governing our notes.

The above factors could limit our financial and operational flexibility, and as a result could have a material adverse effect on our business, financial condition and results of operations.

Our debt agreements contain restrictions that may limit our flexibility in operating our business.

Our senior secured credit agreement, our 2012 secured credit agreement and the indentures governing our second priority secured notes and our secured and unsecured notes contain various covenants that limit our ability to engage in specified types of transactions. These covenants limit our ability to, among other things:

 

   

incur additional indebtedness;

 

   

pay dividends on, repurchase or make distributions in respect of capital stock or make other restricted payments;

 

   

make certain investments;

 

   

sell certain assets;

 

   

create liens on certain assets to secure debt;

 

   

consolidate, merge, sell or otherwise dispose of all or substantially all of our assets;

 

   

enter into certain transactions with affiliates; and

 

   

designate our subsidiaries as unrestricted subsidiaries.

In addition, under our senior secured credit agreement and our 2012 secured credit agreement, we are required to satisfy and maintain compliance with a maximum total leverage ratio, a first lien leverage ratio and a senior secured leverage ratio, as well as maintain a minimum cash balance at the end of each fiscal quarter. Our ability to meet these requirements can be affected by events beyond our control and, in the longer term, we may not be able to meet such requirements. A breach of any of these covenants could result in a default under our senior secured credit agreement, our 2012 secured credit agreement and our indentures. Upon the occurrence of an event of default under our senior secured credit agreement, the lenders could elect to declare all amounts outstanding under our senior secured credit agreement to be immediately due and payable and terminate all commitments to extend further credit. If we are unable to repay those amounts, the lenders under our senior secured credit agreement could take action or exercise remedies, including proceeding against the collateral granted to them to secure that indebtedness. We have pledged a significant portion of our assets as collateral under our senior secured credit agreement, our 2012 secured credit agreement and our second priority secured notes. If the lenders under our senior secured credit agreement accelerate the repayment of borrowings, we cannot provide assurance that we will have sufficient assets to repay amounts outstanding under our senior secured credit agreement, as well as our other secured borrowings or unsecured indebtedness, including our notes.

Despite our high indebtedness level, we may still be able to incur significant additional amounts of debt, which could further exacerbate the risks associated with our substantial indebtedness.

We and our subsidiaries may be able to incur substantial indebtedness in connection with an acquisition or for other purposes in the future so long as we are in compliance with the financial covenants under our senior secured credit agreement. All of those borrowings and any other secured indebtedness permitted under the senior secured credit agreement and the indentures are effectively senior to our notes and the subsidiary guarantees. In addition, the indentures governing the notes do not prevent us from incurring obligations that do not constitute indebtedness. If we were to incur such additional indebtedness, the risks associated with our substantial level of indebtedness would increase, which could limit our financial and operational flexibility.

 

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Government regulation could impose taxes or other burdens on us, which could increase our costs or decrease demand for our products.

We rely upon generally accepted interpretations of tax laws and regulations in the countries in which we have customers and for which we provide travel inventory. We cannot be certain that these interpretations are accurate or that the responsible taxing authority is in agreement with our views. The imposition of additional taxes could cause us to have to pay taxes that we currently do not pay or collect on behalf of authorities and increase the costs of our products or services, which would increase our costs of operations.

Changes in tax laws or interpretations thereof may result in an increase in our effective tax rate.

We have operations in various countries that have differing tax laws and rates. A significant portion of our revenue and income is earned in countries with low corporate tax rates and we intend to continue to focus on growing our businesses in these countries. Our income tax reporting is subject to audit by domestic and foreign authorities, and our effective tax rate may change from year to year based on changes in the mix of activities and income allocated or earned among various jurisdictions, tax laws in these jurisdictions, tax treaties between countries, our eligibility for benefits under those tax treaties and the estimated values of deferred tax assets and liabilities. Such changes could result in an increase in the effective tax rate applicable to all or a portion of our income which would reduce our profitability.

Fluctuations in the exchange rate of the U.S. dollar and other currencies may adversely impact our results of operations.

Our results of operations are reported in U.S. dollars. While most of our revenue is denominated in U.S. dollars, a portion of our revenue and costs, including interest obligations on a portion of our senior secured credit facilities under our senior secured credit agreement and on the euro denominated senior notes due 2014 and senior subordinated notes, is denominated in other currencies, such as pounds sterling, the euro and the Australian dollar. As a result, we face exposure to adverse movements in currency exchange rates. The results of our operations and our operating expenses are exposed to foreign exchange rate fluctuations as the financial results of those operations are translated from local currency into U.S. dollars upon consolidation. If the U.S. dollar weakens against the local currency, the translation of these foreign currency-based local operations will result in increased net assets, revenue, operating expenses, and net income or loss. Similarly, our local currency-based net assets, revenue, operating expenses, and net income or loss will decrease if the U.S. dollar strengthens against local currency. Additionally, transactions denominated in currencies other than the functional currency may result in gains and losses that may adversely impact our results of operations.

Risks Related to Our Relationship with Orbitz Worldwide

We have recorded a significant charge to earnings, and may in the future be required to record additional significant charges to earnings relating to Orbitz Worldwide.

We own approximately 46% of Orbitz Worldwide’s outstanding common stock, which we account for using the equity method of accounting. We recorded losses of $74 million related to our investment in Orbitz Worldwide for the year ended December 31, 2012.

We evaluate our equity investment in Orbitz Worldwide for impairment on a quarterly basis. As of December 31, 2012, the fair market value of our investment in Orbitz Worldwide was approximately $133 million and the carrying value of our investment was nil. The results of Orbitz Worldwide for the year ended December 31, 2012 were impacted by an impairment charge recorded by Orbitz Worldwide amounting to $321 million as a result of the fair value of goodwill and intangible assets related to Orbitz Worldwide’s domestic business being less than the carrying value of such assets. During the fourth quarter of 2012, we wrote off our investment in Orbitz Worldwide as our share of Orbitz Worldwide’s net losses exceeded the carrying value of our investment.

In addition, under our separation agreement with Orbitz Worldwide, we are committed to provide $75 million in letters of credit on behalf of Orbitz Worldwide. As of December 31, 2012, $72 million of such letters

 

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of credit are outstanding. In the event Orbitz Worldwide is not able to meet the financial commitments provided under these letters of credit, it could result in a significant charge to our earnings.

Orbitz Worldwide is an important customer of our business.

Orbitz Worldwide is our largest GDS subscriber, accounting for 13% of our total air segments in the year ended December 31, 2012. Our agreements with Orbitz Worldwide may not be renewed at their expiration or may be renewed on terms less favorable to us. In the event Orbitz Worldwide terminates its relationships with us or Orbitz Worldwide’s business is materially impacted for any reason, such as a travel supplier withholding content from Orbitz Worldwide, and, as a result, Orbitz Worldwide loses, or fails to generate, a substantial amount of bookings that would otherwise be processed through our GDS, our business and results of operations would be adversely affected.

Legal and Regulatory Risks

From time to time, we may be involved in legal proceedings and may experience unfavorable outcomes.

We are, and in the future may be, subject to material legal proceedings in the course of our business, including, but not limited to, actions relating to contract disputes, business practices, intellectual property and other commercial and tax matters. Such legal proceedings may involve claims for substantial amounts of money or for other relief or might necessitate changes to our business or operations, and the defense of such actions may be both time consuming and expensive. Further, if any such proceedings were to result in an unfavorable outcome, it could have a material adverse effect on our business, financial position and results of operations. Currently, we are involved in a legal proceeding related to the Restructuring with Computershare Trust Company, N.A., the trustee under the indentures governing our outstanding senior notes and subordinated notes. The pendency of such legal proceeding until resolved could impede our ability to raise equity or debt financing for general corporate purposes, acquisitions, investments, capital expenditures or other strategic purposes. See Part I, Item 3 — Legal Proceedings — of this Annual Report on Form 10-K for additional information.

Third parties may claim that we have infringed their intellectual property rights, which could expose us to substantial damages and restrict our operations.

We have faced and in the future could face claims that we have infringed the patents, copyrights, trademarks or other intellectual property rights of others. In addition, we may be required to indemnify travel suppliers for claims made against them. Any claims against us or such travel suppliers could require us to spend significant time and money in litigation or pay damages. Such claims could also delay or prohibit the use of existing, or the release of new, products, services or processes, and the development of new intellectual property. We could be required to obtain licenses to the intellectual property that is the subject of the infringement claims, and resolution of these matters may not be available on acceptable terms or at all. Intellectual property claims against us could have a material adverse effect on our business, financial condition and results of operations, and such claims may result in a loss of intellectual property protections that relate to certain parts of our business.

Our business is regulated, and any failure to comply with such regulations or any changes in such regulations could adversely affect us.

We operate in a regulated industry. Our business, financial condition and results of operations could be adversely affected by unfavorable changes in or the enactment of new laws, rules and/or regulations applicable to us, which could decrease demand for 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, such 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.

 

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We store a large volume of personally identifiable information which is subject to legislation and regulation in numerous jurisdictions around the world, including in the U.S., where we are safe harbor certified, and in Europe.

In Europe, CRS regulations or interpretations of them may increase our cost of doing business or lower our revenues, limit our ability to sell marketing data, impact relationships with travel agencies, airlines, rail companies, or others, impair the enforceability of existing agreements with travel agencies and other users of our system, prohibit or limit us from offering services or products, or limit our ability to establish or change fees.

The CRS regulations require GDSs, among other things, to clearly and specifically identify in their displays any flights that are subject to an operating ban within the European Community and to introduce a specific symbol in their displays to identify each so-called blacklisted carrier. We include a link to the European Commission’s blacklist on the information pages accessible by travel agents through our Ask Travelport online facility. We are prohibited from applying a specific symbol to identify a blacklisted carrier in our displays as the European Commission’s blacklist does not currently identify blacklisted carriers with an IATA airline code, although work on a technical solution is currently under way. A common solution for all GDSs is being sought through further dialogue with the European Commission.

Annex 1(9) of the CRS regulations requires a GDS to display a rail or rail/air alternative to air travel, on the first screen of their principal displays, in certain circumstances. We currently have few rail participants in our GDS. We can display direct point to point rail services in our GDS principal displays, for those rail operators that participate in our GDS. Given the lack of harmonization in the rail industry, displaying rail connections in a similar way to airline connections is extremely complex, particularly in relation to timetabling, ticketing and booking systems. We are working towards a solution that will include functionality to search and display connected rail alternatives at such time as the rail industry in Europe provides a technically efficient means to do so. We understand that such efficiencies lie at the heart of the European Commission’s policy objectives to sustain a high quality level of European rail services in the future.

Although regulations governing GDSs have been lifted in the United States, continued regulation of GDSs in the European Union and elsewhere could also create the operational challenge of supporting different products, services and business practices to conform to the different regulatory regimes.

Our failure to comply with these laws and regulations may subject us to fines, penalties and potential criminal violations. Any changes to these laws or regulations or any new laws or regulations may make it more difficult for us to operate our business and may have a material adverse effect on our operations. We do not currently maintain a central database of regulatory requirements affecting our worldwide operations and, as a result, the risk of non-compliance with the laws and regulations described above is heightened.

 

ITEM 1B.    UNRESOLVED STAFF COMMENTS

Not Applicable.

 

ITEM 2.    PROPERTIES

Headquarters and Corporate Offices

Our principal executive office is located in Atlanta, Georgia, under a lease with a term of 12 years that expires in December 2024. We also have an office in Langley in the United Kingdom, under a lease with a term of 20 years which expires in June 2022.

Operations

Our operational business global headquarters are located in our Langley, United Kingdom offices. Our operational business U.S. headquarters are located in Atlanta, Georgia.

In addition, we have leased facilities in 42 countries that function as call centers or fulfillment or sales offices. Our product development centers are located in leased offices in Denver, Colorado, under a 15 year lease expiring in July 2014 and leased offices in Kansas City, Missouri under a lease expiring in February 2021.

 

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The table below provides a summary of our key facilities:

 

Location

  

Purpose

   Leased / Owned

Atlanta, Georgia

  

Corporate Headquarters; GDS

Operational Business

   Leased

Langley, United Kingdom

  

Operational Business Global

Headquarters

   Leased

Atlanta, Georgia

   Data Center    Leased

Denver, Colorado

   Co-location Services    Leased

Kansas City, Missouri

   Product Development Center    Leased

Data Centers

We operate a data center out of leased facilities in Atlanta, Georgia, pursuant to a lease that expires in August 2022. The Atlanta facility is leased from an affiliate of Digital Realty Trust, Inc., a global data center provider, following an assignment of the lease by Delta. In September 2008, we moved our primary systems infrastructure and web and database servers for our Galileo GDS operations from our Denver, Colorado facility to the Atlanta, Georgia facility, which, prior to the consolidation, supported our Worldspan operations. The Atlanta data center powers our consolidated GDS operations and provides access 24 hours a day, seven days a week and 365 days a year. The facility is a hardened building housing two data centers: one used by us and the other used by Delta Technology (a subsidiary of Delta). We and Delta each have equal space and infrastructure at the Atlanta facility. Our Atlanta data center comprises 94,000 square feet of raised floor space, 27,000 square feet of office space and 39,000 square feet of facilities support area. We use our facility in Denver, which we own, to offer co-location services.

We believe that our properties are sufficient to meet our present needs, and we do not anticipate any difficulty in securing additional space, as needed, on acceptable terms.

 

ITEM 3.    LEGAL PROCEEDINGS

American Airlines.    On April 12, 2011, American Airlines filed suit against us and Orbitz Worldwide in the United States District Court for the Northern District of Texas. American Airlines amended its complaint on June 9, 2011 to add Sabre as a defendant. On November 21, 2011, the court dismissed all but one claim against us, but American Airlines amended its complaint again on December 5, 2011, asserting three new claims and reasserting one previously dismissed claim against us. On February 28, 2012, the court granted American Airlines leave to reassert a more limited version of one additional claim that was previously dismissed. We again moved to dismiss American Airlines’ new and reasserted claims, but on August 7, 2012, the Court ruled that American Airlines could proceed with its claims.

American Airlines is alleging violations of US federal antitrust laws based on the ways in which we operate our GDS and the terms of our contracts with suppliers and subscribers, including Orbitz Worldwide. American Airlines also alleges that we conspired with other GDSs and travel agencies to exclude American Airlines’ Direct Connect from competition for travel agencies. The suit seeks injunctive relief and damages. Although we believe American Airlines will allege damages that would be material to us if there was an adverse ruling, we believe American Airlines’ claims are without merit, and we intend to defend the claims vigorously. While no assurance can be provided, we do not believe the outcome of this dispute will have a material adverse effect on our results of operations or liquidity condition.

On December 22, 2011, we filed counterclaims against American Airlines, alleging violations of US federal antitrust laws based on actions American Airlines has taken against us and other industry participants. On August 16, 2012, the Court dismissed our counterclaims on standing grounds. On September 6, 2012, the Court stayed the case until December 21, 2012 to allow for mediation. The mediation was held on December 12 and 13, 2012. The parties continue to negotiate to resolve their dispute and to settle the case. The stay of the case was lifted on January 15, 2013 and discovery is proceeding.

DOJ.    On May 19, 2011, we received a Civil Investigative Demand (“CID”) from the United States Department of Justice (“DOJ”), which seeks our documents and data in connection with an investigation into

 

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whether there have been “horizontal and vertical restraints of trade by global distribution systems.” The investigation is ongoing, and we are in the process of complying with the CID and cooperating with the DOJ in its investigation.

Declaratory Judgment.    In September 2011, we received letters from Dewey & LeBoeuf LLP as counsel to certain holders of our outstanding senior and senior subordinated notes (the “Notes”) making certain assertions alleging potential events of default under the indentures related to the Restructuring. We disagree with the assertions in the letters, and we believe that we are in full compliance with the provisions of the indentures for the Notes.

On October 28, 2011, pursuant to the terms of the Restructuring, we filed a complaint for declaratory judgment against The Bank of Nova Scotia Trust Company of New York, as initial trustee under the indentures governing the Notes, in the United States District Court for the Southern District of New York, and we filed an amended complaint on November 3, 2011. In this declaratory judgment action, we are seeking a ruling from the court that the investment of $135 million in an unrestricted subsidiary is permissible under the terms of the indentures and is, therefore, not an event of default under the indentures as alleged in the letters referenced above. In the event we do not receive a declaratory judgment ruling that the investment in the unrestricted subsidiary is permitted, the investment will not be made.

On February 24, 2012, Computershare Trust Company, N.A. (the successor trustee under the indentures governing such Notes) filed an answer and counterclaim in response to our amended complaint. The answer adds Travelport Holdings Limited as a party and seeks a ruling from the court that the investment of $135 million described above would violate the terms of the indentures and would constitute an event of default under the indentures if it was made. Further, the counterclaim seeks (i) to receive a determination as to the occurrence of certain alleged fraudulent conveyances in the context of the Restructuring and to recover assets alleged to be fraudulently conveyed by Travelport LLC to us, and by us to, or for the benefit of, Travelport Holdings Limited, (ii) to annul and set aside obligations alleged to be fraudulently incurred by Travelport LLC and (iii) to obtain a judicial determination that Travelport LLC has violated its contractual obligations to debt holders. On April 18, 2012, the trustee filed an amended answer and counterclaims. On February 13, 2013, the court issued a 90-day stay of the litigation. We believe these claims are without merit although no assurance can be given due to the uncertainty inherent in litigation.

NDC Arbitration.    In connection with former third-party NDC arrangements, we were involved in disputes with three of our former NDC partners regarding the payment of certain disputed fees. During the fourth quarter of 2010, the dispute with respect to one such former partner was concluded in our favor by third party arbitrators. In November 2011 and March 2012, in the disputes with different partners, arbitrators rendered decisions against us which resulted in a charge of approximately $35 million in the fourth quarter of 2011, including legal costs. While we disagree with the findings of these arbitration decisions, such decisions are binding and not appealable.

In addition, we are a party to various litigation matters incidental to the conduct of our business. We do not believe that the outcome of any of the matters in which we are currently involved will have a material adverse effect on our financial condition or on the results of our operations.

 

ITEM 4.    MINE SAFETY DISCLOSURES

Not Applicable.

 

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PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

We are a wholly owned subsidiary of Travelport Holdings Limited. There is no public trading market for our common stock.

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Debt and Financing Arrangements” for a discussion of potential restrictions on our ability to pay dividends or make distributions.

 

ITEM 6. SELECTED FINANCIAL DATA

The following table presents our selected historical financial data. The statement of operations data and the statement of cash flows data for the years ended December 31, 2012, 2011 and 2010 and the balance sheet data as of December 31, 2012 and 2011 have been derived from our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K. The balance sheet data as of December 31, 2010, 2009 and 2008 and the statement of operations data and statement of cash flows data for the year ended December 31, 2009 and 2008 are derived from audited financial statements that are not included in this Annual Report on Form 10-K and have been restated to retroactively represent discontinued operations as discussed below.

In May 2011, we completed the sale of our GTA business which qualified to be reported as discontinued operations. The gain from the disposal of the GTA business and the results of operations of the GTA business are presented as discontinued operations in our consolidated statements of operations and consolidated statements of cash flows.

The selected historical financial data presented below should be read in conjunction with our financial statements and accompanying notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Annual Report on Form 10-K.

 

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Statement of Operations Data

 

     Year Ended December 31,  
(in $ millions)    2012     2011     2010     2009     2008  
          

Net revenue

     2,002        2,035        1,996        1,981        2,171   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Costs and expenses

          

Cost of revenue

     1,191        1,211        1,119        1,049        1,186   

Selling, general and administrative

     446        397        393        412        508   

Depreciation and amortization

     227        227        210        187        200   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

     1,864        1,835        1,722        1,648        1,894   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     138        200        274        333        277   

Interest expense, net

     (290     (287     (272     (286     (342

Gain on early extinguishment of debt

     6               2        10        29   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from continuing operations before income taxes and equity in losses of investment in Orbitz Worldwide

     (146     (87     4        57        (36

Provision for income taxes

     (23     (29     (47     (23     (27

Equity in losses of investment in Orbitz Worldwide

     (74     (18     (28     (162     (144
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss from continuing operations

     (243     (134     (71     (128     (207

(Loss) income from discontinued operations, net of tax

            (6     27        (741     31   

Gain from disposal of discontinued operations, net of tax

     7        312                        
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

     (236     172        (44     (869     (176

Net loss (income) attributable to non-controlling interest in subsidiaries

            3        1        (2     (3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income attributable to the Company

     (236     175        (43     (871     (179
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Balance Sheet Data

 

     December 31,  
(in $ millions)    2012     2011     2010     2009     2008  
          

Cash and cash equivalents

     110        124        94        124        292   

Total current assets (excluding cash and cash equivalents and assets of discontinued operations)

     372        351        350        312        310   

Assets of discontinued operations

                   1,066        1,091        1,907   

Property and equipment, net

     416        431        484        410        444   

Goodwill and other intangible assets, net

     1,899        1,981        2,070        2,147        2,229   

All other non-current assets

     361        457        436        262        388   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

     3,158        3,344        4,500        4,346        5,570   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities (excluding liabilities of discontinued operations)

     687        623        564        531        535   

Liabilities of discontinued operations

                   555        526        616   

Long-term debt

     3,392        3,357        3,796        3,640        3,783   

All other non-current liabilities

     281        321        257        241        217   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

     4,360        4,301        5,172        4,938        5,151   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total equity

     (1,202     (957     (672     (592     419   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and equity

     3,158        3,344        4,500        4,346        5,570   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Statement of Cash Flows Data

 

     Year Ended December 31,  
(in $ millions)    2012     2011     2010     2009     2008  
          

Net cash provided by operating activities of continuing operations

     181        124        181        166        67   

Net cash (used in) provided by operating activities of discontinued operations

            (12     103        73        57   

Net cash (used in) provided by investing activities

     (89     556        (241     (55     (84

Net cash (used in) provided by financing activities

     (106     (791     (22     (317     6   

Effects of changes in exchange rates on cash and cash equivalents

            5        4        5        (10
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

     (14     (118     25        (128     36   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Other Financial Data

 

     Year Ended December 31,  
      2012      2011      2010      2009     2008  
             

Ratio of earnings to fixed charges (a)

     n/a         n/a         n/a         1.17     n/a   

 

(a) For the purposes of calculating the ratio of earnings to fixed charges, earnings represents income from continuing operations before income taxes and equity in losses of investment in Orbitz Worldwide, plus fixed charges net of interest capitalized and adjusted for amortization of capitalized interest and non-controlling interest in pre-tax income of subsidiaries that have not incurred fixed charges. Fixed charges comprise interest for the period and include amortization of debt financing costs, interest capitalized and the interest portion of rental payments. For each of the years ended December 31, 2012, 2011, 2010 and 2008, earnings were insufficient to cover fixed charges by $146 million, $86 million, $1 million and $39 million, respectively.

Selected Quarterly Financial Data — Unaudited

Provided below is selected unaudited quarterly financial data for 2012 and 2011:

 

     2012  
(in $ millions)    First     Second     Third     Fourth  

Net revenue

     550        506        489        457   

Cost of revenue

     322        301        296        272   

Operating income (loss)

     66        62        27        (17

Net loss from continuing operations

     (12     (20     (40     (171

Net loss

     (12     (20     (40     (164

Net loss attributable to the Company

     (11     (20     (41     (164

 

     2011  
(in $ millions)    First     Second     Third     Fourth  

Net revenue

     531        530        509        465   

Cost of revenue

     317        310        313        271   

Operating income

     79        66        51        4   

Net loss from continuing operations

     (14     (10     (26     (84

Net (loss) income

     (24     306        (26     (84

Net (loss) income attributable to the Company

     (23     306        (26     (82

 

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our results of operations and financial condition for each of the years ended December 31, 2012, 2011 and 2010 should be read in conjunction with the consolidated financial statements and related notes reported in accordance with US GAAP and included elsewhere in this Annual Report on Form 10-K. The discussion includes forward-looking statements that reflect the current view of management and involve risks and uncertainties. Our actual results may differ materially from those contained in any forward-looking statements as a result of factors discussed below and elsewhere in this Annual Report on Form 10-K, particularly under the headings “Item 1A: Risk Factors” and “Forward-Looking Statements”. Unless otherwise noted, all amounts are in $ millions.

Overview

We are a leading provider of critical transaction processing solutions and data to companies operating in the global travel industry. We believe we are one of the most diversified of such companies in the world.

Our global distribution systems (“GDS”) business provides aggregation, search and transaction processing services to travel suppliers and travel agencies, allowing travel agencies to search, compare, process and book tens of thousands of itinerary and pricing options across multiple travel suppliers within seconds. Our GDS business operates three systems, Galileo, Apollo and Worldspan, across over 170 countries to provide travel agencies with booking technology and access to considerable supplier inventory that we aggregate from airlines, hotels, car rental companies, rail networks, cruise and tour operators, and destination service providers. Our GDS business provides travel distribution services to approximately 810 active travel suppliers and approximately 67,000 online and offline travel agency locations, which in turn serve millions of end consumers globally. In 2012, approximately 162 million tickets were issued through our GDS business. Our GDS business processed up to 2.7 billion travel-related messages per day in 2012.

Within our GDS business, our Airline IT Solutions business provides hosting solutions and IT subscription services to airlines to enable them to focus on their core business competencies and reduce costs, as well as business intelligence services. Our Airline IT Solutions business manages the mission-critical reservations and related systems for Delta, as well as five other airlines. Our Airline IT Solutions business also provides an array of leading-edge IT software subscription services and data business intelligence services, directly and indirectly, to over 400 airlines, airports and airline ground handlers globally.

Our payment services venture with eNett provides secure and cost effective automated payment solutions between suppliers and travel agencies, tailored to meet the needs of the travel industry, currently focusing on Asia, Europe and the United States.

Key Performance Indicators (“KPIs”)

Management monitors the performance of our operations against our strategic objectives on a regular basis. Performance is assessed against the strategy, budget and forecasts using financial and non-financial measures. We use the following primary measures to assess our financial performance and the performance of our operating business.

 

     Years Ended
December 31,
     Change     Years Ended
December, 31
     Change  
(in $ millions, except segment data)    2012      2011      $     %     2011      2010      $     %  

Travelport KPIs

                    

Net revenue

     2,002         2,035         (33     (2     2,035         1,996         39        2   

Operating income

     138         200         (62     (31     200         274         (74     (27

Travelport Adjusted EBITDA

     455         507         (52     (10     507         545         (38     (7

Segments (in millions)

                    

Americas

     170         176         (6     (3     176         172         4        2   

Europe

     84         85         (1     (1     85         84         1        1   

APAC

     54         56         (2     (3     56         55         1        2   

MEA

     39         38         1        2        38         38                (1

Total

     347         355         (8     (2     355         349         6        2   

 

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We monitor the performance of our business based on both financial and operational measures. These include the following:

Travelport Adjusted EBITDA

Travelport Adjusted EBITDA is a non-GAAP financial measure and should not be considered as a measure comparable to net income as determined under US GAAP as it does not take into account certain expenses such as depreciation and amortization, interest, income tax, and other costs that we believe are unrelated to our ongoing operations. In addition, Travelport Adjusted EBITDA may not be comparable to similarly named measures used by other companies. The presentation of Travelport Adjusted EBITDA has limitations as an analytical tool, and this measure should not be considered in isolation or as a substitute for analysis of Travelport’s results as reported under US GAAP.

We define Travelport Adjusted EBITDA as net loss from continuing operations before equity in losses of investment in Orbitz Worldwide, interest expense, net, provision benefit for income taxes, depreciation and amortization and adjusted to exclude items we believe potentially restrict our ability to assess the results of our underlying business.

We have included Travelport Adjusted EBITDA as it is the primary metric used by management to evaluate and understand the underlying operations and business trends, forecast future results and determine future capital investment allocations. In addition, it is used by the Board to determine incentive compensation.

We believe Travelport Adjusted EBITDA is a useful measure as it allows management to monitor our ongoing core operations. The core operations represent the primary trading operations of the business. Since our formation, actual results have been significantly affected by events that are unrelated to our ongoing operations due to the number of changes to our business during that time. These events include, among other things, the acquisition of Worldspan and subsequent integration, the transfer of our finance and human resources functions from the United States to the United Kingdom and the associated restructuring costs. During the periods presented, these items primarily relate to the impact of purchase accounting, expenses incurred to acquire and integrate Travelport’s portfolio of businesses, costs associated with Travelport’s restructuring efforts, non-cash equity-based compensation and litigation and related costs.

The following table provides a reconciliation of Travelport Adjusted EBITDA to net loss from continuing operations:

 

     Years Ended December 31,  
(in $ millions)    2012     2011     2010  

Net loss from continuing operations

     (243     (134     (71

Equity in losses of investment in Orbitz Worldwide

     74        18        28   

Provision for income taxes

     23        29        47   

Depreciation and amortization

     227        227        210   

Interest expense, net

     290        287        272   
  

 

 

   

 

 

   

 

 

 

EBITDA

     371        427        486   

Adjustments:

      

Corporate costs (1)

     19        15        36   

GAAP Restructuring charges (2)

            4        11   

Equity-based compensation

     2        5        5   

Litigation and related costs (3)

     53        50          

Gain on extinguishment of debt

     (6            (2

Other—non cash (4)

     16        6        9   
  

 

 

   

 

 

   

 

 

 

Total adjustments

     84        80        59   
  

 

 

   

 

 

   

 

 

 

Travelport Adjusted EBITDA

     455        507        545   
  

 

 

   

 

 

   

 

 

 

 

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(1) Corporate transaction costs represents costs related to strategic transactions (including the proposed offering of securities in 2010), internal re-organization and other costs related to non-core business.

 

(2) Restructuring charges represent the costs incurred to enhance our organizational efficiency and to consolidate and rationalize existing processes.

 

(3) Litigation and related costs predominately relates to the American Airlines and bond holder litigation costs incurred in 2012, and NDC arbitration costs incurred in 2011.

 

(4) Other primarily includes (i) $7 million of write-off and impairment of non-current assets for the year ended December 31, 2011, (ii) unrealized (gains) losses on foreign currency derivatives contracts and euro-denominated debt (totaling $16 million, $(1) million, and $3 million for the years ended December 31, 2012, 2011 and 2010, respectively).

Segments

We record and charge one booking fee for each segment of an air travel itinerary (e.g., two segments for a round-trip airline ticket) and one booking fee for each hotel booking, car rental or cruise booking, regardless of the length of time or cost associated with the booking. Average revenue per segment (“RevPas”) is calculated by dividing our transaction processing revenue by total available segments for the period.

Net Revenue

Transaction Processing Revenue:    Transaction processing revenue is primarily derived from transaction fees paid by travel suppliers for electronic travel distribution services, and to a lesser extent, other transaction and subscription fees. The GDS operate an electronic marketplace in which travel suppliers, such as airlines, hotels, car rental companies, cruise lines, rail companies and other travel suppliers, can store, display, manage and sell their products and services, and in which online and traditional travel agencies are able to electronically locate, price, compare and purchase travel suppliers’ services. As compensation for GDS services, fees are earned, on a per segment or per booking basis, from airline, car rental, hotel and other travel-related suppliers for reservations booked through the GDS.

Fees paid by travel suppliers vary according to the levels of functionality at which they can participate in our GDS. These levels of functionality generally depend upon the type of communications and real-time access allowed with respect to the particular travel supplier’s internal systems. Revenue for air travel reservations is recognized at the time of the booking of the reservation, net of estimated cancellations. Cancellations prior to the date of departure are estimated based on the historical level of cancellations, which are not significant. Revenue for car and hotel reservations is recognized upon fulfillment of the reservation. The later recognition of car and hotel reservation revenue reflects the difference in the contractual rights related to such services as compared to the airline reservation services.

In international markets, we employ a hybrid sales and marketing model consisting of direct sales, SMOs and indirect NDCs. In the United States, we only employ a SMO model. In markets supported by our SMOs, we enter into agreements with subscribers which provide for incentives in the form of development advances, including cash payments, equipment or other services at no charge. The amount of the development advance varies depending upon the expected volume of the subscriber’s business. We establish liabilities for these development advances at the inception of the contract and defer the expense. The development advance expense is then recognized as revenue is earned in accordance with the contractual terms. In markets not supported by our SMOs, we utilize an NDC structure, where feasible, in order to take advantage of the NDC partner’s local market knowledge. The NDC is responsible for cultivating the relationship with subscribers in its territory, installing subscribers’ computer equipment, maintaining the hardware and software supplied to the subscribers and providing ongoing customer support. The NDC earns a commission based on the booking fees generated in the NDC’s territory.

 

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Airline IT Solutions Revenue:    We also provide technology services and solutions for the airline and hotel industry focusing on marketing and sales intelligence, reservation and passenger service system and e-commerce solutions. Such revenue is recognized as the service is performed.

Operating Income

Operating income consists of net revenue less cost of revenue, selling, general and administrative (“SG&A”) expenses and depreciation and amortization.

Cost of revenue consists of direct costs incurred to generate revenue, including inducements paid to travel agencies who subscribe to our GDS, commissions and costs incurred for NDCs and costs for call center operations, data processing and related technology costs. Technology management costs, data processing costs and telecommunication costs included in cost of revenue consist primarily of internal system and software maintenance fees, data communications and other expenses associated with operating our internet sites and payments to outside contractors.

SG&A expenses consist primarily of sales and marketing, labor and associated costs, advertising services, professional fees, and expenses for finance, legal, human resources and other administrative functions.

Factors Affecting Results of Operations

Macroeconomic and Travel Industry Conditions:    Our business is highly correlated to the overall performance of the travel industry, in particular, growth in air passenger travel which, in turn, is linked to the global macro-economic environment. For the year ended December 31, 2012, approximately 82% of our segment volumes were represented by air segments flown, 4% of segment volumes attributable to other air segments (such as cancellations on the day of travel), with land and sea bookings accounting for 14%. Between 2003 and 2011, air travel volumes increased at a compounded annual growth rate of 5.5%, approximately twice the rate of global GDP.

Consolidations within the Airline Industry:    As a result of consolidations within the airline industry, our annual revenue and EBITDA have been impacted. Delta’s acquisition of Northwest, both being customers of our Airline IT Solutions business, resulted in these airlines migrating to a common IT platform, with reduced needs for our IT services. Further, following the merger of United Airlines with Continental Airlines in 2010, we received notice from United Airlines, terminating its agreement for the Apollo reservation system operated by us on their behalf. The integration of United — Continental system was completed in early March 2012 and we no longer service United’s reservation system. The loss of the Master Service Agreement (“MSA”) with United Airlines contributed approximately $69 million and $50 million to the decline in net revenue and EBITDA, respectively for the year ended December 31, 2012.

Seasonality:    Our business experiences seasonal fluctuations, reflecting seasonal trends for the products and services we offer. These trends cause our revenue to be generally higher in the first and second calendar quarters of the year, with revenue peaking as travelers plan and purchase in advance their spring and summer travel. Revenue typically declines in the third and fourth quarters of the calendar year. Our results may also be affected by seasonal fluctuations in the inventory made available to us by our travel suppliers.

Foreign Exchange Movements:    We transact business primarily in US dollars. We have euro denominated debt and while the majority of our revenue is denominated in US dollars, a portion of costs are denominated in other currencies (principally, the British pound, Euro and Australian dollar). We use foreign currency derivative contracts including forward contracts and currency options to manage our exposure to changes in foreign currency exchange rates associated with our foreign currency denominated debt, receivables and payables and forecasted earnings of foreign subsidiaries. The fluctuations in the value of these foreign currency contracts largely offset the impact of changes in the value of the underlying risk they are intended to economically hedge. Nevertheless, our operating results are impacted to a certain extent by movements in the underlying exchange rates between those currencies listed above.

 

 

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Litigation and related costs:    We are involved in various claims, legal proceedings and governmental inquiries related to contract disputes, business practices, intellectual property and other commercial, employment and tax matters. We believe we have adequately accrued for such matters, and for costs of defending against such matters. However, litigation is inherently unpredictable and although we believe that our accruals are adequate and we have valid defenses in these matters, unfavorable resolutions could occur, which could have a material adverse effect on our results of operations or cash flows in a particular reporting period.

We have been involved in disputes with three of our former NDC partners regarding the payment of certain disputed fees. During the fourth quarter of 2010, the dispute with respect to one such former partner was concluded in our favor by third party arbitrators. In November 2011 and March 2012, in the disputes with different partners, arbitrators rendered decisions against us which have had a material adverse impact on our results of operations.

In addition, we are currently in dispute with American Airlines regarding its GDS distribution agreement (as amended). American Airlines is also alleging, among other things, violations of US federal antitrust laws. We are also involved in legal proceedings related to the Restructuring with Computershare Trust Company, N.A., the trustee under the Indentures governing our outstanding Senior Notes and Senior Subordinated Notes. We believe these claims are without merit and, while no assurance can be provided due to the uncertainty inherent in litigation, we do not believe the outcome of these disputes will have a material adverse effect on our results of operations or liquidity condition.

Results of Operations

Year Ended December 31, 2012 Compared to Year Ended December 31, 2011

 

     Year Ended
December 31,
    Change  
(in $ millions)    2012     2011     $     %  

Net revenue

     2,002        2,035        (33     (2
  

 

 

   

 

 

   

 

 

   

 

 

 

Costs and expenses

        

Cost of revenue

     1,191        1,211        (20     (2

Selling, general and administrative

     446        397        49        12   

Depreciation and amortization

     227        227                 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

     1,864        1,835        29        2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     138        200        (62     (31

Interest expense, net

     (290     (287     (3     (1

Gain on early extinguishment of debt

     6               6        *   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from continuing operations before income taxes and equity in losses of investment in Orbitz Worldwide

     (146     (87     (59     (68

Provision for income taxes

     (23     (29     6        21   

Equity in losses of investment in Orbitz Worldwide

     (74     (18     (56     *   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss from continuing operations

     (243     (134     (109     (81

Loss from discontinued operations, net of tax

            (6     6        *   

Gain from disposal of discontinued operations, net of tax

     7        312        (305     *   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

     (236     172        (408     *   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

* Not meaningful

 

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Net Revenue

Net revenue is comprised of:

 

     Year Ended
December 31,
     Change  
(in $ millions)    2012      2011      $     %  

Transaction processing revenue

     1,834         1,823         11        1   

Airline IT solutions revenue

     168         212         (44     (21
  

 

 

    

 

 

    

 

 

   

 

 

 

Net revenue

     2,002         2,035         (33     (2
  

 

 

    

 

 

    

 

 

   

 

 

 

Transaction processing revenue by region is comprised of:

 

     Year Ended
December 31,
     Change  
(in $ millions)    2012      2011      $     %  

Americas

     691         719         (28     (4

Europe

     553         539         14        3   

APAC

     327         315         12        4   

MEA

     263         250         13        5   
  

 

 

    

 

 

    

 

 

   

 

 

 

Transaction processing revenue

     1,834         1,823         11        1   
  

 

 

    

 

 

    

 

 

   

 

 

 

Transaction processing revenue includes booking fees from airlines and revenue from, hospitality, subscribers, payments processing, and other key adjacencies.

The increase in transaction processing revenue of $11 million (1%) is as a result of a 3% increase in RevPas (transaction processing revenue divided by the number of available segments) and a 2% decrease in segment volumes. The 2% decrease in segment volumes is primarily due to a 6 million (3%) decline in Americas, attributable to the loss of 6 million segments from the MSA with United Airlines, and a 3% decline in APAC.

Airline IT solutions revenue decreased as a result of the loss of the MSA with United Airlines.

Cost of Revenue

Cost of revenue is comprised of:

 

     Year Ended
December 31,
     Change  
(in $ millions)    2012      2011      $     %  

Commissions

     919         935         (16     (2

Telecommunication and technology costs

     272         276         (4     (1
  

 

 

    

 

 

    

 

 

   

 

 

 

Cost of revenue

     1,191         1,211         (20     (2
  

 

 

    

 

 

    

 

 

   

 

 

 

Cost of revenue decreased by $20 million (2%) as a result of a 2% decrease in commissions paid to travel agencies and NDCs and a 1% decrease in telecommunication and technology costs. The decrease in commission costs is primarily due to a 2% decline in segment volumes partially offset by a 1% increase in the average rate of agency commission. The decrease in telecommunication and technology costs is due to effective cost management.

 

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Selling, General and Administrative (SG&A)

SG&A costs increased by $49 million (12%) for the year ended December 31, 2012, is primarily due to (i) a $16 million increase in unrealized losses on foreign currency contracts and euro-denominated debt, (ii) a $11 million of unfavorable foreign exchange fluctuations, (iii) an $11 million increase in litigation and related costs, and (iv) a $5 million increase in wages and benefits including an increase in pension expense.

Interest Expense, Net

Interest expense, net, increased by $3 million (1%) due to higher effective interest rates.

Gain on Early Extinguishment of Debt

During 2012, we repurchased $14 million of our 9 7/8 % dollar denominated Senior Notes, $11 million of our euro denominated floating rate Senior Notes and $1 million of dollar denominated floating rate Senior Notes at a discount, resulting in a $6 million gain from early extinguishment of debt.

Provision for Income Taxes

Our tax provision differs significantly from the US Federal statutory rate primarily as a result of (i) being subject to income tax in numerous non-US jurisdictions with varying income tax rates, (ii) a valuation allowance established due to forecast losses in certain jurisdictions, and (iii) certain expenses that are not deductible for tax in the relevant jurisdiction.

The reconciliation from the tax benefit at the US Federal statutory tax rate of 35% is as follows:

 

     Year Ended
December 31,
 
(in $ millions)    2012     2011  

Tax benefit at US federal statutory rate of 35%

     51        30   

Taxes on non-US operations at alternative rates

     (29     (55

Liability for uncertain tax positions

     2        (3

Change in valuation allowance

     (44     (1

Non-deductible expenses

     (4     (5

Other

     1        5   
  

 

 

   

 

 

 

Provision for income taxes

     (23     (29
  

 

 

   

 

 

 

Equity in Losses of Investment in Orbitz Worldwide

We have recorded losses of $74 million in relation to our investment in Orbitz Worldwide for the year ended December 31, 2012 compared to losses of $18 million for the year ended December 31, 2011. These losses reflect our 46% (2011 48%) ownership interest in Orbitz Worldwide. Orbitz Worldwide recorded an impairment charge on certain of its intangible assets amounting to $321 million and $50 million for the years ended December 31, 2012 and 2011, respectively.

 

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Year Ended December 31, 2011 Compared to Year Ended December 31, 2010

 

     Year Ended
December 31,
    Change  
(in $ millions)    2011     2010     $     %  

Net revenue

     2,035        1,996        39        2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Costs and expenses

        

Cost of revenue

     1,211        1,119        92        8   

Selling, general and administrative

     397        393        4        1   

Depreciation and amortization

     227        210        17        8   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

     1,835        1,722        113        7   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     200        274        (74     (27

Interest expense, net

     (287     (272     (15     (6

Gain on early extinguishment of debt

            2        (2     *   
  

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from continuing operations before income taxes and equity in losses of investment in Orbitz Worldwide

     (87     4        (91     *   

Provision for income taxes

     (29     (47     18        38   

Equity in losses of investment in Orbitz Worldwide

     (18     (28     10        36   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss from continuing operations

     (134     (71     (63     (89

(Loss) income from discontinued operations, net of tax

     (6     27        (33     *   

Gain from disposal of discontinued operations, net of tax

     312               312        *   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     172        (44     216        *   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

* Not meaningful

Net Revenue

Net revenue is comprised of:

 

     Year Ended
December 31,
     Change  
(in $ millions)    2011      2010      $      %  

Transaction processing revenue

     1,823         1,797         26         1   

Airline IT solutions revenue

     212         199         13         7   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net revenue

     2,035         1,996         39         2   
  

 

 

    

 

 

    

 

 

    

 

 

 

Transaction processing revenue by region is comprised of:

 

     Year Ended
December 31,
     Change  
(in $ millions)    2011      2010      $     %  

Americas

     719         717         2          

Europe

     539         523         16        3   

APAC

     315         300         15        5   

MEA

     250         257         (7     (3
  

 

 

    

 

 

    

 

 

   

 

 

 

Transaction processing revenue

     1,823         1,797         26        1   
  

 

 

    

 

 

    

 

 

   

 

 

 

Transaction processing revenue includes booking fees from airlines and revenue from, hospitality, subscribers, payments processing, and other key adjacencies.

 

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The increase in transaction processing revenue of $26 million (1%) is as a result of a 2% increase in segment volumes with RevPas remaining flat. The 2% increase in segment volumes is due to a 2% increase in Americas, a 2% increase in APAC, a 1% increase in Europe, offset by a 1% decrease in MEA.

The Airline IT Solutions revenue increase is due to the incremental revenues earned due to the transitioning of United off the Apollo Reservation system.

Cost of Revenue

Cost of revenue is comprised of:

 

     Year Ended
December 31,
     Change  
(in $ millions)    2011      2010      $      %  

Commissions

     935         859         76         9   

Telecommunication and technology costs

     276         260         16         6   
  

 

 

    

 

 

    

 

 

    

 

 

 

Cost of revenue

     1,211         1,119         92         8   
  

 

 

    

 

 

    

 

 

    

 

 

 

Cost of revenue increased by $92 million (8%) as a result of a $76 million (9%) increase in commissions paid to travel agencies and NDCs and a $16 million (6%) increase in telecommunication and technology costs. The increase in commission costs is primarily due to a 2% increase in segment volumes and a 6% increase in the average rate of agency commissions.

Selling, General and Administrative (SG&A)

SG&A costs increased by $4 million (1%) due to (i) a $42 million increase in litigation and related costs including $35 million for costs related to NDC arbitration, (ii) approximately $30 million increase in salaries and wages, primarily due to the re-introduction of the employee incentive plan offset by (iii) a $30 million reduction in cost as a result of the favorable impact of effective cost management and the realized impact of foreign exchange derivative instruments, (iv) a reduction in corporate transactions costs of $21 million, primarily due to costs incurred during 2010 related to a proposed offering of securities and (v) $7 million decrease in restructuring charges.

Depreciation and Amortization

Depreciation and amortization increased by $17 million (8%) primarily due to increased depreciation following a significant purchase of new software and equipment in March 2010 and other fixed assets additions.

Interest Expense, Net

Interest expense, net increased by $15 million (6%) primarily due to (i) an increase of $31 million as a result of higher interest rates arising from amendments made to the senior secured credit agreement in the fourth quarter of 2010, (ii) an increase of $11 million as a result of incremental fees and expenses arising from our debt restructuring in September 2011, partially offset by (iii) a $14 million reduction in interest costs as a result of the early repayment of $655 million of term loans following the sale of our GTA business in the second quarter of 2011, and (iv) a $16 million reduction due to a change in fair value of interest rate derivative instruments.

Gain on Early Extinguishment of Debt

During the year ended December 31, 2010, we repurchased $20 million of our senior notes at a discount, resulting in a $2 million gain from early extinguishment of debt.

Provision for Income Taxes

Our tax provision differs significantly from the US Federal statutory rate primarily as a result of (i) being subject to income tax in numerous non-US jurisdictions with varying income tax rates; (ii) a valuation allowance established due to the forecast losses in certain tax jurisdictions; and (iii) certain expenses that are not deductible for tax in the relevant jurisdiction.

 

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The reconciliation from the tax benefit (provision) at the US Federal tax rate of 35% is as follows:

 

     Year Ended
December 31,
 
(in $ millions)    2011     2010  

Tax benefit (provision) at US Federal statutory rate of 35%

     30        (1

Taxes on non-US operations at alternative rates

     (55     (24

Liability for uncertain tax positions

     (3     (2

Change in valuation allowance

     (1     (10

Non-deductible expenses

     (5     (9

Other

     5        (1
  

 

 

   

 

 

 

Provision for income taxes

     (29     (47
  

 

 

   

 

 

 

Equity in Losses of Investment in Orbitz Worldwide

Our share of equity in losses of investment in Orbitz Worldwide was $18 million for the year ended December 31, 2011 compared to losses of $28 million for the year ended December 31, 2010. These losses reflect our 48% ownership interest in Orbitz Worldwide. Orbitz Worldwide recorded an impairment charge on certain of its intangible assets amounting to $50 million and $81 million for the years ended December 31, 2011 and 2010, respectively.

Financial Condition, Liquidity and Capital Resources

Financial Condition

December 31, 2012 Compared to December 31, 2011

 

     As of December 31,     Change  
(in $ millions)    2012     2011     $  

Current assets

     482        475        7   

Non-current assets

     2,676        2,869        (193
  

 

 

   

 

 

   

 

 

 

Total assets

     3,158        3,344        (186
  

 

 

   

 

 

   

 

 

 

Current liabilities

     687        623        64   

Non-current liabilities

     3,673        3,678        (5
  

 

 

   

 

 

   

 

 

 

Total liabilities

     4,360        4,301        59   
  

 

 

   

 

 

   

 

 

 

Shareholders’ equity

     (1,218     (970     (248

Equity attributable to non-controlling interest in subsidiaries

     16        13        3   
  

 

 

   

 

 

   

 

 

 

Total liabilities and equity

     3,158        3,344        (186
  

 

 

   

 

 

   

 

 

 

Current assets:    The increase of $7 million is primarily due to an increase of $52 million in other current assets; offset by (i) a $14 million decrease in cash and cash equivalents and (ii) a $30 million decrease in accounts receivables primarily due to improvements in days sales outstanding. The increase in other current assets is primarily due to (i) a $40 million increase in restricted cash of subsidiaries, (ii) $8 million increase in the fair value of derivative assets.

Non-current assets:    The decrease of $193 million is due to (i) an $82 million decrease in intangible assets, primarily as a result of amortization, (ii) a $77 million decrease in investment in Orbitz Worldwide (iii) a $15 million decrease in property and equipment, net, primarily as a result of depreciation offset by additions, and (iv) a $19 million decrease in other non-current assets due to decrease in development advances and deferred finance costs.

 

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Current liabilities:    The increase of $64 million is primarily due to a $36 million increase in accrued expenses and other current liabilities, a $38 million increase in deferred income taxes partially offset by a $12 million decrease in the current portion of our long term borrowing. The increase in accrued expenses and other current liabilities is primarily due to, (i) a $40 million increase in customer prepayments due to an increase in volumes of transactions, (ii) a $17 million increase in payroll related costs, (iii) a $13 million increase in deferred revenue, partially offset by, (iv) a $33 million decrease in our derivatives liabilities primarily due to settlement payments on matured derivative contracts.

Non-current liabilities:    The decrease of $5 million is primarily due to a $35 million decreased in deferred income taxes offset by a $35 million net increase in indebtedness and a $5 million increase in other non-current liabilities.

Liquidity and Capital Resources

Our principal source of operating liquidity is cash flows generated from operations, including working capital. We maintain what we consider to be an appropriate level of liquidity through several sources, including maintaining appropriate levels of cash, access to funding sources, and a committed credit facility. As of December 31, 2012, our financing needs were supported by $98 million of available capacity under our revolving credit facility. In the event additional funding is required, there can be no assurance that further funding will be available on terms favorable to us or at all.

A significant concentration of our cash is in geographic locations that have no legal or tax limitations on its usage. We have efficient mechanisms in place to deploy cash as needed to fund operations and capital needs across all of our locations worldwide. Our principal uses of cash are to fund planned operating expenditures, capital expenditures, interest payments on debt and any mandatory or discretionary principal payments or repurchases of debt. With the cash and cash equivalents on our consolidated balance sheet, our ability to generate cash from operations over the course of a year and through access to our revolving credit facility and other lending sources, we believe we have sufficient liquidity to meet our ongoing needs for at least the next twelve months.

As of December 31, 2012, our total leverage ratio was 7.24 compared to the maximum total leverage ratio allowable of 8.0; our first lien leverage ratio was 3.40 compared to the maximum first lien leverage ratio allowable of 4.0; our senior secured leverage ratio was 3.80 compared to the maximum senior secured leverage ratio allowable of 4.95; our cash balance was $110 million; and we were in compliance with all financial covenants related to long-term debt. Under the terms of our debt agreements, the maximum total leverage ratio with which we need to comply remains at 8.0 until June 30, 2013 and becomes 7.75 for the next two quarterly periods, and the first lien leverage ratio with which we need to comply remains at 4.0 until June 30, 2013 and becomes 3.85 for the next two quarterly periods. The senior secured leverage ratio with which we need to comply reduces to 4.75 as of March 31, 2013 and remains at that level until December 31, 2013.

Based on our current financial forecast, we believe we will continue to be in compliance with, or be able to avoid an event of default under, the loan agreements and the indentures governing our notes and meet our cash flow needs during the next twelve months. In the event of an unanticipated adverse variance compared to the financial forecast, which might lead to an event of default, we have the opportunity to take certain mitigating actions in order to avoid such a default, including: reducing or deferring discretionary expenditure; selling assets; re-negotiating financial covenants; and securing additional sources of finance or investment. In the unlikely event our results of operations are significantly lower than our forecast and our mitigating actions are unsuccessful, this could result in a breach of one or more of our financial covenants, including the leverage ratio. Under such circumstances, it is possible we would be required to repay all our outstanding secured debt and unsecured notes. We may not have the ability to repay such amounts.

In December 2012, we amended our Senior Secured Credit agreement as set forth under “—Debt and Financing Arrangements” below. Under continuing terms of our Senior Secured Credit Agreement and 2012 Secured Credit Agreement, we are required to refinance or repay approximately $750 million of our senior notes due 2014 on or prior to May 29, 2014, or the maturity date of our debt under the Senior Secured Credit Agreement and 2012 Secured Credit Agreement will be accelerated from the current maturity dates of August 2015 and November 2015 to May 2014 and August 2014, respectively. We may not have the ability to repay such amounts.

 

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As of the date of this Annual Report on Form 10-K, we announced a restructuring plan, the effect of which, among other things, will be to partially repay the senior notes of approximately $1 billion and exchange all or substantially all of the remaining senior notes with new senior notes due September 2016. In connection with the restructuring, we have entered into a new second priority senior secured credit agreement. In the event that all the senior notes due 2014 are repaid or extended, the maturity of our debt under the Senior Secured Credit Agreement and 2012 Secured Credit Agreement will not be accelerated to May 2014 and August 2014 as reflected above. In this case, substantially all of our debt will be scheduled for repayment in or after August 2015. There is no certainty that this refinancing will be completed.

We believe an important measure of our liquidity is unlevered free cash flow. This measure is a useful indicator of our ability to generate cash to meet our liquidity demands. We believe unlevered free cash flow provides investors a better understanding of how assets are performing and measures management’s effectiveness in managing cash. We define unlevered free cash flow as net cash provided by (used in) operating activities of continuing operations, adjusted to exclude the impact of interest payments and to include capital expenditures on property and equipment additions and capital lease repayments. We believe this measure gives management and investors a better understanding of the cash flows generated by our underlying business, as our interest payments are primarily related to the debt assumed from previous business acquisitions while our capital expenditures are primarily related to the development of our operating platforms.

In addition, we present Travelport Adjusted EBITDA as a liquidity measure as we believe it is a useful measure to our investors to assess our ability to comply with certain debt covenants, including our maximum leverage ratios. Our total leverage ratio under our credit agreements is broadly computed by dividing the total debt (as defined under our credit agreements) as of the balance sheet date by a number which is broadly computed from the last twelve months of Travelport Adjusted EBITDA. Our first lien leverage ratio under our credit agreements is computed by dividing the total first lien loans (as defined under our credit agreements) as of the balance sheet date by a number which is broadly computed from the last twelve months of Travelport Adjusted EBITDA. Our senior secured leverage ratio under our 2012 Secured Credit Agreement is computed by dividing the total senior secured debt (as defined under our 2012 Secured Credit Agreement) as of the balance sheet date by a number which is broadly computed from the last twelve months of Travelport Adjusted EBITDA.

 

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Travelport Adjusted EBITDA and unlevered free cash flow are non-GAAP measures and may not be comparable to similarly named measures used by other companies. These measures should not be considered as measures of liquidity or cash flows from operations as determined under US GAAP. The following table provides a reconciliation of these non-GAAP measures:

 

     Year Ended December 31,  
(in $ millions)    2012     2011     2010  

Travelport Adjusted EBITDA

     455        507        545   

Less:

      

Interest payments

     (232     (267     (232

Tax payments

     (16     (22     (24

Changes in operating working capital

     72        (7     (47

FASA liability payments

     (7     (16     (18

Defined benefit pension plan funding

     (27     (17     (3

Other adjusting items (1)

     (64     (54     (40
  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities of continuing operations

     181        124        181   

Add: interest paid

     232        267        232   

Less: capital expenditures on property and equipment additions of continuing operations

     (92     (72     (173

Less: repayment of capital lease obligations

     (16     (14     (10
  

 

 

   

 

 

   

 

 

 

Unlevered free cash flow

     305        305        230   
  

 

 

   

 

 

   

 

 

 

 

(1) Other adjusting items relates to payments for costs included within operating income but excluded from Travelport Adjusted EBITDA. These include (i) $15 million and $21 million payments related to a historical dispute related to a now terminated arrangement with former distributor in the Middle East during the years ended December 31, 2012 and 2011, respectively, (ii) $20 million, $16 million and $30 million of corporate transaction costs payments during the years ended December 31, 2012, 2011 and 2010, respectively, (iii) $28 million and $6 million of litigation and related costs payments during the years ended December 31, 2012 and 2011, respectively, and (v) $1 million, $11 million and $10 million of restructuring related payments made during the years ended December 31, 2012, 2011 and 2010, respectively.

Cash Flows

The following table summarizes the changes to our cash flows provided by (used in) operating, investing and financing activities for the years ended December 31, 2012, 2011 and 2010:

 

     Year Ended December 31,  
(in $ millions)    2012     2011     2010  

Cash provided by (used in):

      

Operating activities of continuing operations

     181        124        181   

Operating activities of discontinued operations

            (12     103   

Investing activities

     (89     556        (241

Financing activities

     (106     (791     (22

Effects of exchange rate changes

            5        4   
  

 

 

   

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

     (14     (118     25   
  

 

 

   

 

 

   

 

 

 

 

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Year Ended December 31, 2012 Compared to Year Ended December 31, 2011

At December 31, 2012, we had $110 million of cash and cash equivalents, a decrease of $14 million compared to December 31, 2011. The following discussion summarizes changes to our cash flows from operating, investing and financing activities for the year ended December 31, 2012 compared to the year ended December 31, 2011.

Operating activities of continuing operations:    For the year ended December 31, 2012, cash provided by operating activities of continuing operations was $181 million compared to $124 million for the year ended December 31, 2011. The increase of $57 million is primarily due to a $35 million decrease in interest payments and improvements in working capital, offset by a decline in Adjusted EBITDA.

Operating activities of discontinued operations:    For the year ended December 31, 2011, cash used by operating activities of the GTA business was $12 million. The GTA business was disposed of on May 5, 2011.

Investing Activities:    The cash used in investing activities for the year ended December 31, 2012 was primarily in relation to $92 million for capital expenditures. The cash provided by investing activities for the year ended December 31, 2011 consists of $628 million net cash received from the sale of the GTA business, offset by $77 million used for capital expenditure. Capital expenditure includes $5 million related to our disposed GTA business.

Financing Activities:    Cash used in financing activities for the year ended December 31, 2012 was $106 million. This primarily comprised of (i) $296 million of debt repayments, (ii) $42 million of net cash payments on the settlement of derivative contracts, (iii) $20 million of debt finance costs, offset by (vi) $250 million of proceeds from borrowings, including $170 million borrowed under the 2012 Secured Credit Agreement. The cash used in financing activities for the year ended December 31, 2011 was $791 million, and primarily comprised of (i) $672 million of debt repayments, (ii) $100 million of debt finance costs (iii) $89 million of distributions to our parent, offset by (iv) $35 million of revolver borrowings, and (v) $34 million cash received on settlement of derivative contracts.

Year Ended December 31, 2011 Compared to Year Ended December 31, 2010

As of December 31, 2011, we had $124 million of cash and cash equivalents, a decrease of $118 million compared to December 31, 2010. The following discussion summarizes changes to our cash flows from operating, investing and financing activities for the year ended December 31, 2011 compared to the year ended December 31, 2010.

Operating activities of continuing operations:    For the year ended December 31, 2011, cash provided by operating activities of continuing operations was $124 million compared to $181 million for the year ended December 31, 2010. The decrease of $57 million is primarily due to (i) $35 million of incremental interest payments, (ii) $14 million of incremental defined benefit pension plan funding, and (iii) $14 million incremental cash used for other adjusting items, including the payment of NDC arbitration costs.

Operating activities of discontinued operations:    For the year ended December 31, 2011, cash used in operating activities of the GTA business was $12 million, compared to cash provided by operating activities of the GTA business $103 million for the year ended December 31, 2010. The operating activities of the GTA business for 2011 reflect its activities through May 5, 2011, the date of disposal of the business.

Investing activities:    The cash provided by investing activities for the year ended December 31, 2011 was $556 million. This was primarily due to (i) $628 million of net cash received from the sale of the GTA business, offset by (ii) $77 million of cash used for capital expenditures. The cash used in investing activities for the year ended December 31, 2010 was $241 million, primarily due to (i) $182 million used for capital expenditures, including amounts related to the software license from IBM, (ii) $50 million of additional investment in Orbitz Worldwide, (iii) $16 million for business acquisitions, offset by (iv) $7 million relating to sale of assets and restricted cash movement. Capital expenditures include $5 million and $9 million for the years ended December 31, 2011 and 2010, respectively, related to our disposed GTA business.

Financing activities:    Cash used in financing activities for the year ended December 31, 2011 was $791 million. This primarily comprised (i) $672 million of principal repayments of indebtedness, including $655

 

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million of term loan repayments primarily from sale proceeds of the GTA business, (ii) $100 million of cash used for debt finance costs associated with the Restructuring (iii) $89 million of capital distribution to our parent, offset by (iv) $35 million of revolver borrowings, and (v) $34 million cash received on settlement of derivative contracts. The cash used in financing activities for the year ended December 31, 2010 was $22 million and primarily consisted of (i) $517 million of proceeds from new borrowings, offset by (ii) $318 million of debt repayments; (iii) $137 million of cash restricted for “Tranche S” term loans; (iv) $61 million of net cash payments on the settlement of derivative contracts; and (v) $20 million of debt finance costs.

Debt and Financing Arrangements

The following table summarizes our net debt position as of December 31, 2012 and December 31, 2011:

 

     December 31,     Change  
(in $ millions)    2012     2011     $  

Current portion of long-term debt

     38        50        (12

Long-term debt

     3,392        3,357        35   
  

 

 

   

 

 

   

 

 

 

Total debt

     3,430        3,407        23   

Less: cash and cash equivalents

     (110     (124     14   

Less: cash held as collateral

     (137     (137       
  

 

 

   

 

 

   

 

 

 

Net debt

     3,183        3,146        37   
  

 

 

   

 

 

   

 

 

 

Secured Debt

As of December 31, 2012, our credit agreements and secured notes provide financing of $2,012 million, consisting of (i) a $1,881 million term loan facility, (ii) a $118 million of external revolving credit facility, (iii) a $133 million letter of credit facility collateralized with $137 million of restricted cash and (iv) a $13 million synthetic letter of credit facility.

On December 11, 2012, we amended and restated our existing Senior Secured Credit Agreement pursuant to the Fifth Amended and Restated Agreement which, among other things, (i) added additional guarantees and collateral from subsidiaries previously excluded from the collateral and guarantee requirements under the Senior Secured Credit Agreement, (ii) amended intercompany transaction restrictions and (iii) increased the interest rate payable to lenders by 25 basis points. In addition, at a future date and upon an additional increase of 50 basis points in the interest rate payable to lenders under the Senior Secured Credit Agreement, the Fifth Amended and Restated Agreement (i) permits us to issue additional junior secured debt; (ii) amends the change of control definition to permit holders of our Secured Priority Secured Notes, Senior Notes and Senior Subordinated Notes and holders of term loans issued by our direct parent holding company, Travelport Holdings Limited, to acquire voting stock of Travelport Limited or any of its direct or indirect parents without triggering an event of default under the First Lien Credit Agreement and (iii) amends certain existing covenants. The amendments to the covenants include, but are not limited to: (a) a decrease in the minimum liquidity covenant to $45 million starting on September 30, 2013, (b) a delay in step-downs in the total leverage ratio covenant by four quarters commencing with the quarter ending September 30, 2013, (c) an increase in the general basket for investments to $35 million, and (d) permits us to refinance the Secured Priority Secured Notes, which carry payment-in-kind interest, with new junior secured indebtedness that pays cash interest.

As a result of the Fifth Amendment and Restated Credit Agreement, (i) the interest rates on our euro and dollar denominated term loans due August 2015 increased from EURIBOR plus 4.5% and USLIBOR plus 4.5% respectively to EURIBOR plus 4.75% and US LIBOR plus 4.75%, respectively, and (ii) the interest rates on the dollar denominated “Tranche S” term loans increased from USLIBOR plus 4.5% to USLIBOR plus 4.75%.

On May 8, 2012, we entered into a credit agreement (the “2012 Secured Credit Agreement”) which (i) allowed for $175 million of new term loans issued at a discount of 3%, secured on a junior priority basis to the

 

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term loans under the Senior Secured Credit Agreement and on a senior priority basis to Second Priority Secured Notes, (ii) carries interest at USLIBOR plus 9.5% with a minimum USLIBOR floor of 1.5%, payable quarterly, and (iii) added a senior secured leverage ratio test, initially set at 4.95 until December 31, 2012.

Proceeds from the term loans under the 2012 Secured Credit Agreement were used to repay in full $41 million of euro denominated terms loans due August 2013, $121 million of dollar denominated term loans due August 2013 and $3 million of dollar denominated term loans due August 2015.

Foreign exchange fluctuations resulted in a $6 million increase in the principal amount of euro denominated long term debt during the year ended December 31, 2012.

During the year ended December 31, 2012, $14 million of interest was capitalized into the Second Priority Secured Notes.

As of December 31, 2011, we had capacity to borrow $181 million under the revolving credit facility of the Senior Secured Credit Agreement. On May 8, 2012, we entered into a revolving credit loan modification agreement relating to the Senior Secured Credit Agreement that, among other things, extended the maturity date of $61 million of the revolving loans under the Senior Secured Credit Agreement to May 24, 2015. In August 2012, we entered into a separate agreement relating to $62 million of revolving credit facility loan set to expire in August 2012 that assigned the commitments to a Travelport subsidiary and extended the maturity date to August 2013. The remaining $57 million of capacity under the revolving credit facility remains unchanged and is due to expire in August 2013.

The interest rates on the revolving loans increased from LIBOR plus 4.5% to LIBOR 4.75% pursuant to the Fifth Amended and Restated Credit Agreement. The commitment fee on the revolving loans remains at 300 basis point as at December 31, 2012.

During the year ended December, 2012, we borrowed $80 million and repaid $95 million under the revolving credit facility. At December 31, 2012, we had outstanding borrowings to external lenders of $20 million under the revolving credit facility, with remaining external borrowing capacity of $98 million.

As of December 31, 2012, we had approximately $118 million of commitments outstanding under our cash collateralized letter of credit facility and $11 million of commitments outstanding under our synthetic letter of credit facility. The commitments under these two facilities included approximately $72 million in letters of credit issued by us on behalf of Orbitz Worldwide. As of December 31, 2012, we had $17 million of remaining capacity under our letter of credit facilities.

On September 30, 2011, we amended our then existing Senior Secured Credit Agreement pursuant to the Fourth Amended and Restated Credit Agreement. The Fourth Amended and Restated Credit Agreement, among other things (i) allowed for new second lien term loans secured on a second priority basis, as described further below; (ii) added a minimum liquidity covenant to be effective under certain conditions; (iii) increased our restricted payment capacity; (iv) limits the general basket for investments to $20 million; (v) provided for our payment of a consent fee to various lenders; (vi) requires us to purchase and retire up to $20 million of our Senior Notes under certain conditions for each of the next two years; and (vii) amended our total leverage ratio test, which is initially set at 8.0 until June 30, 2013, and added a first lien leverage ratio test, which is initially set at 4.0 until June 30, 2013.

On September 30, 2011, we entered into the Second Lien Credit Agreement which, among other things; (i) allowed for new term loans in an aggregate principal amount of $342.5 million; (ii) matures on December 1, 2016; (iii) carries an interest rate equal to LIBOR plus 6%, payable in cash (only when permitted by the terms of the Fourth Amended and Restated Credit Agreement) or payment-in-kind interest on a cumulative quarterly basis; (iv) is guaranteed, on a secured second priority basis, by the same entities that guarantee our obligations under the senior secured credit agreement; (v) has substantially the same covenants and events of default as under the senior secured credit agreement; and (vi) may, under certain conditions, be converted into newly issued private-for-life bonds (the “Second Priority Secured Notes”) to be governed by an indenture that contains substantially the same covenants, events of default and remedies as the Second Lien Credit Agreement (the “Bond Conversion”).

 

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On September 30, 2011, we issued $207.5 million of term loans under the Second Lien Credit Agreement, which we then distributed to Travelport Holdings Limited. On October 3, 2011, Travelport Holdings Limited exchanged its second lien term loans as consideration to purchase $207.6 million of its unsecured PIK term loans at par.

On November 30, 2011, we completed the Bond Conversion and the Second Lien Credit Agreement was terminated. During 2011, $3 million of interest was capitalized into the Second Priority Secured Notes. As of December 31, 2011, we had outstanding $211 million of Second Priority Secured Notes.

In May 2011, proceeds from the sale of the GTA business, together with existing cash, were used to make a $655 million early repayment of term loans under our Senior Secured Credit Agreement, consisting of $19 million of euro denominated term loans due August 2013, $135 million of euro denominated term loans due August 2015, $51 million of dollar denominated term loans due August 2013 and $450 million of dollar denominated term loans due August 2015. We repaid approximately $3 million of our dollar denominated debt as quarterly installments in the first quarter of 2011.

The principal amount of our euro denominated term loans under the Senior Secured Credit Agreement increased by approximately $4 million as a result of foreign exchange fluctuations during the year ended December 31, 2011. This foreign exchange loss was fully offset by gains on foreign exchange hedge instruments contracted by us.

During the year ended December 31, 2011, we borrowed $35 million under our revolving credit facility which was repaid in January 2012.

Unsecured Debt

As of December 31, 2012, we had outstanding $122 million aggregate principal amount of senior dollar floating rate notes due 2014, €152 million ($201 million) aggregate principal amount of senior euro floating rate notes due 2014, $429 million aggregate principal amount of 9 7/8% senior dollar fixed rate notes due 2014, and $250 million aggregate principal amount of 9% senior dollar fixed rate notes due 2016 (collectively, the “Senior Notes”). Our euro denominated and dollar denominated floating rate senior notes bear interest at a rate equal to EURIBOR plus 4 5/8% and USLIBOR plus 4 5/8%, respectively. Our Senior Notes are unsecured senior obligations and are subordinated to all our existing and future secured indebtedness (including debts outstanding under the Senior Secured Credit Agreement, the 2012 Secured Credit Agreement and the Second Priority Secured Notes described under “—Secured Debt” above), but are senior in right of payment to any existing and future subordinated indebtedness (including the Senior Subordinated Notes described below). Upon the occurrence of a change of control, which is defined in the Indentures governing the Senior Notes, we shall make an offer to repurchase all of the Senior Notes at a price in cash equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest, if any, to the relevant purchase date.

During the year ended December 31, 2012, we repurchased $14 million of 9 7/8% dollar denominated Senior Notes, $11 million of euro denominated floating rate Senior Notes and $1 million of dollar denominated floating rate Senior Notes, resulting in a gain of $6 million.

As of December 31, 2012, we had outstanding $247 million aggregate principal amount of 11 7/8% senior subordinated dollar denominated notes due 2016 and €140 million ($184 million) aggregate principal amount of 10 7/8% senior subordinated euro denominated notes due 2016 (collectively, the “Senior Subordinated Notes”). Our Senior Subordinated Notes are unsecured senior subordinated obligations and are subordinated in right of payment to all of the Borrower’s existing and future senior indebtedness and secured indebtedness (including debts outstanding under the Senior Secured Credit Agreement, the 2012 Secured Credit Agreement and the Second Priority Secured Notes described under “—Secured Debt” above and the Senior Notes described above). Upon the occurrence of a change of control, which is defined in the Indentures governing the Senior Subordinated Notes, we shall make an offer to repurchase the Senior Subordinated Notes at a price in cash equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest, if any, to the relevant purchase date.

 

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The principal amount of our euro denominated Senior Notes and Senior Subordinated Notes increased by approximately $5 million and decreased by approximately $13 million as a result of foreign exchange fluctuations during the year ended December 31, 2012 and December 31, 2011, respectively.

Guarantees and Covenants

Travelport LLC, our indirect wholly-owned subsidiary, is the borrower (the “Borrower”) under the Senior Secured Credit Agreement, the 2012 Secured Credit Agreement, the Second Priority Secured Notes, the Senior Notes and the Senior Subordinated Notes. All obligations under our Senior Secured Credit Agreement, our 2012 Secured Credit Agreement, Second Priority Secured Notes, Senior Notes and Senior Subordinated Notes are unconditionally guaranteed by Travelport Limited, as parent guarantor, Waltonville Limited and TDS Investor (Luxembourg) S.à.r.l., as intermediate parent guarantors, and, subject to certain exceptions, each of our existing and future domestic wholly-owned subsidiaries. In addition, our secured debt issued under the Senior Secured Credit Agreement, the 2012 Secured Credit Agreement and the Second Priority Secured Notes is unconditionally guaranteed by certain existing non-domestic wholly-owned subsidiaries. All obligations under the Senior Secured Credit Agreement, the 2012 Secured Credit Agreement and the Second Priority Secured Notes, and the guarantees of those obligations, are secured by substantially all the following assets of the Borrower and each guarantor, subject to certain exceptions: (i) a pledge of 100% of the capital stock of the Borrower, 100% of the capital stock of each guarantor and 65% of the capital stock of each of our wholly-owned non-US subsidiaries that are directly owned by us or one of the guarantors; and (ii) a security interest in, and mortgages on, substantially all tangible and intangible assets of the Borrower and each U.S. guarantor subject to additional collateral and guarantee obligations.

The 2012 Secured Credit Agreement contains a general debt basket that may be secured by the assets of non-domestic subsidiaries in amounts up to $50 million or $145 million (with a portion of such $145 million being shared with the general lien basket), depending on the percentage of consolidated EBITDA provided by the guarantees of, and pledges of the equity in, such non-domestic guarantors. We currently have not met the threshold that would allow us to utilize the $145 million general debt basket for non-domestic subsidiaries.

Borrowings under the Senior Secured Credit Agreement are subject to amortization and prepayment requirements, and the Senior Secured Credit Agreement contains various covenants, including leverage ratios, events of default and other provisions.

Total net debt per our debt covenants is broadly defined as total debt excluding the collateralized portion of the “Tranche S” term loans, less cash and cash equivalents. Travelport Adjusted EBITDA is defined under our debt covenants as EBITDA adjusted to exclude the impact of purchase accounting, impairment of goodwill and intangibles assets, expenses incurred to acquire and integrate Travelport’s portfolio of businesses, costs associated with our restructuring efforts, non-cash equity-based compensation, unrealized gains (losses) on foreign exchange derivatives and other adjustments made to exclude expenses outside the normal course of operations.

The Senior Secured Credit Agreement, the 2012 Secured Credit Agreement and the Indentures governing the Second Priority Secured Notes, Senior Notes and Senior Subordinated Notes, limit our and certain of our subsidiaries’ ability to:

 

   

incur additional indebtedness or issue certain preferred shares;

 

   

pay dividends on, repurchase or make other distributions in respect of their capital stock or make other restricted payments;

 

   

make certain investments;

 

   

sell certain assets;

 

   

create liens on certain assets to secure debt;

 

   

consolidate, merge, sell or otherwise dispose of all or substantially all their assets;

 

   

enter into certain transactions with affiliates; and

 

   

designate subsidiaries as unrestricted subsidiaries.

 

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Subject to certain exceptions, the Indentures governing the Second Priority Secured Notes, Senior Notes and Senior Subordinated Notes do not permit us or our restricted subsidiaries to incur additional indebtedness, including secured indebtedness. Neither Travelport (Bermuda) Ltd. nor any of its subsidiaries, which together comprise non-US operations of Travelport, guarantees the Senior Notes and the Senior Subordinated Notes. As a result, these entities are less restricted than the Issuer and the guarantor entities in their ability to incur indebtedness. As of December 31, 2012, we were in compliance with the restrictive covenants under the Indentures.

Capital Leases

During the year ended December 31, 2012, we repaid $16 million under our capital lease obligations, terminated $14 million of capital leases and entered into $63 million of new capital leases for information technology assets. During the year ended December 31, 2011, we repaid approximately $14 million under our capital lease obligations and entered into $28 million of capital leases for information technology assets.

Foreign Currency and Interest Rate Risk

Portions of the debt used to finance our operations are exposed to interest rate and foreign currency exchange rate fluctuations. We use various hedging strategies and derivative financial instruments to create an appropriate mix of fixed and floating rate debt and to manage our exposure to changes in foreign currency exchange rates associated with our euro denominated debt. The primary interest rate exposure during the year ended December 31, 2012 and 2011 was due to interest rate fluctuations in the United States and Europe, specifically USLIBOR and EURIBOR interest rates. We currently use interest rate and foreign currency derivative contacts, including forward contracts and currency options as the derivative instruments in these hedging strategies.

We also use foreign currency forward contracts to manage our exposure to changes in foreign currency exchange rates associated with our foreign currency denominated receivables and payables and forecasted earnings of our foreign subsidiaries (primarily to manage our foreign currency exposure to the British pound, Euro and Australian dollar).

During the years ended December 31, 2012, and 2011, none of the derivative financial instruments used to manage our interest rate and foreign currency exposures were designated accounting hedges, although during the year ended December 31, 2010, certain of our derivative financial instruments were designated as hedges for accounting purposes. The fluctuations in the fair value of foreign currency derivative financial instruments not designated as hedges for accounting purposes, along with the ineffective portion of fluctuations in the fair value of such instruments designated as hedges, are recorded as a component of selling, general and administrative expenses in our consolidated statements of operations. (Losses) gains on these foreign currency derivative financial instruments amounted to nil, $(2) million and $(50) million for the years ended December 31, 2012, 2011 and 2010, respectively. The fluctuations in the fair value of interest rate derivative financial instruments not designated as hedges for accounting purposes, along with the ineffective portion of fluctuations in the fair value of such instruments designated as hedges, are recorded as a component of interest expense, net, in our consolidated statements of operations. Losses on these interest rate derivative financial instruments amounted to $(4) million, $(4) million and $(22) million for the years ended December 31, 2012, 2011 and 2010, respectively. The fluctuations in the fair values of our derivative financial instruments partially offset by the impact of the changes in the value of the underlying risks they are intended to economically hedge. During the year ended December 31, 2010, we recorded the effective portion of designated cash flow hedges in other comprehensive income (loss).

As of December 31, 2012, our interest rate and foreign currency hedges cover transactions for periods that do not exceed two years. As of December 31, 2012, we had a net asset position of $11 million related to derivative instruments associated with our euro denominated and floating rate debt, our foreign currency denominated receivables and payables, and forecasted earnings of our foreign subsidiaries.

We assess our market risk based on changes in interest and foreign currency exchange rates utilizing a sensitivity analysis that measures the potential impact in earnings, fair values, and cash flows based on a hypothetical 10% change (increase and decrease) in interest and foreign currency rates. We used December 31,

 

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2012 market rates to perform a sensitivity analysis separately for each of our market risk exposures. The estimates assume instantaneous, parallel shifts in interest rate yield curves and exchange rates. We have determined, through such analyses, that the impact of a 10% change in interest rates and foreign currency exchange rates with respect to the British pound and Australian dollar on our earnings, fair values and cash flows would not be material.

We have determined, through the sensitivity analysis, the impact of a 10% increase in foreign currency exchange rate with respect to the Euro would result in a charge of $24 million to our consolidated statement of operations, while a 10% decrease in foreign currency exchange rate with respect to the Euro wound result in a benefit of $21 million to our consolidated statement of operations. This exposure to the Euro is primarily a result of our Euro long term debt balances, which are not fully hedged by foreign exchange derivative instruments to offset the fluctuations in Euro exchange rates to the US dollar.

Financial Obligations

Contractual Obligations

The following table summarizes our future contractual obligations as of December 31, 2012. The table below does not include future cash payments related to (i) contingent payments that may be made to third parties at a future date; (ii) income tax payments for which the timing is uncertain; (iii) the various guarantees and indemnities described in the notes to the consolidated financial statements; or (iv) obligations related to pension and other post-retirement defined benefit plans.

 

     Year Ended December 31,  
(in $ millions)    2013      2014      2015      2016      2017      Thereafter      Total  

Debt ( 1)

     38         772         1,672         920         15                   13         3,430   

Interest payments (2)

     247         236         150         127         3         3         766   

Operating leases (3)

     13         11         8         7         5         25         69   

Purchase commitments (4)

     47         35         31         33                         146   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     345         1,054         1,861         1,087         23         41         4,411   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Under certain circumstances, of the $1,672 million debt maturing in the year ending December 31, 2015, $1,485 million and $171 million are subject to a reduction in maturity to May 2014 and August 2014 respectively (see “—Liquidity and Capital Resources”).

 

(2) Interest on floating rate debt and euro denominated debt is based on the interest rate and foreign exchange rate as of December 31, 2012. As of December 31, 2012, we have $61 million of accrued interest on our consolidated balance sheet that will be paid in 2013. Interest payments exclude the effects of mark-to-market adjustments on related hedging instruments.

 

(3) Primarily reflects non-cancellable operating leases on facilities and data processing equipment.

 

(4) Primarily reflects our agreement with a third party for data center services.

Our obligations related to defined benefit and post-retirement plans are actuarially determined on an annual basis at our financial year end. As of December 31, 2012, plan contributions of $1 million are expected to be made in 2013. Funding projections beyond 2013 are not practical to estimate. Income tax liabilities for uncertain tax positions were excluded as we are not able to make a reasonably reliable estimate of the amount and period of related future payments. As of December 31, 2012 we had $23 million of gross unrecognized tax benefit for uncertain tax positions.

Other Commercial Commitments and Off-Balance Sheet Arrangements

Other Commitments:    As part of a restructuring (the “Restructuring”) of our direct parent company, Travelport Holdings Limited (“Holdings”), senior unsecured payment-in-kind (“PIK”) term loans, we intend to invest $135 million of Second Priority Secured Notes plus accrued interest, into an unrestricted subsidiary,

 

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subject to a favorable declaratory judgment ruling. The unrestricted subsidiary will then deliver these Second Priority Secured Notes, plus accrued interest, in satisfaction of the existing $135 million of Holdings’ senior unsecured PIK term loans.

Company Litigation:    We are involved in various claims, legal proceedings and governmental inquiries related to contract disputes, business practices, intellectual property and other commercial, employment and tax matters. We believe we have adequately accrued for such matters as appropriate or, for matters not requiring accrual, we will not have a material adverse effect on its results of operations, financial position or cash flows based on information currently available. However, litigation is inherently unpredictable and although we believe our accruals are adequate and/or that it has valid defenses in these matters, unfavorable resolutions could occur, which could have a material effect on our results of operations or cash flows in a particular reporting period.

On April 12, 2011, American Airlines filed a suit against Travelport and Orbitz Worldwide in the United States District Court for the Northern District of Texas. American Airlines amended its complaint on June 9, 2011 to add Sabre as a defendant. On November 21, 2011, the Court dismissed all but one claim against us, but American Airlines amended its complaint again on December 5, 2011, asserting three new claims and reasserting one previously dismissed claim against us. On February 28, 2012, the Court granted American Airlines leave to reassert a more limited version of one additional claim that was previously dismissed. We again moved to dismiss American Airlines’ new and reasserted claims, but on August 7, 2012, the Court ruled that American Airlines could proceed with its claims. American Airlines is alleging violations of US federal antitrust laws based on the ways in which we operate our GDS and the terms of its contracts with suppliers and subscribers, including Orbitz Worldwide. American Airlines also alleges that we conspired with other GDSs and travel agencies to exclude American Airlines’ Direct Connect from competition for travel agencies. The suit seeks injunctive relief and damages. Although we believe American Airlines will allege damages that would be material to us if there was an adverse ruling, we believe American Airlines’ claims are without merit, and we intend to defend the claims vigorously. While no assurance can be provided, we do not believe the outcome of this dispute will have a material adverse effect on our results of operations or liquidity condition. On December 22, 2011, we filed counterclaims against American Airlines, alleging violations of US federal antitrust laws based on actions American Airlines has taken against us and other industry participants. On August 16, 2012, the Court dismissed our counterclaims on standing grounds. On September 6, 2012, the Court stayed the case until December 21, 2012 to allow for mediation. The mediation was held on December 12 and 13, 2012. The parties continue to negotiate to resolve their dispute and to settle the case. The stay of the case was lifted on January 15, 2013 and discovery is proceeding.

In September 2011, we received letters from Dewey & LeBoeuf LLP as counsel to certain holders of its outstanding Senior and Senior Subordinated Notes (the “Notes”) making certain assertions alleging potential events of default under the Indentures relating to the Restructuring. We disagree with the assertions in the letters and we believe we are in full compliance with the provisions of the Indentures for the Notes. On October 28, 2011, pursuant to the terms of the Restructuring, we filed a complaint for declaratory judgment against The Bank of Nova Scotia Trust Company of New York, as initial trustee under the Indentures governing its outstanding Senior Notes, in the United States District Court for the Southern District of New York (the “Court”), and we filed an amended complaint on November 3, 2011. In this declaratory judgment action, we are seeking a ruling from the Court that the investment of $135 million in an unrestricted subsidiary is permissible under the terms of the Indentures and is, therefore, not an event of default under the Indentures as alleged in the letters referenced above. In the event we do not receive a declaratory judgment ruling that the investment in the unrestricted subsidiary is permitted, the investment will not be made. On February 24, 2012, Computershare Trust Company, N.A. (the successor trustee under the Indentures governing such Notes) (the “Trustee”) filed an answer and counterclaim in response to our amended complaint. The answer adds Travelport Holdings Limited as a party and seeks a ruling from the Court that the investment of $135 million described above would violate the terms of the Indentures and would constitute an event of default under the Indentures if it was made. Further, the counterclaim seeks (i) to receive a determination as to the occurrence of certain alleged fraudulent conveyances in the context of the Restructuring and to recover assets alleged to be fraudulently conveyed by Travelport LLC to the Company, and by the Company to, or for the benefit of, Travelport Holdings Limited, (ii) to annul and set aside obligations alleged to be fraudulently incurred by Travelport LLC, and (iii) to obtain a judicial

 

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determination that Travelport LLC has violated its contractual obligations to debt holders. On April 18, 2012, the Trustee filed an amended answer and counterclaims. On February 13, 2013, the Court issued a 90-day stay of the litigation. We believe these claims are without merit although no assurance can be given due to the uncertainty inherent in litigation.

Standard Guarantees/Indemnifications:    In the ordinary course of business, we enter into numerous agreements that contain standard guarantees and indemnities whereby we indemnify another party for breaches of representations and warranties. In addition, many of these parties are also indemnified against any third-party claim resulting from the transaction that is contemplated in the underlying agreement. Such guarantees or indemnifications are granted under various agreements, including those governing (i) purchases, sales or outsourcing of assets or businesses, (ii) leases of real estate, (iii) licensing of trademarks, (iv) use of derivatives, and (v) issuances of debt securities. The guarantees or indemnifications issued are for the benefit of the (i) buyers in sale agreements and sellers in purchase agreements, (ii) landlords in lease contracts, (iii) licensees of our trademarks, (iv) financial institutions in derivative contracts, and (v) underwriters in debt security issuances. While some of these guarantees extend only for the duration of the underlying agreement, many survive the expiration of the term of the agreement or extend into perpetuity (unless subject to a legal statute of limitations). There are no specific limitations on the maximum potential amount of future payments that we could be required to make under these guarantees, nor are we able to develop an estimate of the maximum potential amount of future payments to be made under these guarantees, as the triggering events are not subject to predictability and there is little or no history of claims against us under such arrangements. With respect to certain of the aforementioned guarantees, such as indemnifications of landlords against third-party claims for the use of real estate property leased by us, we maintain insurance coverage that mitigates any potential payments to be made.

Critical Accounting Policies

In presenting our financial statements in conformity with US GAAP, we are required to make estimates and assumptions that affect the amounts reported and related disclosures. Several of the estimates and assumptions required relate to matters that are inherently uncertain as they pertain to future events. If there is a significant unfavorable change to current conditions, it could result in a material adverse impact to our consolidated results of operations, financial position and liquidity. We believe the estimates and assumptions used when preparing our consolidated financial statements were the most appropriate at that time. Presented below are those accounting policies that we believe require subjective and complex judgments that could potentially affect reported results. However, the majority of our businesses operate in environments where a fee is paid for a service performed, and, therefore the majority of transactions are based on accounting policies that are neither particularly subjective, nor complex.

GDS Revenue Recognition

Fees are collected from travel suppliers based upon the bookings made by travel agencies, internet sites and other subscribers. We also collect fees from travel agencies, internet sites and other subscribers for providing the ability to access schedule and fare information, book reservations and issue tickets for air travel through the use of our GDS. Our GDS records revenue for air travel reservations processed through Galileo, Apollo and Worldspan at the time of the booking of the reservation. In cases where the airline booking is cancelled, the booking fee must be refunded to the customer less any cancellation fee. Additionally, certain of our more significant contracts provide for incentive payments based upon business volume. As a result, we record revenue net of estimated future cancellations and net of anticipated incentives for customers. Cancellations prior to the day of departure are estimated based on the historical level of cancellations rates, adjusted to take into account any recent factors which could cause a change in those rates. Anticipated incentives are calculated on a consistent basis and frequently reviewed. In circumstances where expected cancellation rates or booking behavior changes, our estimates are revised, and in these circumstances, future cancellation and incentive estimates could vary materially, with a corresponding variation in net revenue. Factors which could have a significant effect on our estimates include global security issues, epidemics or pandemics, natural disasters, general economic conditions, the financial condition of travel suppliers, and travel related accidents.

 

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Our GDS distribute its products through a combination of owned sales and marketing organizations, or SMOs, and a network of non-owned national distribution companies, or NDCs. The NDCs are used in markets where we do not have our own SMOs to distribute our products. In cases where NDCs are owned by airlines, we may pay a commission to the NDCs/airlines for the sales of distribution services to the travel agencies and also receive revenue from the same NDCs/airlines for the sales of segments through Galileo and Worldspan. We account for the fees received from the NDCs/airlines as revenue, and commissions paid to NDCs/airlines as cost of revenue. Fees received and commissions paid are presented in the consolidated statements of operations on a gross basis, as the benefits derived from the sale of the segment are sufficiently separable from the commissions paid.

Development Advances

We pay inducements to traditional and online travel agencies for their usage of our GDS. These inducements may be paid at the time of signing a long-term agreement, at specified intervals of time, upon reaching specified transaction thresholds or for each transaction processed through our GDS. Inducements that are payable on a per transaction basis are expensed in the month the transactions are generated. Inducements paid at contract signing or payable at specified dates are capitalized as development advances and amortized over the expected life of the travel agency contract. Inducements payable upon the achievement of specified objectives are assessed as to the likelihood and amount of ultimate payment and expensed as incurred. If the estimate of the inducements to be paid to travel agencies in future periods changes, based upon developments in the travel industry or upon the facts and circumstances of a specific travel agency, cost of revenue could increase or decrease accordingly. In addition, we estimate the recoverability of capitalized development advances based upon the expected future cash flows from transactions generated by the related travel agencies. If the estimate of the future recoverability of amounts capitalized changes, cost of revenue will increase as the amounts are written-off. As of December 31, 2012 and December 31, 2011, we recorded development advances of $155 million and $163 million, respectively, which are included on our consolidated balance sheets.

Valuation of Equity Method Investments

We review our investment in Orbitz Worldwide for impairment quarterly to determine if a decrease in value is other than temporary. This analysis is focused on the market value of Orbitz Worldwide shares compared to our recorded book value of such shares. Factors that could lead to impairment of our investment in the equity of Orbitz Worldwide include, but are not limited to, a prolonged period of decline in the price of Orbitz Worldwide stock or a decline in the operating performance of, or an announcement of adverse changes or events by, Orbitz Worldwide. We may be required in the future to record a charge to earnings if our investment in equity of Orbitz Worldwide becomes impaired. Any such charge would adversely impact our results.

Pension and Other Post-Retirement Defined Benefits

We provide post employment defined benefits to a number of our current and former employees. Costs associated with post employment defined benefits include pension and post-retirement health care expenses for employees, retirees and surviving spouses and dependents.

The determination of the obligation and expense for our pension and other post-retirement employee benefits, such as retiree health care, is dependent on certain assumptions used by actuaries in calculating such amounts. Certain of the more important assumptions are described in Note 14 — Employee Benefit Plans to the consolidated financial statements included in Part II, Item 8, “Financial Statements and Supplementary Data”, of this Annual Report on Form 10-K and include the discount rate, expected long-term rate of return on plan assets, rates of increase in health care costs, retirement rates, mortality rates and other factors. The effects of any modification to those assumptions are either recognized immediately or amortized over future periods in accordance with US GAAP. Actual results that differ from assumptions used are accumulated and generally amortized over future periods.

The primary assumptions affecting our accounting for employee benefits are as follows:

 

   

Discount rate:    The discount rate is used to calculate pension and post-retirement employee benefit obligations. The discount rate assumption is based on a constant effective yield from matching projected

 

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plan cash flows to high quality (AA) bond yields of corresponding maturities as of the measurement date. We used weighted average discount rates of 3.6% for defined benefit pension plans and 3.8% for post-retirement benefit plans to determine our pension and other benefit obligations as of December 31, 2012.

The impact of a 100 basis point increase or decrease in the discount rate for defined benefit pension plans would be to decrease pension liabilities by $76 million or increase pension liabilities by $93 million, respectively, as of December 31, 2012. The sensitivity to a 100 basis point increase or decrease in the discount rate assumption related to our pre-tax employee benefit expense for 2012 would be to decrease or increase, respectively, the 2012 pre-tax pension expense by $4 million, as the net actuarial losses or gains more than offset the decrease or increase in interest expense.

 

   

Expected long-term rate of return on plan assets:    The expected long-term rate of return is used in the calculation of net periodic benefit cost. The required use of the expected long-term rate of return on plan assets may result in recognized returns that are greater or less than the actual returns on those plan assets in any given year. The expected long-term rate of return for pension assets has been determined using historical returns for the different asset classes held by our trusts and its asset allocation, as well as inputs from internal and external sources regarding expected capital market return, inflation and other variables. In determining the pension expense for 2012, we used a weighted average expected long-term rate of return on plan assets of 7.2%.

Actual returns on pension assets for 2012, 2011 and 2010 were 11.6%, 5.4% and 12.4%, respectively, compared to the expected rate of return assumption of 7.2%, 7.4% and 6.3%, respectively. The impact of a 100 basis point increase or decrease in the expected return on assets for 2012 would have been to decrease or increase the 2012 pre-tax pension expense by $3 million.

While we believe these assumptions are appropriate, significant differences in actual experience or significant changes in these assumptions may materially affect our defined benefit pension and post-retirement employee benefit obligations and our future expense. See Note 14 — Employee Benefit Plans to the consolidated financial statements for more information regarding our retirement benefit plans.

Derivative Instruments

We use derivative instruments as part of our overall strategy to manage our exposure to market risks primarily associated with fluctuations in foreign currency and interest rates. As a matter of policy, we do not use derivatives for trading or speculative purposes. We determine the fair value of our derivative instruments using pricing models that use inputs from actively quoted markets for similar instruments and other inputs which require judgment. These amounts include fair value adjustments related to our own credit risk and counterparty credit risk.

Subsequent to initial recognition, we adjust the initial fair value position of the derivative instruments for the creditworthiness of its banking counterparty (if the derivative is an asset) or of our own (if the derivative is a liability). This adjustment is calculated based on default probability of the banking counterparty or the Company, as applicable, and is obtained from active credit default swap markets and is then applied to the projected cash flows. The aggregate counterparty credit risk adjustment applied to our derivative position was approximately nil and $11 million as of December 31, 2012 and December 31, 2011, respectively.

We use foreign currency derivative contracts, including forward contracts and currency options, to manage our exposure to changes in foreign currency exchange rates associated with our euro denominated debt, our foreign currency denominated receivables and payables, and forecasted earnings of foreign subsidiaries (primarily to manage our foreign currency exposure to the British pound, Euro and Australian dollar). A portion of our debt is exposed to interest rate fluctuations. We use various hedging strategies and derivative financial instruments to create an appropriate mix of fixed and floating rate assets and liabilities. The primary interest rate exposure as of December 31, 2012 and 2011 was due to interest rate fluctuations in the United States and Europe, specifically the impact of USLIBOR and EURIBOR interest rates on the variable rate borrowings. We currently use interest rate swaps as the derivative instrument in these hedging strategies.

 

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As of December 31, 2012, none of the derivative contracts used to manage our foreign currency and floating interest rate exposures are designated as cash flow hedges, although during the year ended December 31, 2010, certain derivative instruments have been designated as hedges for accounting purposes. The fluctuations in the value of the undesignated derivative instruments and the ineffective portion of derivatives designated as hedging instruments are recognized in earnings in our consolidated statements of operations. However, the fluctuations largely offset the impact of changes in the value of the underlying risk they are intended to economically hedge.

Impairment of Goodwill and Trademarks and Tradenames

We review the carrying value of goodwill and indefinite-lived intangible assets annually or more frequently if circumstances indicate impairment may have occurred. In performing this review, we are required to estimate the fair value of goodwill and other indefinite-lived intangible assets.

The determination of the fair value requires us to make significant judgments and estimates, including projections of future cash flows from the business. These estimates and required assumptions include estimated revenues and revenue growth rates, operating margins used to calculate projected future cash flows, future economic and market conditions, and the estimated weighted average cost of capital (“WACC”). We base our estimates on assumptions we believe to be reasonable but that are unpredictable and inherently uncertain. Actual future results may differ from those estimates.

We perform our annual impairment testing of goodwill and indefinite-lived intangible assets in the fourth quarter of each year, subsequent to completing our annual forecasting process. We have adopted a qualitative approach to test goodwill and indefinite-lived assets for impairment for the year ended December 31, 2012. Based on a number of key factors it is determined that it is more likely than not, that the fair value of goodwill and indefinite-lived intangible assets is greater than its carrying amount. As a result of the impairment testing performed in each of the years ended December 31, 2012, 2011 and 2010, we concluded that the fair value of goodwill and other indefinite-lived intangible assets significantly exceeded the carrying value. As a result no impairment of intangibles was recorded in any of these years.

Impairment of Definite-Lived Assets

We review the carrying value of these assets if indicators of impairment are present and determine whether the sum of the estimated undiscounted future cash flows attributable to these assets is less than the carrying value. If less, we recognize an impairment loss based on the excess of the carrying amount of the definite-lived asset over its respective fair value. In estimating the fair value, we are required to make a number of assumptions including assumptions related to projections of future cash flows, estimated growth and discount rates. A change in these underlying assumptions could cause a change in the results of the tests and, as such, could result in impairment in future periods. No indicators were identified during any of the years 2012, 2011 or 2010 requiring testing of our definite-lived assets for impairment.

Income Taxes

We recognize deferred tax assets and liabilities based on the temporary differences between the financial statement carrying amounts and the tax bases of assets and liabilities. We regularly review deferred tax assets by jurisdiction to assess their potential realization and establish a valuation allowance for portions of such assets that we believe will not be ultimately realized. In performing this review, we make estimates and assumptions regarding projected future taxable income, the expected timing of the reversals of existing temporary differences and the implementation of tax planning strategies. A change in these assumptions could cause an increase or decrease to the valuation allowance resulting in an increase or decrease in the effective tax rate, which could materially impact the results of operations. During 2012, a $44 million increase in the valuation allowance was recognized within the provision for income taxes in the consolidated statement of operations.

We operate in numerous countries where our income tax returns are subject to audit and adjustment by local tax authorities. As we operate globally, the nature of the uncertain tax positions is often very complex and subject to change and the amounts at issue can be substantial. It is inherently difficult and subjective to estimate such amounts, as we have to determine the probability of various possible outcomes. We re-evaluate uncertain tax

 

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positions on a quarterly basis. This evaluation is based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, effectively settled issues under audit, and new audit activity. Such a change in recognition or measurement would result in the recognition of a tax benefit or an additional charge to the tax provision.

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to a variety of market risks, including changes in foreign currency exchange rates and interest rates. Our exposure to market risks is managed though the use of financial instruments when considered appropriate. We use interest rate swaps, foreign currency forward contracts and foreign currency options to manage and reduce interest rate and foreign currency exchange rate risk associated with our euro denominated and floating rate debt, our foreign currency denominated receivables and payables, and forecasted earnings of our foreign subsidiaries.

We are exclusively an end user of these financial instruments, which are commonly referred to as derivatives. We do not engage in trading, market making or other speculative activities in the derivatives markets. We manage our exposure to counterparty credit risk related to our use of derivatives through minimum credit standards and diversification of counterparties. Our counterparties are substantial investment and commercial banks with significant experience in providing such derivative financial instruments. More detailed information about these derivative financial instruments is provided in Note 12—Financial Instruments to the consolidated financial statements.

We assess our market risk based on changes in interest rates and foreign currency exchange rates utilizing a sensitivity analysis that measures the potential impact on earnings, fair values and cash flows. There are certain limitations inherent in this sensitivity analyses as our overall market risk is influenced by a wide variety of factors, including the volatility present within markets and the liquidity of markets. These “shock tests” are constrained by several factors, including the necessity to conduct analysis based on a single point in time and the inability to include complex market reactions normally arising from the market shifts modeled.

Interest Rate Risk

Our primary interest rate exposure as of December 31, 2012 was due to interest rate fluctuations in the United States and Europe, specifically the impact of USLIBOR and EURIBOR interest rates on our variable rate borrowings. We anticipate such interest rate risk will remain a market risk exposure for the foreseeable future.

We assess our interest rate market risk utilizing a sensitivity analysis based on our interest rate derivatives and a hypothetical 10% change (increase or decrease) in interest rates. We have determined, through such analysis, that the impact of a 10% change in interest rates as of December 31, 2012 would not be material on our earnings. Increases or decreases in interest rates on our variable rate borrowings are expected to be partially offset by corresponding gains or losses related to interest rate derivatives and when combined, these do not result in a material impact on our consolidated financial statements.

Foreign Currency Risk

We have foreign currency exposure to exchange rate fluctuations, particularly with respect to the British pound, Euro and Australian dollar. We anticipate such foreign currency risk will remain a market risk exposure for the foreseeable future.

We assess our foreign currency market risk utilizing a sensitivity analysis based on our foreign currency derivatives and a hypothetical 10% change (appreciation or depreciation) in the value of underlying currencies being hedged, against the US dollar as of December 31, 2012. We have determined, through such analysis, that the impact of a 10% change in foreign currency exchange rates with respect to the British pound and Australian dollar would not have a material impact on our earnings for the year ended December 31, 2012.

We have determined, through the sensitivity analysis, the impact of a 10% increase in foreign currency exchange rate with respect to the Euro would result in a charge of $24 million to our consolidated statement of operations, while a 10% decrease in foreign currency exchange rate with respect to the Euro would result in a benefit of $21 million to our consolidated statement of operations. This exposure to the Euro is primarily a result

 

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of our Euro long term debt balances, which are not fully hedged by foreign exchange derivative instruments to offset the fluctuations in Euro exchange rates to the US dollar.

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See Financial Statements and Financial Statement Index commencing on Page F-1 hereof.

The consolidated financial statements and related footnotes of Travelport’s non-controlled affiliate, Orbitz Worldwide, Inc., are included as Exhibit 99 to this Form 10-K and are hereby incorporated by reference herein from the Annual Report on Form 10-K for the fiscal year ended December 31, 2012 filed by Orbitz Worldwide, Inc. with the SEC on March 5, 2013. The Company is required to include the Orbitz Worldwide financial statements in its Form 10-K due to Orbitz Worldwide meeting certain tests of significance under SEC Rule S-X 3-09. The management of Orbitz Worldwide is solely responsible for the form and content of the Orbitz Worldwide financial statements.

 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

 

ITEM 9A(T).   CONTROLS AND PROCEDURES

(a)    Disclosure Controls and Procedures.

The Company maintains disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed in reports filed under the Securities Exchange Act of 1934 (the “Act”) is recorded, processed, summarized and reported within the specified time periods and accumulated and communicated to management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Act for the year ended December 31, 2012. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, our disclosure controls and procedures are effective.

(b)    Management’s Annual Report on Internal Control over Financial Reporting.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Act. Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2012. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on this assessment, our management believes that, as of December 31, 2012, our internal control over financial reporting is effective.

(c)    Changes in Internal Control Over Financial Reporting.

There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Act) during the Company’s fiscal fourth quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

This Annual Report on Form 10-K does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our independent registered public accounting firm pursuant to temporary rules of the Commission that permit us to provide only management’s report in this Annual Report.

 

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ITEM 9B.    OTHER INFORMATION

On March 6, 2013, our Board of Directors approved a special payment to our management, including our Named Executive Officers: Gordon Wilson ($135,646); Eric J. Bock ($61,864); Philip Emery ($45,336); Kurt Ekert ($26,786); and Mark Ryan ($23,953). In addition, our Board of Directors approved supplemental awards to Mr. Wilson of $250,000 under the 2012 Long-Term Incentive Plan and $250,000 under the 2013 Long-Term Management Incentive Program. The Board of Directors also approved additional severance of 12 months of base pay for Kurt Ekert in the event that Mr. Ekert’s employment is terminated by the Company without cause or he is constructively terminated, subject to the terms and conditions set forth in Mr. Ekert’s employment agreement. The letter agreement for Mr. Ekert reflecting this change will be filed as an exhibit to our Quarterly Report on Form 10-Q for the quarterly period ending March 31, 2013.

 

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PART III

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Executive Officers and Directors

The following table sets forth information about our executive officers and directors:

 

Name

   Age     

Position

Gordon A. Wilson

     46       President and Chief Executive Officer; Director

Eric J. Bock

     47       Executive Vice President, Chief Legal Officer and Chief Administrative Officer

Philip Emery

     49       Executive Vice President and Chief Financial Officer

Kurt Ekert

     42       Executive Vice President and Chief Commercial Officer

Mark Ryan

     52       Executive Vice President and Chief Information Officer

Jeff Clarke

     51       Chairman of the Board of Directors

Douglas M. Steenland

     61       Vice Chairman of the Board of Directors

Gavin R. Baiera

     37       Director

Anthony J. Bolland

     59       Director

Martin J. Brand

     38       Director

Paul C. Schorr IV

     45       Director

Gordon A. Wilson.    Mr. Wilson has served as our President and Chief Executive Officer, as well as a member of our Board of Directors, since June 2011. Mr. Wilson served as our Deputy Chief Executive Officer from November 2009 until June 2011 and as President and Chief Executive Officer of Travelport’s GDS business (which includes the Airline IT Solutions business) since January 2007. Mr. Wilson has 21 years of experience in the electronic travel distribution and airline IT industry. Prior to the acquisition of Worldspan, Mr. Wilson served as President and Chief Executive Officer of Galileo. Mr. Wilson was Chief Executive Officer of B2B International Markets for Cendant’s Travel Distribution Services Division from July 2005 to August 2006 and for Travelport’s B2B International Markets from August 2006 to December 2006, as well as Executive Vice President of International Markets from 2003 to 2005. From 2002 to April 2003, Mr. Wilson was Managing Director of Galileo EMEA and Asia Pacific. From 2000 to 2002, Mr. Wilson was Vice President of Galileo EMEA. Mr. Wilson also served as Vice President of Global Customer Delivery based in Denver, Colorado, General Manager of Galileo Southern Africa in Johannesburg, General Manager of Galileo Portugal and Spain in Lisbon, and General Manager of Airline Sales and Marketing. Prior to joining Galileo International in 1991, Mr. Wilson held a number of positions in the European airline and chemical industries.

Eric J. Bock.    Mr. Bock has served as our Executive Vice President, Chief Legal Officer and Chief Compliance Officer since August 2006 and as our Chief Administrative Officer since January 2009. Mr. Bock served as our Corporate Secretary from August 2006 to January 2009. In addition, Mr. Bock oversees our legal, government relations, communications, compliance, corporate social responsibility and philanthropic programs and corporate secretarial functions. In addition, Mr. Bock serves as the Treasurer of the TravelportPAC Governing Committee. Mr. Bock also serves on the Board of Directors of numerous subsidiaries of Travelport, as well as Travelport’s Employee Benefits and Charitable Contribution Committees. Mr. Bock is a member of the Board of Directors of eNett. From May 2002 to August 2006, Mr. Bock was Executive Vice President, Law, and Corporate Secretary of Cendant where he oversaw legal groups in multiple functions, including corporate matters, finance, mergers and acquisitions, corporate secretarial and governance, as well as the Travelport legal function since its inception in 2001. From July 1997 until December 1999, Mr. Bock served as Vice President, Legal, and Assistant Secretary of Cendant and was promoted to Senior Vice President in January 2000 and Corporate Secretary in May 2000. Prior to this, Mr. Bock was an associate in the corporate group at Skadden, Arps, Slate, Meagher & Flom LLP in New York.

Philip Emery.    Mr. Emery has served as our Executive Vice President and Chief Financial Officer since October 2009 and is responsible for all aspects of finance and accounting, decision support and financial

 

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planning and analysis globally. Prior to this role, Mr. Emery had served as Chief Financial Officer of Travelport’s GDS division since September 2006. Between 2002 and 2005, Mr. Emery was Chief Financial Officer of Radianz, a global extranet for the financial services industry, based in New York, which was sold to British Telecom in 2005. Prior to that, Mr. Emery worked in a number of global and European strategic planning and financial roles for London Stock Exchange and NASDAQ-listed companies, such as Rexam plc and 3Com Inc., holding roles such as International Finance Director and Controller and Operations Director.

Kurt Ekert.    Mr. Ekert is our Executive Vice President and Chief Commercial Officer with global responsibility for sales, customer engagement, product marketing, pricing, supplier services/content and operations across over 170 countries. Prior to this role, Mr. Ekert was Chief Operating Officer of the Company’s former GTA business, where Mr. Ekert led GTA’s commercial and operating functions, as well as all elements of its online consumer business. Before joining GTA, Mr. Ekert was Senior Vice President, Travelport Supplier Services. Also at Travelport, Mr. Ekert has held the positions of Group Vice President, Strategy and Business Development and Chief Operating Officer, Travelport/Orbitz for Business. Prior to joining Travelport, Mr. Ekert’s experience in the travel industry included a number of senior finance roles at Continental Airlines. Mr. Ekert serves as a director of Passur Aerospace, Inc.

Mark Ryan.    Mr. Ryan is our Executive Vice President and Chief Information Officer with global responsibility for formulating and executing Travelport’s technology strategy, including software solutions, applications development and IT operations. Mr. Ryan also serves on the Board of Directors of IGT Solutions Private Limited, a joint venture majority owned by Travelport. Prior to joining Travelport, Mr. Ryan was Senior Vice President and Chief Information Officer of Atlanta-based Matria Healthcare. Prior to joining Matria Healthcare in 2005, Mr. Ryan was Chief Technology Officer and a director of Vodafone Global Content Services. From 1999 to 2001, Mr. Ryan was Chief Technology Officer at Weather.com/The Weather Channel. Mr. Ryan also has served as Chief Technology Officer of eBay. Prior to joining eBay, Mr. Ryan spent eighteen years with IBM and was an executive-on-loan to the 1996 Atlanta Olympic Games in the role of chief integration architect.

Jeff Clarke.    Mr. Clarke has served as the Chairman of our Board of Directors since February 2012 and as a member of our Board of Directors since September 2006. Mr. Clarke has served as a member of our Audit Committee and Compensation Committee since February 2012. From June 2011 until February 2012, Mr. Clarke served as our Executive Chairman. From May 2006 until June 2011, Mr. Clarke was as our President and Chief Executive Officer. Mr. Clarke also serves as Chairman of the Board of Directors of Orbitz Worldwide, Inc. Mr. Clarke has served as a Managing Partner at Augusta Columbia Capital Group since February 2012. Mr. Clarke has 26 years of strategic, operational and financial experience with leading high-technology firms. From April 2004 to April 2006, Mr. Clarke was Chief Operating Officer of the software company CA, Inc. (formerly Computer Associates, Inc.). Mr. Clarke also served as Executive Vice President and Chief Financial Officer of CA, Inc. from April 2004 until February 2005. From 2002 through November 2003, Mr. Clarke was Executive Vice President, Global Operations at Hewlett-Packard Company. Before then, Mr. Clarke joined Compaq Computer Corporation in 1998 and held several positions, including Chief Financial Officer of Compaq from 2001 until the time of Compaq’s merger with Hewlett-Packard Company in 2002. From 1985 to 1998, Mr. Clarke held several financial, operational and international management positions with Digital Equipment Corporation. Mr. Clarke serves on the Board of Directors of Red Hat, Inc., a New York Stock Exchange company that is a leading open source technology solutions provider. Mr. Clarke is also a member of the Northeastern University Corporation.

Douglas M. Steenland.    Mr. Steenland has served as our Vice Chairman and as a member of our Audit Committee and Compensation Committee since August 2011. Mr. Steenland is an Executive Advisor to the Blackstone Private Equity Group. Mr. Steenland is Chairman of the Board of Performance Food Group Inc. and holds a portfolio of board directorships, including American International Group, Inc., a New York Stock Exchange company, and its wholly owned subsidiary, International Lease Finance Corporation, Chrysler Group LLC, Digital River, Inc., a Nasdaq company, and Hilton Worldwide Inc. Mr. Steenland previously held numerous executive roles during seventeen years with Northwest Airlines Corporation, most latterly as President

 

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and Chief Executive Officer, from October 2004 until its merger with Delta Air Lines in October 2008. In the past five years, Mr. Steenland has also served as a director of Northwest Airlines Corporation.

Gavin R. Baiera.    Mr. Baiera has served as a member of our Board of Directors and a member of our Audit Committee and Compensation Committee since October 2011. Mr. Baiera is a Managing Director at Angelo, Gordon & Co., L.P., a privately-held registered investment advisor currently managing approximately $23 billion. Prior to joining Angelo Gordon, Mr. Baiera was co-head of the Strategic Finance Group at Morgan Stanley which was responsible for all origination, underwriting and distribution of restructuring transactions. Prior to joining Morgan Stanley in 2005, Mr. Baiera was a Vice President of General Electric Capital Corporation concentrating on underwriting and investing in restructuring transactions. Mr. Baiera began his career at General Electric Capital Corporation in their financial management program. Mr. Baiera serves on the Board of Directors of American Media, Inc.

Anthony J. Bolland.    Mr. Bolland has served as a member of our Board of Directors since December 2011. Mr. Bolland is a managing director and was a founding partner (1983) of BV Investment Partners and predecessor and related entities. Mr. Bolland has over thirty years of experience in principal investing activities and has been a member of the board of directors of numerous private and public corporations, including American Media, Inc., Six Flags Entertainment, Covanta Energy Corporation, Integra Telecommunications, Rural Cellular Corporation, Sygnet Wireless, National Law Publishing Company and Production Resources Group.

Martin J. Brand.    Mr. Brand has served as a member of our Board of Directors, Chairman of our Audit Committee and a member of our Compensation Committee since March 2007. Mr. Brand is a Managing Director in the Corporate Private Equity Group of Blackstone. Mr. Brand joined Blackstone’s London office in 2003 and transferred to Blackstone’s New York office in 2005. Since joining Blackstone, Mr. Brand has been involved in the execution of the firm’s direct investments in BankUnited, PBF Energy, Exeter Finance, Cine UK, Kabel BW, Performance Food Group, Kabelnetz NRW, New Skies, NHP, OSUM, Primacom, Sulo, Travelport and Vistar. Before joining Blackstone, Mr. Brand was a consultant with McKinsey & Company. Prior to that, Mr. Brand was a derivatives trader with the Fixed Income, Currency and Commodities division of Goldman, Sachs & Co. in New York and Tokyo. Mr. Brand is a member of the Boards of Directors of Bayview Financial, Performance Food Group, Orbitz Worldwide, Inc., Exeter Finance and PBF Energy. Mr. Brand serves on the Advisory Board of the Hudson Union Society and the Board of Directors of the Harvard Business School Club of New York.

Paul C. Schorr IV (“Chip”).    Mr. Schorr has served as a member of our Board of Directors since July 2006 and was the Chairman of our Board of Directors from September 2006 until May 2011. Mr. Schorr has served as Chairman of our Compensation Committee since September 2006. Mr. Schorr has served as a member of our Audit Committee since September 2006 and served as Chairman of the Audit Committee from September 2006 to March 2007. Mr. Schorr is Chairman and Managing Partner of Augusta Columbia Capital Group, where he principally concentrates on investments in technology. Until January 2011, Mr. Schorr was a Senior Managing Director in the Corporate Private Equity Group of Blackstone. Mr. Schorr remains a Senior Advisor to Blackstone on technology investments. Before joining Blackstone in 2005, Mr. Schorr was a Managing Partner of Citigroup Venture Capital in New York where he was responsible for group management and the firm’s technology/telecommunications practice. Mr. Schorr was involved in such transactions as Fairchild Semiconductor, ChipPAC, Intersil, AMI Semiconductor, Worldspan and NTelos. He had been with Citigroup Venture Capital for nine years. Mr. Schorr is a member of the Board of Directors of Ameritas Mutual Holding Company. Mr. Schorr is also a member of the Boards of Jazz at Lincoln Center and a Trustee of both the Whitney Museum of American Art and Snowmass Chapel.

Each Director is elected annually and serves until the next annual meeting of stockholders or until his successor is duly elected and qualified.

Our executive officers are appointed by, and serve at the discretion of, our Board of Directors. There are no family relationships between our Directors and executive officers.

 

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Compensation Committee Interlocks and Insider Participation

As a privately-held company, we are not required to have independent directors on our Board of Directors. Other than Mr. Bolland, none of our Directors are independent.

Board Composition

Committees of the Board

Our Board of Directors has an audit committee, a compensation committee and an executive committee. Our Board of Directors may also establish from time to time any other committees that it deems necessary and advisable. None of the Directors on these committees are independent directors.

Audit Committee

Our Audit Committee is comprised of Messrs. Clarke, Steenland, Schorr, Brand and Baiera. Mr. Brand is the Chairman of the Audit Committee. The Audit Committee is responsible for assisting our Board of Directors with its oversight responsibilities regarding: (i) the integrity of our financial statements; (ii) our compliance with legal and regulatory requirements; (iii) our independent registered public accounting firm’s qualifications and independence; and (iv) the performance of our internal audit function and independent registered public accounting firm.

As we do not have publicly traded equity outstanding, we are not required to have an audit committee financial expert. Accordingly, our Board of Directors has not made a determination as to whether it has an audit committee financial expert.

Compensation Committee

Our Compensation Committee is comprised of Messrs. Clarke, Steenland, Schorr, Brand and Baiera. Mr. Schorr is the Chairman of the Compensation Committee. The Compensation Committee is responsible for determining executive base compensation and incentive compensation and approving the terms of grants pursuant to our equity incentive program.

Code of Conduct

We have adopted a Code of Business Conduct and Ethics that applies to all of our officers and employees, including our principal executive officer, principal financial officer and principal accounting officer. Our Code of Business Conduct and Ethics can be accessed on our website at www.travelport.com. The purpose of our code is to promote honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships; to promote full, fair, accurate, timely and understandable disclosure in periodic reports required to be filed by us; and to promote compliance with all applicable rules and regulations that apply to us and our officers and Directors.

Limitations of Liability and Indemnification Matters

Our corporate bye-laws provide that, to the fullest extent permitted by law, every current and former Director, officer or other legal representative of our company shall be entitled to be indemnified by our company against judgments, fines, penalties, excise taxes, amounts paid in settlement and costs, charges and expenses (including attorneys’ fees and disbursements) resulting from any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, including, but not limited to, an action by or in the right of the company to procure a judgment in its favor, by reason of the fact that such person is or was a director or officer of the company, or is or was serving in any capacity at the request of the company for any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise. Persons who are not our Directors or officers may be similarly indemnified in respect of service to the company or to any other entity at the request of the company to the extent our Board of Directors at any time specifies that such persons are entitled to indemnification.

 

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In addition, we and one or more of our affiliates have entered into agreements that indemnify our Directors, executive officers and certain other employees. Such agreements provide for indemnification for related expenses, including attorneys’ fees, judgments, fines and settlement amounts incurred by any of these individuals in any action or proceeding. We believe that these provisions and agreements are necessary to attract and retain qualified persons as our Directors and executive officers.

As of the date of this Annual Report on Form 10-K, we are not aware of any pending litigation or proceeding involving any Director, officer, employee or agent of our company where indemnification will be required or permitted. Nor are we aware of any threatened litigation or proceeding that might result in a claim for indemnification.

 

ITEM 11.     EXECUTIVE COMPENSATION

Compensation Discussion and Analysis

Introduction

Our executive compensation plans are designed to attract and retain talented individuals and to link the compensation of those individuals to our performance.

We have, from time to time, used market data provided by Towers Watson and New Bridge Street Consultants (an Aon Hewitt company) to obtain comparative information about the levels and forms of compensation that companies of comparable size to us award to executives in comparable positions. We use this data to ensure that our executive compensation program is competitive and that the compensation we award to our senior executives is competitive with that awarded to senior executives in similar positions at similarly-sized companies. Our market comparison information is generally based upon S&P 500 and FTSE 250 and 350 survey data. We also use compensation data on competitive companies to the extent that it is available.

The Compensation Committee of our Board of Directors is comprised of Messrs. Schorr (chair), Clarke, Steenland, Baiera and Brand. The purpose of the Compensation Committee is to, among other things, determine executive compensation and approve the terms of our equity incentive plans.

Compensation of Our Named Executive Officers

Our Named Executive Officers for the fiscal year ended December 31, 2012 are Gordon Wilson, our President and Chief Executive Officer; Eric J. Bock, our Executive Vice President, Chief Legal Officer and Chief Administrative Officer; Philip Emery, our Executive Vice President and Chief Financial Officer; Kurt Ekert, our Executive Vice President and Chief Commercial Officer; and Mark Ryan, our Executive Vice President and Chief Information Officer.

Executive Compensation Objectives and Philosophy

Our primary executive compensation objective is to attract and retain top talent from within the highly competitive global marketplace so as to maximize shareholder value. We seek to recruit and retain individuals who have demonstrated a high level of expertise and experience and who are leaders in our unique, technology-based industry. Our highly competitive compensation program is composed of four principal components:

 

   

salary;

 

   

annual incentive compensation (bonus awards);

 

   

long-term incentive compensation (generally in the form of restricted equity); and

 

   

comprehensive employee benefits and limited executive perquisites.

Our executive compensation strategy uses cash compensation and perquisites to attract and retain talent, and our variable cash and long-term incentives aim to ensure a performance-based delivery of pay that aligns, as much as possible, our Named Executive Officers’ rewards with our shareholders’ interests and takes into account

 

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competitive factors and the need to attract and retain talented individuals. We use a balance of performance and time-based targets aligned to strategic objectives. We also consider individual circumstances related to each executive’s retention.

Salary.    Base salaries for our Named Executive Officers reflect each executive’s level of experience, responsibilities and expected future contributions to our success, as well as market competitiveness. Base salaries are specified in each officer’s employment agreement, which dictates the individual’s base salary for so long as the agreement specifies, as described more fully below under “— Employment Agreements.” We review base salaries annually based upon, among other factors, individual and company performance and the competitive environment in our industry in determining whether salary adjustments are warranted.

Bonuses.    We pay several different types of bonuses:

 

   

Discretionary Bonus.    Discretionary bonuses can take the form of signing, sale, transaction and other discretionary bonuses, as determined by the Compensation Committee of our Board of Directors. We paid discretionary bonuses to our Named Executive Officers in 2012, as described in “— Summary Compensation Table” below, and we may elect to pay these types of bonuses again from time to time in the future.

 

   

Annual Incentive Compensation (Bonus).    We have developed an annual bonus program to align executives’ goals with our objectives for the applicable year. The target bonus payment for each of our Named Executive Officers is specified in each Named Executive Officer’s employment agreement or related documentation and ranges from 100% to 150% of each officer’s base salary. As receipt of these bonuses is subject to the attainment of financial performance criteria, they may be paid, to the extent earned or not earned, at, below, or above target levels. The bonuses paid for 2012 are set forth in the Summary Compensation Table below under the “Non-Equity Incentive Plan Compensation” column. Bonuses for 2013 will be paid on an annual basis and will be based upon the achievement of Adjusted EBITDA and revenue targets established by our Board of Directors. For 2013, our Named Executive Officers will have a maximum potential award of twice their target bonus.

 

   

Retention.    In certain circumstances, we provide additional incentives in order to ensure retention of key executives. In October 2011, we put in place a retention agreement for Mr. Bock with respect to each quarter of 2012.

Long-Term Incentive Compensation.    The principal goal of our long-term incentive plans is to align the interests of our executives and our shareholders.

 

   

Stock Partnership in TDS Investor (Cayman) L.P.    We provide long-term incentives through our TDS Investor (Cayman) L.P. equity incentive plan, which uses different classes of equity and is described further below under “— Our Equity Incentive Plans.” Under the terms of the plan, we may grant equity incentive awards in the form of Class A-2 Units and/or restricted equity units (“REUs”) of our ultimate parent, TDS Investor (Cayman) L.P., a limited partnership, to officers, employees, non-employee directors or consultants. Each Class A-2 Unit represents an interest in a limited partnership and has economic characteristics that are similar to those of shares of common stock in a corporation. Each REU entitles its holder to receive one Class A-2 Unit at a future date, subject to certain vesting conditions.

 

   

Stock Ownership in Travelport Worldwide Limited.    We provide long-term incentives through our Travelport Worldwide Limited equity incentive plan, which is described further below under “— Our Equity Incentive Plans.” Under the terms of the plan, we may grant equity incentive awards in the form of shares and/or restricted share units in one of our parent companies, Travelport Worldwide Limited (“TWW”), to officers, employees, non-employee directors or consultants. Each share represents a common share of stock in TWW. Each TWW restricted share unit entitles its holder to receive one share at a future date, subject to certain vesting conditions. In 2012, we awarded restricted share units in TWW to Mr. Ryan, as described in more detail below.

 

   

2012 Executive Long-Term Incentive Plan.    We provide cash long-term incentives through our Travelport 2012 Executive Long-Term Incentive Plan (the “2012 LTIP”). Under the terms of the 2012

 

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LTIP, we granted cash-based awards to our Named Executive Officers that will be paid based on continued employment and our achievement of certain performance targets. One quarter of the award is eligible to be paid in March 2013, and the remainder is eligible to be paid in March 2014, with earlier “good leavers” eligible for pro-rata payment.

 

   

2013 Long-Term Management Incentive Program.    In order to retain our key executives, we provide long-term incentives through our 2013 Long-Term Management Incentive Program. Under the terms of this program, we granted awards to our Named Executive Officers that will be paid based on continued employment and subject to compliance under our debt covenants. The awards under this program vest semi-annually over three years (2013-2015), with 12.5% of the award eligible for vesting in each of the first four semi-annual vesting dates and 25% eligible for vesting in each of the last two semi-annual vesting dates. Following a change in control, earlier “good leavers” are eligible monthly vesting for the period of service plus 18 months.

Pension and Non-Qualified Deferred Compensation.    None of our Named Executive Officers receives benefits under a defined benefit pension plan. We do, however, provide for limited deferred compensation arrangements for US executives.

All Other Compensation.    We have a limited program granting perquisites and other benefits to our executive officers.

Employment Agreements.    We have entered into employment agreements with our Named Executive Officers. In 2012, these include letter agreements with Mr. Wilson and Mr. Ryan with respect to certain terms and conditions of their employment. These agreements are described more fully below under “— Employment Agreements” and “— Potential Payments Upon Termination of Employment or Change in Control.”

COMPENSATION COMMITTEE REPORT

The Compensation Committee has reviewed and discussed the foregoing Compensation Discussion and Analysis with management, and based on that review and discussion, the Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.

Compensation Committee

Paul C. Schorr IV

Jeff Clarke

Douglas M. Steenland

Gavin R. Baiera

Martin J. Brand

 

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Summary Compensation Table

The following table contains compensation information for our Named Executive Officers for the fiscal year ended December 31, 2012.

 

Name and Principal Position

  Year     Salary
($)
    Bonus (1)
($)
    Stock
Awards (2)
($)
    Non-Equity
Incentive Plan
Compensation (3)
($)
    All Other
Compensation (4)
($)
    Total ($)  

Gordon Wilson,

    2012        894,025        77,372        0        1,847,495                    254,067 (6)      3,072,959   

President, Chief Executive Officer and
Director (5)

    2011        822,590        87,865        1,227,925        2,532,571        181,966        4,852,916   
    2010        797,800        93,315        1,088,747        0        165,672        2,145,534   

Eric J. Bock,

    2012        600,000        534,360        0        839,125        164,029 (7)      2,137,513   

Executive Vice President, Chief Legal
Officer and Chief Administrative Officer

    2011        600,003        2,389,149        496,220        1,156,204        309,658        4,951,234   
    2010        475,000        138,968        694,214        0        101,721        1,409,902   

Philip Emery,

    2012        568,925        26,277        0        801,835        146,121 (8)      1,543,158   

Executive Vice President and
Chief Financial Officer (5)

    2011        443,033        181,596        334,684        819,785        118,988        1,898,085   
    2010        454,746        22,860        605,649        0        114,706        1,197,961   

Kurt Ekert,

             

Executive Vice President and
Chief Commercial Officer

    2012        424,231        15,092        0        629,125        65,456 (9)      1,133,904   
    2011        400,000        16,822        186,943        600,000        61,408        1,265,172   

Mark Ryan,

             

Executive Vice President and
Chief Information Officer

    2012        390,000        9,154        0        569,125        18,545 (10)      986,824   

 

  (1) Amounts included in this column reflect special payments to each of our Named Executive Officers in April 2012, April 2011 and April 2010, as well as payments to Mr. Bock in the form of sale/transaction bonuses in May 2011 and October 2011 and quarterly retention payments in each quarter of 2012, as well as a transaction bonus paid to Mr. Emery in June 2011. The amounts in this column do not include any amounts paid as annual incentive compensation (bonus) or under our 2012 LTIP, which are reported separately in the column entitled “Non-Equity Incentive Plan Compensation”.

 

  (2) Amounts included in this column reflect the grant date fair value computed in accordance with FASB ASC 718 Compensation — Stock Compensation (“FASB ASC 718”) for restricted equity units (“REUs”) with service and performance-based vesting conditions; share bonus awards that vested immediately; and restricted share units (“RSUs”) with service and performance-based vesting conditions, granted in the relevant year. As a result, the amounts included in this column do not cover the portion of awards for which the performance goals have not yet been established and communicated. The corresponding maximum grant date fair value for the awards for the applicable year are as follows: for Mr. Wilson: $1,828,180 for 2010, $0 for 2011, and $0 for 2012; for Mr. Bock: $1,165,698 for 2010, $0 for 2011 and $0 for 2012; for Mr. Emery: $985,229 for 2010, $0 for 2011, and $0 for 2012; for Mr. Ekert: $611,040 for 2011 and $0 for 2012; and for Mr. Ryan: $0 for 2012. Related fair values consider the right to receive dividends in respect of such equity awards, and, accordingly, dividends paid are not separately reported in this table. Assumptions used in the calculation of these amounts are included in footnote 17, “Equity-Based Compensation,” to the consolidated financial statements included in this Form 10-K.

 

  (3) Amounts included in this column include amounts paid as annual incentive compensation under our performance-based bonus plan, as well as the amounts paid under the 2012 LTIP in respect of 2012 performance of the Company.

 

  (4) As detailed in footnote 2 above, the right to receive dividends in respect of equity awards is included in the FASB ASC 718 value and, thus, any dividends paid to our Named Executive Officers are not included in All Other Compensation.

 

  (5) All amounts expressed for Messrs. Wilson and Emery (with the exception of equity awards) were paid in British pounds and have been converted to US dollars at the applicable exchange rate for December 31 of the applicable year, i.e. 1.6255 US dollars to 1 British pound as of December 31, 2012, 1.5545 US dollars to 1 British pound as of December 31, 2011, and 1.5659 US dollars to 1 British pound as of December 31, 2010.

 

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  (6) Includes company matching pension contributions of $81,043, supplemental cash allowance in lieu of pension contributions of $99,223, travel allowance of $8,127, car allowance benefits (and cash allowance in lieu of such benefits) of $59,984 and financial planning benefits of $5,689.

 

  (7) Includes company matching 401(k) contributions of $15,000, bonus deferred compensation match of $75,262, base compensation deferred compensation match of $21,000, car allowance benefits of $15,250, financial planning/tax preparation benefits of $13,620, tax assistance on such car allowance and financial planning/tax preparation benefits of $21,414, payment of employee FICA on vesting of equity of $1,339 and tax assistance on such FICA of $1,144.

 

  (8) Includes company matching pension contributions of $88,225, supplemental cash allowance in lieu of pension contributions of $18,994, travel allowance of $8,128, car allowance benefits of $24,870, financial planning benefits of $1,626 and commuting benefits of $4,278.

 

  (9) Includes company matching 401(k) contributions of $15,000, car allowance benefits of $16,158, financial planning/tax preparation benefits of $13,620, tax assistance on such car allowance and financial planning/tax preparation benefits of $19,732, payment of employee FICA on vesting of equity of $508 and tax assistance on such FICA of $439.

 

(10) Includes company matching 401(k) contributions of $15,000, financial planning/tax preparation benefits of $1,488, tax assistance on such financial planning/tax preparation benefits of $742, payment of employee FICA on vesting of equity of $757 and tax assistance on such FICA of $558.

Grants of Plan-Based Awards During 2012

 

              Estimated Potential Payouts
Under Non-Equity Incentive
Plan Awards (1)
    Estimated Future Payouts
Under Equity Plan
Awards
    All Other
Stock
Awards:
Number
of Shares
of Stock
Units
(#)
  Grant
Date
Fair Value
of Stock
and Option
Awards
($) (1)

Name

  Type of Award   Grant Date     Threshold
($)
    Target
($)
    Maximum
($)
    Threshold
(#)
    Target
(#)
    Maximum
(#)
     

Gordon Wilson,

  Non-Equity Incentive Plan     $ 0      $ 1,591,037      $ 2,932,075             

President, Chief Executive Officer and Director

                   

Eric J. Bock,

  Non-Equity Incentive Plan     $ 0      $ 725,000      $ 1,325,000             

Executive Vice President, Chief Legal Officer and Chief Administrative Officer

                   

Philip Emery,

  Non-Equity Incentive Plan     $ 0      $ 693,925      $ 1,262,850             

Executive Vice President and

                   

Chief Financial Officer

                   

Kurt Ekert,

  Non-Equity Incentive Plan     $ 0      $ 675,000      $ 1,225,000             

Executive Vice President and

                   

Chief Commercial Officer

                   

Mark Ryan,

  Non-Equity Incentive Plan     $ 0      $ 525,000      $ 925,000             

Executive Vice President and

  TWW Restricted Share Units     5/21/2012              22,440        45,460        68,000       

Chief Information Officer

                   

 

(1) As noted in footnote 3 to the Summary Compensation Table above, these amounts reflect both our 2012 annual performance-based bonus plan and the 2012 LTIP.

 

(2) These amounts reflect maximum grant date value of the award computed in accordance with FASB ASC 718. See footnote 2 to the Summary Compensation Table above.

Employment Agreements

We have employment agreements with each of our Named Executive Officers, which supersede all prior understandings regarding their employment. We have also granted our Named Executive Officers equity-based awards in TDS Investor (Cayman) L.P. and Travelport Worldwide Limited. The severance arrangements for our Named Executive Officers are described below under “— Potential Payments Upon Termination of Employment or Change in Control.”

 

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Gordon Wilson, President and Chief Executive Officer

Compensation, Term.    Travelport International Limited, our wholly-owned, indirect subsidiary, entered into a service agreement with Gordon Wilson on May 31, 2011 (as amended on November 7, 2012) in connection Mr. Wilson’s assumption of the role of President and Chief Executive Officer. The service agreement continues until it is terminated by either party giving to the other at least twelve months’ prior written notice. If full notice is not given, we will pay salary and benefits in lieu of notice for any unexpired period of notice, regardless of which party gave notice of termination. Mr. Wilson is entitled to a minimum base salary of £550,000, subject to annual increases at the discretion of our Board of Directors. Mr. Wilson is eligible for a target annual bonus of 150% of his base salary. Mr. Wilson’s period of continuous employment with us commenced on May 13, 1991. Mr. Wilson’s current base salary is £550,000.

Eric J. Bock, Executive Vice President, Chief Legal Officer and Chief Administrative Officer

Compensation, Term.    The employment agreement for Eric Bock, as amended on May 27, 2011, has a one-year initial term commencing September 26, 2009. It provides for automatic one-year renewal periods upon the expiration of the initial term or any subsequent term, unless either party provides the notice of non-renewal at least 120 days prior to the end of the then-current term. Mr. Bock’s employment agreement also includes provision for the payment of an annual base salary subject to annual review and adjustment, and he is eligible for a target annual bonus based upon the achievement of certain financial performance criteria of 100% of annual base salary. Mr. Bock’s current base salary is $600,000.

Philip Emery (Executive Vice President and Chief Financial Officer)

Compensation, Term.    Travelport International Limited, our wholly-owned, indirect subsidiary, entered into a contract of employment with Mr. Emery effective October 1, 2009, as amended on March 28, 2011 and November 24, 2011. Mr. Emery’s employment agreement with us continues until it is terminated by either party giving to the other at least 12 months’ prior written notice. If full notice is not given, we will pay salary (and in certain circumstances following a change in control, target bonus) in lieu of notice for any unexpired period of notice, regardless of which party gave notice of termination. Mr. Emery currently is entitled to a base salary of £350,000, which is subject to annual increases. Mr. Emery’s period of continuous employment with us commenced on September 11, 2006. Mr. Emery’s target bonus is currently 100% of his base annual salary.

Kurt Ekert, Executive Vice President and Chief Commercial Officer

Compensation, Term.    Travelport, LP, our wholly-owned, indirect subsidiary, entered into an employment agreement with Kurt Ekert, as amended on November 23, 2011 and March 6, 2013, that has a one-year initial term commencing October 21, 2011. It provides for automatic one-year renewal periods upon the expiration of the initial term or any subsequent term, unless either party provides the notice of non-renewal at least 120 days prior to the end of the then-current term. Mr. Ekert’s employment agreement also includes provision for the payment of an annual base salary subject to annual review and adjustment, and, he is eligible for a target annual bonus based upon the achievement of certain financial performance criteria of 100% of annual base salary. Mr. Ekert’s current base salary is $550,000.

Mark Ryan, Executive Vice President and Chief Information Officer

Compensation, Term.    Travelport, LP, our wholly-owned, indirect subsidiary, entered into an employment agreement with Mark Ryan, as amended on December 3, 2012, that has a one-year initial term commencing December 16, 2011. It provides for automatic one-year renewal periods upon the expiration of the initial term or any subsequent term, unless either party provides the notice of non-renewal at least 120 days prior to the end of the then-current term. Mr. Ryan’s employment agreement also includes provision for the payment of an annual base salary subject to annual review and adjustment, and he is eligible for a target annual bonus based upon the achievement of certain financial performance criteria of 100% of annual base salary. Mr. Ryan’s current base salary is $400,000.

 

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Restrictive Covenants

As a result of the restrictive covenants contained in their employment agreements and/or equity award agreements, each of the Named Executive Officers has agreed not to disclose, or retain and use for his or her own benefit or benefit of another person our confidential information. Each Named Executive Officer has also agreed not to directly or indirectly compete with us, not to solicit our employees or clients, engage in, or directly or indirectly manage, operate, or control or join our competitors, or compete with us or interfere with our business or use his or her status with us to obtain goods or services that would not be available in the absence of such a relationship to us. Each equity award agreement during their service as an executive officer provides that these restrictions are in place for two years after the termination of employment. In the case of Messrs. Bock, Ekert and Ryan, these restrictions in their employment agreements are effective for a period of two years after employment with us has been terminated for any reason. In the case of Messrs. Wilson and Emery, the restrictions contained in their employment agreements are effective for a period of 12 months following the termination of their employment. Should we exercise our right to place Messrs. Wilson or Emery on “garden leave,” the period of time that they are on such leave will be subtracted from and thereby reduce the length of time that they are subject to these restrictive covenants in their employment agreement.

In addition, each of the Named Executive Officers has agreed to grant us a perpetual, non-exclusive, royalty-free, worldwide, and assignable and sub-licensable license over all intellectual property rights that result from their work while employed with us.

Our Equity Incentive Plans

TDS Investor (Cayman) L.P.

Under the terms of the TDS Investor (Cayman) L.P. 2006 Interest Plan, as amended and/or restated, we may grant equity incentive awards in the form of Class A-2 Units or REUs to our current or prospective officers, employees, non-employee directors or consultants. Class A-2 Units are interests in a limited partnership and have economic characteristics that are similar to those of shares of common stock in a corporation. Each restricted equity unit entitles its holder to receive one Class A-2 Unit at a future date, subject to certain vesting conditions.

Travelport Worldwide Limited

On December 16, 2011, the Board of Directors of Travelport Worldwide Limited, our indirect parent company, approved the Travelport Worldwide Limited 2011 Equity Plan and the award agreements governing the grants of shares and RSUs to certain of our executives under the Plan. The shares vested immediately, and the RSUs will vest on January 1, 2014, subject to continued employment and the other terms and conditions of the award agreements. Vested RSUs will convert into shares of Travelport Worldwide Limited.

In addition, on May 21, 2012, the Board of Directors of Travelport Worldwide Limited approved a grant of RSUs under the Travelport Worldwide Limited 2011 Equity Plan to Mr. Ryan. Vesting of these RSUs is based on our achievement of EBITDA, cash flow and/or other financial targets established and defined by the Board for the fiscal years 2012 through 2015, and is subject to Mr. Ryan’s continued employment with, subject to earlier acceleration in certain circumstances described in more detail below under “— Potential Payments Upon Termination of Employment or Change in Control.”

 

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Outstanding Equity Awards at 2012 Fiscal-Year End

 

    Stock Awards  

Name

  Type of Award  (1)   Number of
Shares or
Units of
Stock that
have not
Vested (#)
    Market
Value of
Shares or
Units of
Stock that
have not
Vested ($) (2)
    Equity Incentive
Plan Awards:
Number of
Unearned Shares,
Units or Other
Rights that have
not Vested (#)
    Equity Incentive Plan
Awards: Market or
Payout Value of
Unearned Shares,
Units or Other
Rights that

have not
Vested ($) (2)
 

Gordon Wilson,
President, Chief Executive

  2009 LTIP REUs     n/a        n/a        1,160,430      $ 307,514   

Officer and Director

  2011 TWW RSUs     86,592      $ 344,636        n/a        n/a   

Eric J. Bock,
Executive Vice President, Chief Legal

  2009 LTIP REUs     n/a        n/a        739,921      $ 196,079   

Officer and Chief Administrative Officer

  2011 TWW RSUs     55,233      $ 219,827        n/a        n/a   

Philip Emery,

  2009 LTIP REUs     n/a        n/a        464,172      $ 123,006   

Executive Vice President and

  2010 LTIP REUs     n/a        n/a        509,091      $ 134,909   

Chief Financial Officer

  2011 REUs     n/a        n/a        392,500      $ 104,013   
  2011 TWW RSUs     67,551      $ 268,853        n/a        n/a   

Kurt Ekert,

  2009 LTIP REUs     n/a        n/a        280,391      $ 74,304   

Executive Vice President and

  2010 LTIP REUs     n/a        n/a        339,393      $ 89,939   

Chief Commercial Officer

  2011 TWW RSUs     34,579      $ 137,624        n/a        n/a   

Mark Ryan,

  2009 LTIP REUs     n/a        n/a        414,742      $ 109,907   

Executive Vice President and Chief

  2010 LTIP REUs     n/a        n/a        339.393      $ 89,939   

Information Officer

  2011 TWW RSUs     40,375      $ 160,693        n/a        n/a   
  2012 TWW RSUs     68,000      $ 270,640        n/a        n/a   

 

(1) This includes all awards authorized by the Board of Directors of TDS Investor (Cayman) L.P. and Travelport Worldwide Limited and includes awards which have not yet been recognized for accounting purposes as being granted.

 

(2) The equity underlying these awards is not publicly traded. Payout Value in this column is based upon the established values of each REU or RSU (as applicable) based upon the most recently completed independent valuations of the TDS Investor (Cayman), L.P. or Travelport Worldwide Limited, respectively, as of December 31, 2012. Values for REUs include the value of any cash distribution that will be paid at time of vesting.

Option Exercises and Stock Vested in 2012

 

Name

   Plan or Award Type    Number of
Restricted Equity
Units Becoming
Vested During
the Year (1)
     Number of TWW
Shares Becoming
Vested During
the Year
   Value Realized on
Vesting($)
 

Gordon Wilson,

           

President, Chief Executive

Officer and Director

   2009 LTIP REUs      1,159,014          $ 185,442   

Eric J. Bock,

           

Executive Vice President, Chief Legal Officer

and Chief Administrative Officer

   2009 LTIP REUs      739,019          $ 118,243   

Philip Emery,

   2009 LTIP REUs      463,607          $ 74,177   

Executive Vice President and

   2010 LTIP REUs      286,364          $ 75,886   

Chief Financial Officer

   2011 REUs      107,500          $ 28,488   

Kurt Ekert,

           

Executive Vice President and

   2009 LTIP REUs      280,048          $ 44,808   

Chief Commercial Officer

   2010 LTIP REUs      190,909          $ 50,591   

Mark Ryan,

           

Executive Vice President and

   2009 LTIP REUs      417,650          $ 66,825   

Chief Information Officer

   2010 LTIP REUs      190,909          $ 50,591   

 

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(1) The vesting events reflected above include the January 1, 2012 vesting of the 2011 tranche of REUs granted under the 2009 LTIP and the August 1, 2012 vesting of the 2011 tranche of REUs granted under the 2010 LTIP and separately in 2011 for Mr. Emery only, but do not include the January 1, 2013 vesting of the 2012 tranche of REUs (and those REUs eligible for catch-up vesting) granted under the 2009 LTIP.

Pension Benefits in 2012

No Named Executive Officers are currently participating in a defined benefit plan sponsored by us or our subsidiaries and affiliates.

Nonqualified Deferred Compensation in 2012

All amounts disclosed in this table relate to our Travelport Officer Deferred Compensation Plan (the “Deferred Compensation Plan”). The Deferred Compensation Plan allows certain executives in the United States to defer a portion of their compensation until a later date (which can be during or after their employment), and to receive an employer match on their contributions. In 2012, this compensation included base salary, deal/transaction bonuses, discretionary bonuses and annual and quarterly bonuses, and the employer match was 100% of employee contributions of up to 6% of the relevant compensation amount. Each participant can elect to receive a single lump payment or annual installments over a period elected by the executive of up to 10 years.

In contrast to the Summary Compensation Table and other tables that reflect amounts paid in respect of 2012, the table below reflects deferrals and other contributions occurring in 2012 regardless of the year for which the compensation relates, i.e. the amounts below include amounts deferred in 2012 in respect of 2011 but not amounts deferred in 2013 in respect of 2012.

 

<

Name

  Beginning
Balance at
Prior FYE
(12/31/2011)
($)
    Executive
Contributions
in Last FY

($)
    Registrant
Contributions
in Last FY

($)
    Aggregate
Earnings
in Last FY
($)
    Aggregate
Withdrawals/
Distributions
($)
    Aggregate
Balance
at Last FYE
(12/31/2012)
($)
 

Gordon Wilson

                                         

President, Chief Executive Officer and Director (1)

           

Eric J. Bock

    701,399        83,905        83,905        100,010        0        969,219   

Executive Vice President, Chief Legal Officer and Chief Administrative Officer

           

Philip Emery

                                         

Executive Vice President and Chief Financial Officer (1)

           

Kurt Ekert

    12,612        0        0        1,049        11,385        2,277   

Executive Vice President and Chief Commercial Officer (2)

           

Mark Ryan

    0        0        0        0