The combined statements of operations data reflect the combined
operations of Orbitz, Inc. and Orbitz, LLC. We derived the combined statements
of operations data for the period from February 24, 2000 (date of inception)
through December 31, 2000 and for the year ended December 31, 2001, and the
combined balance sheet data as of December 31, 2000 and 2001, set forth below,
from our audited combined financial statements. We derived the combined
statements of operations data for the three months ended March 31, 2001 and
2002, and the combined balance sheet data as of March 31, 2001 and 2002, from
our unaudited interim combined financial statements. In management's opinion,
these unaudited combined financial statements have been prepared on
substantially the same basis as the audited combined financial statements and
include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the combined financial information for the
periods presented. The historical results do not necessarily indicate results
expected for any future period.
February 24,
2000
(date of Three Months
inception) Year Ended March 31,
through Ended -------------------
December 31, December 31,
2000 2001 2001 2002
(in thousands, except per share data)
Combined Statements of
Operations Data:
Revenues, net: (1)
Air revenues, net $ - $37,752 $3 $26,895
Other travel revenues - 2,557 - 2,474
Other revenues - 3,094 - 2,798
Total revenues, net 43,403 3 32,167
Cost of revenues 50,077 5,750 17,674
Gross profit (loss) - (6,674 ) (5,747 ) 14,493
Operating expenses:
Sales and marketing 7,204 51,517 4,167 12,907
Technology and development 12,436 31,747 11,486 6,662
General and administrative 22,784 14,588 4,171 3,906
Stock-based compensation* 429 976 221 228
Total operating expenses 42,853 98,828 20,045 23,703
Operating loss (42,853 ) (105,502 ) (25,792 ) (9,210 )
Interest income 1,886 2,265 566 284
Net loss (2) $(40,967 ) $(103,237 ) $(25,226 ) $(8,926 )
*Stock-based compensation:
Technology and development $- $93 $- $7
General and administrative 429 883 221 221
Total stock-based
compensation $429 $976 $221 $228
27
February 24,
2000
(date of Three Months
inception) Year Ended March 31,
through Ended ---------------------
December 31, December 31,
2000 2001 2001 2002
(in thousands, except per share data)
Combined Balance Sheet
Data,
at End of Period:
Cash and cash equivalents $41,604 $47,461 $17,742 $39,125
Working capital (current
assets less current
liabilities) 34,944 32,144 1,785 26,316
Total assets 64,640 87,764 50,475 86,401
Total long-term
liabilities 320 960 480 1,120
Total equity 53,898 61,013 28,733 52,366
Other Financial Data:
Cash flows provided by
(used in):
Operating activities $(31,243) $(83,515) $(14,568) $(7,606)
Investing activities (21,909) (20,644) (9,294) (730)
Financing activities 94,756 110,016 - -
Net change in cash $41,604 $5,857 $(23,862) $(8,336)
EBITDA (3) (42,721) (97,453) (25,144) (5,741)
Gross bookings (4) - 818,493 - 541,581
º (1)
º Revenues represent activities of Orbitz subsequent to the limited launch of
our website in February 2001. Revenues include significant transactions
with our Founding Airlines and certain of their affiliates. See further
information about related party transactions at Note 8 to the combined
financial statements appearing elsewhere in this prospectus.
º (2)
º No provision for income taxes is reflected as Orbitz, LLC is treated as a
partnership for tax purposes. All operating losses of the partnership have
been allocated to our Founding Airlines. Subsequent to this offering, we
will be taxed as a C corporation rather than as a partnership and profits
and losses will be taxed at the corporate level.
º (3)
º EBITDA is net loss before interest income, depreciation expense and
amortization expense. Depreciation and amortization expense is included in
cost of revenues and operating expenses and totaled $8,049,000 in 2001 and
$3,469,000 in the first quarter of 2002. We may calculate EBITDA
differently than other companies. While EBITDA is not a recognized measure
under accounting principles generally accepted in the United States of
America, we believe that investors may find it to be a useful tool for
analyzing our financial results. EBITDA should not be construed:
º •
º as an indicator of our operating performance instead of operating
income (loss); or
º •
º as a measure of liquidity instead of cash flows from operating
activities.
º (4)
º "Gross bookings" represents the total value of travel booked through our
website, including taxes and fees.
28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a discussion of the combined operations of Orbitz, Inc.
and Orbitz, LLC and should be read in conjunction with the "Selected Financial
Data" and our combined financial statements and the related notes contained
elsewhere in this prospectus. This discussion contains forward-looking
statements that involve risks and uncertainties. Our actual results may differ
materially from those anticipated in these forward-looking statements as a
result of many factors, including, but not limited to, those set forth under
"Risk Factors" and elsewhere in this prospectus.
Overview
Description of Business
We are a leading online travel company that enables our customers to
search for and purchase a broad array of travel products, including airline
tickets, lodging, car rentals, cruises and vacation packages. At present, we
derive substantially all of our revenues from the following sources:
º •
º Supplier transaction fees: We receive minimum transaction fees based
upon contractual arrangements with our charter associates. We receive
market based commissions from our non-charter suppliers who currently
pay commissions to online travel agents.
º •
º Consumer service fees: Consumers pay a $5.00 per ticket (maximum
$10.00 per reservation) service fee on air transactions and other
additional fees in certain cases.
º •
º Reservation system booking incentives: We receive booking incentives
under our contract with Worldspan for air and car rental ticket
reservations, and Pegasus Solutions for lodging reservations made on
their systems. We are contractually obligated to share with each of
our charter associates a percentage of the booking incentives we
receive that pertain to travel products booked with that charter
associate.
º •
º Sales of advertisements on our website: Advertising revenues are
derived primarily from the delivery of third-party advertisements on
our website.
Formation
On February 24, 2000, Orbitz, LLC was formed as a Delaware limited
liability company under the name of "DUNC, LLC". Its initial members consisted
of Continental Airlines, Delta Air Lines, Northwest Airlines and United Air
Lines. On May 9, 2000, American Airlines acquired membership interests in DUNC,
LLC. Orbitz, Inc. was originally formed under the name of "DUNC, Inc." and was
incorporated in the State of Delaware on May 4, 2000. Pursuant to a series of
subscription letters dated May 9, 2000, its initial stockholders consisted of
American Airlines, Continental Airlines, Delta Air Lines, Northwest Airlines and
United Air Lines. Additionally on May 9, 2000, DUNC, Inc, purchased an
investment in DUNC, LLC and joined the other four airlines as a member of DUNC,
LLC. In July 2000, DUNC, LLC and DUNC, Inc. changed their names to "Orbitz, LLC"
and "Orbitz, Inc.", respectively.
From February 24, 2000 through February 2001, we were developing our
business, which included technology development and the establishment of our
operations. During this period, we did not generate any revenue. On February 20,
2001, we had a limited launch of our website, which generated small amounts of
revenue. On June 4, 2001, we launched Orbitz.com to the general public and began
generating meaningful revenue.
Restructuring
On April 10, 2002, we entered into a restructuring transaction to, among
other things: (1) restructure the capitalization of Orbitz, Inc. and Orbitz, LLC
to facilitate ownership by our Founding Airlines or their affiliates and future
investors in Orbitz, Inc., (2) designate Orbitz, Inc. as the sole manager of
Orbitz, LLC and (3) adopt our 2002 Stock Plan. To accomplish this
29
restructuring, a new wholly owned entity, CANDU, Inc., was formed by our
Founding Airlines or their affiliates and issued to such Founding Airlines or
their affiliates an aggregate of 20,490 shares of its Class B common stock.
CANDU, Inc. was then merged with and into Orbitz, Inc. As a result of this
restructuring transaction: (1) Orbitz, Inc. adopted the form of certificate of
incorporation of CANDU, Inc. as its certificate of incorporation and (2) the
capitalization of Orbitz, Inc. was restructured to give effect to the current
capitalization of CANDU, Inc. by converting all outstanding shares of Class B
common stock of CANDU, Inc. into shares of Class B common stock of Orbitz, Inc.,
converting all outstanding shares of common stock of Orbitz, Inc. into Class C
common stock of Orbitz, Inc. and cancelling all outstanding shares of Series A
preferred stock of Orbitz, Inc. Also in connection with the restructuring,
Orbitz, Inc. amended and restated its bylaws and adopted the CANDU, Inc. 2002
Stock Plan as its 2002 Stock Plan, and the limited liability company agreement
of Orbitz, LLC was amended to designate Orbitz, Inc. as the sole manager.
Pursuant to the certificate of incorporation of Orbitz, Inc., adopted in
connection with the restructuring, each share of Class C common stock converts
into one share of Class A common stock, $.001 par value, of Orbitz, Inc. upon
the earlier of (i) an initial public offering or (ii) one day prior to the IPO
Exchange.
A new measurement date for stock awards occurred as a result of the
restructuring transaction. Total compensation expense related to this new
measurement date is $35,466,000. Compensation expense of $15,076,000 will be
recognized on vested stock awards upon the earlier of one day prior to the IPO
Exchange or consummation of this offering and the remaining $20,390,000 will be
recognized on unvested stock awards on a go-forward basis from that date over
their remaining vesting periods.
Assuming an offering date of July 31, 2002, we expect to recognize the
remaining expense as follows:
Period from August 1 through December 31, 2002 $4,160,000
Year ended 2003 8,632,000
Year ended 2004 6,090,000
Year ended 2005 1,455,000
Year ended 2006 53,000
These amounts may change due to forfeitures and additional grants of
stock awards.
Charter Associate Agreements
We have signed charter associate agreements with 42 airlines, including
our Founding Airlines, five of the largest U.S. lodging companies and seven
major car rental companies. Our charter associate agreements with our Founding
Airlines are terminable by them in July 2007, and our agreements with other
suppliers are generally terminable by them within one to two years. These
agreements provide Orbitz with access to all fares and rates generally available
to the public, including rates and fares available on the suppliers' website. In
addition, our charter associates are obligated to provide aggregate in-kind
marketing support contractually valued at $14 million annually under the terms
of our charter associate agreements, based on anticipated bookings and the
charter associate agreements currently in effect. Examples of this support could
include references to Orbitz in printed promotional materials and in suppliers'
fare sale advertising, free tickets for promotional use and access to discounted
Web-only fares and rates. Finally, these charter associate agreements provide
Orbitz with minimum guaranteed transaction fees that decline periodically during
the term of the charter associate agreement. This is important as it gives us a
guaranteed transaction fee schedule in a time when travel suppliers are
generally reducing or eliminating commissions. In exchange for these benefits,
we provide suppliers with the assurance that we show all fares and rates without
displaying bias towards any particular supplier; that we will not accept
marketing overrides or other payments from a particular supplier in return for
providing more desirable placements in displays resulting from search requests;
and that we will share with air and car rental suppliers a portion of the
booking incentives we receive from the reservation system providers. The
guaranteed transaction fee rates under our charter associate agreements decline
progressively each
30
year throughout the term of the agreement. Beginning in the second quarter of
fiscal year 2002, air charter transaction fee rates will decline approximately
15%, 16%, 27%, 28% and 30% on an annual basis. In addition, lodging charter
transaction fee rates will decline approximately 8%, 19%, 17% and 7% and rental
car transaction fee rates will decline approximately 17% and 13% starting in
fiscal year 2002, on an annual basis. Actual transaction fees associated with a
particular transaction depend on the relevant charter agreement in effect at the
time of the reservation.
Without an increase in the volume of transactions, the declining charter
associate transaction fees will result in decreased revenue for Orbitz. Supplier
transaction fees from charter associates represented 29% of net revenues for the
three months ended March 31, 2002.
Revenues, Net
We launched our website to the general public in June 2001, after a
limited launch in February 2001. To date, we have conducted over seven million
travel transactions. A transaction represents an airline ticket purchased
through our website or a reservation of lodging, rental car, cruise or vacation
package made through our website. In the quarter ended March 31, 2002, we had
reservations for $542 million in gross bookings.
Our revenues are derived from: (1) airline travel reservation services;
(2) lodging, car rental, cruise and vacation reservation services; and (3) other
sources of revenue, including advertising, and the sale of related travel
products such as travel protection, credit cards and other technology services.
º •
º Air revenues, net: Revenues derived from airline travel reservation
services are the largest component of our revenues, accounting for
approximately 87% of revenue in 2001 and 84% for the three months
ended March 31, 2002. Our air revenues are primarily derived from
supplier transaction fees, consumer service fees and reservation
system booking incentives relating to airline travel reservation
services.
The majority of airline supplier transaction fees are based upon
contractual agreements with our 42 airline charter associates,
including our Founding Airlines, while the remaining percentage is
derived from market-based commissions paid by airlines which have not
signed charter associate agreements. We permit customers to make an
air reservation for up to four passengers in a particular session.
Effective in December 2001, we implemented a $5.00 per ticket (maximum
$10.00 per reservation) consumer service fee on air transactions. We
have, and may in the future charge higher consumer service fees in
cases where airlines do not pay supplier transaction fees. We charge
additional fees for all air reservations utilizing paper tickets and
may charge a fee for exchanging and re-issuing tickets. We receive
booking incentives under an agreement with our air reservation service
provider, Worldspan. The level of incentives received is based on a
contractual agreement and increases based on the annual volume of
bookings achieved.
We recognize airline transaction fees, reservation booking incentive
revenues and customer service fees, net of estimated future
cancellations, when the relevant reservation is booked on Orbitz.com.
º •
º Other travel revenues: Other travel revenues are primarily derived
from supplier transaction fees and reservation system booking
incentives relating to lodging, car rental, cruise and vacation
reservation services. Other travel revenues accounted for
approximately 6% of revenues for the year ended December 31, 2001 and
8% of revenues for the three months ended March 31, 2002. We recognize
supplier transaction fees and booking incentives relating to lodging,
car rentals, cruises and vacations when we receive payment or
notification of entitlement by a third-party.
º •
º Other revenues: Other revenues are comprised of revenue from
advertising as well as revenue from sponsoring links on our website to
third-party websites and transaction fees from sales of various
third-party travel-related products on our website. Examples of such
31
products include travel protection and currency exchange services.
Other revenues accounted for approximately 7% of revenues for the year
ended December 31, 2001 and 9% of revenues for the three months ended
March 31, 2002. Advertising revenues are derived from the delivery of
advertisements on our website. Advertising revenues are recognized on
display of each advertisement or ratably over the advertising period,
depending on the terms of the advertising contract.
We are currently developing two technology initiatives, supplier link
technology and Booking Engine Services, and will record revenues from these
initiatives, when and if realized, as a component of air revenues and other
revenues, respectively. Our supplier link technology will enable us to establish
direct links with an airline's internal reservation system, allowing us to
bypass GDSs for a portion of our airline ticket bookings. Our supplier link
technology initiative is at an early stage, however, and we will need to address
technical and commercial issues for it to succeed. We believe this initiative
can reduce distribution costs for airlines, while increasing our profitability.
Through our Booking Engine Services, we will use our technology to
handle bookings on an outsourced basis for some of our airline suppliers.
Effective April 15, 2002, we launched our first "powered by Orbitz" airline
website for American Airlines, so that all airline tickets purchased on AA.com,
the American Airlines website, are routed through our booking technology. As of
March 31, 2002, we had not yet recognized revenue for these services. We expect
to recognize revenues for these services in the second quarter of 2002. We have
signed an agreement with Northwest Airlines to provide similar services.
Cost of Revenues
Cost of revenues consists primarily of vendor fees for call center and
ticket fulfillment services, the costs of operating our data centers, the
portion of the reservation system booking incentive fees that we share with
travel suppliers, and reserves and related payments to airlines for tickets
purchased with fraudulent credit cards.
|