Orbitz Inc SEC Form 10-Q Filed August 11, 2004 Last Updated February 2, 2020 at 11:44 PM ST

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Submission Parts

Sequence Document Type File Name Description
1 SEC Form FORM 10-Q
2 SEC Form EXHIBIT 4.2(A)
3 SEC Form EXHIBIT 10.14(A)
4 SEC Form EXHIBIT 10.31(B)
5 SEC Form EXHIBIT 31.1
6 SEC Form EXHIBIT 31.2
7 SEC Form EXHIBIT 32.1
8 SEC Form EXHIBIT 32.2

FORM 10-Q


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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004

COMMISSION FILE NUMBER 000-50515

ORBITZ, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION)
  52-2237052
(I.R.S. EMPLOYER
IDENTIFICATION NO.)

200 S. WACKER DRIVE, SUITE 1900
CHICAGO, ILLINOIS
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

 

60606
(ZIP CODE)

(312) 894-5000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

        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. ý Yes    o No

        Indicate by check mark whether the registrant is an accelerated filer o Yes    ý No

        As of July 29, 2004 the registrant had outstanding 14,011,969 shares of Class A common stock, $0.001 par value, and 27,173,461 shares of Class B common stock, $0.001 par value.





ORBITZ, INC.
INDEX

 
 
  Page Number
PART I. FINANCIAL INFORMATION    

Item 1.

Financial Statements

 

3

Condensed Consolidated Balance Sheets as of June 30, 2004 (Unaudited) and December 31, 2003

 

3

Consolidated and Combined Statements of Operations for the three and six months ended June 30, 2004 and 2003 (Unaudited)

 

4

Consolidated Statement of Equity and Comprehensive Income for the six months ended June 30, 2004 (Unaudited)

 

5

Consolidated and Combined Statements of Cash Flows for the six months ended June 30, 2004 and 2003 (Unaudited)

 

6

Notes to Unaudited Condensed Consolidated and Combined Financial Statements

 

7

Item 2.

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

 

14

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

42

Item 4.

Controls and Procedures

 

42

PART II. OTHER INFORMATION

 

 

Item 1.

Legal Proceedings

 

44

Item 2.

Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities

 

44

Item 3.

Defaults Upon Senior Securities

 

44

Item 4.

Submission of Matters to a Vote of Security Holders

 

44

Item 5.

Other Information

 

45

Item 6.

Exhibits and Reports on Form 8-K

 

45

SIGNATURES

 

46

Exhibit Index

 

47

2



PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

ORBITZ, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In thousands, except share and per share data)

 
  June 30,
2004

  December 31,
2003

 
  (Unaudited)

   
Assets            
Current assets:            
  Cash and cash equivalents   $ 133,286   $ 173,939
  Short-term investments, including restricted investments of $11,271 and $7,537 as of June 30, 2004 and December 31, 2003, respectively     34,935     7,537
  Accounts receivable, net of allowance of $139 and $168 as of June 30, 2004 and December 31, 2003, respectively     18,418     11,031
  Due from related parties     4,828     3,305
  Prepaid expenses     7,315     4,973
  Other current assets     1,850     1,394
   
 
  Total current assets     200,632     202,179
   
 
Property and equipment, net     15,396     17,146
   
 

Other long-term assets:

 

 

 

 

 

 
  Long-term investments, including restricted investments of $981 and $1,265 as of June 30, 2004 and December 31, 2003, respectively     44,923     1,265
  Other assets, net     1,326     355
   
 
  Total other long-term assets     46,249     1,620
   
 
  Total assets   $ 262,277   $ 220,945
   
 
Liabilities and Shareholders' Equity            
Current liabilities:            
  Accounts payable   $ 5,180   $ 5,206
  Accrued compensation     3,750     6,309
  Accrued supplier rebates     754     899
  Due to related parties     4,256     2,810
  Accrued expenses     32,787     24,932
  Deferred revenue     26,065     11,896
  Current portion of capital lease obligation     256    
   
 
  Total current liabilities     73,048     52,052
   
 
Long-term liabilities     8,086     6,924
   
 
Redeemable Series A non-voting convertible preferred stock, $26.00 face value; 434,782 shares authorized, issued and outstanding as of June 30, 2004 and December 31, 2003, stated at redemption price     11,452     11,323
   
 
Shareholders' Equity     169,691     150,646
   
 
  Total liabilities and shareholders' equity   $ 262,277   $ 220,945
   
 

See accompanying notes to condensed consolidated and combined financial statements.

3



ORBITZ, INC. AND SUBSIDIARIES

Consolidated and Combined Statements of Operations

(In thousands, except per share amounts)

(Unaudited)

 
  Three Months Ended
June 30,

  Six Months Ended
June 30,

 
 
  2004
  2003
  2004
  2003
 
Revenues, net:                          
  Air revenues, net   $ 44,210   $ 39,436   $ 87,326   $ 74,828  
  Other travel revenues     22,046     11,226     39,745     18,585  
  Other revenues     9,338     7,623     18,780     14,340  
   
 
 
 
 
  Total revenues, net     75,594     58,285     145,851     107,753  
Cost of revenues     19,753     18,487     39,770     36,252  
   
 
 
 
 
  Gross profit     55,841     39,798     106,081     71,501  
   
 
 
 
 
Operating expenses:                          
  Sales and marketing     31,214     30,074     63,706     52,648  
  Technology and development     7,091     7,545     15,036     13,916  
  General and administrative     5,258     5,056     11,980     9,893  
  Stock-based compensation*     1,704     257     3,459     756  
   
 
 
 
 
  Total operating expenses     45,267     42,932     94,181     77,213  
   
 
 
 
 
Operating income (loss)     10,574     (3,134 )   11,900     (5,712 )
Interest income     743     194     1,277     386  
Tax sharing expense     (967 )       (967 )    
   
 
 
 
 
Income (loss) before provision for income taxes     10,350     (2,940 )   12,210     (5,326 )
Provision for income taxes                  
   
 
 
 
 
Net income (loss)     10,350   $ (2,940 )   12,210   $ (5,326 )
         
       
 
Less: dividends and accretion on redeemable Series A non-voting convertible preferred stock     (141 )         (283 )      
   
       
       
Net income available to common shareholders   $ 10,209         $ 11,927        
   
       
       
Earnings per common share:                          
  Basic   $ 0.25         $ 0.30        
   
       
       
  Diluted   $ 0.24         $ 0.28        
   
       
       
Weighted average shares used to calculate earnings per common share:                          
  Basic     40,302           40,144        
   
       
       
  Diluted     42,524           42,483        
   
       
       
*Stock-based compensation:                          
  Cost of revenues   $ 136   $   $ 276   $  
  Sales and marketing     176     22     366     22  
  Technology and development     355         740     290  
  General and administrative     1,037     235     2,077     444  
   
 
 
 
 
  Total stock-based compensation   $ 1,704   $ 257   $ 3,459   $ 756  
   
 
 
 
 

See accompanying notes to condensed consolidated and combined financial statements.

4



ORBITZ, INC. AND SUBSIDIARIES

Consolidated Statement of Equity and Comprehensive Income

(In thousands, except share amounts)

 
  Common Stock
   
   
   
   
   
 
 
  Class A
  Class B
   
   
  Accumulated
Other
Comprehensive
Income

   
   
 
 
  Additional
Paid-in
Capital

  Unearned
Compensation

  Accumulated
Deficit

  Total
Equity

 
 
  Shares
  Amount
  Shares
  Amount
 
Balance—December 31, 2003   12,813,212   $ 13   27,269,809   $ 27   $ 179,001   $ (2,382 ) $   $ (26,013 ) $ 150,646  
Stock-based compensation expense                 3,120     339             3,459  
Exercise of stock options   723,271     1           5,104                 5,105  
Conversion of Class A shares to Class B shares at option of holder   96,348       (96,348 )                        
Dividends on preferred stock                 (95 )               (95 )
Accretion on preferred stock                 (188 )               (188 )
Costs related to the December 2003 initial public offering                 (867 )               (867 )
Comprehensive income:                                                    
  Net income                             12,210     12,210  
  Unrealized loss on available for sale securities                         (579 )       (579 )
                                               
 
Total comprehensive income                                 11,631  
   
 
 
 
 
 
 
 
 
 
Balance—June 30, 2004 (unaudited)   13,632,831   $ 14   27,173,461   $ 27   $ 186,075   $ (2,043 ) $ (579 ) $ (13,803 ) $ 169,691  
   
 
 
 
 
 
 
 
 
 

See accompanying notes to condensed consolidated and combined financial statements.

5



ORBITZ, INC. AND SUBSIDIARIES

Consolidated and Combined Statements of Cash Flows

(In thousands)

(Unaudited)

 
  Six Months Ended
June 30,

 
 
  2004
  2003
 
Cash flows from operating activities:              
  Net income (loss)   $ 12,210   $ (5,326 )
  Adjustments to reconcile net income (loss) to net cash provided by operating activities:              
    Depreciation and amortization     6,585     6,397  
    Stock-based compensation     3,459     756  
    Changes in operating assets and liabilities:              
      Accounts receivable, net of allowance     (7,387 )   (2,566 )
      Prepaid expenses and other current assets     (2,798 )   (2,306 )
      Other long-term assets     (1,023 )   (42 )
      Accounts payable     (26 )   (3,039 )
      Due to/from related parties     (77 )   (2,122 )
      Accrued liabilities     5,151     8,491  
      Deferred revenue     14,169     3,697  
      Other liabilities, net     685     2,217  
   
 
 
  Net cash provided by operating activities     30,948     6,157  
   
 
 
Cash flows from investing activities:              
  Purchases of property and equipment     (3,988 )   (5,203 )
  Purchases of investments     (72,570 )    
  Redemptions of investments     935     405  
   
 
 
  Net cash used in investing activities     (75,623 )   (4,798 )
   
 
 
Cash flows from financing activities:              
  Proceeds from exercise of stock options     5,105     375  
  Costs related to the December 2003 initial public offering     (867 )    
  Dividends paid on preferred stock     (154 )    
  Payment of capital lease obligation     (62 )    
  Purchase of restricted shares         (41 )
   
 
 
  Net cash provided by financing activities     4,022     334  
   
 
 
  Net change in cash and cash equivalents     (40,653 )   1,693  
Cash and cash equivalents, beginning of period     173,939     56,028  
   
 
 
Cash and cash equivalents, end of period   $ 133,286   $ 57,721  
   
 
 
Noncash investing and financing activities—              
  Capital leases   $ 733   $  
   
 
 

See accompanying notes to condensed consolidated and combined financial statements.

6



ORBITZ, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated and Combined Financial Statements

(unaudited)

(1)   Description of Business and Organization

        Orbitz, Inc. and Subsidiaries (collectively referred to as Orbitz, the Company, we, us and our) is an online travel company that enables customers to search for and purchase a broad array of travel products, including airline tickets, lodging, car rentals, cruises and vacation packages through its website, orbitz.com. We sell these travel products both individually and as part of packaged trips to leisure and corporate customers located primarily in the United States. We also offer access to travel news and other information of interest to travelers on our website.

        We generate the majority of our revenues from payments from the travel suppliers whose services we sell, from the distribution and reservation services we utilize and from customers who purchase travel on our website. We also generate revenues from other sources, such as from companies that advertise and sell travel-related products on our website. Additionally, we license components of our technology to selected airlines as a platform for their websites and provide ongoing website hosting services to these airlines.

        Orbitz, LLC was formed on February 24, 2000 as a Delaware limited liability company. The original investors and founders of Orbitz, LLC were Continental Airlines, Delta Air Lines, Northwest Airlines, and United Air Lines. American Airlines joined as an investor of Orbitz, LLC on May 9, 2000. Collectively, these five investors are referred to as the "Founding Airlines."

        Orbitz, Inc. was incorporated in the state of Delaware on May 4, 2000 and was initially owned by the Founding Airlines. Orbitz, Inc. joined the Founding Airlines as a member of Orbitz, LLC.

        On December 18, 2003, we formed a wholly owned subsidiary, O Holdings Inc., a Delaware corporation, and contributed 3,700,000 Class C Units in Orbitz, LLC to O Holdings Inc. In addition, on December 19, 2003, immediately prior to the closing of our initial public offering ("IPO") pursuant to an agreement among us and each of the holders of Class B common stock, our Founding Airlines or their affiliates contributed all their membership interests in Orbitz, LLC to us in exchange for an aggregate of 8,180,000 shares of Class A common stock, an aggregate of 27,262,980 shares of Class B common stock and an aggregate of 434,782 shares of redeemable Series A non-voting convertible preferred stock. As a result of the foregoing transactions, Orbitz, LLC is 99% owned by us and 1% owned by our wholly owned subsidiary, O Holdings Inc. We act as the sole manager of Orbitz, LLC. This transaction is referred to as the "IPO Exchange." Additionally, concurrent with the IPO Exchange, all shares of Class C common stock were converted to shares of Class A common stock.

        On December 19, 2003, we consummated an IPO of our Class A common stock. We sold 4,000,000 shares of Class A common stock at an offering price of $26.00 per share and received net proceeds of $93.7 million. The Founding Airlines sold an aggregate of 8,180,000 shares in the IPO; however, we did not receive any proceeds from the sale of these shares.

(2)   General

    (a)    Basis of Presentation

        Our interim condensed consolidated and combined financial statements are unaudited and should be read in conjunction with the audited consolidated and combined financial statements for the year ended December 31, 2003 contained in our Annual Report on Form 10-K ("Annual Report"). In our opinion, all adjustments necessary for a fair presentation of such condensed consolidated and combined financial statements, consisting only of normal recurring items, have been included. Interim results are not necessarily indicative of results for a full year. The interim condensed consolidated and combined

7


financial statements and related notes are presented as permitted by the Securities and Exchange Commission and do not contain certain information included in our audited consolidated and combined financial statements.

        The accompanying financial statements present the condensed consolidated financial position, results of operations and cash flows of Orbitz, Inc. and Subsidiaries and the combined financial results of Orbitz, Inc. and Orbitz, LLC as further discussed below. All intercompany transactions have been eliminated in all periods presented.

        Before the IPO Exchange, the financial statements presented the combined financial position, results of operations and cash flows of Orbitz, Inc. and Orbitz, LLC. Subsequent to the IPO Exchange, the financial statements present the consolidated financial position, results of operations, and cash flows of Orbitz, Inc., O Holdings, Inc., and Orbitz, LLC.

    (b)    Use of Estimates

        The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. On an ongoing basis, management reviews its estimates, including those related to allowances for doubtful accounts, asset lives and reserves for credit card fraud losses, debit memos, net deferred tax assets and litigation based on currently available information. Changes in facts and circumstances may result in revised estimates and such revisions could be material.

    (c)    Significant Accounting Policies

        See Note 2 to the Consolidated and Combined Financial Statements in our Annual Report for a summary of all significant accounting policies. Other than our policy for accounting for investments discussed below, there have been no new policies or changes in our significant accounting policies during the six months ended June 30, 2004.

    Investments

        We classify marketable debt securities included in short-term and long-term investments as available-for-sale. The securities consist of investment grade, interest bearing corporate and government securities and are stated at fair value, with net unrealized gains or losses on the securities recorded as accumulated other comprehensive income (loss) in shareholders' equity. Realized gains and losses are included in earnings and are derived using the specific identification method for determining the cost of the securities. There were no realized gains or losses in the three or six months ended June 30, 2004. We did not hold marketable securities during 2003.

    (d)    Stock-Based Compensation

        We have two stock-based compensation plans, which are more fully described in Note 10 to the Consolidated and Combined Financial Statements in our Annual Report. We account for these plans in accordance with the provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. Under APB No. 25, compensation expense is based on the difference, if any, on the measurement date, between the estimated fair value of the Company's stock and the exercise price of options to purchase that stock. Stock-based compensation expense is recognized on a straight-line basis over the vesting period of the equity award.

8


        A new measurement date for stock awards occurred as a result of the restructuring transaction discussed in Note 10 to the Consolidated and Combined Financial Statements in our Annual Report. Total compensation expense related to this new measurement date, net of subsequent forfeitures, was $33,382,000. We began to record this compensation expense for all vested awards on consummation of the IPO Exchange. We recognized $26,474,000 of this charge in the year ended December 31, 2003 and $1,399,000 and $2,852,000 in the three and six months ended June 30, 2004, respectively. We will recognize compensation on unvested stock awards of $4,056,000 on a go-forward basis over the remaining vesting periods. Stock-based compensation on unvested awards may be reduced by forfeitures of stock awards.

        Additionally, we recorded other stock-based compensation expense of $305,000 and $607,000 in the three and six months ended June 30, 2004, respectively, and $257,000 and $756,000 in the three and six months ended June 30, 2003. These charges were primarily related to issuances of restricted stock to certain executives.

        The following table illustrates the effect on net income (loss) if we had applied the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation, to stock awards granted to employees (in thousands, except per share data):

 
  Three Months Ended
June 30,

  Six Months Ended
June 30,

 
 
  2004
  2003
  2004
  2003
 
Net income (loss) as reported   $ 10,350   $ (2,940 ) $ 12,210   $ (5,326 )
Add stock-based compensation expense included in reported net income (loss)     1,704     257     3,459     756  
Less stock-based compensation determined under the provisions of SFAS No. 123     (2,966 )   (815 )   (5,407 )   (1,921 )
   
 
 
 
 
Pro forma net income (loss)     9,088   $ (3,498 )   10,262   $ (6,491 )
         
       
 
Less dividends and accretion on redeemable Series A non-voting convertible preferred stock     (141 )         (283 )      
   
       
       
Pro forma net income available to common shareholders   $ 8,947         $ 9,979        
   
       
       
Basic earnings per share:                          
  As reported   $ 0.25         $ 0.30        
   
       
       
  Pro forma   $ 0.22         $ 0.25        
   
       
       
Diluted earnings per share:                          
  As reported   $ 0.24         $ 0.28        
   
       
       
  Pro forma   $ 0.21         $ 0.23        
   
       
       

        The fair value of options granted was estimated as of the grant date, using the Black-Sholes method with the following weighted-average assumptions:

 
  Three Months Ended
June 30,

  Six Months Ended
June 30,

 
 
  2004
  2003
  2004
  2003
 
Dividend yield     %   %   %   %
Volatility     53.2 %   %   53.0 %   %
Expected life     5 yea rs   5 yea rs   5 yea rs   5 yea rs
Risk-free interest rate     3.9 %   2.6 %   3.8 %   2.6 %
Weighted average fair value   $ 11.32   $ 3.40   $ 11.33   $ 2.51  

9


    (e)    Recent Accounting Pronouncements

        Financial Accounting Standards Board Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, was issued in May 2003. This Statement establishes standards for the classification and measurement of certain financial instruments with characteristics of both liabilities and equity. The Statement also includes required disclosures for financial instruments within its scope. For the Company, the Statement was effective for instruments entered into or modified after May 31, 2003 and otherwise will be effective as of January 1, 2004, except for mandatorily redeemable financial instruments. For certain mandatorily redeemable financial instruments, the Statement will be effective for the Company on January 1, 2005. The effective date has been deferred indefinitely for certain other types of mandatorily redeemable financial instruments. The Company currently does not have any financial instruments that are within the scope of this Statement.

(3)   Commitments and Contingencies

        In November 2001, we entered into a 10-year computer reservation system and related services agreement with Worldspan that expires in October 2011. This agreement, as amended, requires that we guarantee certain levels of minimum net air and car segments to be booked each calendar quarter through Worldspan's computer reservation system. The agreement provides that these minimum levels will be waived if we cure any shortfall within the quarter or if we elect to book 100% of net air and car segments through Worldspan for that quarter. In the event that we fall short of the minimum net segments without curing the shortfall, we would be required to pay $1.78 for each segment below the specified minimum. To date, no such shortfall has occurred.

        In April 2004, we entered into an agreement with Travelweb to receive access to lodging accommodation inventory to display for sale on our website. The agreement requires that Orbitz guarantee certain levels of minimum room nights for each of the calendar quarters during the term, which expires on December 31, 2005. The agreement provides that the minimum room night commitment will be waived if we elect to terminate all land-only merchant hotel programs on the website for at least one full calendar quarter following the date of termination. Should we fall short of the minimum room night guarantee without terminating our land-only merchant programs, we would be required to pay Travelweb $9 for each room night below the guaranteed minimum in calendar quarters in 2004, and $10 for calendar quarters in 2005. To date, no such shortfall has occurred.

        We have an agreement with a vendor to purchase $3.0 million in computer hardware and software and professional services prior to December 2006. To date, we have made purchases of $1.7 million against this commitment.

        In addition to the matters discussed above, we have certain contingencies resulting from litigation, government regulation and claims, some of which are incidental to the ordinary course of business. Management believes, after considering a number of factors, including (but not limited to) the views of legal counsel and the nature of the contingencies to which the Company is subject, that the ultimate disposition of these contingencies either cannot be determined at the present time or will not materially affect our results of operations or financial position.

(4)   Related Party Transactions

        We derive revenue from our Founding Airlines from ticket distribution and customer support services. Additionally, we provide Booking Engine Services and other services to certain of our Founding Airlines. For the three and six months ended June 30, 2004, the Company received total revenues from its Founding Airlines of approximately $12,603,000 and $26,266,000, respectively. For the three and six months ended June 30, 2003, the Company received total revenues from its Founding Airlines of approximately $13,399,000 and $26,147,000, respectively. Receivables outstanding from the

10



Founding Airlines were approximately $4,828,000 and $3,305,000 at June 30, 2004 and December 31, 2003, respectively.

        As discussed in Note 3, we have an agreement with Worldspan, which was previously owned by Delta Air Lines, Northwest Airlines, and American Airlines, or their respective affiliates. On July 1, 2003, these airlines sold their interest in Worldspan and, therefore, it ceased to be a related party. Worldspan pays us incentives for air and car bookings made on our website through the Worldspan reservation system. We recognized revenues from Worldspan for the three and six months ended June 30, 2003 in the amount of $11,305,000 and $19,648,000, respectively. Worldspan was not a related party in 2004.

        The Founding Airlines provide Orbitz with access to the fares and rates generally available to the public and also provide certain in-kind marketing support to the Company. In return, we rebate to the Founding Airlines a portion of the booking incentives received from the reservation system provider. Such rebates amounted to $3,164,000 and $5,440,000 for the three and six months ended June 30, 2004, respectively, and $2,919,000 and $5,718,000 for the three and six months ended June 30, 2003, respectively, and are included as a component of cost of revenue in the accompanying consolidated and combined statements of operations. The related payables outstanding to the Founding Airlines totaled approximately $3,288,000 and $2,810,000 at June 30, 2004 and December 31, 2003, respectively.

        On November 25, 2003, we entered into a tax agreement with our Founding Airlines or their affiliates governing the allocation of the approximately $333,642,000 of tax benefits that are attributable to the taxable IPO Exchange. For each tax period during the term of the tax agreement, we have agreed to pay to our Founding Airlines or their affiliates 87% of the amount of any tax benefit we actually realize as a result of the additional deductions. Such tax sharing expense, which has not been paid as of June 30, 2004, was $967,000 for the three and six months ended June 30, 2004.

        On August 1, 2001, we entered into an alliance agreement with Hotwire, which was previously owned by our Founding Airlines or their respective affiliates, among others, to offer reciprocal co-marketing links between our website and Hotwire's website. On November 5, 2003, the Founding Airlines sold their interests in Hotwire and therefore, Hotwire ceased to be a related party. We recognized other revenues from Hotwire, primarily for advertising on our website, of $1,751,000 and $3,287,000 for the three and six months ended June 30, 2003, respectively. Additionally, we recorded sales and marketing expense related to our alliance agreement with Hotwire of $266,000 and $434,000 for the three and six months ended June 30, 2003. Hotwire was not a related party in 2004.

        We have an outstanding loan to the Chairman, President and Chief Executive Officer of the Company, evidenced by a promissory note and stock pledge agreement executed in 2001. The loan is secured by a pledge of 83,333 shares of common stock of Orbitz. The note accrues interest at a rate equal to the applicable Federal Rate, and is adjusted and compounded semi-annually. As of June 30, 2004 and December 31, 2003, the amount outstanding, including accrued interest, was $273,000 and $269,000, respectively, and is included in other long-term assets on the accompanying condensed consolidated balance sheets.

(5)   Earnings Per Share and Pro Forma Net Loss Per Share

        Basic earnings per share is computed by dividing income available to common shareholders, as determined under the two-class method, by the weighted average number of common shares outstanding. Our preferred stock agreement provides that the holders of Series A preferred stock shall be entitled to receive dividends at the rate of 3% per annum payable in preference and priority to any payment of dividends on any junior stock. Additionally, if the Company issues or pays holders of junior stock, in any consecutive 12-month period, a dividend in excess of 5% of the face value of the Series A preferred stock, then the holders of Series A preferred stock shall be entitled to share equally in dividends over the 5% threshold.

11



        Diluted earnings per share reflects the potential dilution that could occur based on the effect of unvested restricted Class A common stock and the exercise of stock options with an exercise price of less than the average market price of our common stock.

        Before the December 2003 IPO Exchange, ownership in the enterprise was reflected primarily through membership in Orbitz, LLC, with only a small number of outstanding shares in Orbitz, Inc. The financial statements of Orbitz, Inc. and Orbitz, LLC were presented on a combined basis; accordingly, there was no single capital structure upon which to calculate historical earnings per share information. In addition, management has determined that presentation of actual net loss per share of Orbitz, Inc. for 2003 and prior periods is not meaningful and, therefore, has elected to present only pro forma net loss per share for those periods.

        Pro forma net loss per share is calculated based on the weighted average number of shares outstanding assuming that all units held by members in Orbitz, LLC had been converted to shares in Orbitz, Inc. as of the date such units were issued and the automatic conversion of Class C common stock to Class A common stock that occurred immediately prior to the IPO. Pro forma net loss to common shareholders reflects charges for dividends and accretion on the preferred stock as if it had been outstanding at the beginning of each period presented.

        Actual earnings per share and pro forma net loss per share is calculated as follows for the three and six months ended June 30 (in thousands, except per share amounts):

 
  Three Months Ended
June 30,

  Six Months Ended
June 30,

 
 
  Actual
2004

  Pro forma
2003

  Actual
2004

  Pro forma
2003

 
Net income (loss)   $ 10,350   $ (2,940 ) $ 12,210   $ (5,326 )
Dividends and accretion on preferred stock     (141 )         (283 )      
Income allocated to preferred stock under the two-class method                      
   
       
       
Net income available to common shareholders   $ 10,209         $ 11,927        
   
       
       
Pro forma dividends and accretion on preferred stock           (141 )         (283 )
         
       
 
Pro forma net loss attributable to common shareholders         $ (3,081 )       $ (5,609 )
         
       
 
Earnings per common share:                          
  Basic   $ 0.25         $ 0.30        
   
       
       
  Diluted   $ 0.24         $ 0.28        
   
       
       
Weighted average number of shares outstanding:                          
  Basic     40,302           40,144        
   
       
       
  Diluted     42,524           42,483        
   
       
       
Pro forma net loss per common share—basic and diluted         $ (0.09 )       $ (0.16 )
         
       
 
Pro forma weighted average number of shares outstanding—basic and diluted           35,665           35,652  
         
       
 
Anti-dilutive securities not included in the calculations above                          
  Options     871     1,841     871     1,696  
  Unvested restricted stock         16         8  
  Convertible preferred stock     435     435     435     435  
   
 
 
 
 
  Total     1,306     2,292     1,306     2,139  
   
 
 
 
 

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6.     Provision for Income Taxes

        As part of our IPO Exchange that is more fully discussed in our Annual Report filed on Form 10-K, we realized a step-up in the tax basis of our net assets, which we are allowed to amortize over 15 years for income tax purposes. This amortization reduces our taxable income, and under the terms of our tax sharing agreement, we agreed to share 87% of the tax savings we actually realize with our Founding Airlines. During the three and six months ending June 30, 2004, the 87% portion of the tax savings realized amounted to $967,000 and is included as a component of net income before provision for income taxes on our consolidated and combined statements of income.

        We did not record a provision for income taxes for the three or six months ended June 30, 2004, as the Company had no taxable income after deducting the step-up amortization and has a full valuation allowance related to its net deferred tax assets.

7.     Accumulated Other Comprehensive Loss

        The components of comprehensive income (loss) are as follows:

 
  Three Months Ended
June 30,

  Six Months Ended
June 30,

 
 
  2004
  2003
  2004
  2003
 
Net income (loss)   $ 10,350   $ (2,940 ) $ 12,210   $ (5,326 )
Unrealized losses on marketable securities     (615 )       (579 )    
   
 
 
 
 

Comprehensive income (loss)

 

$

9,735

 

$

(2,940

)

$

11,631

 

$

(5,326

)
   
 
 
 
 

        Accumulated other comprehensive loss consists solely of unrealized losses on marketable securities.

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

        The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated and combined financial statements and the related notes thereto appearing elsewhere in this report and in our Annual Report filed with the Securities and Exchange Commission. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors.

Overview

    Executive Summary

        We launched our travel services website to the general public in June 2001 and since then, have grown to be one of the top 10 travel agencies in the United States as measured by gross travel bookings. Since our launch, we have become well-known for the ease-of-use of our website, featuring our proprietary air matrix which typically shows more itineraries and airlines per search than any other travel agency and displays unbiased air results that do not favor any supplier. We extended our easy-to-use website by launching matrix shopping display technology for our hotel, car, vacation, cruise and travel-related products. We also offer a unique customer care program, which provides proactive care updates and services to our travelers. Additionally, we have introduced technology services for our suppliers, such as Supplier Link and Booking Engine Services and were the first online travel agency to initiate a corporate travel offering.

        Throughout the remainder of 2004, we intend to add to and enhance our capabilities in non-air travel products and other services, including:

    Orbitz Merchant Hotel—Our hotel business has led our revenue and gross profit growth over the last year due to the introduction of the Orbitz Merchant Hotel product in March 2003. Under this model, we derive revenues from hotel transactions where we serve as the merchant of record and determine the room rate. We have agreements with hotels that supply us with rooms to sell under this program, but we have no obligation to pay for unsold rooms. We generate significantly higher per-transaction revenues for Orbitz Merchant Hotel transactions than for rooms sold under the traditional commission-based model.

    Dynamic Packaging—We added a new dynamic packaging vacation product using the software platform of one of our strategic partners to showcase vacation travel in August 2003. Dynamic packaging enables users to compare multiple flight and hotel combinations at a glance and create customized packages of air, hotel and other products in a single transaction at one bundled price. In February 2004, we implemented our own dynamic packaging software and operating infrastructure, enabling customers to combine air and hotel together, and in May 2004, we expanded dynamic packaging to also include hotel and car rental combinations in one bundled price. In the second half of 2004, we plan to introduce the third phase of our dynamic packaging product, which will enable our customers to combine air, hotel and car options in a single transaction and is expected to provide further savings to customers through the use of specially negotiated packaged travel rates. We believe that dynamic packaging has the potential of significantly increasing bookings of higher-margin products.

    Orbitz for Business—We were the first online travel agency to initiate a corporate travel offering and since its launch, over 1,200 companies have signed up for the Orbitz for Business service. Our corporate booking and travel tools can save companies of all sizes up to 75% on service fees, and provide around-the-clock service and customer care for our corporate accounts.

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        Our results in the first half of 2004 reflect increased bookings that demonstrate the continued migration of travelers to online travel agencies. Our gross travel bookings increased by 29% over the same period of the prior year, with growth in all of our major product offerings. At the same time, we saw our gross profit margin improve to 73% for the first six months of 2004 from 66% during the first six months of 2003, while income from operations rose to $11.9 million through June 30, 2004 from an operating loss of $5.7 million for the same period in 2003. We achieved our seventh consecutive quarter of positive cash flow from operations, generating $30.9 million in cash flows from operations in the first six months of 2004.

        While we are satisfied with the overall health and profitability of our business, we were disappointed in our slower than expected growth in hotel and air revenues, caused by a number of issues that were primarily operational in nature. Our hotel results were below expectations due to merchant mix (the percentage of prepaid hotel transactions to total hotel transactions) and volume, which fell below our forecasted levels. This was due primarily to ineffective display management and internal and third party system issues, which constrained hotel transactions during the period. Two items negatively impacted our air volume, which has grown when compared to the prior year, but was below our expected levels. As summer air traffic increased, we saw fewer fare sales, which we believe have typically stimulated our bookings. Coinciding with this increased demand, results were affected by certain airlines tightening their yield management efforts through a methodology called Journey Control Logic (JCL). JCL is a method whereby the airline tends to make more inventory available for point-to-point passengers (and fares) rather than connecting passengers and impacts all travel agencies. However, several airlines' JCL implementations surfaced interface errors between the airlines' inventory systems and that of our search engine provider. The result was that in some cases, Orbitz actually reduced the number of flight options available to an Orbitz customer beyond what was made available to us by the supplier. We have already begun implementing detailed solutions to these issues.

        The remainder of 2004 will see continued focus on Orbitz Merchant Hotel, Dynamic Packaging and Orbitz for Business. Additionally, as we increase the number of higher profit margin merchant hotel and vacation transactions, we expect to modestly ramp up our investment in marketing as a further catalyst for growth; however, we continue to believe that our more cost-efficient marketing approach is the right one, as demonstrated by our significant site traffic—especially self-directed traffic—and our strong brand awareness level. Although we do plan to increase marketing expenditures, we will continue to do so in a manner that combines efficient marketing with attractive product offerings for our customers.

    Description of Business

        We are an online travel company headquartered in Chicago, Illinois 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:

    Supplier transaction fees:  We receive transaction fees for sales of travel products based upon contractual arrangements with our charter associates and other suppliers. We also receive commissions from our non-charter suppliers who currently pay commissions to online travel agents.

    Consumer service fees:  Consumers pay a service fee per ticket on air transactions and other additional fees in certain cases.

    Reservation system booking incentives:  We receive booking incentives under our contracts 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 some of our air

15


      and car suppliers a percentage of the booking incentives we receive that pertain to travel products booked with that supplier.

    Supplier Link:  Under our Supplier Link program, we establish direct links with an airline's internal reservation system, allowing us to book airline tickets without using a GDS. We receive a Supplier Link transaction fee from the airlines that utilize this service for each ticket booked through our Supplier Link services, net of refunded or exchanged tickets. Total fees received from a Supplier Link transaction are lower than total inducements received from a GDS transaction, resulting in lower revenues per transaction. However, we must pay part of the inducement received from a GDS transaction to the charter associates, and as a result, the gross profit from a Supplier Link transaction is higher than that from a GDS transaction.

    Orbitz Merchant Hotel:  We introduced the Orbitz Merchant Hotel program in March 2003. Through this program, we receive revenues from hotel transactions where we serve as merchant of record and determine the price of the room.

    Other revenues:  Other revenues are derived primarily from advertising, Booking Engine Services, sponsoring links on our website and commissions from sales of travel-related products on our site.

    Critical Accounting Policies and Estimates

        In presenting our condensed consolidated and combined financial statements in conformity with generally accepted accounting principles in the United States of America, we are required to make judgments, estimates and assumptions that affect the amounts reported therein. Certain of the estimates and assumptions we are required to make relate to matters that are inherently uncertain, as they pertain to future events. While we believe the estimates and assumptions used were appropriate, actual results could differ significantly from those estimates under different assumptions and conditions. Note 2 to the Consolidated and Combined Financial Statements in our Annual Report and Note 2 to the Condensed Consolidated and Combined Financial Statements contained herein describe the significant accounting policies and methods used in the preparation of the consolidated and combined financial statements.

        The critical accounting policies that require particularly subjective and complex judgments that could have a material effect on our reported financial condition or results of operations are described in Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report. There have not been any material changes to our critical accounting policies.

Results of Operations

Second quarter ended June 30, 2004 compared to second quarter ended June 30, 2003

Overview

        Significant events of the quarter ended June 30, 2004 include:

    Gross bookings for the quarter ended June 30, 2004 were $1.0 billion, representing a 21% increase over the same period in the prior year. We achieved increases in gross bookings in all of our major product offerings.

    Orbitz Merchant Hotel revenues represented 52% and 12% of all hotel revenues for the quarters ended June 30, 2004 and 2003, respectively.

    We further enhanced our dynamic packaging technical and operating infrastructure in May 2004 with the introduction of the hotel and car rental packaged pricing. Dynamic packaging enables consumers to shop for combinations of travel products bundled together under one price. We

16


      believe that dynamic packaging has the potential to significantly increase bookings of higher-margin products.

    Also in May, we enhanced the homepage of our website to improve navigation and increase the prominence of product combinations. The changes increased the percentage of visitors who conduct searches from the homepage, as well as the number of hotel searches.

    The annual resetting of volume thresholds under our Worldspan contract occurred on January 1, resulting in lower booking incentive fee revenues than in later quarters in the year. We reached our first volume plateau in the second quarter of both 2004 and 2003.

    Cost of revenues and all categories of operating expenses benefitted from lower than expected expense for incentive compensation in the quarter ended June 30, 2004.

    Revenues, Net

 
  Three Months Ended
June 30,

   
   
 
 
  2004
  2003
  $ Change
  % Change
 
 
  (dollars in thousands)

 
Air revenues, net   $ 44,210   $ 39,436   $ 4,774   12 %
Other travel revenues     22,046     11,226     10,820   96 %
Other revenues     9,338     7,623     1,715   23 %
   
 
 
     
Total revenues, net   $ 75,594   $ 58,285   $ 17,309   30 %
   
 
 
     

        The increase in air revenues was primarily driven by a $4.8 million increase in consumer service fee revenues resulting from an increase in both business and leisure air transactions and a $1.00 increase to our per ticket service fee implemented in late June 2003. Supplier transaction fee revenues were flat year over year, with higher air transactions offset by an 11% decrease in the average supplier transaction fee per ticket.

        Supplier Link revenues rose by $1.1 million, offset by a $1.4 million decrease in reservation system booking incentives, which reflects the trend of shifting more air transactions to our Supplier Link program. We receive a higher margin on Supplier Link transactions because we do not pay GDS rebates to our airline charter associates on these transactions, but we recognize lower revenues because we do not receive GDS inducement payments. Supplier Link represented 39% of air transactions in the quarter ended June 30, 2004 compared to 29% in the quarter ended June 30, 2003. We expect our Supplier Link mix to stay fairly constant until our next implementation of a major carrier, which is expected to occur later in the year.

        The increase in other travel revenues of 96% is due primarily to an $8.4 million increase in hotel revenues, mostly related to our Orbitz Merchant Hotel ("OMH") program launched in March 2003. OMH revenues represented 52% of all hotel revenues in the quarter ended June 30, 2004, compared to 12% in the quarter ended June 30, 2003, and rooms sold under this program generate significantly more revenue per transaction compared to rooms sold through other channels. Growth in hotel revenue outpaced growth in hotel transactions due to the more favorable economics of OMH bookings.

        Other travel revenues also benefited from a $1.6 million increase in rental car revenues and a $0.6 million increase in vacation package revenues, driven by increases in bookings volume. In mid-February, 2004, we launched our attractions and services product, under which consumers can purchase theme park passes, museum and sight-seeing tours, airport transportation and similar products. Revenues from this product line were not significant in the quarter ended June 30, 2004.

        Other revenues benefited from increases in all major product lines in the category, led primarily by increases of $0.4 million from advertising revenue and $0.6 million from commissions for sales driven by sponsoring links on our website.

17



    Cost of Revenues

 
  Three Months Ended
June 30,

 
 
  2004
  2003
  $ Change
  % Change
 
 
  (dollars in thousands)

 
Cost of revenues   $ 19,753   $ 18,487   $ 1,266   7 %
% of revenues, net     26 %   32 %          
Gross profit     55,841     39,798     16,043   40 %
% of revenues, net     74 %   68 %          

        Gross profit rose 40% to $55.8 million for the quarter ended June 30, 2004, versus $39.8 million in the same period of 2003. The gross margin was 74% in the second quarter of 2004, compared with 68% in the second quarter of 2003, primarily because we shifted our mix into higher margin non-air products. Revenues from non-air travel products represented 29% of total revenues in the quarter ended June 30, 2004, compared to 19% in the same period of 2003. Additionally, our rebate costs decreased by 25% due to the shift to Supplier Link, and we incurred lower per transaction customer service costs. We have achieved savings in our customer service costs by allowing our call center service vendor to route e-mail questions and certain leisure travel calls through a call center in India and by reducing incoming calls through enhanced interactive voice response systems and self-service online capabilities, such as online exchange.

        Cost of revenues increased 7% in absolute dollars to $19.8 million for the quarter ended June 30, 2004 from $18.5 million for the same period of 2003, primarily attributable to a $0.9 million increase in credit card processing fees resulting from higher transaction volumes in the Orbitz Merchant Hotel program and a $0.5 million increase in costs associated with our credit card loyalty program. We record a liability for the maximum value of all points earned under the credit card loyalty program; the actual value of points redeemed under the program could be less than the amount recorded.

    Sales and Marketing

 
  Three Months Ended
June 30,

   
   
 
 
  2004
  2003
  $ Change
  % Change
 
 
  (dollars in thousands)

 
Sales and marketing   $ 31,214   $ 30,074   $ 1,140   4 %
% of revenues, net     41 %   52 %          

        Sales and marketing expense increased primarily due to a $1.4 million increase in salaries and benefits related to additional personnel and a $1.0 million rise in professional services fees related primarily to our additional sales efforts for Orbitz for Business. These increases were partly offset by a $1.3 million drop in marketing fees due to lower spending related to traditional advertising channels. We expect to increase our marketing investment modestly in the latter half of the year.

    Technology and Development

 
  Three Months Ended
June 30,

   
   
 
 
  2004
  2003
  $ Change
  % Change
 
 
  (dollars in thousands)

 
Technology and development   $ 7,091   $ 7,545   $ (454 ) (6 )%
% of revenues, net     9 %   13 %          

        Technology and development costs decreased in the second quarter of 2004 as compared to the second quarter of 2003, due mostly to lower depreciation expense of $0.6 million as the software and hardware from the initial site build-out become fully depreciated.

18



    General and Administrative

 
  Three Months Ended
June 30,

   
   
 
 
  2004
  2003
  $ Change
  % Change
 
 
  (dollars in thousands)

 
General and administrative   $ 5,258   $ 5,056   $ 202   4 %
% of revenues, net     7 %   9 %          

        General and administrative costs were flat year over year, as decreased spending in legal services was offset by increased insurance and other costs related to being a public company.

    Stock-Based Compensation

 
  Three Months Ended
June 30,

   
   
 
 
  2004
  2003
  $ Change
  % Change
 
 
  (dollars in thousands)

 
Stock-based compensation   $ 1,704   $ 257   $ 1,447   563 %
% of revenues, net     2 %   N/M            

        In connection with the April 2002 Restructuring described in our Annual Report, all options to purchase Class C nonvoting common stock were automatically converted to options to purchase Class A common stock. This conversion was deemed to be a new grant for all options outstanding at the restructuring date, resulting in non-cash stock-based compensation expense totaling $33.4 million. To date, we have recorded $29.4 million of this expense, and the remaining expense will be recorded as the options vest over the remainder of 2004, 2005 and 2006. This charge accounted for $1.4 million of the total stock-based compensation expense for the quarter ended June 30, 2004 and none of the stock-based compensation expense for the quarter ended June 30, 2003.

    Interest Income

 
  Three Months Ended
June 30,

   
   
 
 
  2004
  2003
  $ Change
  % Change
 
 
  (dollars in thousands)

 
Interest income   $ 743   $ 194   $ 549   283 %
% of revenues, net     1 %   N/M            

        Interest income increased due to a significant increase in our average cash and investment balances following our December 2003 IPO.

    Tax-Sharing Expense and Provision for Income Taxes

 
  Three Months Ended
June 30,

   
   
 
  2004
  2003
  $ Change
  % Change
 
  (dollars in thousands)

Tax-sharing expense   $ 967   $   $ 967   N/M
% of revenues, net     1 %   N/A          
Provision for income taxes                  

        As part of our IPO Exchange, we realized a step-up in the tax basis of our net assets, which we are allowed to amortize over 15 years for income tax purposes. This amortization reduces our taxable income and under the terms of our tax sharing agreement, we agreed to share 87% of the tax savings we actually realize with our Founding Airlines. During the quarter ended June 30, 2004, the 87% portion of the tax savings realized amounted to approximately $1.0 million and is included in net

19



income before provision for income taxes on our consolidated and combined statements of operations. Without this amortization, we would have had income tax expense for the quarter.

        Prior to the IPO Exchange, no provision for Federal or state income taxes was recorded, as the primary operations of the Company resided in Orbitz, LLC, which was treated as a partnership for tax purposes. All operating losses of the partnership were allocated to the Founding Airlines, pursuant to the limited liability company agreement. Following the IPO Exchange, all operating income or loss is allocated to Orbitz, Inc., which is taxed as a C Corporation. We did not record a provision for income taxes for the quarter ended June 30, 2004, as the Company has no current taxable income after deducting the step-up amortization and has a full valuation allowance related to its net deferred tax assets.

Six months ended June 30, 2004 compared to six months ended June 30, 2003

Overview

        Significant events of the six months ended June 30, 2004 include:

    Gross bookings for the six months ended June 30, 2004 were $2.1 billion, representing a 29% increase over the same period in the prior year. We achieved increases in gross bookings in all of our major product offerings.

    Orbitz Merchant Hotel revenues represented 51% and 8% of all hotel revenues for the six months ended June 30, 2004 and 2003, respectively.

    We implemented our own dynamic packaging technical and operating infrastructure in February 2004 and rolled out phase two of dynamic packaging in May 2004, enabling Orbitz to become the first travel site to display multiple hotel and car options on a single screen with estimated total pricing, including car rental taxes and fees. Dynamic packaging enables consumers to shop for combinations of travel products bundled together under one price. We believe that dynamic packaging has the potential to significantly increase bookings in higher-margin products.

    We introduced our attractions and services program in February 2004 to facilitate cross-selling and revenue growth. Under this program, consumers can purchase theme park passes, museum and sight-seeing tours, airport transportation and more.

    The annual resetting of volume thresholds under our Worldspan contract occurred on January 1, resulting in lower booking incentive fee revenues than in later quarters in the year. We reached our first volume plateau in the second quarter of both 2004 and 2003.

    Cost of revenues and all categories of operating expenses benefitted from lower than expected expense for incentive compensation in the six months ended June 30, 2004.

    Revenues, Net

 
  Six Months Ended
June 30,

   
   
 
 
  2004
  2003
  $ Change
  % Change
 
 
  (dollars in thousands)

 
Air revenues, net   $ 87,326   $ 74,828   $ 12,498   17 %
Other travel revenues     39,745     18,585     21,160   114 %
Other revenues     18,780     14,340     4,440   31 %
   
 
 
     
Total revenues, net   $ 145,851   $ 107,753   $ 38,098   35 %
   
 
 
     

        The increase in air revenues was primarily driven by a $10.6 million increase in consumer service fee revenues resulting from an increase in both business and leisure air transactions and a $1.00

20



increase to our per ticket service fee implemented in late June 2003. Supplier transaction fee revenues increased by $1.2 million due to higher air transactions, offset by an 11% decrease in the average supplier transaction fee per ticket.

        Also contributing to the increase in air revenues were Supplier Link revenues, which rose by $2.7 million, offsetting the $2.1 million decrease in reservation system booking incentives, which reflects the trend of shifting more air transactions to our Supplier Link program. We receive a higher margin on Supplier Link transactions because we do not pay GDS rebates to our airline charter associates on these transactions, but we recognize lower revenues because we do not receive GDS inducement payments. Supplier Link represented 40% of air transactions in the six months ended June 30, 2004 compared to 28% in the six months ended June 30, 2003. We expect our Supplier Link mix to stay fairly constant until our next implementation of a major carrier, which is expected to occur later in the year.

        The increase in other travel revenues of 114% is due primarily to a $16.4 million increase in hotel revenues, mostly related to our Orbitz Merchant Hotel ("OMH") program launched in March 2003. OMH revenues represented 51% of all hotel revenues in the six months ended June 30, 2004, compared to 8% in the six months ended June 30, 2003, and, on average, rooms sold under this program generate more than three times the amount of revenue per transaction compared to rooms sold through other channels. Growth in hotel revenue outpaced growth in hotel transactions due to the more favorable economics of OMH bookings.

        Other travel revenues also benefited from a $2.7 million increase in rental car revenues driven by increased bookings and a $1.7 million increase in vacation package revenues corresponding with the rollout of our dynamic packaging product. In mid-February, 2004, we launched our attractions and services product, under which consumers can purchase theme park passes, museum and sight-seeing tours, airport transportation and similar products. Revenues from this product line were not significant in the six months ended June 30, 2004.

        Other revenues benefited from growth across the category, led by increases of $1.9 million in advertising revenue and$1.2 million from commissions for sales driven by sponsoring links on our website.

    Cost of Revenues and Gross Profit

 
  Six Months Ended
June 30,

 
 
  2004
  2003
  $ Change
  % Change
 
 
  (dollars in thousands)

 
Cost of revenues   $ 39,770   $ 36,252   $ 3,518   10 %
% of revenues, net     27 %   34 %          
Gross profit     106,081     71,501     34,580   48 %
% of revenues, net     73 %   66 %          

        Gross profit rose 48% to $106.1 million for the six months ended June 30, 2004, versus $71.5 million in the same period of 2003. The gross margin was 73% for the six months ended June 30, 2004, compared with 66% in the six months ended June 30, 2003, primarily because we shifted our mix into higher margin non-air products. Revenues from non-air travel products represented 27% of total revenues in the six months ended June 30, 2004, compared to 17% in the same period of 2003. Additionally, we incurred lower per transaction customer service and fulfillment costs, and our rebate costs decreased by 16% due to the increase in Supplier Link transactions.

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        Cost of revenues increased 10% in absolute dollars to $39.8 million for the six months ended June 30, 2004 from $36.3 million for the same period of 2003, primarily attributable to a $1.8 million increase in credit card processing fees resulting from higher transaction volumes in the Orbitz Merchant Hotel program, a $1.0 million increase in costs associated with our credit card loyalty program and $0.8 million in salaries and benefits related to additional personnel.

    Sales and Marketing

 
  Six Months Ended
June 30,

   
   
 
 
  2004
  2003
  $ Change
  % Change
 
 
  (dollars in thousands)

 
Sales and marketing   $ 63,706   $ 52,648   $ 11,058   21 %
% of revenues, net     44 %   49 %          

        Sales and marketing expense rose primarily due to a $6.2 million increase in advertising and marketing campaigns driven by increased online advertising expenditures intended to direct traffic to our website. We also experienced a $3.0 million increase in salaries and benefits related to additional personnel.

    Technology and Development

 
  Six Months Ended
June 30,

   
   
 
 
  2004
  2003
  $ Change
  % Change
 
 
  (dollars in thousands)

 
Technology and development   $ 15,036   $ 13,916   $ 1,120   8 %
% of revenues, net     10 %   13 %          

        Technology and development costs increased in absolute dollars in the six months ended June 30, 2004 as compared to the same period in 2003, due mostly to a $1.7 million increase in salaries and benefits related to additional personnel.

    General and Administrative

 
  Six Months Ended
June 30,

   
   
 
 
  2004
  2003
  $ Change
  % Change
 
 
  (dollars in thousands)

 
General and administrative   $ 11,980   $ 9,893   $ 2,087   21 %
% of revenues, net     8 %   9 %          

        The increase in general and administrative costs is due primarily to $1.3 million for increased insurance expenses related to being a public company.

    Stock-Based Compensation

 
  Six Months Ended
June 30,

   
   
 
 
  2004
  2003
  $ Change
  % Change
 
 
  (dollars in thousands)

 
Stock-based compensation   $ 3,459   $ 756   $ 2,703   357 %
% of revenues, net     2 %   1 %          

        In connection with the April 2002 Restructuring described in our Annual Report, all options to purchase Class C nonvoting common stock were automatically converted to options to purchase Class A common stock. This conversion was deemed to be a new grant for all options outstanding at

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the restructuring date, resulting in non-cash stock-based compensation expense totaling $33.4 million. To date, we have recorded $29.4 million of this expense, and the remaining expense will be recorded as the options vest over the remainder of 2004, 2005 and 2006. This charge accounted for $2.9 million of the total stock-based compensation expense for the six months ended June 30, 2004 and none of the stock-based compensation expense for the six months ended June 30, 2003.

    Interest Income

 
  Six Months Ended
June 30,

   
   
 
 
  2004
  2003
  $ Change
  % Change
 
 
  (dollars in thousands)

 
Interest income   $ 1,277   $ 386   $ 891   231 %
% of revenues, net     1 %   N/M            

        Interest income increased due to a significant increase in our average cash and investment balances following our December 2003 IPO.

    Tax-Sharing Expense and Provision for Income Taxes

 
  Six Months Ended
June 30,

   
   
 
  2004
  2003
  $ Change
  % Change
 
  (dollars in thousands)

Tax-sharing expense   $ 967   $   $ 967   N/M
% of revenues, net     1 %   N/A          
Provision for income taxes                  

        As part of our IPO Exchange, we realized a step-up in the tax basis of our net assets, which we are allowed to amortize over 15 years for income tax purposes. This amortization reduces our taxable income and under the terms of our tax sharing agreement, we agreed to share 87% of the tax savings we actually realize with our Founding Airlines. During the six months ended June 30, 2004, the 87% portion of the tax savings realized amounted to approximately $1.0 million and is included in net income before provision for income taxes on our consolidated and combined statements of operations. Without this amortization, we would have an income tax expense for the period.

        Prior to the IPO Exchange, no provision for Federal or state income taxes was recorded, as the primary operations of the Company resided in Orbitz, LLC, which was treated as a partnership for tax purposes. All operating losses of the partnership were allocated to the Founding Airlines, pursuant to the limited liability company agreement. Following the IPO Exchange, all operating income or loss is allocated to Orbitz, Inc., which is taxed as a C Corporation. We did not record a provision for income taxes for the six months ended June 30, 2004, as the Company has no current taxable income after deducting the step-up amortization and has a full valuation allowance related to its net deferred tax assets.

Financial Condition, Liquidity and Capital Resources

        Historically, the majority of our financing was provided through contributions from our Founding Airlines and their affiliates and through lease arrangements on our equipment. Our Founding Airlines and their affiliates invested an aggregate of $214.8 million in us through August 31, 2002.

        In December 2003, we raised net proceeds of $93.7 million in an IPO. The Founding Airlines sold an aggregate of 8,180,000 shares of Class A common stock in the IPO, and now own 67% of our outstanding stock and control 95% of the voting power of our common stock.

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        The Founding Airlines and their affiliates have no obligations to make further investments in us, and we do not anticipate that they will do so. Depending on the nature of the financing, our ability to raise capital from other sources may require the consent of two-thirds of our board of directors and the consent of the holders of three-fourths of the voting power of the Class B common stock then outstanding entitled to supervoting rights.

        During the next 12 months, we intend to continue our marketing campaigns focused on the retention of existing customers and the acquisition of new customers. In addition, we plan to continue to invest in expanding our product offerings and improving our website while enhancing our technical infrastructure. We believe that our available cash and anticipated future cash flows will be sufficient to fund currently anticipated liquidity needs for the next 12 months and beyond. However, any projections of future cash inflows and outflows and any projections of the future state of the economy and travel industry conditions, which may have a direct effect on our cash inflows, are subject to substantial uncertainty. If we determine that we need to raise additional capital in the future, we may seek to sell additional equity or borrow funds. The sale of additional equity would result in dilution to our shareholders. We cannot assure you that any of these financing alternatives will be available in amounts or on terms acceptable to us, if at all. If we are unable to raise or borrow any needed additional capital, we could be required to significantly alter our operating plan, which could have a material adverse effect on our business, financial condition or results of operations.

    Cash and Cash Equivalents and Total Investments

        Cash and cash equivalents and total investments were $213.1 million at June 30, 2004, an increase of $30.4 million from $182.7 million at December 31, 2003. This increase was primarily due to cash flows generated from operations.

    Deferred Revenue

        Deferred revenue was $26.1 million at June 30, 2004 compared to $11.9 million at December 31, 2003. The increase of $14.2 million was mainly due to a $6.8 million increase in deferred revenue related to our OMH program and $2.3 million in deferred revenue related to the annual volume resetting of our Worldspan contract.

    Cash Flows

        We generated cash flows from operations of $30.9 million and $6.2 million for the six months ended June 30, 2004 and 2003, respectively. In the quarter ended June 30, 2004, we generated cash flows from operations of $12.2 million compared with $5.6 million for the same period in 2003. This was our seventh consecutive quarter of positive cash flows from operations. The growth in cash flows generated from operations when comparing the six months ended June 30, 2004 to the six months ended June 30, 2003 is primarily due to improved profitability coupled with an increase in cash received on prepaid hotel reservations in advance of our payments to the hotels.

        Net cash used in investing activities was $75.6 million and $4.8 million for the six months ended June 30, 2004 and 2003, respectively. Our investing activities consist primarily of the purchase of available-for-sale investment securities, which we began following our IPO. We invest mostly in investment grade, interest bearing corporate and government securities.

        Cash flows from financing activities amounted to $4.0 million and $0.3 million for the six months ended June 30, 2004 and 2003, respectively. These amounts primarily related to proceeds from the exercises of stock options.

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Off-Balance Sheet Arrangements

        We do not have any off-balance sheet arrangements, other than the operating leases discussed in our Annual Report. There have been no material changes to our operating lease commitments since December 31, 2003.

Summary Disclosures about Contractual Obligations and Commercial Commitments

        There have been no material changes that are outside the ordinary course of our business to the contractual obligations and commercial commitments that we reported in our Annual Report.

        We do not currently have a borrowing facility in place. All outstanding letters of credit are secured by restricted investments. We have no available letters of credit.

        In November 2001, we entered into a 10-year computer reservation system and related services agreement with Worldspan that expires in October 2011. As amended, this agreement requires that we guarantee certain levels of minimum net air and car segments to be booked each calendar quarter through Worldspan's computer reservation system. The agreement provides that these minimum levels will be waived if we cure any shortfall within the quarter or elect to book 100% of net air and car segments through Worldspan for that quarter. In the event that we fall short of the minimum net segments without curing the shortfall, we would be required to pay $1.78 for each segment below the specified minimum.

        In April 2004, we entered into an agreement with Travelweb to receive access to lodging accommodation inventory to display for sale on our website. The agreement requires that Orbitz guarantee certain levels of minimum room nights for each of the calendar quarters under term, which expires on December 31, 2005. The agreement provides that the minimum room night commitment will be waived if we elect to terminate all land-only merchant hotel programs on the website for at least one full calendar quarter following the date of termination. Should we fall short of the minimum room night guarantee without terminating our land-only merchant programs, we would be required to pay Travelweb $9 for each room night below the guaranteed minimum in calendar quarters in 2004, and $10 for calendar quarters in 2005. To date, no such shortfall has occurred.

        As a component of an employment agreement with Jeffrey G. Katz, our Chairman, President and Chief Executive Officer, we are obligated to make a one-time cash payment to him, at his option, in an amount calculated by multiplying 83,333 by the difference between $30.00 and the average closing price of our common stock (if less than $30.00) for the preceding 20 days on any of the following dates: (1) the first four anniversaries of July 6, 2003, (2) 30 days after the completion of our IPO, or (3) Mr. Katz's resignation or termination by us for any reason. Although he has been eligible to receive the cash payment on several occasions following the completion of our IPO, Mr. Katz has not elected to exercise the right to date.

        At any time from and after December 19, 2008, the holders of the redeemable Series A non-voting convertible preferred stock have the right to require the Company to redeem the shares for cash at the Redemption Price, which is equal to the face value plus an annual accretion factor of 2.0% and any accrued but unpaid dividends. In lieu of paying the redemption price in cash, the Company may elect, in its sole option, to exchange such shares of Series A preferred stock for shares of Class A common stock having a fair market value equal to the Redemption Price. At any time from and after June 19, 2009, the Company has the right to redeem all of the Series A preferred shares for cash at the Redemption Price. Additionally, the holders of Series A preferred stock have the right to convert their shares into shares of class A common stock on a one-for-one basis at any time from and after December 19, 2008. As of June 30, 2004, the Redemption Price was $11,452,000.

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        We have an agreement with a vendor to purchase $3.0 million in computer hardware and software and professional services prior to December 2006. To date, we have made purchases of $1.7 million against this commitment.

Risks Related To Our Business

        Set forth below and elsewhere in this report and in other documents we file with the Securities and Exchange Commission are certain risks and uncertainties that we believe could cause actual results to differ materially from the results contemplated by the forward-looking statements contained in this report.

        Because we have a limited operating history, it is difficult to evaluate our business and prospects.

        Our business began operations in February 2000 and we launched our online travel service in June 2001. As a result, we have only a limited operating history from which you can evaluate our business and our prospects. We will encounter risks and difficulties frequently experienced by early-stage companies in rapidly evolving industries, such as the online travel industry. Some of these risks relate to our ability to:

    attract and retain customers on a cost-effective basis;

    expand and enhance our service offerings;

    operate, support, expand and develop our operations, our website, our software and communications and other systems;

    diversify our sources of revenue;

    manage our relationships with important travel suppliers and other partners;

    maintain adequate control of our expenses;

    raise additional capital, if required;

    respond to technological changes;

    respond to litigation;

    respond to regulatory changes or demands; and

    respond to competitive market conditions.

        If we are unsuccessful in addressing these risks or in executing our business strategy, our business, financial condition or results of operations may suffer.

    We have a history of operating losses and may incur losses in the future.

        Since our inception in February 2000, we have reported operating losses each year. Our operating losses were $42.9 million from the period of inception through December 31, 2000, and $105.5 million, $18.9 million and $16.9 million for the years ended December 31, 2001, 2002, and 2003, respectively. Although we reported operating income of $12.2 million for the six months ended June 30, 2004, we may continue to incur additional operating losses in the future, and cannot assure you that we will be profitable in future periods. Historically, most of our financing came through contributions from our Founding Airlines and their affiliates. The Founding Airlines and their affiliates have no obligation to make further investments in us, and we do not anticipate that they will do so.

        Under our business plan, we will continue to incur significant sales and marketing expenses to expand our customer base. Accordingly, we will need to increase our revenues at a rate greater than our expenses to maintain profitability. We cannot predict whether we will maintain profitability in

26



future periods. If our business does not expand enough to increase our revenues sufficiently, or even if our business does expand but we are unable to manage our expenses, we may not sustain profitability in future periods.

        Our growth cannot be assured. Even if we do experience growth, we cannot assure you that we will grow profitably.

        Our business strategy is dependent on the growth of our business. For us to achieve significant growth, consumers and travel suppliers must accept our website as a valuable commercial tool. Consumers who have historically purchased travel products through traditional commercial channels, such as using local travel agents and booking with suppliers directly, must instead purchase these products on our website. Similarly, travel suppliers will also need to accept or expand their use of our website and to view our website as an efficient and profitable channel of distribution for their travel products.

        Our growth will depend on our ability to broaden the range of travel products we offer. For the year ended December 31, 2003 and the six months ended June 30, 2004, we derived 66% and 60%, respectively, of our revenues from airline ticket sales. Our business strategy is dependent on expanding our revenues from lodging, car rentals, cruises, vacation packages, corporate travel and other travel related products. Key components of this strategy include the growth of our hotel business, particularly our Orbitz Merchant Hotel program, and the dynamic packaging product that we have developed. See "—Our business plans call for the significant growth of our hotel business, and we may be unsuccessful in managing or expanding that business". We cannot assure you that our efforts will be successful or result in increased revenues, higher margins or continued profitability.

        Our growth is also dependent on our ability to broaden the appeal of our website to business and other travelers. Although we launched an Orbitz for Business service directed at corporate users in September 2002, we have had a short period of experience with corporate travel, and our ability to offer products and services that will attract a significant number of business travelers to use our services is not certain. If any of these initiatives is not successful, our growth may be limited and we may be unable to maintain profitability.

        Our plans to pursue other opportunities for revenue growth and cost reduction are at an early stage, and we cannot assure you that our plans will be successful or that we will actually proceed with them as described.

        Adverse changes or interruptions in our relationships with travel suppliers could affect our access to travel offerings and reduce our revenues.

        We rely on charter associate agreements or other participation or commission agreements with our airline suppliers, and these agreements contain terms that could affect our access to airline inventory and reduce our revenues. In particular, our charter associate agreements with our Founding Airlines, which accounted for approximately 71% and 67% of our air supplier transaction fees during the year ended December 31, 2003 and the six months ended June 30, 2004, respectively, are terminable by each of the Founding Airlines upon 30 days notice to us, subject to the restriction set forth in the stockholders agreement that such agreements or similar commercial agreements not be terminated for a period of two years from the date of our IPO. Most of the remaining relationships we have with airline suppliers are freely terminable by the supplier, or will become so within the next year. None of these arrangements is exclusive and airline suppliers could enter into, and in some cases may have entered into, similar agreements with our competitors.

        In addition, we are dependent for lodging and car rental inventory on arrangements with our lodging and car rental suppliers under which these suppliers provide us inventory and compensate us on a commission basis, or supply us with inventory on a merchant basis which we are free to mark up prior to sale. Many of these arrangements are short-term in nature and in some cases unwritten.

27



        We cannot assure you that our arrangements with travel suppliers will remain in effect or that any of these suppliers will continue to supply us with the same level of access to inventory of travel offerings in the future. Additionally, we cannot assure you that our travel suppliers will provide us with comparable perquisites, such as room upgrades, as they offer to their customers. If our access to inventory or features is affected, or our ability to offer their inventory on comparatively favorable economic terms is diminished, it could have a material adverse effect on our business, financial condition or results of operations.

        We are controlled by our Founding Airlines or their affiliates, who may have strategic interests that differ from those of our other shareholders.

        Our Founding Airlines or their affiliates hold a majority of our voting power and their designees comprise a majority of our board. Our Founding Airlines may have strategic interests that are different from ours. Our Founding Airlines or their affiliates own, in the aggregate, approximately 67% of our outstanding common stock, and, through the exercise of certain supermajority voting rights accorded to them in our corporate governance documents, control approximately 95% of the voting power of all shares of voting stock.

        In addition, our Founding Airlines have filed a Schedule 13G with the Securities and Exchange Commission to report their Orbitz holdings as a group. As a result, under a "controlled company" exception to Nasdaq's independence requirements, we are exempt from an obligation to maintain a majority of independent directors on our board and instead have a majority of directors affiliated with our Founding Airlines. In addition, directors affiliated with our Founding Airlines continue to oversee the director nomination and executive compensation functions.

        For the foreseeable future, to the extent that some or all of our Founding Airlines or their affiliates vote similarly, they will be able to exercise control over all matters requiring approval by the board of directors or our shareholders, and this power may be expected to continue even if our Founding Airlines or their affiliates own a minority economic interest in Orbitz. As a result, they or their affiliates will be able to:

    control the composition of our board of directors, including the right to select six of the nine members of our board (one of whom is our chief executive officer) and the ability to nominate the remaining three directors and vote their shares to elect (together with the holders of Class A common stock) them;

    control our management and policies; and

    determine the outcome of significant corporate transactions, including changes in control that may be beneficial to shareholders.

        In addition, our corporate governance documents and our stockholders agreement with our Founding Airlines or their affiliates provide them with a greater degree of control and influence in the operation of our business and the management of our affairs than is typically available to shareholders of a publicly-traded company. In particular, our corporate governance documents and the stockholders agreement with our Founding Airlines or their affiliates provide that:

    Orbitz cannot issue common stock or other securities without the vote of two-thirds of its directors and, for issuances of securities with voting rights greater than one vote per share, without the further approval of the holders of three-fourths of the voting power of the Class B common stock then outstanding entitled to supervoting rights;

    Orbitz cannot enter into any transaction involving any merger, acquisition, consolidation, reorganization or issuance of securities as a result of which our Founding Airlines or their affiliates would own less than a majority of the voting power of the successor or surviving entity,

28


      without the approval of the holders of two-thirds of the voting power of the Class B common stock then outstanding entitled to supervoting rights; and

    Orbitz cannot sell, or contract for the lease or license of, all or substantially all of its assets or sell, or contract for the lease or license of, all or a substantial portion of the assets or business of any of its controlled affiliates, if the assets sold, leased or licensed generate more than 20% of its consolidated net revenues or consolidated income, without the approval of the holders of two-thirds of the voting power of the Class B common stock then outstanding entitled to supervoting rights.

        These restrictions could keep us from pursuing relationships with strategic partners and from raising additional capital, which could impede our ability to expand our business and strengthen our competitive position. These restrictions could also limit shareholder value by preventing a sale of Orbitz.

        We are controlled by our Founding Airlines and conflicts of interest with and among them could impede our business strategy and hurt our business.

        Our Founding Airlines and their affiliates will be able to act in each of their own interests, which may conflict with, or be different from, the interests of other shareholders who do not maintain a commercial relationship with Orbitz. For the foreseeable future, we expect a majority of our directors will be senior employees of our Founding Airlines. Our Founding Airlines compete with each other in the operation of their respective businesses and can be expected to have individual business interests that may conflict with those of the other Founding Airlines. Their differing interests could make it difficult for us to pursue strategic initiatives that require consensus among our Founding Airlines. In addition, our certificate of incorporation and stockholders agreement expressly provide that holders of our Class B common stock may have other business interests and may engage in any other businesses, including businesses similar to ours, except for restrictions on specified investments that expire two years after our IPO. These potential conflicts of interest could have a material adverse effect on our business, financial condition, results of operations or prospects.

        Our relationships with our Founding Airlines have subjected Orbitz to significant litigation and regulatory scrutiny, which may continue.

        As an enterprise founded and controlled by horizontal airline competitors, we may be subject to ongoing regulatory scrutiny of our business to a degree that is not likely to be experienced by our competitors.

        During the last several years, we have been reviewed or investigated by a number of federal and state regulators. In July 2003, the Antitrust Division of the Department of Justice completed an investigation of us and our Founding Airlines that it commenced in 2000 and concluded that our business has not harmed consumers or reduced competition. In late 2002, a commission created by Congress to study the economic status of travel agents and impediments to the flow of travel information concluded its review, which included an examination of our impact on traditional travel agents and consumers, without taking action adverse to us. In December 2002, the Department of Transportation issued the results of a review of our business and operations, and did not find evidence that our operations had an anti-competitive effect on the marketplace for air travel. Our business and operations were under longstanding informal review by a working group of Attorneys General from various states, the last of which ended their inquiry in July 2003 without taking action adverse to us.

        We remain at risk that other or similar regulatory investigations could commence in the future. At any time, the outcome of investigations and other regulatory scrutiny could lead to compulsory changes to our business model, industry agreements, conduct or practices or our relationships with our Founding Airlines and governmental or additional private lawsuits against us, any of which could materially harm our revenue, impair our ability to provide access to the broadest range of low fares and impact our ability to grow and compete effectively.

29


        We expect that our competitors will continue to engage in lobbying and other activities, with the objective of generating negative publicity about us and pressing legislation or regulation that could be harmful to us. These activities may result in private or governmental litigation against us, further investigations of our business by various governmental authorities or the adoption of laws and regulations that make it more difficult for us to compete effectively, particularly as we implement new initiatives designed to enhance our competitive position.

        The continued involvement of our Founding Airlines on our board of directors and as shareholders may result in litigation and regulatory scrutiny of our business. Our competitors or other third parties could file additional lawsuits alleging anti-competitive conduct against us in the future.

        The activities described above may result in significant distractions to our management and could have a material adverse effect on our business, financial condition or results of operations.

        Restrictions on our ability to sell air travel in an "opaque" or "biased" manner may limit our growth.

        Our bylaws limit our ability to market, sell and service air travel products in an "opaque" manner and prevent us from displaying our airfares in a "biased" manner. Our bylaws also limit our ability to acquire a company that engages in either activity. "Opaque" refers to the sale of travel where the customer is not able to see one or more items of important information, such as the identity of the travel provider, or arrival or departure times, until the transaction is completed. "Bias" refers to the practice of favoring the display of one travel supplier over another on the basis of commissions paid, fee overrides or other factors unrelated to price or the customer's choice. Our charter associate agreements contain similar provisions.

        Currently, our bylaws permit us to derive revenues from the sale of airline tickets in an opaque manner, but only to the extent such revenues are derived from links to opaque websites or referrals to opaque websites, and only to the extent the revenues we derive do not exceed 20% of our or our controlled affiliates' revenues from the sale of airline tickets. Under our bylaws, any change in the scope of our business to provide information concerning air travel products to customers in an opaque or biased manner requires the following approvals:

    on or prior to May 8, 2010, the unanimous approval of each holder of our Class B common stock that (1) is, or within the six months prior to the approval being sought was, a party to a commercial agreement with us, pursuant to which such holder of Class B common stock has agreed to provide us with published fare and inventory information for air transportation for inclusion and sale on our website, (2) terminated such an agreement due to an uncured default by us or (3) owns 2,421,360 shares of Class B and Class A common stock (received upon conversion of Class B common stock) in the aggregate (as adjusted to give effect to any stock split, stock dividend, reclassification, recapitalization or other event); and

    after May 8, 2010, the unanimous approval of each holder of our Class B common stock, so long as the holders of our Class B common stock own, in the aggregate, at least 20% of the voting power of all outstanding shares of our capital stock.

        Currently, this would require approval of all of our Founding Airlines or their affiliates. These restrictions may limit our ability to expand the scope of our business and improve our margins in ways that are available to some of our competitors.

        Our Founding Airlines are not prevented from selling to consumers through their own websites or third-party websites and may be able to establish new competitors to Orbitz.

        Our five Founding Airlines collectively represented approximately 72% of the airline tickets sold through Orbitz and 71% of our air supplier transaction fees during the year ended December 31, 2003 and approximately 73% of the airline tickets sold through Orbitz and 67% of our air supplier

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transaction fees during the six months ended June 30, 2004. Our Founding Airlines offer travel products, including Web-only fares, through their own websites and other distribution channels and offer some features, such as mileage bonus awards redemption, which we do not currently offer. Our Founding Airlines are not barred under their relationships with us from selling directly to consumers, and we believe that airlines, including the Founding Airlines, are increasingly focused on using their own web sites as a means for selling tickets. These parties may continue to operate their own businesses in a manner that could increasingly divert customers and revenues from us. Furthermore, one of our Founding Airlines has an ownership interest in priceline.com, and our Founding Airlines may make other investments in travel businesses, subject to restrictions in our stockholders agreement. Our stockholders agreement limits the ability, for the period ending two years after our IPO, of any holder of our Class B common stock or its affiliates to act in concert with two or more other holders of Class B common stock or their respective affiliates to acquire beneficial ownership of more than 10%, in the aggregate, of a third party that offers the direct sale to consumers of air travel products predominantly through an Internet site. However, nothing in our agreements with our Founding Airlines would prevent them individually or acting in concert with only one other Founding Airline from organizing or investing in a separate company, similar to Orbitz, for the purpose of competing with us or from pursuing corporate opportunities that might be attractive to Orbitz. After the expiration of the two-year period described above, this investment restriction will lapse. Our charter associate agreements with our Founding Airlines are terminable upon 30 days notice to us, subject to the restriction set forth in the stockholders agreement that such agreements or similar commercial agreements not be terminated for a period of two years from the date of our IPO.

        None of our other charter associates or other travel suppliers is prevented from selling directly to consumers, organizing or investing in a separate company similar to us or pursuing corporate opportunities that might be attractive to us.

        The terms of our agreement with Worldspan may limit the growth of our Supplier Link business and may have an adverse effect on our business.

        We have agreed with Worldspan, a GDS, that we will direct to Worldspan's system all airline and car rental bookings made through our website, with the exception of bookings transacted using our Supplier Link technology. Under our agreement, we are obligated to meet quarterly minimum volume guarantees totaling 16,000,000 segments on an annual basis for air and car transactions for any year in which we utilize Supplier Link technology for either travel product, with a similar, but separate, volume guarantee applicable to car transactions alone that would apply if we were using Supplier Link technology for car transactions. If we do not meet specific quarterly thresholds, we must pay Worldspan a segment fee of $1.78 for each segment that we fall short. Our current business plans contemplate the expansion of our Supplier Link program to include additional airlines. However, unless we are able to sufficiently increase our number of bookings, or modify the terms of the agreement with Worldspan, it will be necessary for us to control the number of Supplier Link segments we can complete in a particular year, and instead direct some of these transactions to Worldspan, if we wish to avoid making these segment fee payments to Worldspan. We have modified our Supplier Link agreements in a manner that would limit expansion of Supplier Link in the near term.

        Recent significant changes in the marketplace for air travel distribution, such as airlines' decreasing reliance on GDSs, and GDS deregulation, may have impacts on our business that are difficult to predict. One or more carriers may determine that distribution through Worldspan or other GDSs is too costly relative to alternatives, and demand fundamental changes in the allocation of distribution cost and compensation among GDSs, travel agents and airlines. If, as a result of these or other changes, Worldspan's ability to distribute a broad range of air inventory were impaired, then our business could be adversely affected.

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        Airline "journey controls" may reduce our advantage in the number of low-priced connecting itineraries we can present to our customers.

        Some carriers currently employ, or may adopt, "journey control logic" designed to enhance the management of airfares and seat availability for connecting itineraries, based on a traveler's origin and final destination. ITA, our search engine provider, is capable of accommodating journey control restrictions, but requires coordination with the airline to do so. If the carrier does not coordinate with ITA prior to, and during the use of, journey control logic, some connecting itineraries found by ITA's search engine will be rejected by the airline's system during the Orbitz booking process and the customer will receive an error message, which may negatively affect their perception of our service. Management believes that airlines that have expressed an interest in implementing journey control logic are currently cooperating with ITA, consistent with contractual requirements between us and those carriers. We believe that our bookings on some carriers have been affected by these journey control programs. In the quarterly period ending June 30, 2004, several major carriers implemented extensive tests of their journey control software and these tests uncovered problems with the interface between these carriers' revised inventory methodologies and the ITA fare search software. This caused us to reduce the number of flight options available to Orbitz customers during the period below what was made available by these carriers, and we believe, adversely affected our sales volume. If airlines activate or reactivate journey control restrictions without coordinating these programs with Orbitz, then our ability to present a large number of low-priced fare and flight combinations on connecting itineraries that can be successfully booked by consumers may be compromised. Our efforts to mitigate the implementation risks posed by journey control restrictions may continue to involve a reduction in the number of connecting itineraries that are displayed to our customers, and could reduce any advantage we maintain in the number of low-priced connecting itineraries we can present to our customers. This could have a material adverse effect on our business and financial results.

        We operate in a highly competitive market, and we may not be able to compete effectively.

        The market for travel products is intensely competitive. We compete with a variety of companies with respect to each product or service we offer, including:

    InterActiveCorp, an online commerce company, which owns or controls numerous travel-related enterprises, including Expedia, an online travel agency, Expedia Corporate Travel, an online travel agency for business travelers, Hotels.com, a distributor of online lodging reservations, Hotwire, a wholesaler of airline tickets, lodging and other travel products, and Ticketmaster and Citysearch, both of which offer destination information and tickets to attractions;

    Sabre Holdings, which owns Travelocity, an online travel agency, GetThere, a provider of online corporate travel technology and services, Travelocity Business, an online travel agency for corporate travel, and the Sabre Travel Network, a GDS;

    Cendant, a provider of travel and vacation services, which owns or controls the following: Galileo International, a worldwide GDS; Cheap Tickets, an online travel agency; Lodging.com, an online distributor of hotel rooms; Howard Johnson, Ramada Inns, and other hotel franchisors; Avis and Budget car rental companies; Travelport, a provider of online corporate travel services and other travel-related brands;

    other consolidators and wholesalers of airline tickets, lodging and other travel products, including priceline.com, which also owns Travelweb;

    travel agencies targeting the corporate market, such as American Express, Navigant/TQ3, World Travel Partners and Carlson Wagonlit, which compete against our Orbitz for Business service;

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    Amadeus, an international GDS operator, which also owns or controls online travel agencies in the United States and Europe, including Opodo, and corporate booking services that compete against our Orbitz for Business service;

    other local, regional, national and international traditional travel agencies servicing leisure and business travelers; and

    operators of other GDSs, which control the computer systems through which travel reservations historically have been booked.

        Many of our competitors have longer operating histories, larger customer bases, more established brands and significantly greater financial, marketing and other resources than we do. Some of our competitors benefit from vertical integration with GDSs. In particular, we believe our two primary competitors in the online travel products market to be Expedia and Travelocity, which have each operated their respective businesses for significantly longer than Orbitz and may benefit from greater market share, brand recognition, product diversification, scale and operating experience than we do. In addition, Expedia and Travelocity, unlike us, have each established exclusive relationships as preferred travel partners for widely used Internet destinations such as America Online, MSN and Yahoo!. These arrangements, and similar relationships Expedia and Travelocity may be able to secure in the future, could provide them with a significant advantage in obtaining new customers. Furthermore, the flexibility of being able to provide biased displays for fares may provide Expedia, Travelocity and other competitors an opportunity to receive additional incentive payments from their suppliers. We expect Expedia and Travelocity will devote significant financial and operating resources to maintain their respective positions in the online travel products market.

        We expect existing competitors and business partners and new entrants to the travel business to constantly revise and improve their business models in response to challenges from competing Internet-based businesses, including ours. For example, firms that provide services to us and our competitors may introduce pricing or other business changes that adversely affect our attractiveness to suppliers in favor of our competitors. Similarly, some of our airline suppliers have recently entered into arrangements with GDS providers containing "most favored nations" obligations in which they have committed, in exchange for reduced GDS booking fees, to provide to the GDS and its subscribers, including some of our online travel agency competitors, all fares the supplier offers to the general public through any distribution channel. The effect of these arrangements may be to preclude us from successfully bargaining for superior airline inventory or other promotional advantages, and to reduce the relative attractiveness of Orbitz as a low cost distribution channel for these airlines. If Expedia, Travelocity or other travel industry participants introduce changes or developments we cannot meet in a timely or cost-effective manner, our business may be adversely affected. We cannot assure you that we will be able to effectively compete with Expedia, Travelocity or with other travel industry providers.

        In addition, consumers frequently use our website for itinerary pricing and other travel information, and then may choose to purchase travel products from a source other than our website, including travel suppliers' own websites. Many travel suppliers, including our Founding Airlines and other airlines, lodging, car rental companies and cruise operators, also offer and distribute travel products, including products from other travel suppliers, directly to the consumer through their own websites. We expect competition from these travel suppliers to intensify. In many cases, these competitors offer advantages, such as bonus miles or lower transaction fees, that we do not or cannot provide to consumers.

        In addition, the airline industry has experienced a shift in market share from full-service carriers, such as our Founding Airlines, to low-cost carriers that focus primarily on discount fares to leisure destinations and we expect this trend to continue. Some low-cost carriers, such as Southwest and JetBlue, do not distribute their tickets through Orbitz or other third-party intermediaries.

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        Our business plans call for the significant growth of our hotel business, and we may be unsuccessful in managing or expanding that business.

        We are dependent on our hotel business as a significant source of growth for our business. We have less experience than our competitors in the area of hotels, and we remain subject to numerous risks in the operation and growth of that business. Our hotel strategy is particularly dependent on our ability to obtain an adequate inventory of hotel rooms to offer under our OrbitzSaver model, which requires pre-payment by the consumer at the time of booking. To procure this prepaid inventory, we currently rely on a third-party relationship with Travelweb and on internal sales efforts under our Orbitz Merchant Hotel program.

        Our strategy calls for us to increase the number of hotel rooms we can offer under our Orbitz Merchant Hotel program based on merchant arrangements we make directly with individual hotel properties and independent chains. Under the Orbitz Merchant Hotel program, we receive inventory directly from a hotel at a negotiated rate, and we determine the retail price at which we choose to offer it to the consumer. We believe that acting as merchant under this model will allow us to achieve higher revenues per transaction. However, there are significant risks associated with our Orbitz Merchant Hotel program. Many hoteliers utilize merchant arrangements with us and our competitors as a channel to dispose of excess hotel room inventory at wholesale rates. Improving economic conditions are creating increased demand for hotel rooms, and some hotel managers may reduce the amount of inventory they choose to sell through merchant arrangements or increase the negotiated rates at which they are willing to provide that inventory to us. We expect that this will continue to be the trend in many markets, and will be heightened by strong competition from our competitors seeking inventory for their own merchant rate programs. We believe that our ability to obtain desired results from our OMH program will be highly dependent on our ability to successfully manage and promote our hotel inventory to consumers. We did not begin this program until March 2003, and our experience with operational issues is limited. For example, we believe that software and display management issues surrounding the presentation of our hotel inventory impaired the growth of our merchant hotel revenues in the first half of 2004, and there can be no assurance that our efforts to resolve these or similar issues in the future will be successful. Any of these events could exert downward pressure on the margins we can achieve from our merchant hotel business, or otherwise prevent us from achieving our financial objectives for the Orbitz Merchant Hotel program. This could have a material adverse effect on our hotel business.

        In May 2004, we entered into a replacement agreement with Travelweb, under which we receive prepaid inventory from Travelweb founders and other participating chains and properties for display on our website. Travelweb was formed by Pegasus Solutions and by several leading hotel chains, including Hilton, Hyatt, Intercontinental, Marriott and Starwood. Although the founders sold the majority of their interests to priceline.com in May 2004, Travelweb continues to act as a reseller of hotel inventory provided by these and other participating chains. Travelweb sets the consumer prices for this inventory and pays us a commission for each hotel room. Under the terms of our revised agreement, which has been extended through the end of 2005, we are free to enter into direct relationships with any property, regardless of its participation in Travelweb, except that we agreed with four of the five founding Travelweb chains not to enter into direct relationships with properties affiliated with one of those chains without such chain's consent. We are required to display all room inventory provided to us by hotels affiliated with Travelweb's founding chains, and we must engage in good faith efforts to sell such inventory, with specified compensatory payments due to Travelweb to the extent our bookings from Travelweb inventory fall short of the quarterly room night targets. If we are unable to meet these quarterly thresholds, there is a risk that our financial results could be adversely affected by the compensatory payments.

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        A reduction in transaction fees or the elimination of commissions paid by travel suppliers could reduce our revenues. The minimum transaction fees many of our airline suppliers have agreed to pay to us decrease in amount each year over the term of our charter associate agreements.

        For the year ended December 31, 2003 and the six months ended June 30, 2004, 19% and 17%, respectively, of our revenues came from the transaction fees paid directly by travel suppliers for airline bookings made by our customers through our online travel service. Where we have charter associate agreements with airline suppliers, these agreements obligate the airline to pay us transaction fees on published fares that are not less than certain agreed-upon floor rates for tickets sold on our website. These minimum transaction fees decrease in amount each year and declined by approximately 27% on June 1, 2004. They are scheduled to decline an additional 28% and 30% on June 1, 2005 and June 1, 2006, respectively, and to become constant thereafter. It is unlikely that any of our charter associate airlines will choose to pay us transaction fees above the minimum levels specified in our contracts. Furthermore, our charter associate agreements have defined durations, and we cannot assure you that our transaction fees will not be reduced or eliminated in the future or will be competitive with market terms during the duration of the agreements.

        A portion of our revenues is dependent on consumer service fees.

        For the year ended December 31, 2003 and the six months ended June 30, 2004, approximately 21% and 27%, respectively, of our revenues were derived from consumer service fees. We charge our customers a $6 consumer service fee each time they purchase an airline ticket on our website. This fee is $10 for all international markets other than Canada, Mexico and the Caribbean. Although traditional travel agencies and many other online travel companies (including our principal competitors) charge consumer service fees, some other travel websites, including the websites of our travel suppliers, do not charge a service fee and many of our suppliers' sites offer benefits, such as frequent flier miles, that we cannot provide. If we were required by competitive forces to reduce or eliminate our service fee, our revenues could decline as a result.

        If we fail to attract and retain customers in a cost-effective manner, our ability to grow and become profitable may be impaired.

        Our business strategy depends on increasing our overall number of customer transactions in a cost-effective manner. In order to increase our number of transactions, we must attract new visitors to our website, convert these visitors into paying customers and capture repeat business from existing customers. Similarly, our corporate travel offering is dependent on enlisting new corporate customers and attracting their travel booking activity online to Orbitz. For the year ended December 31, 2003 and the six months ended June 30, 2004, we incurred sales and marketing expenses of $110.6 million and $63.7 million, respectively. Although we have spent significant financial resources on sales and marketing and plan to continue to do so, there are no assurances that these efforts will be cost effective at attracting new customers or increasing transaction volume. In particular, we believe that rates for desirable advertising and marketing placements are likely to increase in the foreseeable future, especially for web-based marketing such as internet search terms, which are increasingly important to us as a source of new users. We may be disadvantaged relative to our larger competitors in our ability to expand or maintain our advertising and marketing commitments. Additionally, we have limited experience in marketing to corporate users. If we do not achieve our marketing objectives, our ability to attract users, to grow and to become consistently profitable may be impaired.

        Interruptions in service from third parties or transitions to new service providers could impair the quality of our service.

        We rely on third-party computer systems and other service providers, including the computerized central reservation systems of the airline, lodging and car rental industries, to make airline ticket, lodging and car rental reservations and credit card verifications and confirmations. Currently,

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approximately 60% of our airline ticket transactions are processed through Worldspan's systems, and approximately 75% of our hotel room transactions are processed through Pegasus. Other third parties provide, for instance, our data center, telecommunications access lines and significant computer systems and software licensing, support and maintenance services. In the past, third parties, including Worldspan and Pegasus, have suffered system outages that have adversely affected our ability to offer our travel services or to process booking transactions. Any future interruption in these, or other, third-party services or a deterioration in their performance could impair the quality of our service. We cannot be certain of the financial viability of all of the third parties on which we rely. We work with many vendors in the telecommunications industry, including MCI, Ameritech, AT&T, Sprint and Cable & Wireless. That industry is continuing to experience a severe economic downturn. If our arrangements with any of these third parties are terminated or if they were to cease operations, we might not be able to find an alternate provider on a timely basis or on reasonable terms, which could hurt our business.

        We rely on relationships with licensors for key components of our software. We also hire contractors to assist in the development and maintenance of our systems. Continued access to these licensors and contractors on favorable contract terms or access to alternative software licenses and information technology contractors is important to our operations. Adverse changes in any of these relationships could have a material adverse effect on our business, financial condition or results of operations.

        For all our service providers, we attempt to negotiate favorable pricing, service, confidentiality and intellectual property ownership or licensing terms in our contracts with them. These contracts usually have multi-year terms. However, there is no guarantee that these contracts will not terminate and that we will be able to negotiate successor agreements or agreements with alternate service providers on competitive terms. Further, the existing agreements may bind us for a period of time to terms and technology that become obsolete as our industry and our competitors advance their own operations and contracts.

        Our success depends on maintaining the integrity of our systems and infrastructure.

        In order to be successful, we must provide reliable, real-time access to our systems for our customers and suppliers. As our operations grow in both size and scope, we will 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. The expansion of our systems and infrastructure will require us to commit substantial financial, operational and technical resources before the volume of business increases, with no assurance that the volume of business will increase. Consumers and suppliers will not tolerate a service hampered by slow delivery times, unreliable service levels or insufficient capacity, any of which could have a material adverse effect on our business, financial condition or results of operations.

        Our computer systems may suffer failures, capacity constraints and business interruptions that could increase our operating costs and cause us to lose customers.

        Our operations face the risk of systems failures. Our systems and operations are vulnerable to damage or interruption from fire, flood, power loss, telecommunications failure, computer hacking break-ins and other malicious activity, earthquake, terrorism and similar events. The occurrence of a natural disaster or unanticipated problems at our facilities in Chicago or locations of key vendors such as Hitachi Data Systems, ITA, MCI, AT&T, Oracle, Sun, Compaq, Worldspan or Pegasus could cause interruptions or delays in our business, loss of data or render us unable to process reservations. We are particularly dependent on Oracle, Sun and Hitachi Data Systems as providers of computer infrastructure critical to our business. Hardware failure or software error that affects their systems could result in corruption or loss of data and could cause an interruption in the availability of our services. We are also dependent on external data centers operated by MCI and Savvis, which we do not

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control. The failure of our computer and communications systems to provide the data communications capacity required by us, as a result of human error, natural disaster or other occurrence of any or all of these events could adversely affect our reputation, brand and business. In the past, third-party failures and human error have resulted in system interruptions, including a significant outage in July 2003, and we cannot assure you that similar system interruptions will not occur in the future.

        In these circumstances, our redundant systems or disaster recovery plans may not be adequate. Similarly, although many of our contracts with our service providers require them to have disaster recovery plans, we cannot be certain that these will be adequate or implemented properly. In addition, our business interruption insurance may not adequately compensate us for losses that may occur. If we were to experience significant systems failures, it could erode consumer confidence in our services and have a material adverse effect on our business, financial condition and results of operations.

        Rapid technological changes may render our technology obsolete or decrease the attractiveness of our products to consumers.

        To remain competitive in the online travel industry, we must continue to enhance and improve the functionality and features of our website. The Internet and the online commerce industry are rapidly changing. In particular, the online travel industry is characterized by increasingly complex systems and infrastructures and new business models. If competitors introduce new products embodying new technologies, or if new industry standards and practices emerge, our existing website, technology and systems may become obsolete. Our future success will depend on our ability to do the following:

    enhance our existing products;

    develop and license new products and technologies that address the increasingly sophisticated and varied needs of our prospective customers and suppliers; and

    respond to technological advances and emerging industry standards and practices on a cost-effective and timely basis.

        Developing our website and other technology entails significant technical and business risks. We may use new technologies ineffectively or we may fail to adapt our website, transaction processing systems and network infrastructure to consumer requirements or emerging industry standards. For example, our website functionality that allows searches and displays of ticket pricing and travel itineraries is a critical part of our service, and it may become out-of-date or insufficient from our customers' perspective and in relation to the search and display functionality of our competitors' websites. Additionally, as the architecture of our systems becomes more complex, our ability to efficiently innovate or react to emerging standards may be impaired. If we face material delays in introducing new services, products and enhancements, our customers and suppliers may forego the use of our products and use those of our competitors.

        We may not protect our technology effectively, which would allow competitors to duplicate our products. This could make it more difficult for us to compete with them.

        Our success and ability to compete in the online travel industry depend, in part, upon our technology. We rely primarily on patent, copyright, trade secret and trademark laws and provisions in our contracts to protect our technology. We attempt to negotiate beneficial intellectual property ownership provisions in our contracts. However, laws and our actual contractual terms may not be sufficient to protect our technology from use or theft by third parties. For instance, a third party might try to reverse engineer or otherwise obtain and use our technology without our permission and without our knowledge, allowing competitors to duplicate our products. We may have legal or contractual rights that we could assert against such illegal use, but lawsuits claiming infringement or misappropriation are complex and expensive, and the outcome would not be certain. In addition, the laws of some countries

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in which we may wish to sell our products may not protect software and intellectual property rights to the same extent as the laws of the United States.

        Defending against intellectual property claims could be expensive and disruptive to our business.

        We cannot assure you that others will not obtain and assert patents or other intellectual property rights against us affecting essential elements of our business. From time to time, in the ordinary course of our business, we have been subject to legal proceedings and claims relating to the intellectual property rights of others, and we expect that third parties will continue to assert intellectual property claims against us, particularly as we expand the complexity and scope of our business. We endeavor to defend our intellectual property rights diligently, but intellectual property litigation is expensive and time consuming, and successful infringement claims against us could result in significant monetary liability or prevent us from operating our business, or portions of our business. In addition, resolution of claims may require us to obtain licenses to use intellectual property rights belonging to third parties, which may be expensive to procure, or possibly to cease using those rights altogether. Any of these events could have a material adverse effect on our business, results of operations or financial condition. Please see "Part II, Item 1. Legal Proceedings."

        If we do not continue to attract and retain qualified personnel, we may not be able to expand our business.

        Our business and financial results depend on the continued service of our key personnel. The loss of the services of our executive officers or other key personnel could harm our business and financial results. Our success also depends on our ability to hire, train, retain and manage highly skilled employees. We cannot assure you that we will be able to attract and retain a significant number of qualified employees or that we will successfully train and manage the employees we hire.

        We may acquire other businesses, products or technologies; if we do, we may be unable to integrate them with our business, or we may impair our financial performance.

        If appropriate opportunities present themselves, we may acquire businesses, products or technologies that we believe are strategic. We may not be able to identify, negotiate or finance any future acquisition successfully. Even if we do succeed in acquiring a business, product or technology, we have no experience in integrating an acquisition into our business; the process of integration may produce unforeseen operating difficulties and expenditures and may absorb significant attention of our management that would otherwise be available for the ongoing development of our business. Such acquisitions may involve numerous other risks, including: failure to realize expected synergies or cost savings; unidentified issues not discovered in our due diligence process, including product and service quality issues and legal contingencies; potential loss of our key employees or key employees of the acquired company; difficulty in maintaining controls, procedures and policies during the transition and integration process and difficulty in maintaining our relationships with existing travel suppliers or customers. If we make acquisitions, we may issue shares of stock that dilute the interests of our other shareholders and dilute our earnings per share, expend cash, incur debt, assume contingent liabilities or create additional expenses related to amortizing other intangible assets with estimable useful lives, any of which might harm our business, financial condition or results of operations.

        Declines or disruptions in the travel industry, such as those caused by general economic downturns, terrorism, health concerns or strikes or bankruptcies within the travel industry could reduce our revenues.

        Our business is affected by the health of the travel industry. Travel expenditures are sensitive to business and personal discretionary spending levels and tend to decline during general economic downturns. Since 2001, the travel industry has experienced significant downturns, and there is a risk that a future downturn, or periods of weak demand for travel, could adversely affect the growth of our business. Additionally, travel is sensitive to safety concerns, and thus may decline after incidents of

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terrorism, during periods of geopolitical conflict in which travelers become concerned about safety issues, or when travel might involve health-related risks. For example, the terrorist attacks of September 11, 2001, which included attacks on the World Trade Center and the Pentagon using hijacked commercial aircraft, resulted in a decline in travel bookings, including those through our website. Following the September 11, 2001 attacks, our weekly transactions decreased approximately 50% and returned to pre-attack levels in late October 2001. Similarly, our weekly transactions decreased approximately 20% when the war with Iraq began in mid-March 2003 and returned to pre-war levels in mid-April 2003. The long-term effects of events such as these could include, among other things, a protracted decrease in demand for air travel due to fears regarding terrorism, war or disease. These effects, depending on their scope and duration, which we cannot predict at this time, could significantly impact our long-term results of operations or financial condition. Other adverse trends or events that tend to reduce travel and may reduce our revenues include:

    higher fares and rates in the airline industry or other travel-related industries;

    labor actions involving airline or other travel suppliers;

    political instability and hostilities;

    fuel price escalation;

    travel-related accidents;

    bankruptcies of travel suppliers and vendors; and

    bad weather.

        Evolving government regulation could impose taxes or other burdens on our business, which could increase our costs or decrease demand for our products.

        We must comply with laws and regulations applicable to online commerce and the sale of air transportation. Increased regulation of the Internet or air transportation or different applications of existing laws might slow the growth in the use of the Internet and commercial online services, or could encumber the sale of air transportation, which could decrease demand for our products, increase the cost of doing business or otherwise reduce our sales and revenues. The statutes and case law governing online commerce are still evolving, and new laws, regulations or judicial decisions may impose on us additional risks and costs of operations.

        Federal legislation imposing limitations on the ability of states to tax Internet-based sales was enacted in 1998. The Internet Tax Freedom Act, which was extended by the Internet Non-Discrimination Act, exempted specific types of sales transactions conducted over the Internet from multiple or discriminatory state and local taxation through November 1, 2003. If this legislation is not renewed, state and local governments could impose additional taxes on Internet-based sales, and these taxes could decrease the demand for our products or increase our costs of operations.

        We are currently reviewing the tax laws in various states and jurisdictions relating to state and local hotel occupancy taxes. Several jurisdictions have indicated that they may take the position that hotel occupancy tax is applicable to the gross profit on merchant hotel transactions. Historically, we have not paid such taxes. Some state and local jurisdictions could rule that we are subject to hotel occupancy taxes on the gross profit and could seek to collect such taxes, either retroactively or prospectively or both. If hotel occupancy tax is applied to the gross profit on merchant hotel transactions, it could increase our costs or decrease demand for our products.

        In addition, new regulations, domestic or international, regarding the privacy of our users' personally identifiable information may impose on us additional costs and operational constraints. Because our market is seasonal, our quarterly results will fluctuate. Our business experiences seasonal fluctuations, reflecting seasonal trends for the products offered by our website, as well as Internet

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services generally. For example, traditional leisure travel bookings are higher in the first two calendar quarters of the year in anticipation of spring and summer vacations and holiday periods, but online travel reservations may decline with reduced Internet usage during the summer months. In the last two quarters of the calendar year, demand for travel products generally declines and the number of bookings flattens or decreases. These factors could cause our revenues to fluctuate from quarter to quarter. Our results may also be affected by seasonal fluctuations in the inventory made available to us by travel suppliers.

        The success of our business depends on continued growth of online travel commerce.

        Our sales and revenues will not grow as we plan if consumers and businesses do not purchase significantly more travel products online than they currently do and if the use of the Internet as a medium of commerce for travel products does not continue to grow or grows more slowly than expected. Consumers and businesses have traditionally relied on travel agents and travel suppliers and are accustomed to a high degree of human interaction in purchasing travel products. The success of our business is dependent on the number of consumers and businesses who use the Internet to purchase travel products increasing significantly.

        Our business is exposed to risks associated with online commerce security and credit card fraud.

        Consumer concerns over the security of transactions conducted on the Internet or the privacy of users may inhibit the growth of the Internet and online commerce. To transmit confidential information such as customer credit card numbers securely, we rely on encryption and authentication technology. Unanticipated events or developments could result in a compromise or breach of the systems we use to protect customer transaction data. Furthermore, our servers and those of our service providers may be vulnerable to viruses or other harmful code or activity transmitted over the Internet. While we proactively check for intrusions into our infrastructure, a virus or other harmful activity could cause a service disruption.

        In addition, we bear financial risk from products or services purchased with fraudulent credit card data. Although we have implemented anti-fraud measures, a failure to control fraudulent credit card transactions adequately could adversely affect our business. Because of our limited operating history, we cannot assure you that our anti-fraud measures are sufficient to prevent material financial loss.

        The market price of our Class A common stock may be highly volatile or may decline regardless of our operating performance.

        The market prices of the securities of Internet-related and online commerce companies have been extremely volatile and have declined overall significantly since early 2000. Broad market and industry factors may adversely affect the market price of our Class A common stock, regardless of our actual operating performance. Factors that could cause fluctuation in the stock price may include, among other things:

    actual or anticipated variations in quarterly operating results;

    changes in financial estimates by us or by any securities analysts who cover our stock;

    conditions or trends in our industry;

    changes in the market valuations of other travel service providers;

    announcements by us or our competitors of significant acquisitions, strategic partnerships or divestitures;

    announcements of investigations or regulatory scrutiny of our operations or lawsuits filed against us;

    capital commitments;

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    additions or departures of key personnel; and

    sales of our common stock, including sales of our common stock by our directors and officers or our Founding Airlines.

        Future sales of our Class A common stock may cause our stock price to decline.

        If our shareholders sell substantial amounts of our Class A common stock in the public market, the market price of our Class A common stock could decline. These sales might also make it more difficult for us to sell additional equity securities at a time and price that we deem appropriate. As of June 30, 2004, we had an aggregate of 40,806,292 shares of common stock outstanding, including 13,632,831 shares of Class A common stock and 27,173,461 shares of Class B common stock, which is convertible at any time into Class A common stock. Of these outstanding shares, 12,833,581 shares of our Class A common stock are freely tradable in the public market. The remaining 799,250 shares of our Class A common stock and all of our Class B common stock shares are restricted securities as defined in Rule 144 under the Securities Act.

        These 27,972,711 shares of restricted stock may be sold into the public market in the future without registration under the Securities Act to the extent permitted under Rule 144. The Class B shares, which can be converted to Class A shares at any time, are also subject to registration rights under which their holders may require us to file a future registration statement under the Securities Act to permit them to sell their shares freely into the public market.

        In addition, 6,667,563 shares reserved for issuance pursuant to outstanding options and 1,171,631 shares available for grant under our existing stock plans as of June 30, 2004, if granted, will become eligible for sale in the public market once permitted by provisions of various vesting agreements and Rule 144, as applicable. In addition, 434,782 shares of redeemable Series A non-voting convertible preferred stock will be convertible into the same number of shares of Class A common stock at any time from and after December 19, 2008.

        Under our tax agreement with the Founding Airlines, we could have exposure if a tax authority were to determine that tax benefits were unavailable to us in connection with the IPO Exchange and the Founding Airlines were unable to satisfy related repayment obligations.

        We have treated the IPO Exchange as a taxable exchange of membership units in Orbitz, LLC for capital stock of Orbitz, Inc., resulting in our Founding Airlines or their affiliates recognizing taxable gain. In connection with the IPO Exchange, we have increased our tax basis in our tangible and intangible assets by an amount equal to the taxable gain recognized by our Founding Airlines or their affiliates. As a result, we expect the IPO Exchange to reduce the amounts we must pay to various tax authorities by increasing our future tax deductions for depreciation and amortization. We have agreed in our tax agreement with our Founding Airlines or their affiliates to pay them 87% of the amount by which our tax payments to various tax authorities actually are reduced. We have recorded the first such payment obligation in connection with the quarterly period ended June 30, 2004, and we expect that we will be obligated to make such payments on a regular basis in future periods. Such payments to our Founding Airlines or their affiliates could exceed $250 million over 15 years or longer. If, as a result of an income tax audit or examination, a tax authority determines that any significant amount of these tax benefits should not have been available to Orbitz, we might be required to pay additional taxes, interest and/or penalties to one or more tax authorities, as well as any costs associated with such tax audit or examination, after having already paid the tax benefits to our Founding Airlines or their affiliates. If at that time any of our Founding Airlines were insolvent or bankrupt or otherwise unable to repay such tax benefits to us as provided in our tax agreement, this could have a material adverse effect on our financial condition.

41



        We do not expect to pay any dividends to the holders of our common stock for the foreseeable future.

        We do not anticipate that we will pay any dividends to holders of our common stock in the foreseeable future. Accordingly, investors must rely on sales of their Class A common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investment. Investors seeking cash dividends should not purchase our Class A common stock.

        Recently enacted and proposed changes in securities laws and regulations are likely to increase our costs.

        The Sarbanes-Oxley Act of 2002 and the Securities and Exchange Commission rules implementing that Act have required changes in some of our corporate governance practices and may require further changes. These new rules and regulations will increase our legal and financial compliance costs, and make some activities more difficult, time-consuming or costly. We also expect these new rules and regulations to make it more difficult and more expensive for us to maintain director and officer liability insurance. These new rules and regulations could also make it more difficult for us to attract and retain qualified independent members of our board of directors and qualified members of our management team.

FORWARD-LOOKING STATEMENTS

        We have made statements in this report, including statements under "Management's Discussion and Analysis of Financial Condition and Results of Operations," which constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements are subject to a number of risks, uncertainties and assumptions about the Company, including those described under "Risk Factors" in the Company's Annual Report on Form 10-K for the year ended December 31, 2003 filed with the Securities and Exchange Commission. In light of these risks and uncertainties, the forward-looking events and circumstances discussed in this report may not occur and actual results could differ materially from those anticipated or implied in the forward-looking statements.

        You can identify these forward-looking statements by forward-looking words such as "believe," "may," "could," "will," "estimate," "continue," "anticipate," "intend," "seek," "plan," "expect," "should," "would" and similar expressions in this report.


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        We consider investments purchased with an original or remaining maturity of less than three months at the date of purchase to be cash equivalents. We maintain an investment portfolio of various holdings, types and maturities, consisting primarily of corporate debt. These securities are classified as available-for-sale and consequently are recorded on the condensed consolidated balance sheets at fair market value with unrealized gains or losses reported as a separate component of accumulated other comprehensive income.

        At any time, a sharp rise in interest rates could have a material adverse impact on the fair value of our investment portfolio. Conversely, declines in interest rates could have a material impact on interest earnings for our investment portfolio. We do not currently hedge these interest rate exposures.


ITEM 4. CONTROLS AND PROCEDURES

        The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company's Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to the Company's management, including its Chief

42



Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

        As required by SEC Rule 13a-15(b), the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and the Company's Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures as of the end of the quarter covered by this report. Based on the foregoing, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective at the reasonable assurance level.

        There has been no change in the Company's internal controls over financial reporting during the Company's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

        On October 16, 2002, Amadeus Global Travel Distribution, S.A. and Amadeus s.a.s., collectively "Amadeus," filed a complaint against us in the United States District Court for the District of Delaware. In the lawsuit, Amadeus alleged that our use of the ITA software in combination with GDS services from Worldspan (a competitor of Amadeus) constituted a breach of the terms of our agreement with ITA. Amadeus also contended that we tortiously interfered with the contract between Amadeus s.a.s. and ITA, claiming that ITA was not contractually free to license its low fare searching software to us. The court granted summary judgment in favor of Orbitz and ITA and against Amadeus on February 19, 2004. Amadeus, in lieu of pursuing its appeal, reached an agreement with co-defendant ITA and dismissed the action in its entirety on May 14, 2004, including all claims against us.

        On January 10, 2004, NCR Corporation ("NCR") filed a complaint in the United States District Court for the Western District of Pennsylvania, alleging that Orbitz's commercial Internet operations infringe 13 separate patents, including business method patents, allegedly owned by NCR. In June 2004, Orbitz and NCR settled this dispute, and NCR has dismissed the matter in its entirety.

        On June 2, 2004, ArrivalStar, Inc. filed a complaint in the United States District Court for the Eastern District of Texas naming Orbitz and two other unrelated defendants. The suit alleges infringement of a number of separate patents, including business method patents, related to our customer care program and the automated communication of flight times to our customers. We believe that this lawsuit is without merit, and we intend to vigorously defend this action.

        In addition to the matters described above, we are party to various pending legal actions that we believe to be incidental to the operation of our business. We believe that the outcome of these pending, incidental legal proceedings will not have a material adverse effect on our financial position or results of operations.

        We cannot predict the outcome or ultimate impact of any legal or regulatory proceedings pending against us or affecting our business. Consequently, we cannot assure you that the legal or regulatory proceedings referred to in this report or any that may arise in the future will be resolved without a material adverse effect on our business, financial condition or results of operations.


ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES

        None.


ITEM 3. DEFAULTS UPON SENIOR SECURITIES

        None.


ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

        We held our Annual Meeting of Shareholders on June 2, 2004. At the meeting, our shareholders voted on the following proposals and cast their votes as follows:

    Proposal 1:  Election of Class A Director

        Holders of our Class A common stock and Class B common stock voted as a single class to elect a Class A Director to our Board of Directors:

Nominee

  For
  Withheld
Denise K. Fletcher   284,202,931   60,309

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    Proposal 2:  Election of Class B Directors

        Holders of our Class B common stock, voting separately by series, elected five Class B Directors to our Board of Directors:

Nominee

  Series of Class B
Stock Entitled to Vote

  For
  Withheld
Daniel P. Garton   Series B-AA   6,733,847   0
Jeffery A. Smisek   Series B-CO   3,549,669   0
Vincent F. Caminiti   Series B-DL   5,206,897   0
J. Timothy Griffin   Series B-NW   5,045,549   0
Douglas A. Hacker   Series B-UA   6,733,847   0

    Proposal 3:  Election of Management Director

        Holders of our Class B common stock voted as a single class to elect the Management Director to our Board of Directors:

Nominee

  For
  Withheld
Jeffrey G. Katz   27,269,809   0

    Proposal 4:  Approval of Auditors

        Holders of our Class A common stock and Class B common stock voted as a single class to ratify the appointment of KPMG LLP as our independent auditors for 2004:

For
  Against
  Abstain
284,037,389   224,801   1,050

        In addition to the Class A director, the Class B directors and the Management Director elected to our Board of Directors at the Annual Meeting, the terms of office of two Class A directors, Marc L. Andreessen and Scott D. Miller, continued after the meeting.


ITEM 5. OTHER INFORMATION

        There have been no material changes to the procedures set forth in our proxy statement by which stockholders may recommend nominees to the Company's board.


ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)
Exhibits: The exhibits listed in the accompanying "Exhibit Index" are filed as part of this report.

(b)
Reports on Form 8-K

        We furnished one report on Form 8-K during the quarter ended June 30, 2004. Information regarding each item reported on is as follows:

Date Furnished

Item No.
  Description
May 5, 2004 Item 12   On May 5, 2004, we announced our financial results for the quarter ended March 31, 2004.

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SIGNATURES

        Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

    ORBITZ, INC.

Date:  August 11, 2004

 

/s/  
JEFFREY G. KATZ      
Jeffrey G. Katz
Chairman of the Board, President and
Chief Executive Officer

Date:  August 11, 2004

 

/s/  
JOHN J. PARK      
John J. Park
Chief Financial Officer

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Exhibit Index

Exhibit
Number

  Description
  3.1   Amended and Restated Certificate of Incorporation of Orbitz, Inc. (incorporated by reference to Exhibit No. 3.1 to Amendment No. 5 to the Registration Statement on Form S-1 of Orbitz, Inc., Registration No. 333-88646, with a file date of November 26, 2003)

  3.2

 

Amended and Restated Bylaws of Orbitz, Inc. (incorporated by reference to Exhibit No. 3.2 to Amendment No. 5 to the Registration Statement on Form S-1 of Orbitz, Inc., Registration No. 333-88646, with a file date of November 26, 2003)

  4.1

 

Specimen Class A Common Stock Certificate (incorporated by reference to Exhibit No. 4.1 to Amendment No. 5 to the Registration Statement on Form S-1 of Orbitz, Inc., Registration No. 333-88646, with a file date of November 26, 2003)

  4.2

 

Amended and Restated Stockholders Agreement (incorporated by reference to Exhibit No. 4.2 to Amendment No. 5 to the Registration Statement on Form S-1 of Orbitz, Inc., Registration No. 333-88646, with a file date of November 26, 2003)

  4.2(a)*

 

Amendment No. 1 to Amended and Restated Stockholders Agreement dated as of April 14, 2004

  4.3

 

Certificate of Designations, Preferences and Rights of Series A Non-Voting Convertible Preferred Stock (incorporated by reference to Exhibit No. 4.3 to Amendment No. 5 to the Registration Statement on Form S-1 of Orbitz, Inc., Registration No. 333-88646, with a file date of November 26, 2003)

10.14(a)*†

 

Letter Agreement, dated as of April 30, 2004, between Orbitz and Travelweb, LLC

10.31(b)*

 

Second Amended and Restated Orbitz, Inc. 2002 Stock Plan

31.1*

 

Certification by Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2*

 

Certification by Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1*

 

Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2*

 

Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

*
Filed herewith.

Confidential treatment has been requested with respect to certain portions of this exhibit. Omitted portions have been filed separately with the Securities and Exchange Commission.

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ORBITZ, INC. INDEX
PART I. FINANCIAL INFORMATION
ORBITZ, INC. AND SUBSIDIARIES Condensed Consolidated Balance Sheets (In thousands, except share and per share data)
ORBITZ, INC. AND SUBSIDIARIES Consolidated and Combined Statements of Operations (In thousands, except per share amounts) (Unaudited)
ORBITZ, INC. AND SUBSIDIARIES Consolidated Statement of Equity and Comprehensive Income (In thousands, except share amounts)
ORBITZ, INC. AND SUBSIDIARIES Consolidated and Combined Statements of Cash Flows (In thousands) (Unaudited)
ORBITZ, INC. AND SUBSIDIARIES Notes to Condensed Consolidated and Combined Financial Statements (unaudited)
PART II. OTHER INFORMATION
SIGNATURES
Exhibit Index

EXHIBIT 4.2(A)


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Exhibit 4.2(a)


AMENDMENT NO. 1 TO
AMENDED AND RESTATED STOCKHOLDERS AGREEMENT

        This AMENDMENT NO. 1 TO AMENDED AND RESTATED STOCKHOLDERS AGREEMENT (this "Amendment"), is made and entered into as of April 14, 2004, by and among Orbitz, Inc., a Delaware corporation (the "Corporation"), American Airlines, Inc., a Delaware corporation ("American"), Continental Airlines, Inc., a Delaware corporation ("Continental"), Omicron Reservations Management, Inc., a Delaware corporation ("Delta"), Northwest Airlines, Inc., a Minnesota corporation ("Northwest"), and United Air Lines, Inc., a Delaware corporation ("United") (American, Continental, Delta, Northwest, and United each a "Class B Common Stockholder" and collectively the "Class B Common Stockholders").

        WHEREAS, the Corporation and the Class B Common Stockholders are parties to that certain Amended and Restated Stockholders Agreement, dated as of December 19, 2003 (the "Stockholders Agreement");

        WHEREAS, the Class B Common Stockholders are the holders of all of the issued and outstanding shares of each series of Class B Common Stock of the Corporation; and

        WHEREAS, pursuant to Section 13 of the Stockholders Agreement, the Corporation and the Class B Common Stockholders desire to amend the Stockholders Agreement as provided in this Amendment.

        NOW, THEREFORE, for good and valuable consideration, the sufficiency of which is hereby acknowledged, the parties hereby agree as follows:

1.    Amendments to the Stockholders Agreement.

    1.1
    Section 2 of the Stockholders Agreement is hereby amended to insert a clause (g) to read as follows:

      "(g) Notwithstanding anything set forth in Section 2 hereof, a Class B Common Stockholder shall have no further obligations under Sections 2(b), 2(c) and 2(d) hereof (and, for the avoidance of doubt, shall no longer be required to vote its Voting Securities to elect or remove the chief executive officer of the Corporation as a member of the Board) from and after the date that both of the following conditions have been satisfied: (i) there shall have occurred a Triggering Event (as defined in the Certificate of Incorporation) or an Individual Triggering Event (as defined in the Certificate of Incorporation) with respect to all the shares of Class B Common Stock held by such Class B Common Stockholder, and (ii) all rights of such Class B Common Stockholder to designate a director pursuant to Section 7.1 of the Certificate of Incorporation shall have been forever cancelled.

    1.2
    Section 4.1 of the Stockholders Agreement is hereby amended to insert a clause (f) to read as follows:

      "(f) Notwithstanding anything set forth in this Section 4.1, a Class B Common Stockholder shall have no further rights or obligations under this Section 4.1 (and, for the avoidance of doubt, shall not be (A) subject to the transfer restrictions set forth in this Section 4.1, or (B) entitled to receive an Offer Notice pursuant to Section 4.1(a) or otherwise exercise any rights of first refusal under this Section 4.1) from and after the date that both of the following conditions have been satisfied: (i) there shall have occurred a Triggering Event (as defined in the Certificate of Incorporation) or an Individual Triggering Event (as defined in the Certificate of Incorporation) with respect to the shares of Class B Common Stock held by

1


      such Class B Common Stockholder, and (ii) all rights of such Class B Common Stockholder to designate a director pursuant to Section 7.1 of the Certificate of Incorporation shall have been forever cancelled.

2.    Definitions. Any capitalized terms used but not defined in this Amendment shall have the meaning ascribed to such terms in the Stockholders Agreement.

3.    Unanimous Class B Approval. The Class B Common Stockholders are all of the holders of each of the series of Class B Common Stock issued and outstanding. The execution of this Amendment by each Class B Common Stockholder constitutes a Unanimous Class B Approval of this Amendment as required by Section 13 of the Stockholders Agreement.

4.    Limited Amendment. This Amendment is limited by its terms and does not and shall not serve to amend or waive any provision of the Stockholders Agreement except as expressly provided for in this Amendment. The Stockholders Agreement, as amended by this Amendment, is hereby ratified and confirmed and shall continue in full force and effect.

5.    Counterparts. This Amendment may be executed in one or more counterparts (including by means of facsimile signature pages), each of which shall be considered an original instrument, but all of which shall be considered one and the same agreement, and shall become binding when one or more counterparts have been signed by each of the parties hereto and delivered to each of the parties hereto.

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        IN WITNESS WHEREOF, the parties have duly executed this Amendment No. 1 to Amended and Restated Stockholders Agreement as of the date first written above.

    ORBITZ, INC.

 

 

By:

/s/  
GARY DOERNHOEFER      
Name: Gary Doernhoefer
Title: VP & General Counsel

 

 

AMERICAN AIRLINES, INC.

 

 

By:

/s/  
BEVERLY K. GOULET      
Name: Beverly K. Goulet
Title: VP Corporate Development and Treasurer

 

 

CONTINENTAL AIRLINES, INC.

 

 

By:

/s/  
JEFFERY A. SMISEK      
Name: Jeffery A. Smisek
Title: Executive Vice President

 

 

OMICRON RESERVATIONS
MANAGEMENT, INC.

 

 

By:

/s/  
VINCENT F. CAMINITI      
Name: Vincent F. Caminiti
Title: President

 

 

NORTHWEST AIRLINES, INC.

 

 

By:

/s/  
ADOLFO M. LENZA      
Name: Adolfo M. Lenza
Title: VP, Distribution and E-Commerce

 

 

UNITED AIR LINES, INC.

 

 

By:

/s/  
PAUL R. LOVEJOY      
Name: Paul R. Lovejoy
Title: Sr. Vice President, General Counsel & Secretary

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AMENDMENT NO. 1 TO AMENDED AND RESTATED STOCKHOLDERS AGREEMENT

EXHIBIT 10.14(A)


Exhibit 10.14(a)

[ORBITZ LETTERHEAD]

April 30, 2004

VIA PERSONAL DELIVERY AND FAX

Jaynne Allison, Esq.
Acting Chief Operating Officer and General Counsel
Travelweb, LLC
2777 Stemmons Freeway, Suite 675
Dallas, TX 75207

    Re:
    Agreement between Travelweb, LLC, its successors and assigns ("TRAVELWEB") and ORBITZ, LLC, its successors and assigns ("ORBITZ")

Dear Jaynne:

        This letter agreement, together with the Exhibits attached hereto and incorporated by reference herein (collectively, this "Agreement"), sets forth the terms under which TRAVELWEB will provide ORBITZ with access to lodging accommodation inventory to display for sale on the ORBITZ web site. Defined terms have the meanings set forth in Exhibit A. The term of this Agreement shall commence on the date this Agreement is countersigned and dated by TRAVELWEB (the "Effective Date") and continue through December 31, 2005 (the "Term").

           I.  Provision of Services. TRAVELWEB will provide the Services to ORBITZ during the Term.

          II.  Termination for Change in Control. ORBITZ will have the right to terminate this Agreement upon thirty (30) days prior written notice to TRAVELWEB, if TRAVELWEB undergoes a Change in Control (provided that the right to terminate this Agreement shall expire if unexercised within 3 months of the closing of the Change in Control); provided, however, that ORBITZ will not have the right to terminate this Agreement if there is one Change in Control during the six-month period immediately following the Effective Date, and if such person or entity assuming control as a result of such Change in Control is a person or entity other than The Sabre Group or Interactive Corp., or any of their Affiliates (such person or entity assuming control of TRAVELWEB without giving rise to ORBITZ's right to terminate, a "Qualified Buyer").

        III.  Display of Travel Inventory. During the Term, ORBITZ will display for sale on the ORBITZ Web Site all Founder Chain Travel Inventory transmitted to ORBITZ via the Travel Inventory Datafeed in a good faith effort to sell such inventory (the "Founder Chain Obligation"). Subject to ORBITZ's obligations in the preceding sentences, TRAVELWEB acknowledges that ORBITZ has complete discretion with respect to the display of Accommodations on the ORBITZ Web Site. ORBITZ may display other Travel Inventory on the ORBITZ Web Site, but ORBITZ will have the right to work directly with hotel companies and hotels other than the Founder Chains for the provision of Accommodations on the ORBITZ Web Site.

         IV.  Transaction Fees. As compensation to ORBITZ for any Reservations made on the ORBITZ Web Site, TRAVELWEB agrees to pay ORBITZ transaction fees equal to (i) [***]% of the total Net Paid Bookings with respect to Transactions generated on or after the Effective Date through December 31, 2004 and (ii) [***]% of the total Net Paid Bookings with respect to Transactions generated on or after January 1, 2005 through December 31, 2005 (the "Transaction Fees").


***
Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions.

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           V.  Inventory and Rate Access.

            a.     Founder Chain Inventory. On the Effective Date, TRAVELWEB is a party to a Preferred Distribution Agreement with each of the Founder Chains, pursuant to which TRAVELWEB accesses competitive rates and inventory for distribution and sale as Travel Inventory. During the Term, TRAVELWEB will not modify or amend the Preferred Distribution Agreement with any Founder Chain in a manner that would impair in any material respect TRAVELWEB's access to competitive rates and inventory.

            b.     Rate Access. TRAVELWEB will provide ORBITZ Travel Inventory at Marked-Up Rates equal to or better than the rates provided by TRAVELWEB to any Distribution Channel for substantially similar inventory.

            c.     No Additional Fees. TRAVELWEB will not include any additional fees (including, but not limited to cancellation fees and service fees) in the Marked-Up Rates provided to ORBITZ, or otherwise impose any such fees on ORBITZ Users, unless TRAVELWEB includes such fees in the Marked-Up Rates TRAVELWEB provides to all other Distribution Channels or imposes on users of all other Distribution Channels.

        VI.  Minimum Room Night Commitment. During the Term, ORBITZ shall guarantee the number of room nights booked from Travel Inventory on the ORBITZ Web Site during each of the calendar quarters as set forth in the table below (the "Room Night Commitment"). In the event the room nights booked from Travel Inventory on the ORBITZ Web Site in a calendar quarter are less than the Room Night Commitment for such calendar quarter, then within 30 days after the end of such calendar quarter, ORBITZ will compensate TRAVELWEB for such shortfall in room night bookings by paying TRAVELWEB an amount equal to the Room Night Commitment minus the actual number of room nights booked from Travel Inventory in the relevant calendar quarter, multiplied by nine dollars ($9) for calendar quarters ending in 2004 and ten dollars ($10) for calendar quarters ending in 2005 (the "Shortfall Payments"). However, if the Room Night Commitment is exceeded in any calendar quarter, the number by which the Room Night Commitment was exceeded (the "Excess Room Nights") shall be carried forward and added to the number of room nights actually booked from Travel Inventory in the next calendar quarter, for purposes of determining whether the Room Night Commitment was achieved in such next calendar quarter; provided, however, that Excess Room Nights shall never be carried forward more than one calendar quarter, or backwards to any previous calendar quarter. For illustration, if [***] room nights were booked from Travel Inventory in the calendar quarter ended June 30, 2004, then [***] Excess Room Nights ([***]) will be carried forward and added to the number of room nights actually booked from Travel Inventory in the calendar quarter ended September 30, 2004, for purposes of determining whether the [***] Room Night Commitment for the calendar quarter ended September 30, 2004 was achieved. In determining the number of Excess Room Nights for the calendar quarter ended September 30, 2004, if any, to be carried forward for the calendar quarter ended December 31, 2004, the [***] Excess Room Nights would not be counted. Subject to

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section 6.2.4 of Exhibit A, Shortfall Payments shall be the sole remedy for any failure to satisfy the Room Night Commitment.

CALENDAR QUARTER
ENDED

  MINIMUM NUMBER OF ROOM NIGHTS
GUARANTEED TO BE BOOKED FROM TRAVEL INVENTORY DURING CALENDAR QUARTER

June 30, 2004   [***]
September 30, 2004   [***]
December 31, 2004   [***]
March 31, 2005   [***]
June 30, 2005   [***]
September 30, 2005   [***]
December 31, 2005   [***]

       VII.  Termination of Room Night Commitment. In the event ORBITZ terminates all land-only net rate hotel program on the ORBITZ Web Site, the Room Night Commitment (and liability for any Shortfall Payments with respect thereto) will simultaneously terminate upon notice to TRAVELWEB; provided, that once terminated, the ORBITZ land-only net rate hotel program will not be reinstated for at least one full calendar quarter following the date of termination. Upon reinstatement of the program, the Room Night Commitment will also be reinstated.

     VIII.  Joint Press Release. Following execution of this Agreement, the parties will issue a joint press release regarding this Agreement and the resolution of outstanding disputes between the parties, subject to the prior approval of each party, such approval not to be unreasonably withheld.


***
Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions.

3


        IX.  Conditional Nature of Agreement. This Agreement is conditioned on the execution and delivery of the Confidential Settlement Agreement and Mutual General Release between ORBITZ and TRAVELWEB attached hereto as Exhibit C. In addition, in the event any Founder Chain (a) declines to sign the Code of Conduct Letter (the form of which is attached hereto as Exhibit B) between such Founder Chain and ORBITZ or (b) provides TRAVELWEB with notice that the Founder Chain is no longer required to comply with its inventory obligations or otherwise fails to comply in any material respect with its inventory obligations set forth in the Preferred Distribution Agreement (any of the foregoing, a "Founder Breach"), then TRAVELWEB shall provide ORBITZ notice of the Founder Breach and as of the date of such Founder Breach, (i) the Founder Chain Obligation will be of no further force or effect with respect to such Founder Chain and (ii) the Room Night Commitment shall be ratably reduced to account for such Founder Chain as follows:

Founder Chain

  Reduction to Room Night Commitment
Hilton   [***]%
Hyatt   [***]%
InterContinental   [***]%
Marriott   [***]%
Starwood   [***]%

          X.  Entire Agreement. This Agreement, together with the Exhibits attached hereto and incorporated by reference herein, constitutes the entire agreement between the parties with respect to the subject matter hereof and merges all prior and contemporaneous communications, and upon execution hereof, the Agreement entered into between TRAVELWEB (f/k/a Pegasus Solutions, Inc.) and ORBITZ as of January 7, 2002 shall, without any further action of the parties, be terminated and of no further force or effect.

        If TRAVELWEB is willing to enter into this Agreement on the terms and conditions stated herein, please so indicate by executing the enclosed copy of this letter by 5:00 PM Central on April 30, 2004; after which time ORBITZ's offer of the agreement set forth in this letter will be deemed withdrawn.

Very truly yours,

/s/ Kurt Weinsheimer

Kurt Weinsheimer
Vice President Hotels

Agreed and Accepted this
3rd day of May, 2004

TRAVELWEB, LLC

By:   /s/  JAYNNE ALLISON      
   
Print Name:   Jaynne Allison
   
Title:   Acting COO and General Counsel
   

       


***
Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions.

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EXHIBIT A

GENERAL TERMS AND CONDITIONS

1.     DEFINITIONS

         1.1  "Accommodation" means a lodging accommodation for a fixed number of nights on a pre-paid basis, with such other terms and conditions, including cancellation policy, as the hotel at which such lodging accommodation is to take place may determine, and which accommodation is presented to the guest in a Non-Opaque Manner and is subject to a rate other than a Packaged Rate or a Restricted Rate.

         1.2  "Affiliate" means, with respect to any entity, any other entity that directly or indirectly, controls, is controlled by, or is under common control with such entity. For purposes of this definition, "control" (including the terms "controlled by" and "under common control with") means the power, directly or indirectly, to direct or cause the direction of the management and policies of such entity, whether through the ownership of voting securities, by contract or otherwise.

         1.3  "Chain Marks" means any Participating Chain's trade names, trademarks, service marks, domain names and other visual representations thereof, including logos, designs, symbols, word marks, images, colors and color combinations, trade dress, characters and other publicity rights, or other indicia of ownership owned or used by such Participating Chain and provided to ORBITZ hereunder.

         1.4  "Change in Control" means the occurrence of any of the following events with respect to a party to this Agreement:

              (i)  an acquisition by any individual, entity or group, of beneficial ownership of 50% or more of either (1) the then outstanding equity interests of the party (the "Outstanding Interests") or (2) the combined voting power of the then outstanding voting interests of the party entitled to vote in the general election of directors (the "Voting Interests"); or

             (ii)  a reorganization, merger, consolidation or sale or other disposition of all or substantially all of the assets of the party (a "CIC Event").

Notwithstanding the provisions of this Section 1.4 above, a "Change of Control" will not include a transaction under subparagraph 1.4(i) above (an "Acquisition") or a CIC Event, if, after such Acquisition or CIC Event, the individuals and entities who are the beneficial owners, respectively, of the Outstanding Interests and the Voting Interests immediately prior to such Acquisition or CIC Event beneficially own, directly or indirectly, more than 50%, respectively, of the Outstanding Interests and the Voting Interests of the entity resulting from such Acquisition or CIC Event.

         1.5  "Confidential Information" shall have the meaning given such term in Section 11.1 of this Agreement.

         1.6  "Customer Data" means information regarding Users that is gathered during a Transaction.

         1.7  "Distribution Channel" means any online provider of travel products and/or services, including, but not limited to any web site owned or operated by TRAVELWEB or any web site owned or operated by any acquirer of Travelweb in a Change in Control.

         1.8  "Fixed Rate" means the rate charged by a hotel to a third party intermediary for Accommodations when the compensation to such third party intermediary is based upon the margin between such rate and the rate charged to the guest; provided that such intermediary is not the hotel's Participating Chain.

         1.9  "Founder Chain" means any of Six Continents Hotels, Inc., Hyatt Corporation, Marriott International, Inc., Hilton Hotels Corporation and Starwood Hotels and Resorts Worldwide, Inc. and

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their respective Affiliates (but only to the extent an Affiliate is primarily engaged in operating hotels and specifically excluding any Distribution Channel that is an Affiliate of a hotel company), including hotels owned, managed, operated or franchised by one of the foregoing hotel companies under the brand names listed in Annex B, or any successor-in-interest to any of the foregoing hotel companies. All of the foregoing, shall collectively be referred to as the "Founder Chains".

       1.10  "Marked-Up Rate" means the rate charged by a third party for an Accommodation when the rate charged by the hotel is a Fixed Rate.

       1.11  "Net Paid Bookings" means the gross revenue received by TRAVELWEB for Reservations for which the applicable cancellation deadline has passed without cancellation, exclusive of taxes and other government charges, and net of discounts, refunds, credit card processing fees, and rebates. Net Paid Bookings shall not include any amounts due to a Participating Chain or Participating Property because of credit card fraud or bad debt.

       1.12  "Non-Opaque Manner" means the provision of information to a user concerning hotel lodging accommodations where the user is able to see the identity of the hotel prior to booking the accommodation.

       1.13  "ORBITZ Marks" means ORBITZ's trade names, trademarks, service marks, domain names and other visual representations thereof, including logos, designs, symbols, word marks, images, colors and color combinations, trade dress, characters and other publicity rights, or other indicia of ownership owned or used by ORBITZ.

       1.14  "ORBITZ Web Site" means the consumer-oriented Internet travel site located at the URL www.ORBITZ.com or any successor Internet site which primarily targets customers in the United States.

       1.15  "Packaged Rate" means the rate provided to a User for a lodging accommodation which requires the purchase of other products or services and for which the total price of the package on the date first offered for sale is higher than the highest price commercially available to the consumer of the lodging accommodation alone on such date. For clarity, the parties do not intend that such Packaged Rate shall serve as a means by which a Participating Chain is able to diminish its obligations under its Preferred Distribution Agreement.

       1.16  "Participating Chain" means any hotel company that has signed a Preferred Distribution Agreement (including any Founder Chain), and any successor-in-interest to any such company.

       1.17  "Participating Property" means any hotel that is a member of a Participating Chain, which provides lodging accommodations to be sold as Travel Inventory through the Travel Inventory Datafeed.

       1.18  "Preferred Distribution Agreement" means any distribution agreement entered into between TRAVELWEB and a hotel company whereby such hotel company provides Accommodations to Travelweb for use as Travel Inventory.

       1.19  "Property Marks" means any Participating Property's trade names, trademarks, service marks, domain names and other visual representations thereof, including logos, designs, symbols, word marks, images, colors and color combinations, trade dress, characters and other publicity rights, or other indicia of ownership owned or used by such Participating Property.

       1.20  "Regular Inventory" means lodging accommodations offered for sale by Participating Chains and Participating Properties that are not Travel Inventory.

       1.21  "Reservation" means a reserved Accommodation booked at a Marked-Up Rate utilizing the Travel Inventory Datafeed.

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       1.22  "Restricted Rate" means a rate that is not generally available for purchase by the general public, including but not limited to corporate discounted rates, tour operator rates, group rates, meeting and incentive rates, or rates targeted to a select group of travelers such as a rate offered to members of a club, affinity program or other membership organization (e.g., AAA) where there is a good faith effort by the Participating Chain (or entity acting on behalf of the Participating Chain) to limit the availability of such rate to the targeted group.

       1.23  "Services" means the activities which TRAVELWEB undertakes to provide Travel Inventory to ORBITZ as set forth in Annex A..

       1.24  "Transmitted Customer Data" means those elements of Customer Data that are transmitted by ORBITZ to TRAVELWEB in connection with this Agreement.

       1.25  "Transaction" means the electronic booking of a Reservation that occurs when a User hits the "Buy" button and supplies valid credit card information, whether accomplished by means of the Internet, email, broadband, Internet II, wireless and handheld devices, cell phones browser or digital appliances or other digital interactive means, networks, devices or transmissions (whether existing now or in the future).

       1.26  "Travel Inventory" means Accommodations offered for sale by TRAVELWEB pursuant to a Preferred Distribution Agreement at a Marked-Up Rate.

       1.27  "Travel Inventory Datafeed" means the XML datafeed transmitted from TRAVELWEB to ORBITZ containing available Travel Inventory for display on the ORBITZ Web Site which will allow a User to effectuate a Transaction.

       1.28  "User" means any individual or entity that effectuates Transactions during the Term.

       1.29  "Web Confirmation Page" means a page view displayed immediately following the completion of a Transaction that confirms such Transaction.

2.     CONFIRMATIONS AND REPORTING.

         2.1  Confirmations. TRAVELWEB will transmit to ORBITZ confirmations for all Transactions, which ORBITZ shall promptly display on a Web Confirmation Page. The parties shall use commercially reasonable efforts to seamlessly transfer the details of Transactions between TRAVELWEB and the ORBITZ Web Site so that Users may view their Transactions on a real-time basis on the ORBITZ Web Site.

         2.2  TRAVELWEB Reporting. TRAVELWEB shall provide ORBITZ with monthly reports that set forth, at a minimum, the number of Transactions, the Net Paid Bookings and the amount of Transaction Fees due to ORBITZ during the applicable month.

         2.3  Reporting and Cooperation. ORBITZ will use reasonable commercial efforts to provide TRAVELWEB, at TRAVELWEB's reasonable request, with (i) reports and information relating to the offering for sale of Travel Inventory on the ORBITZ Web Site, such as Transactions data and trends (e.g., booking activity, purchasing volume by time periods, and (ii) reasonable cooperation to facilitate tracking and reporting by TRAVELWEB to Participating Chains with respect to Travel Inventory (e.g., booking source identification); provided, that ORBITZ is not required to incur additional costs in connection therewith.

3.     LICENSE RIGHTS

        During the Term, TRAVELWEB grants to ORBITZ, a limited, non-exclusive, worldwide, royalty-free right and license to (i) use and display the Travel Inventory available from the Travel Inventory Datafeed on the ORBITZ Web Site pursuant to Section III above, and (ii) use any

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TRAVELWEB logos and other images and materials ("TRAVELWEB Marks"), Chain Marks, and Property Marks which TRAVELWEB provides to ORBITZ hereunder solely for the purpose of identifying TRAVELWEB, the Participating Chains, and the Participating Properties in ORBITZ's promotional materials; provided, however, that ORBITZ's right to use any Chain Marks or Property Marks shall be subject in all respects to the terms of the licenses pursuant to which the applicable Participating Chain or Participating Property granted to TRAVELWEB the right to use or sublicense the use of such Chain Marks or Property Marks, as the case may be. In any event, ORBITZ agrees not to use the Chain Marks and Property Marks in any manner that could reasonably be expected to have an adverse impact on the goodwill attached to such marks. In such circumstances, TRAVELWEB shall have the right to require ORBITZ to cease or to modify any particular use. ORBITZ acknowledges that the TRAVELWEB Marks, Chain Marks and Property Marks are owned by TRAVELWEB, the Participating Chains and the Participating Properties respectively and their use by ORBITZ in connection with this Agreement inures to the benefit of TRAVELWEB, the Participating Chains and the Participating Properties respectively. TRAVELWEB, the Participating Chains and the Participating Properties retain all right, title and interest therein and nothing in this Agreement grants any ownership interest therein to ORBITZ. Notwithstanding anything in this Agreement to the contrary, and subject to any direct rights to use Chain Marks or Property Marks, to the extent ORBITZ wishes to use the Chain Marks and the Property Marks on promotional materials separate from the ORBITZ Web Site, ORBITZ shall provide such promotional materials to TRAVELWEB so that it can obtain the review and approval of the Participating Chains and/or Participating Properties, which approval shall be a pre-requisite for such use by ORBITZ.

4.     OWNERSHIP

         4.1  TRAVELWEB Ownership. TRAVELWEB shall own all right, title and interest, including without limitation all copyrights, patents, trademarks, trade secrets and other intellectual property rights, in and to all versions of the Travel Inventory Datafeed, exclusive of the ORBITZ Marks, and nothing contained in this Agreement shall be deemed to transfer any such right, title or interest to ORBITZ.

         4.2  ORBITZ Ownership. ORBITZ shall own all right, title and interest, including all copyrights, patents, trademarks, trade secrets and other intellectual property rights, in and to the ORBITZ Web Site and the ORBITZ Marks.

         4.3  Participating Entity Ownership. Each Participating Chain and Participating Property shall own all right, title and interest, including without limitation all copyrights, patents, trademarks, trade secrets and other intellectual property rights, in and to its respective Chain Marks or Property Marks.

         4.4  Ownership of Users and Customer Data.

             (a)  Users and Customer Data. Except as set forth in Section 4.4(b), Customer Data shall be considered proprietary information of ORBITZ. TRAVELWEB agrees not to use any Customer Data, except as specifically permitted by this Agreement. TRAVELWEB agrees that all ORBITZ terms and conditions, rules, policies and operating procedures, including, but not limited to, policies relating to the use of customer personally identifying information will apply to Customer Data, and TRAVELWEB agrees not to sell, rent or otherwise transfer such Customer Data to third parties except as reasonably necessary to perform its obligations under the terms of this Agreement. Notwithstanding the foregoing, Participating Chains and Participating Properties may use User information which is collected directly by such Participating Property or Participating Chain.

             (b)  Transmitted Customer Data. Transmitted Customer Data relating to each Transaction shall be considered proprietary information of ORBITZ and TRAVELWEB, and all right, title and interest in such Transmitted Customer Data is jointly owned by such parties. TRAVELWEB agrees

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    that during the term of this Agreement and thereafter, TRAVELWEB will (i) use such Transmitted Customer Data only as necessary to perform its obligations under this Agreement; and (ii) maintain such Transmitted Customer Data in strict confidence in accordance with the provisions of Section 11 of this Agreement. In no event may any Transmitted Customer Data be disclosed to third parties other than the applicable Participating Chain or Participating Property by ORBITZ or TRAVELWEB if such disclosure would violate either TRAVELWEB's or ORBITZ's policies regarding the protection of customer privacy. Notwithstanding anything to the contrary contained herein, TRAVELWEB shall have the further right to grant unrestricted ownership rights in and to Transmitted Customer Data to the Participating Chain and Participating Property that are the subjects of the Transaction to which such Transmitted Customer Data relates.

             (c)  Use by TRAVELWEB. Subject to ORBITZ's prior written approval, which approval shall not be unreasonably withheld, TRAVELWEB may use and disclose aggregated, statistical or trend data derived from Transactions on the ORBITZ Web Site, provided that the details of any individual Transaction (including the identity of any User) and the identities of individual Participating Chains or Participating Hotels are not identifiable or reasonably ascertainable from such disclosed data (all such data, the "ORBITZ Transaction Data"). . The ORBITZ Transaction Data shall be considered "Confidential Information" subject to Section 11 of this Agreement. ORBITZ Transaction Data may be disclosed to TRAVELWEB's Representatives in accordance with Section 11 without prior written approval from ORBITZ.

5.     PAYMENTS

        Within thirty (30) days after the end of each month during the Term with respect to which TRAVELWEB owes ORBITZ any Transaction Fees, TRAVELWEB shall furnish ORBITZ with a statement together with payment for any Transaction Fees shown thereby to be due to ORBITZ. The statement shall contain information clearly demonstrating how the payment was computed, and shall at a minimum include Net Paid Bookings, projected Net Paid Bookings for Reservations for which the applicable cancellation deadline has not passed, and number of Transactions. TRAVELWEB shall remit all payments owed to ORBITZ herein to ORBITZ's address set forth in Section 13.3 (Notices).

6.     TERMINATION.

         6.1  Termination. Either party shall have the right to terminate this Agreement at anytime, upon thirty (30) days prior written notice to the other party, if

            6.1.1  Such other party materially fails to perform or comply with this Agreement and fails to remedy the default within the 30 day period following written notice; or

            6.1.2  Such other party goes into voluntary or involuntary liquidation, is declared insolvent either in bankruptcy or other legal proceedings, or becomes party to an agreement with creditors due to such party's failure or inability to pay debts as they fall due, or has a receiver appointed over the whole or part of such party's business; or

            6.1.3  The right to terminate this Agreement pursuant to this Section 6.1 is not an exclusive right and is in addition to any other rights and remedies provided by law or this Agreement.

         6.2  Effect of Termination.

            6.2.1  Upon termination or expiration of this Agreement for any reason, TRAVELWEB shall immediately remove any ORBITZ logo link from any TRAVELWEB-owned or operated web site and cease any use of any and all ORBITZ Marks pursuant to this Agreement,

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            6.2.2  Upon termination or expiration of this Agreement for any reason, ORBITZ shall immediately cease any use of any and all TRAVELWEB Marks and any Chain Marks and/or Property Marks licensed or sub-licensed to ORBITZ pursuant to this Agreement,

            6.2.3  Upon termination or expiration of this Agreement for any reason, TRAVELWEB shall pay Transaction Fees to ORBITZ as set forth herein with respect to all Net Paid Bookings for which the Reservation related thereto is made prior to the date of termination, even if the applicable cancellation deadline related to such Net Paid Booking does not pass until after such termination date, and

            6.2.4  In the event that ORBITZ materially fails to perform or comply with this Agreement and fails to remedy the default within the 30 day period following written notice from TRAVELWEB and TRAVELWEB exercises its right to terminate as set forth in Section 6.1 above, ORBITZ shall pay TRAVELWEB an amount equal to the aggregate Shortfall Payments with respect to all calendar quarters between the date of such termination and December 31, 2005.

            6.2.5  The following provisions shall survive termination of this Agreement: IV (Transaction Fees)(with respect to amounts due but unpaid as of the effective date of the termination, IX (Settlement and Release of Claims), 1 (Definitions), 4 (Ownership), 5 (Payment), 6 (Termination), 8 (Limitation on Warranty), 9 (Indemnification), 10 (Limitation of Liability), 11 (Confidentiality; Media Communications), 12 (Audit) and 13 (General).

7.    REPRESENTATIONS AND WARRANTIES.  Each party hereby represents and warrants as follows:

         7.1  Corporate Power. Such party is duly organized and validly existing under the laws of the state of its incorporation and has full corporate power and authority to enter into this Agreement and to carry out the provisions hereof.

         7.2  Due Authorization. Such party is duly authorized to execute and deliver this Agreement and to perform its obligations hereunder.

         7.3  Binding Agreement. To such party's knowledge, this Agreement is a legal and valid obligation binding upon it and enforceable with its terms. The execution, delivery and performance of this Agreement by such party does not conflict with any agreement, instrument or understanding, oral or written, to which it is a party or by which it may be bound, nor, to such party's knowledge, violate any law or regulation of any court, governmental body or administrative or other agency having jurisdiction over it.

         7.4  Logos and Trademarks. To such party's knowledge, such party has the full and exclusive right to grant or otherwise permit the other party to use the trademarks, logos and trade names as set forth in this Agreement, and that it is aware of no claims by any third parties adverse to any of such trademarks, logos and trade names.

8.     LIMITATION OF WARRANTY

        EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT, NEITHER PARTY MAKES, AND EACH PARTY HEREBY DISCLAIMS, ANY INDEMNITIES, WARRANTIES, GUARANTEES, OR REPRESENTATIONS OF ANY KIND, EXPRESS OR IMPLIED, INCLUDING, WITHOUT LIMITATION, ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.

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9.     INDEMNIFICATION

         9.1  Mutual Indemnities. Each party agrees to indemnify, defend, and hold harmless the other party and its successors, assigns, affiliates, directors, members, managers, officers, employees, and agents from and against any and all claims, actions, damages, liabilities, costs and expenses, including reasonable attorneys' fees and expenses, arising out of any third party claim related to:

             (a)  Any death or personal injury, or any destruction of or damage to any real or tangible personal property, alleged to have been caused by or on behalf of the indemnifying party or its employees or agents.

             (b)  Any infringement of a letters patent, a trade secret, or any copyright, trademark, service mark, trade name or similar proprietary rights conferred by statute, by common law, or by contract alleged to have occurred as a result of rights conveyed, materials provided, or work performed by or on behalf of the indemnifying party; provided, however, that the indemnifying party shall have no liability for any claim of infringement if: (i) the indemnified party is not using the latest version of any intellectual property provided by the indemnifying party ("Current Release"), to the extent such claimed infringement would have been avoided by use of the Current Release, (ii) indemnified party is using a form of materials that has been modified by someone other than the indemnifying party from those initially provided by the indemnifying party to the extent such claimed infringement would have been avoided by use of an unmodified form of such materials, or (iii) the allegedly infringing materials have been combined, operated, or used with products or data not supplied by the indemnifying party, to the extent such claimed infringement would have been avoided by the use of such materials without such products or data.

             (c)  Any use of Customer Data other than as permitted by this Agreement.

         9.2  Indemnification Procedures. Any party claiming indemnification pursuant to this Agreement will give the indemnifying party prompt written notice of any matters with respect to which this indemnity may apply, will give the indemnifying party full opportunity to control the response thereto and the defense thereof, and will provide reasonable cooperation and assistance in connection with the defense and/or settlement of the claim. However, the indemnified party may, at its own expense, participate in such defense and in any settlement discussions, either directly or through counsel of its choice.

         9.3  Intellectual Property Remedies. In the event of a claim that any TRAVELWEB product infringes the intellectual property rights of any third party, and in addition to all other obligations of TRAVELWEB in this Section 9, TRAVELWEB shall at its option and expense (a) procure for ORBITZ the right to continue use of such infringing products or services, or any component thereof; or (b) replace or modify the same with non-infringing products or services reasonably satisfactory to ORBITZ.

10.   LIMITATION OF LIABILITY.

        EXCEPT FOR THE OBLIGATIONS SET FORTH IN SECTION 9 (INDEMNIFICATION) AND CLAIMS ARISING UNDER SECTION 11 (CONFIDENTIALITY), BOTH PARTIES AGREE THAT NEITHER PARTY WILL BE LIABLE FOR ANY SPECIAL, INDIRECT, INCIDENTAL, OR CONSEQUENTIAL DAMAGES (INCLUDING BUT NOT LIMITED TO SUCH DAMAGES ARISING FROM BREACH OF CONTRACT OR WARRANTY OR FROM NEGLIGENCE OR STRICT LIABILITY), OR FOR INTERRUPTED COMMUNICATIONS, LOST BUSINESS, LOST DATA OR LOST PROFITS, ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT, EVEN IF SUCH PARTY HAS BEEN ADVISED OF (OR KNOWS OR SHOULD KNOW OF) THE POSSIBILITY OF SUCH DAMAGES. EXCEPT FOR THE OBLIGATIONS SET FORTH IN SECTION 9 (INDEMNIFICATION) AND CLAIMS ARISING UNDER SECTION 11 (CONFIDENTIALITY), UNDER NO CIRCUMSTANCES SHALL EITHER PARTY, ITS

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AFFILIATES, OR RELATED COMPANIES BE LIABLE TO THE OTHER PARTY FOR AN AMOUNT GREATER THAN THE MAXIMUM AGGREGATE AMOUNT OF SHORTFALL PAYMENTS THAT COULD BECOME DUE UNDER SECTION VI OF THIS AGREEMENT, FROM THE DATE THE LIABILITY AROSE THROUGH DECEMBER 31, 2005.

11.   CONFIDENTIALITY; MEDIA COMMUNICATIONS

       11.1  Confidentiality.

             (a)  "Confidential Information" is any information concerning any of the parties hereto (whether prepared by a party, its advisors or otherwise) or the performance of this Agreement which is or has been previously furnished to any party receiving such information (the "Receiving Party") by or on behalf of a party in connection with the subject matter of this Agreement, including, but not limited to, any financial data, notes, summaries, reports, analyses or other materials derived in whole or in part from such information, and, if in writing, is either clearly marked "confidential" or the like or is otherwise identified to the Receiving Party to be non-public and confidential, or which the Receiving Party would reasonably expect to be considered confidential and non-public; provided, that notwithstanding any failure to so identify it, all financial reports, business plans, information regarding volumes or projections of a party or any information provided or discussed during a meeting of the parties in connection with the subject matter of this Agreement will be deemed to be Confidential Information. Further, any information pertaining to any of the Participating Chains or Participating Properties, other than information contained in the Travel Inventory Datafeed or information provided to ORBITZ by any party other than TRAVELWEB, shall be deemed the Confidential Information of TRAVELWEB. The term "Confidential Information" does not include information which (i) is already in the possession of a Receiving Party prior to disclosure by the party disclosing such information (the "Disclosing Party"), provided that such information is not known by such Receiving Party to be subject to another confidentiality agreement with or other obligation of secrecy to the Disclosing Party or another party, or (ii) becomes generally available to the public other than as a result of a disclosure by a Receiving Party, its employees, agents or advisors, or (iii) becomes available to a party from a source other than the Disclosing Party or its advisors, provided that such source is not known to be bound by a confidentiality agreement with or other obligation of secrecy to such Disclosing Party with respect to such information, or (iv) which may be used or disclosed by any party pursuant to the express provisions of this Agreement.

             (b)  Each party hereby agrees that the Confidential Information will be used solely in connection with the performance of this Agreement, and that Confidential Information will be kept confidential by each party; provided, however, that (i) any such information may be disclosed to a Receiving Party's partners, employees, officers, directors, advisors and the representatives of its advisors (collectively, "Representatives") who are involved in the negotiation or performance of this Agreement and need to know such information for the purpose of evaluating issues relating to this Agreement (it being understood that a Receiving Party's Representatives shall be informed by the Receiving Party of the confidential nature of such information and shall be directed by the Receiving Party to treat such information confidentially), (ii) Confidential Information may be disclosed pursuant to subsection (c) below, and (iii) any disclosure of Confidential Information may be made to which the Disclosing Party consents in writing.

             (c)  Each party agrees to be responsible for any breach of this Agreement by its Representatives. If any Receiving Party or any of its Representatives are requested or required (by deposition, interrogatory, request for documents, subpoena, civil investigative demand or similar process) to disclose any of the Confidential Information, it shall provide the Disclosing Party with prompt prior written notice of such requirement so that the Disclosing Party may seek a protective order or other appropriate remedy and/or waive compliance with the terms of this Agreement. If

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    such protective order or other remedy is not obtained or such Disclosing Party waives compliance with the terms hereof, the Receiving Party agrees to furnish only that portion of the Confidential Information which Receiving Party is advised by its counsel is legally required and to exercise its reasonable efforts to obtain assurances that confidential treatment will be accorded such Confidential Information.

             (d)  In addition, without the prior written consent of each other party, each party agrees not to, and will direct its Representatives not to, disclose to any person any of the terms, conditions or other facts with respect to the terms of this Agreement, except (i) to confirm that such party is a party to this Agreement, and (ii) as may be necessary or advisable, in confidential communications with third parties, in order to proceed with the obligations of either party pursuant to this Agreement.

             (e)  Each party agrees that the other party shall be entitled to equitable relief, including injunction, in the event of any breach of the provisions of this Agreement and that each party shall not raise as a defense or an objection to the request for or granting of such relief that any breach of the provisions of this Agreement is or would be compensable by an award of monetary damages.

              (f)  No party nor any of their Representatives have made or make any representation or warranty as to the accuracy or completeness of the Confidential Information. No party nor any of its Representatives shall have any liability to any party or any of its Representatives resulting from the use of the Confidential Information.

       11.2  Each party will submit to the other party, for its prior written approval, any marketing, advertising, or other promotional materials related to this Agreement and/or referencing the other party and/or its web site, trade names, trademarks and service marks (the "Promotional Materials"). Once approved, the Promotional Materials may be used by a party for the purpose of promoting the services provided under this Agreement, and the content contained therein can be used for such purpose until such approval is withdrawn with reasonable prior notice. In the event such approval is withdrawn, existing inventories of Promotional Materials may be depleted.

12.   AUDIT

        Each of ORBITZ and TRAVELWEB will maintain complete and accurate files, books and records with respect to the Transaction Fees and the reports required under this Agreement for a period of not less than two (2) years following the effective date of termination or expiration of this Agreement. Each of ORBITZ and TRAVELWEB agrees to allow a mutually acceptable independent certified public accountant to audit and analyze its records relating to such Transaction Fees or reports, provided that such auditor agrees in advance to maintain all information obtained during such audit in confidence pursuant to a written agreement that provides no less protection of such information than the terms of Section 11 of this Agreement. All information received by either party and/or its auditor in connection with an audit hereunder shall be deemed Confidential Information subject to the confidentiality provisions of this Agreement. The expense of any such audit shall be borne by the party requesting the audit. Any such audit will be permitted by ORBITZ or TRAVELWEB within thirty (30) days of the other party's written request, during normal business hours and at times mutually agreed upon by the parties. If, upon completion of an audit, the party that requested such audit reasonably determines that there are discrepancies in the reports provided by the audited party under this Agreement, the parties shall engage in good faith discussions with each other regarding such discrepancies. If such discrepancies are valid, as determined in good faith by the audited party, then the audited party shall take such actions as are necessary to correct such discrepancies and to make any payments to the other party that are based on such discrepancies. Any audit of a party will be made no

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more than once during any twelve (12) month period, and will not unreasonably interfere with the audited party's business activities.

13.   GENERAL

       13.1  Governing Law; Venue. This Agreement shall be construed and controlled by the laws of the State of Illinois, and each party further consents to jurisdiction by the state and federal courts sitting in the City of Chicago, Illinois. Process may be served on either party by U.S. Mail, postage prepaid, certified or registered, return receipt requested, or by such other method as is authorized by law.

       13.2  Force Majeure. If the performance of this Agreement or any obligation hereunder is prevented, restricted or interfered with by acts of God, civil or military authority, war, riots, strikes, fire, or any similar act or condition beyond the reasonable control of the affected party and which such party is unable to overcome by the exercise of reasonable diligence, the party so affected, upon giving prompt notice to the other party, shall be excused from such performance to the extent that it is necessarily prevented, restricted or interfered during the continuation of any such act or condition and the time for performance shall be extended, except for the making of Shortfall Payments that have accrued as of the date of such force majeure event and Transaction Fee payments hereunder, for the period of delay or inability to perform due to the occurrence of such act or condition.

       13.3  Notices; Requests. All notices and requests in connection with this Agreement shall be deemed given as of the day they are (a) deposited in the U.S. mails, postage prepaid, certified or registered, return receipt requested; or (b) sent by overnight courier, charges prepaid, with a confirming fax; to the following address. Either party may change such address at any time by written notice to the other party.

    If to ORBITZ:

      ORBITZ, LLC
      200 South Wacker Drive, Suite 1900
      Chicago, IL 60606
      Attn: General Counsel
      Fax: 312-894-5001
      Phone: 312-894-5000

    If to TRAVELWEB:

      TRAVELWEB, LLC
      2777 Stemmons Freeway, Suite 675
      Dallas, TX 75207
      Attn: General Counsel
      Fax: 214-424-8431
      Phone: 214-424-8459

       13.4  Assignment.

             (a)  Neither party may assign this Agreement, or any portion thereof, to any third party unless the other party expressly consents to such assignment in writing.

             (c)  All terms and provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and each of their permitted transferees, successors and assigns.

       13.5  Severability. In the event that any provision of this Agreement is found invalid or unenforceable pursuant to judicial decree or decision, the remainder of this Agreement shall remain valid and enforceable according to its terms. The parties intend that the provisions of this Agreement be enforced to the fullest extent permitted by applicable law. Accordingly, the parties agree that if any

14


provisions are deemed not enforceable, they shall be deemed modified to the extent necessary to make them enforceable.

       13.6  Modification; No Offer. This Agreement shall not be modified except by a written agreement dated subsequent hereto signed on behalf of each party by its duly authorized representatives. Neither this Agreement nor any written or oral statements related hereto constitute an offer, and this Agreement shall not be legally binding until executed by both parties hereto.

       13.7  Binding Effect. Subject to the limitations set forth herein, this Agreement will inure to the benefit of and be binding upon the parties, their successors, administrators, heirs, and permitted assigns.

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ANNEX A

SERVICES & FUNCTIONALITY

        TRAVELWEB shall provide the following Services:

        A.    Operation and maintenance of the Travel Inventory Datafeed, in accordance with the following specifications, for use by Users via the ORBITZ Web Site:

    1.
    Database. TRAVELWEB will provide ORBITZ with access to a database identifying Participating Properties. All updates to such database will be provided to ORBITZ through a nightly automated batch processing service, and will include all property information and images loaded into such database.

    2.
    Hotel Rates and Availability. TRAVELWEB will provide ORBITZ with access to real-time rate and availability data relating to Participating Properties and will provide ORBITZ with the ability to search across Participating Properties with respect to rates and availability. Functionality provided by TRAVELWEB to ORBITZ will include the ability to search and display Marked-Up Rates, room categories and availability status with respect to Travel Inventory.

    3.
    Reservation Function. TRAVELWEB will maintain functionality to allow Users to make real-time Reservations and cancellations thereof. Each confirmation of a Transaction transmitted by TRAVELWEB to ORBITZ will include a confirmation number.

    4.
    Merchant Processing. TRAVELWEB will transmit for processing, on a real-time, secure basis, online credit card charges authorized by Users purchasing Transactions on ORBITZ. TRAVELWEB will manage all aspects of the implementation, development and support of such processing and will provide mutually-agreed upon support to ORBITZ Customer Services for the purpose of resolving issues associated with such processing.

    5.
    Modifications. TRAVELWEB will enable functionality to allow Users to make real-time modifications of Reservations (including addition or reduction of room nights or guest rooms) to the extent such functionality is available to TRAVELWEB.

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ANNEX B

BRAND

  CHAIN

Doubletree Hotels   Hilton
Embassy Suites   Hilton
Homewood Suites   Hilton
Hilton   Hilton
Hampton Inns   Hilton
Hilton Garden Inns   Hilton
Hyatt   Hyatt
Renaissance   Marriott
Courtyard   Marriott
Marriott Conference Centers   Marriott
Fairfield   Marriott
Marriott Vacation Club   Marriott
Marriott   Marriott
Ramada International   Marriott
Residence   Marriott
Ritz Carlton   Marriott
TownePlace   Marriott
Springhill Suites   Marriott
Crowne Plaza   Six Continents
Holiday Inn Hotels & Resorts   Six Continents
Intercontinental   Six Continents
Staybridge Suites   Six Continents
Candlewood Suites   Six Continents
Global Connections   Starwood
Sheraton   Starwood
W Hotels   Starwood
Westin   Starwood
Four Points   Starwood
St. Regis   Starwood
Luxury Collection   Starwood

17


EXHIBIT B

FORM OF CODE OF CONDUCT LETTER

April 29, 2004

VIA FEDERAL EXPRESS AND FAX

[Hotel]

    Re:
    Code of Conduct for Solicitation of Net Rate Inventory Agreements

Dear                        :

        Orbitz hereby agrees that during the term of the Letter Agreement by and between Orbitz, LLC and Travelweb, LLC regarding the provision of net rate inventory executed as of April     , 2004 (the "Letter Agreement") (i) Orbitz will not directly or indirectly solicit properties owned, operated or franchised by [Hotel] (each, a "Hotel Property") to enter into an agreement to participate in the [***] program, whereby such Hotel Property provides [***] (ii) Orbitz will not discourage any Hotel Property from participating in the [***] program, and (iii) if any Hotel Property contacts Orbitz directly and desires to participate in the [***] program, Orbitz will not enter into a [***] agreement with such Hotel Property without Hotel's concurrence. Nothing herein shall prohibit Orbitz from entering into agreements with Hotel or any Hotel Property for the provision of net rate package product inventory (hotel packaged with a rental car or hotel packaged with an airline ticket reservation).

        [Hotel] hereby agrees to provide TRAVELWEB, on behalf of ORBITZ with room night availability at [Hotel's] participating properties in a manner consistent with ORBITZ's historic chain production with TRAVELWEB.

        If you are in agreement with the foregoing, please sign and return a copy of this letter to my attention no later than 5:00 pm CST on April 30, 2004, after which time this letter will be deemed withdrawn.

Very truly yours,

      

Kurt Weinsheimer
Vice President Hotels

Agreed and Accepted this
            day of April, 2004

[Hotel]

By:  
   
Print Name:  
   
Title:  
   



 

 

       


***
Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions.

18


EXHIBIT C

CONFIDENTIAL SETTLEMENT AGREEMENT AND MUTUAL GENERAL RELEASE

        This Confidential Settlement Agreement and General Release ("Agreement") is made this        day of May, 2004 ("Effective Date") by and between Travelweb, LLC ("Travelweb") and Orbitz, LLC and Orbitz, Inc. (collectively "Orbitz") (collectively, "the Parties").

Recitals and Representations

        WHEREAS, on October 9, 2003, Travelweb filed a Verified Complaint for Declaratory Judgment and Other Relief in the Circuit Court of Cook County, Illinois, entitled Travelweb, LLC v. Orbitz, LLC, No. 03 CH 16894 (the "Litigation");

        WHEREAS, on October 24, 2003, Orbitz filed counterclaims against Travelweb (the "Counterclaim");

        WHEREAS, Travelweb and Orbitz deny liability as to each and every one of the claims made by the other against them;

        WHEREAS, on March 31, 2004, the Court entered a Memorandum Opinion, granting Travelweb a preliminary injunction against Orbitz;

        WHEREAS, no finding has been made on the ultimate merits of the Litigation or the Counterclaim;

        WHEREAS, the Parties desire to settle all potential and actual outstanding issues between them, whether the subject of the Litigation, the Counterclaim or otherwise, on a confidential and amicable basis on the terms and conditions stated in this Agreement;

Agreement and Mutual Release

        NOW, THEREFORE, Travelweb and Orbitz hereby agree as follows:

           1.  Incorporation. The recitals and representations set forth above are incorporated herein.

           2.  Mutual General Release. For value received and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged by all Parties, the Parties hereby agree: (a) from and after the Effective Date of this Agreement, the Parties, for themselves and each and all of their respective past, present, and future partners, members, predecessors-in-interest, parents, subsidiaries, officers, directors, shareholders, affiliates, employees, representatives, agents, attorneys, administrators, insurers, beneficiaries, successors, assigns, and guarantors thereof, do hereby forever remise, release, discharge, acquit, and covenant not to sue one another and each and all of their respective past, present, and future partners, members, predecessors-in-interest, parents, subsidiaries, officers, directors, shareholders, affiliates, employees, representatives, agents, attorneys, administrators, insurers, beneficiaries, successors, assigns and guarantors thereof, from and against any and all past or present claims, actions, causes of action, suits, debts, sums of money, judgment, accounts, agreements, promises, demands, fines, damages, liabilities, penalties, sanctions, costs, expenses or attorneys' fees, of any nature whatsoever, whether in law or equity, or any other form, whether any of the foregoing is known or unknown, asserted or unasserted, foreseen or unforeseen, contingent, actual, liquidated or unliquidated, arising or relating to any period of time prior to the Effective Date of this Agreement (collectively, the "Claims"), provided, however that expressly excluded from this release are any and all claims to enforce any rights or remedies under this Agreement; and (b) the foregoing release, when pleaded, shall be and constitute a complete defense to any proceeding of any kind that violates its terms.

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           3.  Dismissal of Litigation and Counterclaims. Within 5 days of the execution of this Agreement, Travelweb and Orbitz shall, in a manner consistent with the accompanying Stipulation To Dismiss and Dissolve Preliminary Injunction attached hereto as Exhibit A, dismiss the Litigation and Counterclaim with prejudice, with each party to bear its own costs and attorneys' fees,

           4.  No Assignment. Travelweb and Orbitz warrant and represent that they have never made nor suffered to be made any assignment or transfer of any right, claim, demand, or cause of action covered by this Agreement and that they are the sole and absolute and equitable owners of all thereof.

           5.  No Admissions. Travelweb and Orbitz agree that this is a compromised settlement which is not, in any respect or for any purpose, to be deemed or construed to be an admission or concession of fault, liability, or wrongdoing whatsoever on the part of the other, such fault, liability or wrongdoing having been expressly denied.

           6.  Binding Agreement. This Agreement shall be binding upon and inure to the benefit of Travelweb and Orbitz and their respective successors-in-interest.

           7.  No Other Agreement. The Parties warrant and represent that, with the exception of the Letter Agreement dated April 30, 2004 and as specifically set forth herein, there is no other agreement among them relating to the subject matter hereof, that (a) neither of them has relied upon any representation, disclosure or nondisclosure by or on behalf of anyone other than their own respective counsel, as to the meaning, terms or effect of this Agreement, and (b) no such representation or disclosure has been made.

           8.  Binding Effect. Each of the Parties has been represented by counsel of its own choice in connection with the initiation, negotiation, preparation, execution and delivery of this Agreement and each of them has entered into the same freely and voluntarily without coercion, duress or undue influence of any kind or nature.

           9.  Attorney Fees. Each of the Parties agrees to bear their own costs, legal or otherwise, in connection with the negotiation, preparation, execution and implementation of this Agreement.

         10.  Confidentiality. Notwithstanding any other provisions in this Agreement, the Parties agree that the negotiations, terms and existence of this Agreement (and the settlement negotiations prior to the execution of this Agreement) are and shall remain strictly confidential and shall not be made public or discussed with or disclosed to any person other than the Parties to this Agreement, and their respective officers, directors, members, managers, attorneys and/or accountants except (a) with the prior written consent and approval of all Parties to this Agreement, (b) pursuant to an order of a court of competent jurisdiction, (c) to comply with any statute, regulation, law or ordinance or (d) in any action to enforce the terms of this Agreement.

         11.  Severability. If any term, provision, covenant, condition, paragraph or subparagraph of this Agreement is held by a court of competent jurisdiction to be invalid, void or unenforceable, the rest of this Agreement shall be deemed severable therefrom, and shall remain in full force and effect and shall in no way be affected, impaired or invalidated thereby.

         12.  Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original for all purposes.

         13.  Governing Law and Venue. This Agreement, its construction, validity, and enforceability, and all rights and obligations hereunder, shall be construed and controlled by the laws of the State of Illinois and the parties hereby expressly consent to the jurisdiction and venue of any such court for any such issue. Any action to enforce or interpret this Agreement, or for declaratory relief with respect thereto, including, without limitation, an action for breach of this Agreement, shall be brought in a state or federal court of competent jurisdiction sitting in the City of Chicago, Illinois.

20



         14.  Protective Order. The Parties agree that all documents received from the other Party in discovery and marked "Confidential" or "Highly Confidential" under the Protective Order entered in the Litigation, and all copies of said received "Confidential" or "Highly Confidential" documents, shall be destroyed within 30 days of the date of the execution of this Agreement. Nothing in this Agreement shall relieve the Parties of any duties to maintain the confidentiality of, and to restrict the use of, any such documents.

TRAVELWEB, LLC   ORBITZ, LLC

By:

 

 

 

By:

 

 
   
     

Its:

 

 

 

Its:

 

 
   
     

SUBSCRIBED and SWORN to before me this         day of April, 2004.

 

SUBSCRIBED and SWORN to before me this         day of April, 2004.


Notary Public

 


Notary Public

21



EXHIBIT 10.31(B)


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Exhibit 10.31(b)


SECOND AMENDED AND RESTATED

ORBITZ, INC.

2002 STOCK PLAN1

        1.    Purposes of the Plan.    The purposes of this Stock Plan are to attract and retain the best available personnel for positions of substantial responsibility, to provide additional incentive to Employees, Directors and Consultants and to promote the success of the Company's business. Options granted under the Plan may be Incentive Stock Options or Nonstatutory Stock Options, as determined by the Administrator at the time of grant. Stock Appreciation Rights, Restricted Stock Awards and Stock Purchase Rights may also be granted under the Plan.

        2.    Definitions.    As used herein, the following definitions shall apply:

            (a)   "Administrator" means the Board or any of its Committees as shall be administering the Plan in accordance with Section 4 hereof.

            (b)   "Applicable Laws" means the requirements relating to the administration of equity compensation plans under U.S. state corporate laws, U.S. federal and state securities laws, the Code, any stock exchange or quotation system on which the Shares are listed or quoted and the applicable laws of any other country or jurisdiction where Option, Stock Purchase Rights, SARs or Restricted Stock Awards are granted under the Plan.

            (c)   "Award Agreement" means one or more written or electronic agreements between the Company and a recipient of an award (other than an Option) under the Plan evidencing the terms and conditions of such award. The Award Agreement is subject to the terms and conditions of the Plan.

            (d)   "Board" means the Board of Directors of the Company.

            (e)   "Code" means the Internal Revenue Code of 1986, as amended.

            (f)    "Committee" means a committee of Directors appointed by the Board in accordance with Section 4 hereof.

            (g)   "Common Stock" means the Class C Common Stock par value $0.001 per share of the Company.

            (h)   "Company" means Orbitz, Inc., a Delaware corporation and any successor thereto.

            (i)    "Consultant" means any person who is engaged by the Company or any Parent or Subsidiary of the Company to render consulting or advisory services to such entity. On the date that any Parent or Subsidiary which engages a Consultant ceases to be a Parent or Subsidiary of the Company such person shall cease to be a Consultant and will be deemed to have terminated as a Service Provider, unless otherwise provided in Section 14(c) hereof.

            (j)    "Director" means a member of the Board.

            (k)   "Disability" means total and permanent disability as defined in Section 22(e)(3) of the Code.


1
Amended and restated to reflect amendments to the 2002 Stock Plan adopted April 28, 2004.

            (l)    "Employee" means any person, including Officers and Directors, employed by the Company or any Parent or Subsidiary of the Company. A person shall not cease to be an Employee in the case of (i) any leave of absence approved by the Company, or any Parent or Subsidiary of the Company, as applicable or (ii) transfers between locations of the Company or between the Company, any Parent and any Subsidiary of the Company, or any successor of the Company. For purposes of Incentive Stock Options, no such leave may exceed ninety days, unless reemployment upon expiration of such leave is guaranteed by statute or contract. If reemployment upon expiration of a leave of absence approved by the Company is not so guaranteed, then three (3) months following the 90th day of such leave, any Incentive Stock Option held by the Optionee shall cease to be treated as an Incentive Stock Option and shall be treated for tax purposes as a Nonstatutory Stock Option. Neither service as a Director nor payment of a director's fee by the Company shall be sufficient to constitute "employment" by the Company. On the date that any Parent or Subsidiary which employs an Employee ceases to be a Parent or Subsidiary of the Company such person shall cease to be an Employee and will be deemed to have terminated as a Service Provider, unless otherwise provided in Section 14(c) hereof.

            (m)  "Exchange Act" means the Securities Exchange Act of 1934, as amended.

            (n)   "Fair Market Value" means, as of any date, the value of Common Stock determined as follows:

                (i)  If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its Fair Market Value shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or system for the last market trading day prior to the time of determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable;

               (ii)  If the Common Stock is regularly quoted by a recognized securities dealer but selling prices are not reported, its Fair Market Value shall be the mean between the high bid and low asked prices for the Common Stock on the last market trading day prior to the day of determination; or

              (iii)  If neither of paragraphs (i) or (ii) above are applicable, the Fair Market Value thereof shall be determined in good faith by the Administrator.

            (o)   "Incentive Stock Option" means an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code.

            (p)   "Investors" means the holders of each series of Class B Common Stock $.0001 par value per share of the Company on the relevant date.

            (q)   "Nonstatutory Stock Option" means an Option not intended to qualify as an Incentive Stock Option.

            (r)   "Officer" means a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder.

            (s)   "Option" means a stock option granted pursuant to the Plan.

            (t)    "Option Agreement" means one or more written or electronic agreements between the Company and an Optionee evidencing the terms and conditions of an individual Option grant. The Option Agreement is subject to the terms and conditions of the Plan.

            (u)   "Option Exchange Program" means a program whereby outstanding Options are exchanged for Options with a lower exercise price.

2



            (v)   "Optioned Stock" means the Common Stock subject to an Option or a Stock Purchase Right.

            (w)  "Optionee" means the holder of an outstanding Option, Stock Purchase Right, SAR or Restricted Stock Award granted under the Plan.

            (x)   "Parent" means a "parent corporation," whether now or hereafter existing, as defined in Section 424(e) of the Code.

            (y)   "Plan" means this Orbitz, Inc. 2002 Stock Plan.

            (z)   "Public Trading Date" means the first date upon which the Common Stock of the Company is listed (or approved for listing) upon notice of issuance on any securities exchange or designated (or approved for designation) upon notice of issuance as a national market security on an interdealer quotation system.

            (aa) "Restricted Stock" means shares of Common Sock acquired pursuant to a grant of a Stock Purchase Right under Section 13 below or pursuant to the grant of a Restricted Stock Award under Section 10 below.

            (bb) "Restricted Stock Award" means a grant of Restricted Stock or a Restricted Stock Unit under Section 10 below.

            (cc) "Stock Appreciation Right" or "SAR" means an award issued pursuant to Section 11 below.

            (dd) "Service Provider" means an Employee, Director or Consultant.

            (ee) "Share" means a share of the Common Stock, as adjusted in accordance with Section 14 below.

            (ff)  "Stock Purchase Right" means a right to purchase Common Stock pursuant to Section 13 below.

            (gg) "Subsidiary" means Orbitz, LLC, a Delaware limited liability company and other "subsidiary corporation," whether now or hereafter existing, as defined in Section 424(f) of the Code.

            (hh) "Restricted Stock Unit" means a right to receive Shares granted under Section 10 below.

        3.    Stock Subject to the Plan.    Subject to the provisions of Section 14 of the Plan, the maximum aggregate number of Shares that may be subject to options and other awards and issued under the Plan is 16,340,747 Shares; provided, however, only 12,663,747 Shares may be subject to options and other awards and issued under the Plan, subject to the provisions below, prior to the Public Trading Date. The Shares may be authorized but unissued, or reacquired Common Stock.

        If an Option, Stock Purchase Right, SAR or Restricted Stock Award granted under this Plan or under the Orbitz, Inc. 2000 Stock Plan ("Orbitz Plan") expires or becomes unexercisable without having been exercised in full, or is surrendered pursuant to an Option Exchange Program, or, with respect to a Restricted Stock Award, is forfeited back to the Company, the unpurchased Shares (or for Restricted Stock Awards, the forfeited Shares) which were subject thereto shall become available for future grant or sale under the Plan (unless the Plan has terminated). However, Shares that have actually been issued under the Plan, upon exercise of either an Option, Stock Purchase Right, SAR or Restricted Stock Award shall not be returned to the Plan and shall not become available for future distribution under the Plan, except that if Shares of Restricted Stock granted under this Plan or the Orbitz Plan are repurchased by the Company at their original purchase price or forfeited to the Company, such Shares shall become available for future grant under the Plan.

3



        4.    Administration of the Plan.    

            (a)    Administrator.    The Plan shall be administered by the Board or a Committee appointed by the Board, which Committee shall be constituted to comply with Applicable Laws. If administration of the Plan is delegated to a Committee, then after the Public Trading Date and upon expiration of the transition period set forth in Treasury Regulation § 1.162-27(f) such Committee shall consist solely of two or more Directors each of whom is both an "outside director," within the meaning of Section 162(m) of the Code, and a "non-employee director" within the meaning of Rule 16b-3 of the Exchange Act.

            (b)    Powers of the Administrator.    Subject to the provisions of the Plan and, in the case of a Committee, the specific duties delegated by the Board to such Committee, and subject to the approval of any relevant authorities, the Administrator shall have the authority in its discretion:

                (i)  to determine the Fair Market Value;

               (ii)  to select the Service Providers to whom Options, Stock Purchase Rights, SARs and Restricted Stock Awards may from time to time be granted hereunder;

              (iii)  to determine the number of Shares to be covered by each such award granted hereunder;

              (iv)  to approve forms of agreement for use under the Plan;

               (v)  to determine the terms and conditions, of any Option, Stock Purchase Right, SAR or Restricted Stock Award granted hereunder. Such terms and conditions include, but are not limited to, the exercise price, the time or times when Options, Stock Purchase Rights, SARs or Restricted Stock Awards may be exercised (which may be based on performance criteria), any vesting acceleration or waiver of forfeiture restrictions, and any restriction or limitation regarding any Option, Stock Purchase Right, SAR or Restricted Stock Award or the Common Stock relating thereto, based in each case on such factors as the Administrator, in its sole discretion, shall determine;

              (vi)  to determine whether and under what circumstances an Option may be bought out in cash under subsection 9(e);

             (vii)  to reduce the exercise price of any Option, Stock Purchase Right or SAR to the then current Fair Market Value if the Fair Market Value of the Common Stock covered by such Option, Stock Purchase Right or SAR has declined since the date the Option, Stock Purchase Right or SAR was granted;

            (viii)  to initiate an Option Exchange Program;

              (ix)  to prescribe, amend and rescind rules and regulations relating to the Plan, including rules and regulations relating to sub-plans established for the purpose of qualifying for preferred tax treatment under foreign tax laws;

               (x)  to allow Optionees to satisfy withholding tax obligations by electing to have the Company withhold from the Shares to be issued upon exercise of an Option, Stock Purchase Right or SAR or the vesting of a Restricted Stock Award that number of Shares having a Fair Market Value equal to the minimum statutory amount required to be withheld. The Fair Market Value of the Shares to be withheld shall be determined on the date that the amount of tax to be withheld is to be determined. All elections by Optionees to have Shares withheld for this purpose shall be made in such form and under such conditions as the Administrator may deem necessary or advisable;

4



              (xi)  to construe and interpret the terms of the Plan and awards granted pursuant to the Plan.

            (c)    Effect of Administrator's Decision.    All decisions, determinations and interpretations of the Administrator shall be final and binding on all Optionees.

        5.    Eligibility.    

            (a)   Nonstatutory Stock Options, Stock Purchase Rights, SARs and Restricted Stock Awards may be granted to Service Providers. Incentive Stock Options may be granted only to Employees.

            (b)   Each Option shall be designated in the Option Agreement as either an Incentive Stock Option or a Nonstatutory Stock Option. However, notwithstanding such designation, to the extent that the aggregate Fair Market Value of the Shares with respect to which Incentive Stock Options are exercisable for the first time by the Optionee during any calendar year (under all plans of the Company and any Parent or Subsidiary) exceeds $100,000, such Options shall be treated as Nonstatutory Stock Options. For purposes of this Section 5(b), Incentive Stock Options shall be taken into account in the order in which they were granted. The Fair Market Value of the Shares shall be determined as of the time the Option with respect to such Shares is granted.

            (c)   Neither the Plan nor any Option, Stock Purchase Right, SAR or Restricted Stock Award shall confer upon any Optionee any right with respect to continuing the Optionee's relationship as a Service Provider with the Company, nor shall it interfere in any way with his or her right or the Company's right to terminate such relationship at any time, with or without cause.

        6.    Term of Plan.    The Plan shall become effective upon its adoption by the Board. It shall continue in effect for a term of ten (10) years unless sooner terminated under Section 14 of the Plan.

        7.    Term of Option.    The term of each Option shall be stated in the Option Agreement; provided, however, that the term shall be no more than ten (10) years from the date of grant thereof. In the case of an Incentive Stock Option granted to an Optionee who, at the time the Option is granted, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary of the Company, the term of the Option shall be five (5) years from the date of grant or such shorter term as may be provided in the Option Agreement.

        8.    Option Exercise Price and Consideration.    

            (a)   The per share exercise price for the Shares to be issued upon exercise of an Option shall be such price as is determined by the Administrator, but shall be subject to the following:

                (i)  In the case of an Incentive Stock Option

                (A)  granted to an Employee who, at the time of grant of such Option, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary of the Company, the exercise price shall be no less than 110% of the Fair Market Value per Share on the date of grant.

                (B)  granted to any other Employee, the per Share exercise price shall be no less than 100% of the Fair Market Value per Share on the date of grant.

               (ii)  In the case of a Nonstatutory Stock Option, the per Share exercise price shall be determined by the Administrator.

              (iii)  Notwithstanding the foregoing, Options may be granted with a per Share exercise price other than as required above pursuant to a merger or other corporate transaction.

            (b)   The consideration to be paid for the Shares to be issued upon exercise of an Option, including the method of payment, shall be determined by the Administrator (and, in the case of an

5


    Incentive Stock Option, shall be determined at the time of grant). Such consideration may consist of (1) cash, (2) check, (3) promissory note, (4) other Shares which (x) in the case of Shares acquired upon exercise of an Option, have been owned by the Optionee for more than six months on the date of surrender, and (y) have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which such Option shall be exercised, (5) consideration received by the Company under a cashless exercise program implemented by the Company in connection with the Plan, or (6) any combination of the foregoing methods of payment. In making its determination as to the type of consideration to accept, the Administrator shall consider if acceptance of such consideration may be reasonably expected to benefit the Company.

        9.    Exercise of Option.    

            (a)    Procedure for Exercise; Rights as a Stockholder.    Any Option granted hereunder shall be exercisable according to the terms hereof at such times and under such conditions as determined by the Administrator and set forth in the Option Agreement. Unless the Administrator provides otherwise, vesting of Options granted hereunder shall be suspended during any unpaid leave of absence. An Option may not be exercised for a fraction of a Share.

        Subject to Sections 17 and 18 below, an Option shall be deemed exercised when the Company receives (i) written or electronic notice of exercise (in accordance with the Option Agreement) from the person entitled to exercise the Option, and (ii) full payment for the Shares with respect to which the Option is exercised. Full payment may consist of any consideration and method of payment authorized by the Administrator and permitted by the Option Agreement and the Plan. Shares issued upon exercise of an Option shall be issued in the name of the Optionee or, if requested by the Optionee, in the name of the Optionee and his or her spouse. Until the Shares are issued (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), no right to vote or receive dividends or any other rights as a stockholder shall exist with respect to the Shares, notwithstanding the exercise of the Option. The Company shall issue (or cause to be issued) such Shares promptly after the Option is exercised. No adjustment will be made for a dividend or other right for which the record date is prior to the date the Shares are issued, except as provided in Section 14 of the Plan.

        Exercise of an Option in any manner shall result in a decrease in the number of Shares thereafter available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised.

            (b)    Termination of Relationship as a Service Provider.    If an Optionee ceases to be a Service Provider, such Optionee may exercise his or her Option within such period of time as is specified in the Option Agreement to the extent that the Option is vested on the date of termination (but in no event later than the expiration of the term of the Option as set forth in the Option Agreement). In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for three (3) months following the Optionee's termination. If, on the date of termination, the Optionee is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall revert to the Plan. If, after termination, the Optionee does not exercise his or her Option within the time set forth above, or within the time specified by the Administrator, if later, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan.

            (c)    Disability of Optionee.    If an Optionee ceases to be a Service Provider as a result of the Optionee's Disability, the Optionee may exercise his or her Option within such period of time as is specified in the Option Agreement to the extent the Option is vested on the date of termination (but in no event later than the expiration of the term of such Option as set forth in the Option Agreement). In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for twelve (12) months following the Optionee's termination. If, on the date of

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    termination, the Optionee is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall revert to the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan.

            (d)    Death of Optionee.    If an Optionee dies while a Service Provider, the Option may be exercised within such period of time as is specified in the Option Agreement to the extent that the Option is vested on the date of death (but in no event later than the expiration of the term of such Option as set forth in the Option Agreement) by the Optionee's estate or by a person who acquires the right to exercise the Option by bequest or inheritance. In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for twelve (12) months following the Optionee's termination. If, at the time of death, the Optionee is not vested as to the entire Option, the Shares covered by the unvested portion of the Option shall immediately revert to the Plan. If the Option is not so exercised within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan.

            (e)    Buyout Provisions.    The Administrator may at any time offer to buy out for a payment in cash or Shares, an Option previously granted, based on such terms and conditions as the Administrator shall establish and communicate to the Optionee at the time that such offer is made.

        10.    Restricted Stock Awards.    

            (a)   Restricted Stock Awards may consist of awards of Restricted Stock or Restricted Stock Units, or a combination of both. Restricted Stock Awards shall be subject to the terms, conditions and restrictions determined by the Administrator at the time the Restricted Stock Award is granted and set forth in the applicable Award Agreement, if any. The Administrator may require the recipient to sign an Award Agreement as condition of the award, but may not require the recipient to pay any money consideration (other than as required by applicable law or applicable tax withholding obligations). The agreement may contain such terms, conditions, representations and warranties as the Administrator may require.

            (b)   In order to enforce the restrictions imposed upon shares of Restricted Stock awarded under a Restricted Stock Award, the Administrator may cause a legend or legends to be placed on certificates representing all shares of Restricted Stock that are still subject to restrictions under Award Agreements, which legend or legends shall make appropriate reference to the conditions imposed thereby.

            (c)   Each Restricted Stock Unit may have an initial value that is established by the Administrator on or before the date of grant. Payment of Restricted Stock Units will be made as soon as practicable after they become vested and such payments shall be in the form of Shares (which have an aggregate Fair Market Value equal to the value of the earned Restricted Stock Units). On the date or event set forth in the Award agreement, all unvested Restricted Stock Units will be forfeited to the Company.

        11.    Stock Appreciation Rights.    

            (a)    Grant of SARs.    Subject to the terms and conditions of the Plan, SARs may be granted to Service Providers at any time and from time to time as shall be determined by the Administrator, in its sole discretion. The Administrator shall have complete discretion to determine the number of SARs granted to any Participant.

            (b)    Exercise Price and Other Terms.    The Administrator, subject to the provisions of the Plan, shall have complete discretion to determine the terms and conditions of SARs granted under the

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    Plan. However, the exercise price of an SAR shall be not less than one hundred percent (100%) of the Fair Market Value of a Share on the grant date.

            (c)    SAR Agreement.    Each SAR grant shall be evidenced by an award agreement that shall specify the exercise price, the term of the SAR, the conditions of exercise, and such other terms and conditions as the Administrator, in its sole discretion, shall determine.

            (d)    Expiration of SARs.    A SAR granted under the Plan shall expire upon the date determined by the Administrator, in its sole discretion, and set forth in the Award Agreements.

            (e)    Payment of SAR Amount.    Upon exercise of a SAR, a Participant shall be entitled to receive payment from the Company in an amount determined by multiplying:

                (i)  The difference between the Fair Market Value of a Share on the date of exercise over the exercise price; times

               (ii)  The number of Shares with respect to which the SAR is exercised.

            (f)    Payment Upon Exercise of SAR.    At the discretion of the Administrator, payment for a SAR may be in cash, Shares with a Fair Market Value equal to the amount determined in paragraph (e) above or a combination thereof.

            (g)    Cash Settlements and Plan Share Allocation.    Cash payments of Stock Appreciation Rights as well as Common Stock issued upon exercise of Stock Appreciation Rights shall be applied against the maximum number of shares of Common Stock that may be issued pursuant to the Plan, The number of shares to be applied against such maximum number of shares in such circumstances shall be the number of shares equal to the amount of the cash payment divided by the Fair Market Value of a Share on the date the Stock Appreciation Right is granted.

        12.    Non-Transferability of Options, Stock Purchase Rights, SARs and Restricted Stock Awards.    Unless determined otherwise by the Administrator, the Options, Stock Purchase Rights, SARs and Restricted Stock Awards may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the Optionee, only by the Optionee. Any transferee by will or by the laws of descent or distribution shall be required to acknowledge and agree that such transferee is subject to all of the terms of the Plan and the applicable Award Agreement as if such transferee had received the applicable award.

        13.    Stock Purchase Rights.    

            (a)    Rights to Purchase.    Stock Purchase Rights may be issued either alone, in addition to, or in tandem with other awards granted under the Plan and/or cash awards made outside of the Plan. After the Administrator determines that it will offer Stock Purchase Rights under the Plan, it shall advise the offeree in writing or electronically of the terms, conditions and restrictions related to the offer, including the number of Shares that such person shall be entitled to purchase, the price to be paid, and the time within which such person must accept such offer. The offer shall be accepted by execution of an Award Agreement in the form determined by the Administrator.

            (b)    Repurchase Option.    Unless the Administrator determines otherwise, the Award Agreement shall grant the Company a repurchase option exercisable upon the voluntary or involuntary termination of the purchaser's service with the Company for any reason (including death or disability). Unless the Administrator determines otherwise, the purchase price for Shares repurchased pursuant to the Restricted Stock purchase agreement shall be the original price paid by the purchaser and may be paid by cancellation of any indebtedness of the purchaser to the Company. The repurchase option shall lapse at such rate as the Administrator may determine.

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            (c)    Other Provisions.    The Award Agreement shall contain such other terms, provisions and conditions not inconsistent with the Plan as may be determined by the Administrator in its sole discretion.

            (d)    Rights as a Stockholder.    Subject to Sections 17 and 18 below, once the Stock Purchase Right is exercised, the purchaser shall have rights equivalent to those of a stockholder and shall be a stockholder when his or her purchase is entered upon the records of the duly authorized transfer agent of the Company. No adjustment shall be made for a dividend or other right for which the record date is prior to the date the Stock Purchase Right is exercised, except as provided in Section 14 of the Plan.

        14.    Adjustments Upon Changes in Capitalization, Merger or Asset Sale.    

            (a)    Changes in Capitalization.    Subject to any required approval of the stockholders of the Company, and except as provided in (b) and (c) below, in the event that the Administrator determines that any dividend or other distribution (whether in the form of cash, Common Stock, other securities, or other property), recapitalization, reclassification, stock split, reverse stock split, reorganization, consolidation, split-up, spin-off, combination, repurchase, or exchange of Common Stock or other securities of the Company, issuance of warrants or other rights to purchase Common Stock or other securities of the Company, or other similar corporate transaction or event, effected without the receipt of consideration by the Company in the Administrator's sole discretion, affects the Common Stock such that an adjustment is determined by the Administrator to be appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended by the Company to be made available under the Plan or with respect to any Option, Stock Purchase Right, Restricted Stock Award or SAR then the Administrator shall, in such manner as it may deem equitable, adjust any or all of:

                (i)  the number and kind of shares of Common Stock (or other securities or property) with respect to which Options, Stock Purchase Rights, Restricted Stock Awards or SARs may be granted or awarded (including, but not limited to, adjustments of the limitations in Section 3 on the maximum number of shares which may be issued);

               (ii)  the number and kind of shares of Common Stock (or other securities or property) subject to outstanding Options, Stock Purchase Rights, Restricted Stock Awards or SARs; and

              (iii)  the grant or exercise price with respect to any Option, Stock Purchase Right or SAR.

        The conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Administrator, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Stock subject to an Option, Stock Purchase Right, SAR or Restricted Stock Award.

            (b)    Dissolution or Liquidation.    In the event of the proposed dissolution or liquidation of the Company, the Administrator shall notify each Optionee as soon as practicable prior to the effective date of such proposed transaction. The Administrator in its discretion may provide for an Optionee to have the right to exercise his or her Option, Stock Purchase Right or SAR until fifteen (15) days prior to such transaction as to all of the Optioned Stock covered thereby, including Shares as to which the Option, Stock Purchase Right or SAR would not otherwise be exercisable. In addition, the Administrator may provide that any Company repurchase option applicable to any Shares purchased upon exercise of an Option, Stock Purchase Right or SAR shall lapse as to all such Shares, provided the proposed dissolution or liquidation takes place at the time and in the manner contemplated. In its discretion, the Administrator may also determine that

9


    an Optionee's Restricted Stock Awards shall become fully vested on or prior to such transaction. To the extent it has not been previously exercised, an Option, Stock Purchase Right or SAR or Restricted Stock Award will terminate immediately prior to the consummation of such proposed transaction.

            (c)    Merger or Asset Sale.    In the event of a merger of the Company with or into another corporation, or the sale of substantially all of the assets of the Company, except as otherwise provided in this paragraph (c), each outstanding Option, Restricted Stock Award and Stock Purchase Right shall be assumed or an equivalent option or right substituted by the successor corporation or a Parent or Subsidiary of the successor corporation. In the event that the successor corporation or its Parent or Subsidiary does not assume or substitute equivalent options or rights, then to the extent not already vested or otherwise provided in the Option Agreement each Optionee shall fully vest in and have the right to exercise, as applicable, his or her Options, Restricted Stock Award, Stock Purchase Right or SARs as to all of the Shares subject thereto, including Shares as to which he or she would not otherwise be vested in or exercisable. If an Option, Stock Purchase Right, Restricted Stock Award or SAR becomes fully vested and/or exercisable in the event of a merger or sale of assets pursuant to the foregoing sentence, then the Administrator shall notify the Optionee in writing or electronically that such Option, Stock Purchase Right, Restricted Stock Award or SAR shall be fully vested and/or exercisable for a period of not less than fifteen (15) days from the date of such notice, and the Option, Stock Purchase Right or SAR shall terminate upon the expiration of such period. For the purposes of this paragraph, an Option, Stock Purchase Right, Restricted Stock Award or SAR shall be considered assumed if, following the merger or sale of assets, the option or right confers the right to purchase or receive, for each Share subject to the Option, Stock Purchase Right, Restricted Stock Award or SAR immediately prior to the merger or sale of assets, the consideration (whether stock, cash, or other securities or property) received in the merger or sale of assets by holders of Common Stock for each Share held on the effective date of the transaction (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding Shares); provided, however, that if such consideration received in the merger or sale of assets is not solely stock of the successor corporation or its Parent or Subsidiary, the Administrator may, provide for the consideration to be received upon the exercise of the Option, Stock Purchase Right, Restricted Stock Award or SAR, for each Share subject to the Option, Stock Purchase Right, Restricted Stock Award or SAR, to be solely stock of the successor corporation or its Parent or Subsidiary equal in fair market value to the per share consideration received by holders of Shares in the merger or sale of assets. An Award Agreement may provide for vesting and exercisability in full of an Option, Restricted Stock Award, Stock Purchase Right or SAR upon a merger or sale of assets regardless of whether a successor or any Parent or Subsidiary thereof assumes such Option, Stock Purchase Right, Restricted Stock Award or SAR. In such event, the vesting and exercisability of such Option, Restricted Stock Award, Stock Purchase Right or SAR shall be governed by the terms and conditions of such Award Agreement, notwithstanding the terms set forth above in this Section 14(c).

        15.    Time of Granting Options, Stock Purchase Rights, SARs and Restricted Stock.    The date of grant of an Option, Stock Purchase Right, SAR or Restricted Stock Award shall, for all purposes, be the date on which the Administrator makes the determination granting such Option, Stock Purchase Right, SAR or Restricted Stock Award, or such other date as is determined by the Administrator. Notice of the determination shall be given to each Service Provider to whom an Option, Stock Purchase Right, SAR or Restricted Stock Award is so granted within a reasonable time after the date of such grant.

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        16.    Amendment and Termination of the Plan.    

            (a)    Amendment and Termination.    The Board may at any time amend, alter, suspend or terminate the Plan.

            (b)    Stockholder Approval.    The Board shall obtain stockholder approval of any Plan amendment to the extent necessary and desirable to comply with Applicable Laws.

            (c)    Effect of Amendment or Termination.    No amendment, alteration, suspension or termination of the Plan shall impair the rights of any Optionee, unless mutually agreed otherwise between the Optionee and the Administrator, which agreement must be in writing and signed by the Optionee and the Company. Termination of the Plan shall not affect the Administrator's ability to exercise the powers granted to it hereunder with respect to Options granted under the Plan prior to the date of such termination.

        17.    Conditions Upon Issuance of Shares.    

            (a)    Legal Compliance.    Shares shall not be issued pursuant to the exercise of an Option, Stock Purchase Right, Restricted Stock Award or SAR unless the exercise of such Option, Stock Purchase Right or SAR and/or the issuance and delivery of Shares pursuant to such Award shall comply with Applicable Laws and shall be further subject to the approval of counsel for the Company with respect to such compliance.

            (b)    Investment Representations.    As a condition to the exercise of an Option, Stock Purchase Right or SAR or the vesting of a Restricted Stock Award, the Administrator may require the person exercising such Option, Stock Purchase Right or SAR or becoming vested with respect to such Restricted Stock Award to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required.

        18.    Inability to Obtain Authority.    The Company shall use commercially reasonable efforts to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance and sale of any Shares hereunder. The inability of the Company to obtain such authority shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained.

        19.    Reservation of Shares.    The Company, during the term of this Plan, shall at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan.

        20.    Stockholder Approval.    The Plan shall be subject to approval by the stockholders of the Company within twelve (12) months after the date the Plan is adopted. Such stockholder approval shall be obtained in the degree and manner required under Applicable Laws.

        21.    Rights and Restrictions on Shares.    The Shares acquired upon exercise of an Option or Stock Purchase Right granted under the Plan shall be subject to such terms and conditions as the Administrator shall determine in its sole discretion, including, without limitation, the following rights and restrictions:

            (a)    Company's Right of First Refusal.    Subject to subsection (b) below, before any Shares held by an Optionee or any permitted transferee (each, a "Holder") may be sold, pledged, assigned, hypothecated, transferred, or otherwise disposed of (each, a "Transfer"), the Company or its assignee(s) shall have a right of first refusal to purchase the Shares on the terms and conditions set forth in this Section (the "Right of First Refusal"). Such Right of First Refusal shall terminate

11


    as to all Shares upon the first to occur of (i) the Public Trading Date or (ii) a merger or sale of the Company with a publicly traded company as described in Section 14(c).

            (b)    Notice of Proposed Transfer.    The Holder of the Shares shall deliver to the Company at least sixty (60) days prior to making a Transfer a written notice (the "Transfer Notice") stating: (A) the Holder's bona fide intention to sell or otherwise Transfer such Shares; (B) the name of each proposed purchaser or other transferee ("Proposed Transferee"); (C) the proposed sale price and (D) the number of Shares to be Transferred to each Proposed Transferee, and the Holder shall offer the Shares at the then Fair Market Value to the Company or its assignee(s).

            (c)    Exercise of Right of First Refusal.    During the thirty (30) days after receipt of the Transfer Notice, the Company may elect in writing to purchase all, but not less than all, of the Shares proposed to be Transferred to any one or more of the Proposed Transferees. If the Company does not elect to purchase all of the Shares proposed to be Transferred within such thirty (30) day period, the Investors may elect to purchase all, but not less than all, of the Shares proposed to be Transferred by delivering a written notice of such election to the Holder within sixty (60) days after the receipt of the Transfer Notice by the Company. If more than one Investor elects to purchase such Shares, the number of Shares to be purchased by the electing Investors shall be allocated among them pro rata on the basis of the number of shares of the Company's Class B Common Stock on an "As Converted Ownership" (as defined in the Company's Certificate of Incorporation) basis by them. The purchase price will be determined in accordance with clause (iii) below.

            (d)    Purchase Price.    The purchase price ("Purchase Price") for the Shares repurchased under this Section shall be the then Fair Market Value.

            (e)    Payment.    Payment of the purchase price shall be made, at the option of the Company or its assignee(s), in cash (by check), by cancellation of all or a portion of any outstanding indebtedness of the Holder to the Company (or, in the case of repurchase by an assignee, to the assignee), or by any combination thereof within thirty (30) days after receipt of the Transfer Notice or in the manner and at the times set forth in the Transfer Notice.

            (f)    Holder's Right to Transfer.    If all of the Shares proposed in the Transfer Notice to be transferred to a given Proposed Transferee are not purchased by the Company and/or its assignee(s) as provided in this Section, then the Holder may sell or otherwise transfer such Shares to that Proposed Transferee at the then Fair Market Value or at the sale price set forth in the Transfer Notice, provided that (A) such sale or other Transfer is consummated within one hundred twenty (120) days after the date of the Transfer Notice, (B) any such sale or other Transfer is effected in accordance with any applicable securities laws, (C) the Proposed Transferee agrees in writing that the provisions of this Section shall continue to apply to the Shares in the hands of such Proposed Transferee, and (D) prior to making any Transfer, the Holder shall use reasonable efforts to ascertain whether the Proposed Transferee(s) or any person or entity affiliated with the Proposed Transferee(s) is a competitor of the Company and if Holder has reason to believe that the Proposed Transferee is or is affiliated with or acting on behalf of such a competitor, the Holder shall not transfer any Shares to the Proposed Transferee. If the Shares described in the Transfer Notice are not Transferred to the Proposed Transferee within such 120 day period, a new Transfer Notice shall be given to the Company, and the Company and/or its assignees shall again be offered the Right of First Refusal as provided herein before any Shares held by the Holder may be sold or otherwise Transferred.

            (g)    Exception for Certain Family Transfers.    Notwithstanding any provision in the Plan to the contrary, the Transfer of any or all of the Shares during the Holder's lifetime to a Family Member (as defined below) or the Transfer on the Holder's death by will or intestacy to anyone shall be exempt from the Right of First Refusal; provided, however, that any Transfer by the Holder during the Holder's lifetime to the Holder's Family Member shall be without payment of any

12



    consideration whatsoever and must be approved in advance by the Administrator. In such case, the transferee or other recipient shall receive and hold the Shares so Transferred subject to the provisions of this Section 21, and there shall be no further Transfer of such Shares except in accordance with the terms of this Section 21. "Family Member" means, and is limited to, any child, stepchild, grandchild, parent, stepparent, grandparent, spouse, former spouse, sibling, niece, nephew, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law, including adoptive relationships, any person sharing the Holder's household (other than a tenant or employee), a trust in which these persons have more than fifty percent of the beneficial interest, a foundation in which these persons (or the Holder) control the management of assets, and any other entity in which these persons (or the Holder) own more than fifty percent of the voting interests.

        22.    Governing Law.    The validity and enforceability of this Plan shall be governed by and construed in accordance with the laws of the State of Delaware without regard to otherwise governing principles of conflicts of law.

    Adopted by and approved by the shareholders of
Orbitz, Inc. on April 10, 2002

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SECOND AMENDED AND RESTATED ORBITZ, INC. 2002 STOCK PLAN1

EXHIBIT 31.1


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Exhibit 31.1

CERTIFICATION

        I, Jeffrey G. Katz, Chairman of the Board, President and Chief Executive Officer of Orbitz, Inc., certify that:

            1)    I have reviewed this quarterly report of Orbitz, Inc.;

            2)    Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

            3)    Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

            4)    The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

              a)    Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

              b)    Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

              c)     Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

            5)    The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

              a)    All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

              b)    Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date:  August 11, 2004    

 

 

/s/  
JEFFREY G. KATZ      
Jeffrey G. Katz
Chairman of the Board, President and
Chief Executive Officer



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EXHIBIT 31.2


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Exhibit 31.2

CERTIFICATION

        I, John J. Park, Chief Financial Officer of Orbitz, Inc., certify that:

            1)    I have reviewed this quarterly report of Orbitz, Inc.;

            2)    Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

            3)    Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

            4)    The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

              a)    Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

              b)    Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

              c)     Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

            5)    The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

              a)    All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

              b)    Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date:  August 11, 2004    

 

 

/s/  
JOHN J. PARK      
John J. Park
Chief Financial Officer



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EXHIBIT 32.1


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Exhibit 32.1

Certification

        Pursuant to 18 U.S.C. § 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of Orbitz, Inc. (the "Company") hereby certifies, to such officer's knowledge, that:

              (i)  the accompanying Quarterly Report on Form 10-Q of the Company for the quarterly period ended June 30, 2004 (the "Report") fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and

             (ii)  the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date:  August 11, 2004    

 

 

/s/  
JEFFREY G. KATZ      
Jeffrey G. Katz
Chairman of the Board, President and
Chief Executive Officer



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EXHIBIT 32.2


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Exhibit 32.2

Certification

        Pursuant to 18 U.S.C. § 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of Orbitz, Inc. (the "Company") hereby certifies, to such officer's knowledge, that:

              (i)  the accompanying Quarterly Report on Form 10-Q of the Company for the quarterly period ended June 30, 2004 (the "Report") fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and

             (ii)  the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date:  August 11, 2004    

 

 

/s/  
JOHN J. PARK      
John J. Park
Chief Financial Officer



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