**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

 

**Washington, D.C. 20549**

 

**FORM 10-Q**

** **

| **ý**                                                                                                    | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934**  |
|---------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------|
|                                                                                                          |                                                                                          |
| **For the quarterly period ended June 30,  2004**                                                             |
|                                                                                                          |                                                                                          |
| **OR**                                                                                                        |
|                                                                                                          | ** **                                                                                    |
| ** ̈**                                                                                                    | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                          |                                                                                          |
| **For the transition period  from            To** |
|                                                                                                          |                                                                                          |
| **Commission file number  333-109064**                                                                   |

 

**WORLDSPAN, L.P.**

(Exact name of registrant as specified in itscharter)

 
| **Delaware**                                                               | **75-3125716**                       |
|----------------------------------------------------------------------------|--------------------------------------|
| (State or other jurisdiction of  incorporation or organization)            | (I.R.S. Employer Identification No.) |
|                                                                       |                                 |
| **300 Galleria Parkway, N.W.  Atlanta, Georgia**                           | **30339**                            |
| (Address of principal executive offices)                                   | (Zip Code)                           |
|                                                                       |                                 |
| Registrant’s telephone number, including area code **(770) 563-7400** |

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.

 

ý                                    Yes                             ̈                                    No

 

Indicate by check mark whether the registrant is anaccelerated filer (as defined by Rule 12b-2 of the Act).

 

 ̈                                    Yes                            ý                                    No

 

As of August 10, 2004, Registrant’s parent hadoutstanding 29,661,533 shares of Common Stock and 3,929,288 shares of Class BCommon Stock.

 

 

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**WORLDSPAN, L.P.**

**REPORT ON FORM 10-Q**

**FOR THE PERIOD ENDED JUNE 30, 2004**

 

**INDEX**

 
| **PART I:**  | **FINANCIAL  INFORMATION**                                                                                                                         | ** ** |
|--------------|----------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **   | ** **                                                                                                                                         | ** ** |
| **Item 1.**  | **Condensed Financial Statements (Unaudited)**                                                                                                     | ** ** |
| ** **   | ** **                                                                                                                                         | ** ** |
| ** **   | **Condensed  Consolidated Balance Sheets – June 30, 2004 and December 31, 2003**                                                              | ** ** |
| ** **   | ** **                                                                                                                                         | ** ** |
| ** **   | **Condensed  Consolidated Statements of Operations – Three and six months ended June 30,  2004 and three and six months ended June 30, 2003** | ** ** |
| ** **   | ** **                                                                                                                                         | ** ** |
| ** **   | **Condensed  Consolidated Statements of Partners’ Capital – Six months ended June 30, 2004**                                             | ** ** |
| ** **   | ** **                                                                                                                                         | ** ** |
| ** **   | **Condensed  Consolidated Statements of Cash Flows – Six months ended June 30, 2004 and  six months ended June 30, 2003**                     | ** ** |
| ** **   | ** **                                                                                                                                         | ** ** |
| ** **   | **Notes  to Condensed Consolidated Financial Statements**                                                                                          | ** ** |
| ** **   | ** **                                                                                                                                         | ** ** |
| **Item  2.** | **Management’s  Discussion and Analysis of Financial Condition and Results of Operations**                                                    | ** ** |
| ** **   | ** **                                                                                                                                         | ** ** |
| **Item  3.** | **Quantitative  and Qualitative Disclosures About Market Risk**                                                                                    | ** ** |
| ** **   | ** **                                                                                                                                         | ** ** |
| **Item 4.**  | **Controls  and Procedures**                                                                                                                       | ** ** |
| ** **   | ** **                                                                                                                                         | ** ** |
| **PART II**  | **OTHER INFORMATION**                                                                                                                              | ** ** |
| ** **   | ** **                                                                                                                                         | ** ** |
| **Item 1.**  | **Legal Procedings**                                                                                                                               | ** ** |
| ** **   | ** **                                                                                                                                         | ** ** |
| **Item  2.** | **Changes  in Securities, Use of Proceeds and Issuer Purchases of Equity Securities**                                                              | ** ** |
| ** **   | ** **                                                                                                                                         | ** ** |
| **Item 5.**  | **Other Information**                                                                                                                              | ** ** |
| ** **   | ** **                                                                                                                                         | ** ** |
| **Item 6.**  | **Exhibits and Reports  on Form 8-K**                                                                                                              | ** ** |

 

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**PART I. FINANCIAL INFORMATION**

 

**ITEM 1****.  FINANCIAL STATEMENTS**

 

**Worldspan, L.P.**

 

**Condensed Consolidated Balance Sheets**

 

**(Unaudited) (dollars in thousands)**

 
| ** **                                      | ** ** | **Successor Basis** | ** ** |
|-------------------------------------------------|------------|---------------------|------------|
| ** **                                      | ** ** | **June 30, 2004**   | ** ** | **December 31, 2003** | ** ** |
| **Assets**                                      |       |                |       |   |   |
| Current assets                                  |       |                |       |   |   |
| Cash and cash equivalents                       |       | $                   | 73,458     |   | $ | 43,746 |   |
| Trade accounts receivable, net                  |       | 128,258             |       | 103,122 |   |
| Prepaid expenses and other current assets       |       | 14,721              |       | 23,629 |   |
| Total current assets                            |       | 216,437             |       | 170,497 |   |
| Property and equipment, net                     |       | 130,116             |       | 120,510 |   |
| Deferred charges                                |       | 36,463              |       | 33,544 |   |
| Debt issuance costs, net                        |       | 11,729              |       | 13,626 |   |
| Supplier and agency relationships, net          |       | 287,886             |       | 304,752 |   |
| Developed technology, net                       |       | 219,539             |       | 228,322 |   |
| Trade name                                      |       | 72,142              |       | 72,142 |   |
| Goodwill                                        |       | 116,048             |       | 109,740 |   |
| Other intangible assets, net                    |       | 33,318              |       | 34,722 |   |
| Investments                                     |       | 6,063               |       | 6,377 |   |
| Other long-term assets                          |       | 21,570              |       | 25,263 |   |
| Total assets                                    |       | $                   | 1,151,311  |   | $ | 1,119,495 |   |
|                                            |       |                |       |   |   |
| **Liabilities and Partners’ Capital**      |       |                |       |   |   |
| Current liabilities                             |       |                |       |   |   |
| Accounts payable                                |       | $                   | 11,212     |   | $ | 19,675 |   |
| Accrued expenses                                |       | 175,043             |       | 144,415 |   |
| Current portion of capital lease  obligations   |       | 19,471              |       | 16,136 |   |
| Current portion of long-term debt               |       | 10,364              |       | 8,000 |   |
| Total current liabilities                       |       | 216,090             |       | 188,226 |   |
| Long-term portion of capital lease  obligations |       | 61,884              |       | 55,002 |   |
| Long-term debt                                  |       | 344,380             |       | 385,000 |   |
| Pension and postretirement benefits             |       | 65,113              |       | 68,405 |   |
| Other long-term liabilities                     |       | 11,689              |       | 6,310 |   |
| Total liabilities                               |       | 699,156             |       | 702,943 |   |
| Commitments and contingencies                   |       |                |       |   |   |
| Partners’ capital                          |       | 452,155             |       | 416,552 |   |
| Total liabilities and Partners’ capital    |       | $                   | 1,151,311  |   | $ | 1,119,495 |   |

 

The accompanying notes are an integral partof these condensed consolidated financial statements.

 

3

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**Worldspan, L.P.**

 

**Condensed Consolidated Statements ofOperations**

 

**(Unaudited) (dollars in thousands)**

 
| ** **                                                    | ** ** | **Successor  Basis**                   | ** ** | **Predecessor  Basis**                 | ** ** | **Successor  Basis**                 | ** ** | **Predecessor  Basis**               | ** ** |
|---------------------------------------------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|--------------------------------------|------------|--------------------------------------|------------|
| ** **                                                    | ** ** | **Three months  Ended  June 30, 2004** | ** ** | **Three months  ended  June 30, 2003** | ** ** | **Six months  ended  June 30, 2004** | ** ** | **Six months  ended  June 30, 2003** | ** ** |
|                                                          |       |                                   |       |                                   |       |                                 |       |                                 |       |
| **Revenues**                                                  |       |                                   |       |                                   |       |                                 |       |                                 |       |
| Electronic travel distribution                                |       |                                   |       |                                   |       |                                 |       |                                 |       |
| Third party                                                   |       | $                                      | 232,487    |                                   | $          | 137,696                              |       | $                                    | 465,026    |   | $ | 272,968 |   |
| Related party                                                 |       | —                                 |       | 70,293                                 |       | —                               |       | 141,965                              |       |
| Information technology services                               |       |                                   |       |                                   |       |                                 |       |                                 |       |
| Third party                                                   |       | 16,317                                 |       | 3,088                                  |       | 32,309                               |       | 6,572                                |       |
| Related party                                                 |       | —                                 |       | 22,050                                 |       | —                               |       | 45,967                               |       |
| Total revenues                                                |       | 248,804                                |       | 233,127                                |       | 497,335                              |       | 467,472                              |       |
| **Operating Expenses**                                        |       |                                   |       |                                   |       |                                 |       |                                 |       |
| Cost of revenues                                              |       |                                   |       |                                   |       |                                 |       |                                 |       |
| Cost of revenues excluding developed  technology amortization |       | 173,416                                |       | 171,617                                |       | 343,754                              |       | 334,469                              |       |
| Developed technology amortization                             |       | 5,508                                  |       | 3,397                                  |       | 11,015                               |       | 7,359                                |       |
| Total cost of revenues                                        |       | 178,924                                |       | 175,014                                |       | 354,769                              |       | 341,828                              |       |
| Selling, general and administrative                           |       | 29,632                                 |       | 35,863                                 |       | 65,792                               |       | 76,141                               |       |
| Amortization of intangible assets                             |       | 9,135                                  |       | —                                 |       | 18,270                               |       | —                               |       |
| Total operating expenses                                      |       | 217,691                                |       | 210,877                                |       | 438,831                              |       | 417,969                              |       |
| Operating income                                              |       | 31,113                                 |       | 22,250                                 |       | 58,504                               |       | 49,503                               |       |
| **Other Income (Expense)**                                    |       |                                   |       |                                   |       |                                 |       |                                 |       |
| Interest income                                               |       | 86                                     |       | 150                                    |       | 186                                  |       | 401                                  |       |
| Interest expense                                              |       | (10,046                                | )          | (1,388                                 | )          | (20,840                              | )          | (2,756                               | )          |
| Equity in earnings of investee                                |       | 107                                    |       | 127                                    |       | 57                                   |       | 130                                  |       |
| Change-in-control expense                                     |       | —                                 |       | (17,259                                | )          | —                               |       | (17,259                              | )          |
| Other, net                                                    |       | 326                                    |       | (681                                   | )          | 61                                   |       | (1,461                               | )          |
| Total other expense, net                                      |       | (9,527                                 | )          | (19,051                                | )          | (20,536                              | )          | (20,945                              | )          |
| **Income before provision for income taxes**                  |       | 21,586                                 |       | 3,199                                  |       | 37,968                               |       | 28,558                               |       |
| Income tax expense                                            |       | 73                                     |       | 87                                     |       | 302                                  |       | 144                                  |       |
| Net income                                                    |       | $                                      | 21,513     |                                   | $          | 3,112                                |       | $                                    | 37,666     |   | $ | 28,414 |   |

 

The accompanying notes are an integral partof these condensed consolidated financial statements.

 

4

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**Worldspan, L.P.**

 

**Condensed Consolidated Statements ofPartners’ Capital**

 

**(Unaudited) (dollars in thousands)**

 
| ** **                            | ** ** | **Partners’  Capital** | ** ** | **Accumulated  Other  Comprehensive Income** | ** ** | **Total** | ** ** |
|---------------------------------------|------------|-----------------------------|------------|---------------------------------------------------|------------|-----------|------------|
|                                  |       |                        |       |                                              |       |      |       |
| **Successor Basis**                   |       |                        |       |                                              |       |      |       |
| Balance at December 31, 2003          |       | $                           | 416,127    |                                              | $          | 425       |       | $ | 416,552 |   |
| Comprehensive income:                 |       |                        |       |                                              |       |      |       |
| Net income                            |       | 37,666                      |       | —                                            |       | 37,666    |       |
| Unrealized holding loss on investment |       | —                      |       | (366                                              | )          | (366      | )          |
| Comprehensive income:                 |       |                        |       |                                              |       | 37,300    |       |
| Distribution to WTI                   |       | (3,464                      | )          | —                                            |       | (3,464    | )          |
| Stock-based compensation              |       | 1,767                       |       | —                                            |       | 1,767     |       |
| Balance at June 30, 2004              |       | $                           | 452,096    |                                              | $          | 59        |       | $ | 452,155 |   |

 

The accompanying notes are an integral partof these condensed consolidated financial statements.

 

5

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** **

**Worldspan, L.P.**

 

**Condensed Consolidated Statements of Cas****h Flows**

 

**(Unaudited) (dollars in thousands)**

 
| ** **                                                                         | ** ** | **Successor Basis**                 | ** ** | **Predecessor Basis**               | ** ** |
|------------------------------------------------------------------------------------|------------|-------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                         | ** ** | **Six months ended  June 30, 2004** | ** ** | **Six months ended  June 30, 2003** | ** ** |
|                                                                               |       |                                |       |                                |       |
| Cash flows from operating activities:                                              |       |                                |       |                                |       |
| Net income                                                                         |       | $                                   | 37,666     |                                | $          | 28,414 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |       |                                |       |                                |       |
| Depreciation and amortization                                                      |       | 51,084                              |       | 32,322                              |       |
| Amortization of debt issuance costs                                                |       | 1,899                               |       | —                              |       |
| Stock-based compensation                                                           |       | 1,767                               |       | —                              |       |
| Equity in earnings of investee                                                     |       | (57                                 | )          | (130                                | )          |
| Loss on disposal of property and equipment,  net                                   |       | 584                                 |       | 1,010                               |       |
| Other                                                                              |       | —                              |       | 300                                 |       |
| Changes in operating assets and liabilities:                                       |       |                                |       |                                |       |
| Trade accounts receivable, net                                                     |       | (25,136                             | )          | (17,075                             | )          |
| Related party accounts receivable, net                                             |       | —                              |       | (3,396                              | )          |
| Prepaid expenses and other current assets                                          |       | 8,908                               |       | 5,412                               |       |
| Deferred charges                                                                   |       | (2,919                              | )          | 1,945                               |       |
| Other long-term assets                                                             |       | 159                                 |       | (16,840                             | )          |
| Accounts payable                                                                   |       | (8,463                              | )          | 640                                 |       |
| Accrued expenses                                                                   |       | 29,092                              |       | 6,330                               |       |
| Pension and postretirement benefits                                                |       | (3,292                              | )          | 3,203                               |       |
| Other long-term liabilities                                                        |       | (880                                | )          | (1,112                              | )          |
| Net cash provided by operating activities                                          |       | 90,412                              |       | 41,023                              |       |
| Cash flows from investing activities:                                              |       |                                |       |                                |       |
| Purchase of property and equipment                                                 |       | (7,359                              | )          | (4,236                              | )          |
| Proceeds from sale of property and  equipment                                      |       | 92                                  |       | 396                                 |       |
| Capitalized software for internal use                                              |       | (744                                | )          | (1,367                              | )          |
| Net cash used in investing activities                                              |       | (8,011                              | )          | (5,207                              | )          |
| Cash flows from financing activities:                                              |       |                                |       |                                |       |
| Distributions to founding airlines                                                 |       | —                              |       | (110,000                            | )          |
| Distributions to WTI                                                               |       | (3,464                              | )          | —                              |       |
| Principal payments on capital leases                                               |       | (10,969                             | )          | (13,986                             | )          |
| Principal payments on debt                                                         |       | (38,256                             | )          | —                              |       |
| Net cash used in financing activities                                              |       | (52,689                             | )          | (123,986                            | )          |
| Net increase (decrease) in cash and cash  equivalents                              |       | 29,712                              |       | (88,170                             | )          |
| Cash and cash equivalents at beginning of  period                                  |       | 43,746                              |       | 132,101                             |       |
| Cash and cash equivalents at end of period                                         |       | $                                   | 73,458     |                                | $          | 43,931 |   |

 

The accompanying notes are an integral partof these condensed consolidated financial statements.

 

6

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**Worldspan, L.P.**

 

**Notes to Condensed Consolidated Financia****l Statements**

 

**(Unaudited) (dollars in thousands)**

 

**1. Accounting Policies**

 

*Nature of Business.*  Worldspan, L.P. (the “Partnership”) is aDelaware limited partnership formed in 1990. On June 30, 2003, WorldspanTechnologies Inc. (“WTI”), formerly named Travel Transaction ProcessingCorporation, formed by Citigroup Venture Capital Equity Partners, L.P. (“CVC”)and Ontario Teachers’ Pension Plan Board (“OTPP”), indirectly acquired 100% ofthe outstanding partnership interests of the Partnership from affiliates ofDelta Air Lines, Inc. (“Delta”), Northwest Airlines, Inc. (“Northwest”) andAmerican Airlines, Inc. (“American”) (the “Acquisition”). WTI owns all of thegeneral partnership interests in the Partnership. WS Holdings LLC (“WSHoldings”), which is owned by WTI, is the sole limited partner of the Partnership,owning all of the limited partnership interests. Prior to the Acquisition,Delta, Northwest and American (collectively, the Partnership’s “foundingairlines”) owned, through affiliates, approximately 40%, 34% and 26%,respectively, of the general partnership interests in the Partnership. NEWCRSLimited, Inc. (“NEWCRS”), which was owned by the founding airlines, owned allof the limited partnership interests. American acquired its interest in thePartnership as part of its acquisition of substantially all of the assets ofTrans World Airlines, Inc. (“TWA”) in April 2001.

 

The Partnership provides information, reservations, transactionprocessing and related services for airlines, travel agencies and othertravel-related entities. The Partnership owns and operates a globaldistribution system (“GDS”) and provides subscribers with access to and use ofthis GDS. The Partnership also charges Delta, Northwest and others for the useof the GDS.

 

*Basis of Presentation.*  The accompanying unaudited condensed consolidatedfinancial statements have been prepared in accordance with accountingprinciples generally accepted in the United States for interim financialinformation and with the instructions to Form 10-Q and Article 10 of RegulationS-X. Accordingly, they do not include all of the information and footnotesrequired by accounting principles generally accepted in the United States forcomplete financial statements. In the opinion of management these financialstatements contain all adjustments, consisting of normal recurring accruals,necessary to present fairly the financial position, results of operations andcash flows for the periods indicated. The preparation of financial statementsin accordance with accounting principles generally accepted in the UnitedStates requires management to make estimates and assumptions that affect theamounts reported in the financial statements and the accompanying notes.Operating results for the three and six months ended June 30, 2004 are notnecessarily indicative of results that may be expected for any other interimperiod or for the year ending December 31, 2004. Our quarterly financial datashould be read in conjunction with our consolidated financial statements forthe year ended December 31, 2003 (including the notes thereto), set forth inour annual report on Form 10-K filed with the Securities and ExchangeCommission on March 30, 2004.

 

The consolidated financial statements present the Partnership for thethree and six months ended June 30, 2004 (“successor basis” reflecting theAcquisition and associated basis) and the three and six months ended June 30,2003 (“predecessor basis” for the period of Delta’s, Northwest’s and American’sownership of the Partnership and associated basis).

 

In accordance with the requirements of purchase accounting, the assetsand liabilities of the Partnership were adjusted to their estimated fair valuesand the resulting goodwill computed for the Acquisition (see Note 2). Theapplication of purchase accounting generally results in higher depreciation andamortization expense in periods following an acquisition. Accordingly, andbecause of other effects of purchase accounting, the accompanying consolidatedfinancial statements as of and for the period prior to the Acquisition are notcomparable with those periods subsequent to the Acquisition.

 

7

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*Stock-Based Compensation.*  Under the WTI stock incentive plan, WTIoffers restricted shares of its Common Stock and grants options to purchaseshares of its Common Stock to certain employees of the Partnership. WTIaccounts for employee stock options and restricted shares of Common Stock inaccordance with SFAS No. 123, *Accounting forStock Based Compensation*. WTI values stock options based upon a binomialoption-pricing model. As the WTI options and restricted shares of WTI CommonStock are being granted to employees of the Partnership, the Partnershiprecognizes this value as an expense over the period in which the options andrestricted shares vest, with a corresponding increase in partners’ capital.

 

*Risks and Uncertainties.*  The Partnership derives substantially all ofits revenues from the travel industry. Accordingly, events affecting the travelindustry, particularly airline travel and participating airlines, cansignificantly affect the Partnership’s business, financial condition andresults of operations. The Partnership’s customers are primarily located in theUnited States and Europe.

 

Travel agencies are the primary channel of distribution for theservices offered by travel vendors. If the Partnership were to lose and notreplace the transactions generated by any significant travel agencies, itsbusiness, financial condition and results of operations could be adverselyaffected. For the six months ended June 30, 2004 and 2003, one subscribergenerated transactions in our electronic travel distribution segment whichresulted in revenue of approximately $125,944 and $89,322 respectively. Theseamounts represented 25% and 19% of total operating revenues for the six monthsended June 30, 2004 and 2003, respectively.

 

Furthermore, the Partnership charges associates for electronic traveldistribution services and information technology services. Revenues generatedby two associates for the six months ended June 30, 2004 and 2003 were $137,121and $152,506, respectively. These amounts, included in the electronic traveldistribution segment and the information technology services segment,represented approximately 28% of total operating revenues for the six monthsended June 30, 2004 and 33% of total operating revenues for the six monthsended June 30, 2003. At June 30, 2004 and December 31, 2003, accountsreceivable from these same two associates was approximately $36,827 and$32,704, respectively.

 

The Partnership maintained an allowance for doubtful accounts ofapproximately $16,166 and $15,530 at June 30, 2004 and December 31, 2003,respectively.

 

*Reclassifications.*  Certain reclassifications have been made inthe prior year’s financial statements to conform to classifications used in thecurrent year.

 

**2.  WTIAcquisition of Worldspan**

 

On June 30, 2003, WTI indirectly acquired 100% of the outstandingpartnership interests of the Partnership from affiliates of Delta, Northwestand American. The aggregate consideration for the Acquisition was $901,500,consisting of $817,500 in cash and the issuance by WTI of $84,000 of holdingcompany subordinated seller notes payable by WTI to American and Delta. Theholding company subordinated seller notes are unsecured obligations of WTI andare not the Partnership’s debt. The purchase consideration was subject toadjustment based upon certain items, such as the Partnership’s closing cash,debt and working capital. The resulting net aggregate consideration for the Acquisitionwas $837,766. The Acquisition has been accounted for as a purchase transactionin accordance with SFAS No. 141, *BusinessCombinations*.

 

8

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The $116,048 excess of the purchase priceover the estimated fair values of the net tangible assets and separatelyidentifiable intangible assets of the Partnership was recorded as goodwill. Asall income or losses of the Partnership are allocated to WTI and WS Holdingsfor inclusion in their respective income tax returns, none of the goodwill isexpected to be tax deductible by the Partnership. The purchase price wasallocated among tangible and intangible assets acquired and liabilities assumedbased on estimated fair values at the transaction date. The followingrepresents the allocation of the purchase price that was pushed down to thePartnership at the time of the acquisition:

 
| Current assets                                  |   | $        | 178,756 |   |
|-------------------------------------------------|--------|----------|---------|--------|
| Property and equipment                          |   | 129,504  |    |
| Deferred charges                                |   | 33,975   |    |
| Other long-term assets                          |   | 59,901   |    |
| Goodwill                                        |   | 116,048  |    |
| Other identifiable intangibles                  |   | 666,723  |    |
| Current liabilities                             |   | (203,085 | )       |
| Pension and postretirement benefits             |   | (64,067  | )       |
| Long-term portion of capital lease  obligations |   | (62,640  | )       |
| Other long-term liabilities                     |   | (17,349  | )       |
| Allocated purchase price                        |   | $        | 837,766 |   |

 

The $116,048 of goodwill was allocated asfollows: $102,189 to the electronic travel distribution segment and $13,859 tothe information technology services segment.

 

Other identifiable intangibles acquiredconsist of the following:

 
| **Asset**                                 | ** ** | **Fair Value** | ** ** | **Estimated  Useful Life** | ** ** |
|-------------------------------------------|------------|----------------|------------|----------------------------|------------|
|                                      |       |           |       |                       |       |
| Supplier and agency relationships         |       | $              | 321,618    |                       | 8-11 years |   |
| Information technology services contracts |       | 36,126         |       | 5-15 years                 |       |
| Developed technology                      |       | 236,837        |       | 11 years                   |       |
| Trade name                                |       | 72,142         |       | Indefinite                 |       |
|                                           |            |                |            |                            |            |  |

 

The weighted average life of acquired identifiable intangibles, subjectto amortization, is approximately nine years. Goodwill and trade name are notamortized but will be tested for impairment on an annual basis or at an interimdate if indicators of impairment exist.

 

The following unaudited financial information presents the results ofoperations of the Partnership as if the Acquisition had occurred at thebeginning of the period presented. Adjustments related to the Acquisition thataffect the results of operations include credits provided to Delta andNorthwest under their respective founder airline services agreement (“FASA”),interest expense associated with the debt issued in conjunction with theAcquisition, depreciation of the step-up of fixed assets, amortization of thefair value of amortizing intangible assets, and the advisory fee payable toWTI. This pro forma information does not purport to be indicative of what wouldhave occurred had the Acquisition occurred as of January 1, 2003 or of resultsof operations that may occur in the future.

 
| ** ** | ** ** | **Predecessor Basis**               | ** ** |
|------------|------------|-------------------------------------|------------|
| ** ** | ** ** | **Six months ended  June 30, 2003** | ** ** |
|       |       |                                |       |
| Revenues   |       | $                                   | 450,805    |   |
| Net loss   |       | $                                   | (12,357    | ) |

 

9

----

 

**3. Debt**

 

In conjunction with the Acquisition, the Partnership issued and sold$280,000 aggregate principal amount of 9 5/8% Senior Notes due 2011 (“SeniorNotes”) and borrowed $125,000 under the term loan facility portion of a seniorcredit facility due 2007 (“Term Loan”). The senior credit facility alsoprovides for a four-year revolving credit facility of up to $50,000 inrevolving credit loans and letters of credit. The Senior Notes are effectivelysubordinated to the Term Loan, which is secured by substantially all of theassets of the issuers and the guarantors of the Senior Notes. The interest rateapplicable to borrowings under the Term Loan is based on the LIBOR rate, or, atthe Partnership’s option, the higher of several other common indices. At June30, 2004, the interest rate on the Term Loan was 5.12%. The Partnership isrequired to pay a commitment fee of 0.50% per annum on the difference betweencommitted amounts and amounts actually utilized under the Term Loan.

 

Debt covenants require the Partnership to maintain certain financialratios, including a minimum fixed charge coverage ratio, a minimum interestcoverage ratio, a maximum senior secured leverage ratio and a maximum totalleverage ratio. In addition, certain non-financial covenants restrict theactivities of the Partnership.

 

Long-term debt consisted of the following:

 
| ** **                                | ** ** | **Successor Basis  June 30, 2004** | ** ** |
|-------------------------------------------|------------|------------------------------------|------------|
|                                      |       |                               |       |
| Senior Notes                              |       | $                                  | 280,000    |   |
| Term Loan                                 |       | 74,744                             |       |
|                                      |       | 354,744                            |       |
| Less current portion of long-term debt    |       | 10,364                             |       |
| Long-term debt, excluding current portion |       | $                                  | 344,380    |   |

 

During 2004, the Partnership paid $38,256 inprincipal on the Term Loan, of which $3,256 was scheduled principal payments.

 

**4. Employee Benefit Plans**

 

The components of net pension and postretirement costs were as follows:

 
| ** **                            | ** ** | **Pension benefits**                   | ** ** | **Pension benefits**                   | ** ** |
|---------------------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|
| ** **                            | ** ** | **Successor Basis**                    | ** ** | **Predecessor Basis**                  | ** ** | **Successor Basis** | ** ** | **Predecessor Basis** | ** ** |
| ** **                            | ** ** | **Three months  Ended  June 30, 2004** | ** ** | **Three months  Ended  June 30, 2003** | ** ** | **Six months  ended  June 30, 2004** | ** ** | **Six months  ended  June 30, 2003** | ** ** |
|                                  |       |                                   |       |                                   |       |   |   |   |   |
| Service cost                          |       | $                                      | —     |                                   | $          | 2,741 |   | $ | — |   | $ | 5,483 |   |
| Interest cost                         |       | 2,762                                  |       | 3,031                                  |       | 5,524 |   | 6,061 |   |
| Expected return on plan assets        |       | (3,389                                 | )          | (3,530                                 | )          | (6,778 | ) | (7,061 | ) |
| Amortization of transition obligation |       | —                                 |       | 43                                     |       | — |   | 86 |   |
| Amortization of prior service cost    |       | —                                 |       | 29                                     |       | — |   | 59 |   |
| Recognized net actuarial loss         |       | —                                 |       | 107                                    |       | — |   | 214 |   |
| Net periodic benefit (income) expense |       | $                                      | (627       | )                                      | $          | 2,421 |   | $ | (1,254 | ) | $ | 4,842 |   |

 

10

----

 
| ** **                            | ** ** | **Postretirement benefits**            | ** ** | **Postretirement benefits**            | ** ** |
|---------------------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|
| ** **                            | ** ** | **Successor Basis**                    | ** ** | **Predecessor Basis**                  | ** ** | **Successor Basis** | ** ** | **Predecessor Basis** | ** ** |
| ** **                            | ** ** | **Three months  Ended  June 30, 2004** | ** ** | **Three months  Ended  June 30, 2003** | ** ** | **Six months  ended  June 30, 2004** | ** ** | **Six months  Ended  June 30, 2003** | ** ** |
|                                  |       |                                   |       |                                   |       |   |   |   |   |
| Service cost                          |       | $                                      | 82         |                                   | $          | 476 |   | $ | 164 |   | $ | 955 |   |
| Interest cost                         |       | 418                                    |       | 840                                    |       | 836 |   | 1,681 |   |
| Expected return on plan assets        |       | —                                 |       | —                                 |       | — |   | — |   |
| Amortization of transition obligation |       | —                                 |       | —                                 |       | — |   | — |   |
| Amortization of prior service cost    |       | —                                 |       | (212                                   | )          | — |   | (425 | ) |
| Recognized net actuarial loss         |       | —                                 |       | 114                                    |       | — |   | 228 |   |
| Net periodic benefit expense          |       | $                                      | 500        |                                   | $          | 1,218 |   | $ | 1,000 |   | $ | 2,439 |   |

 

InDecember 2003, the United States enacted into law the Medicare PrescriptionDrug, Improvement and Modernization Act of 2003 (the “Act”). The Actestablishes a prescription drug benefit under Medicare, known as “Medicare PartD,” and a federal subsidy to sponsors of retiree health care benefit plans thatprovide a benefit that is at least actuarially equivalent to Medicare Part D.In January 2004, the FASB issued FASB Staff Position No. 106-1, “Accounting andDisclosure Requirements Related to the Medicare Prescription Drug, Improvementand Modernization Act of 2003” (“FSP 106-1”). The Partnership elected to deferaccounting for the effects of the Act, as permitted by FSP 106-1. Therefore, inaccordance with FSP 106-1, the Partnership’s accumulated postretirement benefitobligation and net postretirement health care costs included in the condensedconsolidated financial statements and accompanying notes do not reflect theeffects of the Act on the plan. In May 2004, the FASB issued FASB StaffPosition No. 106-2, “Accounting and Disclosure Requirements Related to theMedicare Prescription Drug, Improvement and Modernization Act of 2003” (“FSP106-2”). FSP 106-2 requires companies to account for the effect of the subsidyon benefits attributable to past service as an actuarial experience gain and asa reduction of the service cost component of net postretirement health carecosts for amounts attributable to current service, if the benefit provided is atleast actuarially equivalent to Medicare Part D. The Partnership will adopt FSP106-2 during the third quarter of 2004. The Partnership is evaluating theeffect the adoption of FSP 106-2 will have on its financial position andresults of operations.  

 

**5. Other Significant Events**

 

During the first quarter of 2004, the Partnership announced a workforcereduction. This reduction was the result of improved organizational efficiencyand the outsourcing of programming for certain applications. The total chargerecorded for this workforce reduction, which affected approximately 125employees, was $1,290, all of which was for severance and benefits. This amountis included in “Selling, general and administrative” expenses in theaccompanying condensed consolidated statements of operations. The $1,290 chargeincluded $960 for the electronic travel distribution segment and $330 for theinformation technology services segment. At June 30, 2004, the remaining liability associated with this workforcereduction was $146.

 

On May 5, 2004, the Partnership announced that it had been informed byExpedia that Expedia intends to move a portion of its transactions to anotherGDS provider in order to diversify its GDS relationships beyond using a singleprovider to process substantially all of its GDS transactions.

 

**6. Contingencies**

 

In September 2003, the Partnership received multiple assessmentstotaling €39,503 from the tax authorities of Greece relating to tax years1993-2000. The Partnership is currently in the process of filing appeals ofthese assessments, the outcome of which is currently uncertain. The PartnershipInterest Purchase Agreement, dated March 3, 2003, provides that each of ourfounding airlines shall severally indemnify WTI and hold WTI harmless on a netafter-tax basis from and against any and all taxes of Worldspan and itssubsidiaries related to periods prior to the sale of the Partnership on June30, 2003. The Partnership has informed our founding airlines of the receipt ofthese assessments and the indemnity obligation of our founding airlines underthe Partnership Interest Purchase Agreement. Because of this indemnity, thePartnership believes that amounts paid, if any, to settle this assessment willbe reimbursed by our founding airlines and will not have an effect on thePartnership’s financial position or results of operations.

 

11

----

 

**7. Business Segment Information**

 

The Partnership’s operations are classified into two reportablebusiness segments: electronic travel distribution and information technologyservices. The Partnership’s two reportable business segments are managedseparately based on fundamental differences in their operations. In addition,each business segment offers different products and services. The electronictravel distribution segment distributes travel services of its associates tosubscribers of the Worldspan GDS. By having access to the Worldspan GDS,subscribers are able to book reservations with the associates. The informationtechnology services segment provides technology services to Delta and Northwestand other companies in the travel industry.

 

The Partnership evaluates performance and allocates resources based onoperating income. The accounting policies of the reportable segments are thesame as those described in the summary of significant accounting policies.There are no intersegment sales.

 
| ** **                          | ** ** | **Successor Basis**                    | ** ** | **Predecessor Basis**                  | ** ** | **Successor Basis**                  | ** ** | **Predecessor Basis**                | ** ** |
|-------------------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|--------------------------------------|------------|--------------------------------------|------------|
| ** **                          | ** ** | **Three months  ended  June 30, 2004** | ** ** | **Three months  ended  June 30, 2003** | ** ** | **Six months  ended  June 30, 2004** | ** ** | **Six months  ended  June 30, 2003** | ** ** |
|                                |       |                                   |       |                                   |       |                                 |       |                                 |       |
| Revenues                            |       |                                   |       |                                   |       |                                 |       |                                 |       |
| Electronic travel distribution      |       | $                                      | 232,487    |                                   | $          | 207,989                              |       | $                                    | 465,026    |   | $ | 414,933 |   |
| Information technology services     |       | 16,317                                 |       | 25,138                                 |       | 32,309                               |       | 52,539                               |       |
| Total revenues                      |       | $                                      | 248,804    |                                   | $          | 233,127                              |       | $                                    | 497,335    |   | $ | 467,472 |   |
| Operating income                    |       |                                   |       |                                   |       |                                 |       |                                 |       |
| Electronic travel distribution      |       | $                                      | 38,158     |                                   | $          | 21,068                               |       | $                                    | 74,691     |   | $ | 45,803 |   |
| Information technology services     |       | (7,045                                 | )          | 1,182                                  |       | (16,187                              | )          | 3,700                                |       |
| Total operating income              |       | $                                      | 31,113     |                                   | $          | 22,250                               |       | $                                    | 58,504     |   | $ | 49,503 |   |
| Depreciation and amortization       |       |                                   |       |                                   |       |                                 |       |                                 |       |
| Electronic travel distribution      |       | $                                      | 22,743     |                                   | $          | 12,665                               |       | $                                    | 43,226     |   | $ | 26,701 |   |
| Information technology services     |       | 3,278                                  |       | 2,511                                  |       | 7,858                                |       | 5,621                                |       |
| Total depreciation and amortization |       | $                                      | 26,021     |                                   | $          | 15,176                               |       | $                                    | 51,084     |   | $ | 32,322 |   |
| Geographic areas                    |       |                                   |       |                                   |       |                                 |       |                                 |       |
| Total revenues                      |       |                                   |       |                                   |       |                                 |       |                                 |       |
| United States                       |       | $                                      | 210,949    |                                   | $          | 204,401                              |       | $                                    | 424,156    |   | $ | 406,854 |   |
| Foreign                             |       | 37,855                                 |       | 28,726                                 |       | 73,179                               |       | 60,618                               |       |
| Total                               |       | $                                      | 248,804    |                                   | $          | 233,127                              |       | $                                    | 497,335    |   | $ | 467,472 |   |
| Long-lived assets                   |       |                                   |       |                                   |       |                                 |       |                                 |       |
| United States                       |       | $                                      | 902,970    |                                   | $          | 173,362                              |       | $                                    | 902,970    |   | $ | 173,362 |   |
| Foreign                             |       | 31,904                                 |       | 31,772                                 |       | 31,904                               |       | 31,772                               |       |
| Total                               |       | $                                      | 934,874    |                                   | $          | 205,134                              |       | $                                    | 934,874    |   | $ | 205,134 |   |

 

12

----

 

**8. Supplemental Guarantor/Non-Guarantor Financial Information**

 

Concurrent with the closing of theAcquisition discussed in Note 2, the Senior Notes became fully andunconditionally guaranteed on a senior unsecured basis by the domesticoperations and assets of the Partnership (referred to as “Worldspan,L.P.—Guarantor” in the accompanying financial information). Included inWorldspan, L.P.—Guarantor are Worldspan, L.P. and all of its wholly-owneddomestic subsidiaries including WS Financing Corp.  These domestic subsidiaries collectivelyrepresent less than one percent of the Partnership’s total assets, Partners’capital, total revenues, net income, and cash flows from operating activities.The guarantees of each of the legal entities comprised by Worldspan,L.P.—Guarantor are joint and several. The foreign subsidiaries (referred to as “Non-Guarantor Subsidiaries” inthe accompanying financial information) represent the foreign operations of thePartnership. WS Financing Corp., the co-issuer, was established June 6,2003.  WS Financing Corp. does not haveany substantial operations, assets or revenues. The following financialinformation presents condensed consolidating balance sheets, statements ofoperations and statements of cash flows for Worldspan, L.P.—Guarantor andNon-Guarantor Subsidiaries. The information has been presented as if Worldspan,L.P.—Guarantor accounted for its ownership of the Non-Guarantor Subsidiariesusing the equity method of accounting.

 

13

----

 

##### **Condensed ConsolidatingBalance Sheets**

**as of June 30, 2004**

**(Successor Basis)**

 
| ** **                                      | ** ** | **Worldspan, L.P.—  Guarantor** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Eliminating  Entries** | ** ** | **Worldspan  Consolidated** | ** ** |
|-------------------------------------------------|------------|--------------------------------------|------------|---------------------------------|------------|--------------------------|------------|-----------------------------|------------|
|                                            |       |                                 |       |                            |       |                     |       |                        |       |
| **Assets**                                      |       |                                 |       |                            |       |                     |       |                        |       |
| Current assets                                  |       |                                 |       |                            |       |                     |       |                        |       |
| Cash and cash equivalents                       |       | $                                    | 71,610     |                            | $          | 1,848                    |       | $                           | —     |   | $ | 73,458 |   |
| Trade accounts receivable, net                  |       | 125,622                              |       | 2,636                           |       | —                   |       | 128,258                     |       |
| Prepaid expenses and other current assets       |       | 11,542                               |       | 3,179                           |       | —                   |       | 14,721                      |       |
| Total current assets                            |       | 208,774                              |       | 7,663                           |       | —                   |       | 216,437                     |       |
| Property and equipment, net                     |       | 123,483                              |       | 6,633                           |       | —                   |       | 130,116                     |       |
| Deferred charges                                |       | 19,632                               |       | 16,831                          |       | —                   |       | 36,463                      |       |
| Debt issuance costs                             |       | 11,729                               |       | —                          |       | —                   |       | 11,729                      |       |
| Goodwill                                        |       | 116,048                              |       | —                          |       | —                   |       | 116,048                     |       |
| Other intangible assets, net                    |       | 612,885                              |       | —                          |       | —                   |       | 612,885                     |       |
| Investments                                     |       | 4,750                                |       | 1,313                           |       | —                   |       | 6,063                       |       |
| Investments in subsidiaries                     |       | 15,637                               |       | —                          |       | (15,637                  | )          | —                      |       |
| Other long-term assets                          |       | 14,443                               |       | 7,127                           |       | —                   |       | 21,570                      |       |
| Total assets                                    |       | $                                    | 1,127,381  |                            | $          | 39,567                   |       | $                           | (15,637    | ) | $ | 1,151,311 |   |
|                                            |       |                                 |       |                            |       |                     |       |                        |       |
| **Liabilities and Partners’ Capital**      |       |                                 |       |                            |       |                     |       |                        |       |
| Current liabilities                             |       |                                 |       |                            |       |                     |       |                        |       |
| Accounts payable                                |       | $                                    | 9,281      |                            | $          | 1,931                    |       | $                           | —     |   | $ | 11,212 |   |
| Intercompany accounts payable (receivable)      |       | 6,279                                |       | (6,279                          | )          | —                   |       | —                      |       |
| Accrued expenses                                |       | 146,712                              |       | 28,331                          |       | —                   |       | 175,043                     |       |
| Current portion of capital lease  obligations   |       | 19,471                               |       | —                          |       | —                   |       | 19,471                      |       |
| Current portion of long-term debt               |       | 10,364                               |       | —                          |       | —                   |       | 10,364                      |       |
| Total current liabilities                       |       | 192,107                              |       | 23,983                          |       | —                   |       | 216,090                     |       |
| Long-term portion of capital lease  obligations |       | 61,884                               |       | —                          |       | —                   |       | 61,884                      |       |
| Long-term debt                                  |       | 344,380                              |       | —                          |       | —                   |       | 344,380                     |       |
| Pension and postretirement benefits             |       | 65,155                               |       | (42                             | )          | —                   |       | 65,113                      |       |
| Other long-term liabilities                     |       | 11,700                               |       | (11                             | )          | —                   |       | 11,689                      |       |
| Total liabilities                               |       | 675,226                              |       | 23,930                          |       | —                   |       | 699,156                     |       |
| Commitments and contingencies                   |       |                                 |       |                            |       |                     |       |                        |       |
| Partners’ capital                          |       | 452,155                              |       | 15,637                          |       | (15,637                  | )          | 452,155                     |       |
| Total liabilities and Partners’ capital    |       | $                                    | 1,127,381  |                            | $          | 39,567                   |       | $                           | (15,637    | ) | $ | 1,151,311 |   |

 

14

----

 

**Condensed Consolidating Balance Sheets**

**as of December 31, 2003**

**(Successor Basis)**

 
| ** **                                      | ** ** | **Worldspan, L.P.—  Guarantor** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Eliminating  Entries** | ** ** | **Worldspan  Consolidated** | ** ** |
|-------------------------------------------------|------------|--------------------------------------|------------|---------------------------------|------------|--------------------------|------------|-----------------------------|------------|
|                                            |       |                                 |       |                            |       |                     |       |                        |       |
| **Assets**                                      |       |                                 |       |                            |       |                     |       |                        |       |
| Current assets                                  |       |                                 |       |                            |       |                     |       |                        |       |
| Cash and cash equivalents                       |       | $                                    | 41,615     |                            | $          | 2,131                    |       | $                           | —     |   | $ | 43,746 |   |
| Trade accounts receivable, net                  |       | 100,593                              |       | 2,529                           |       | —                   |       | 103,122                     |       |
| Prepaid expenses and other current assets       |       | 21,422                               |       | 2,207                           |       | —                   |       | 23,629                      |       |
| Total current assets                            |       | 163,630                              |       | 6,867                           |       | —                   |       | 170,497                     |       |
| Property and equipment, net                     |       | 113,321                              |       | 7,189                           |       | —                   |       | 120,510                     |       |
| Deferred charges                                |       | 17,472                               |       | 16,072                          |       | —                   |       | 33,544                      |       |
| Debt issuance costs, net                        |       | 13,626                               |       | —                          |       | —                   |       | 13,626                      |       |
| Goodwill                                        |       | 109,740                              |       | —                          |       | —                   |       | 109,740                     |       |
| Other intangible assets, net                    |       | 639,938                              |       | —                          |       | —                   |       | 639,938                     |       |
| Investments                                     |       | 5,064                                |       | 1,313                           |       | —                   |       | 6,377                       |       |
| Investments in subsidiaries                     |       | 7,845                                |       | —                          |       | (7,845                   | )          | —                      |       |
| Other long-term assets                          |       | 18,472                               |       | 6,791                           |       | —                   |       | 25,263                      |       |
| Total assets                                    |       | $                                    | 1,089,108  |                            | $          | 38,232                   |       | $                           | (7,845     | ) | $ | 1,119,495 |   |
|                                            |       |                                 |       |                            |       |                     |       |                        |       |
| **Liabilities and Partners’ Capital**      |       |                                 |       |                            |       |                     |       |                        |       |
| Current liabilities                             |       |                                 |       |                            |       |                     |       |                        |       |
| Accounts payable                                |       | $                                    | 16,933     |                            | $          | 2,742                    |       | $                           | —     |   | $ | 19,675 |   |
| Intercompany accounts payable (receivable)      |       | (1,226                               | )          | 1,226                           |       | —                   |       | —                      |       |
| Accrued expenses                                |       | 117,944                              |       | 26,471                          |       | —                   |       | 144,415                     |       |
| Current portion of capital lease  obligations   |       | 16,136                               |       | —                          |       | —                   |       | 16,136                      |       |
| Current portion of long-term debt               |       | 8,000                                |       | —                          |       | —                   |       | 8,000                       |       |
| Total current liabilities                       |       | 157,787                              |       | 30,439                          |       | —                   |       | 188,226                     |       |
| Long-term portion of capital lease  obligations |       | 55,002                               |       | —                          |       | —                   |       | 55,002                      |       |
| Long-term debt                                  |       | 385,000                              |       | —                          |       | —                   |       | 385,000                     |       |
| Pension and postretirement benefits             |       | 68,439                               |       | (34                             | )          | —                   |       | 68,405                      |       |
| Other long-term liabilities                     |       | 6,328                                |       | (18                             | )          | —                   |       | 6,310                       |       |
| Total liabilities                               |       | 672,556                              |       | 30,387                          |       | —                   |       | 702,943                     |       |
| Commitments and contingencies                   |       |                                 |       |                            |       |                     |       |                        |       |
| Partners’ capital                          |       | 416,552                              |       | 7,845                           |       | (7,845                   | )          | 416,552                     |       |
| Total liabilities and Partners’ capital    |       | $                                    | 1,089,108  |                            | $          | 38,232                   |       | $                           | (7,845     | ) | $ | 1,119,495 |   |

 

15

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**Condensed Consolidating Statements ofOperations**

**for the Three Months Ended June 30, 2004**

**(Successor Basis)**

 
| ** **                        | ** ** | **Worldspan, L.P.—  Guarantor** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Eliminating  Entries** | ** ** | **Worldspan  Consolidated** | ** ** |
|-----------------------------------|------------|--------------------------------------|------------|---------------------------------|------------|--------------------------|------------|-----------------------------|------------|
|                              |       |                                 |       |                            |       |                     |       |                        |       |
| Revenues                          |       | $                                    | 210,949    |                            | $          | 37,855                   |       | $                           | —     |   | $ | 248,804 |   |
| Operating expenses                |       | 185,031                              |       | 32,660                          |       | —                   |       | 217,691                     |       |
| Operating income                  |       | 25,918                               |       | 5,195                           |       | —                   |       | 31,113                      |       |
| Other income (expense)            |       |                                 |       |                            |       |                     |       |                        |       |
| Interest income                   |       | 83                                   |       | 3                               |       | —                   |       | 86                          |       |
| Interest expense                  |       | (10,046                              | )          | —                          |       | —                   |       | (10,046                     | )          |
| Equity in earnings of investee    |       | 107                                  |       | —                          |       | —                   |       | 107                         |       |
| Income from subsidiaries          |       | 5,471                                |       | —                          |       | (5,471                   | )          | —                      |       |
| Other, net                        |       | (20                                  | )          | 346                             |       | —                   |       | 326                         |       |
| Total other (expense) income, net |       | (4,405                               | )          | 349                             |       | (5,471                   | )          | (9,527                      | )          |
| Income before income taxes        |       | 21,513                               |       | 5,544                           |       | (5,471                   | )          | 21,586                      |       |
| Income tax expense                |       | —                               |       | 73                              |       | —                   |       | 73                          |       |
| Net income                        |       | $                                    | 21,513     |                            | $          | 5,471                    |       | $                           | (5,471     | ) | $ | 21,513 |   |

 

**Condensed Consolidating Statements ofOperations**

**for the Three Months Ended June 30, 2003**

**(Predecessor Basis)**

 
| ** **                        | ** ** | **Worldspan, L.P.—  Guarantor** | ** ** | **Non-Guarantor Subsidiaries** | ** ** | **Eliminating  Entries** | ** ** | **Worldspan  Consolidated** | ** ** |
|-----------------------------------|------------|--------------------------------------|------------|-------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
|                              |       |                                 |       |                                |       |                     |       |                        |       |
| Revenues                          |       | $                                    | 204,401    |                                | $          | 28,726                   |       | $                           | —     |   | $ | 233,127 |   |
| Operating expenses                |       | 177,672                              |       | 33,205                              |       | —                   |       | 210,877                     |       |
| Operating income (loss)           |       | 26,729                               |       | (4,479                              | )          | —                   |       | 22,250                      |       |
| Other income (expense)            |       |                                 |       |                                |       |                     |       |                        |       |
| Interest income                   |       | 133                                  |       | 17                                  |       | —                   |       | 150                         |       |
| Interest expense                  |       | (1,388                               | )          | —                              |       | —                   |       | (1,388                      | )          |
| Equity in earnings of investee    |       | 127                                  |       | —                              |       | —                   |       | 127                         |       |
| Loss from subsidiaries            |       | (4,116                               | )          | —                              |       | 4,116                    |       | —                      |       |
| Change-in-control expense         |       | (17,259                              | )          | —                              |       | —                   |       | (17,259                     | )          |
| Other, net                        |       | (1,114                               | )          | 433                                 |       | —                   |       | (681                        | )          |
| Total other (expense) income, net |       | (23,617                              | )          | 450                                 |       | 4,116                    |       | (19,051                     | )          |
| Income (loss) before income taxes |       | 3,112                                |       | (4,029                              | )          | 4,116                    |       | 3,199                       |       |
| Income tax expense                |       | —                               |       | 87                                  |       | —                   |       | 87                          |       |
| Net income (loss)                 |       | $                                    | 3,112      |                                | $          | (4,116                   | )          | $                           | 4,116      |   | $ | 3,112 |   |

 

16

----

 

**Condensed Consolidating Statements ofOperations**

**for the Six Months Ended June 30, 2004**

**(Successor Basis)**

 
| ** **                        | ** ** | **Worldspan, L.P.—  Guarantor** | ** ** | **Non-Guarantor Subsidiaries** | ** ** | **Eliminating  Entries** | ** ** | **Worldspan  Consolidated** | ** ** |
|-----------------------------------|------------|--------------------------------------|------------|-------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
|                              |       |                                 |       |                                |       |                     |       |                        |       |
| Revenues                          |       | $                                    | 424,156    |                                | $          | 73,179                   |       | $                           | —     |   | $ | 497,335 |   |
| Operating expenses                |       | 372,861                              |       | 65,970                              |       | —                   |       | 438,831                     |       |
| Operating income                  |       | 51,295                               |       | 7,209                               |       | —                   |       | 58,504                      |       |
| Other income (expense)            |       |                                 |       |                                |       |                     |       |                        |       |
| Interest income                   |       | 128                                  |       | 58                                  |       | —                   |       | 186                         |       |
| Interest expense                  |       | (20,840                              | )          | —                              |       | —                   |       | (20,840                     | )          |
| Equity in earnings of investee    |       | 57                                   |       | —                              |       | —                   |       | 57                          |       |
| Income from subsidiaries          |       | 7,050                                |       | —                              |       | (7,050                   | )          | —                      |       |
| Other, net                        |       | (27                                  | )          | 88                                  |       | —                   |       | 61                          |       |
| Total other (expense) income, net |       | (13,632                              | )          | 146                                 |       | (7,050                   | )          | (20,536                     | )          |
| Income before income taxes        |       | 37,663                               |       | 7,355                               |       | (7,050                   | )          | 37,968                      |       |
| Income tax (benefit) expense      |       | (3                                   | )          | 305                                 |       | —                   |       | 302                         |       |
| Net income                        |       | $                                    | 37,666     |                                | $          | 7,050                    |       | $                           | (7,050     | ) | $ | 37,666 |   |

 

**Condensed Consolidating Statements ofOperations**

**for the Six Months Ended June 30, 2003**

**(Predecessor Basis)**

 
| ** **                        | ** ** | **Worldspan, L.P.—  Guarantor** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Eliminating  Entries** | ** ** | **Worldspan  Consolidated** | ** ** |
|-----------------------------------|------------|--------------------------------------|------------|---------------------------------|------------|--------------------------|------------|-----------------------------|------------|
|                              |       |                                 |       |                            |       |                     |       |                        |       |
| Revenues                          |       | $                                    | 406,854    |                            | $          | 60,618                   |       | $                           | —     |   | $ | 467,472 |   |
| Operating expenses                |       | 351,447                              |       | 66,522                          |       | —                   |       | 417,969                     |       |
| Operating income (loss)           |       | 55,407                               |       | (5,904                          | )          | —                   |       | 49,503                      |       |
| Other income (expense)            |       |                                 |       |                            |       |                     |       |                        |       |
| Interest income                   |       | 360                                  |       | 41                              |       | —                   |       | 401                         |       |
| Interest expense                  |       | (2,756                               | )          | —                          |       | —                   |       | (2,756                      | )          |
| Equity in earnings of investee    |       | 130                                  |       | —                          |       | —                   |       | 130                         |       |
| Loss from subsidiaries            |       | (5,632                               | )          | —                          |       | 5,632                    |       | —                      |       |
| Change-in-control expense         |       | (17,259                              | )          | —                          |       | —                   |       | (17,259                     | )          |
| Other, net                        |       | (1,836                               | )          | 375                             |       | —                   |       | (1,461                      | )          |
| Total other (expense) income, net |       | (26,993                              | )          | 416                             |       | 5,632                    |       | (20,945                     | )          |
| Income (loss) before income taxes |       | 28,414                               |       | (5,488                          | )          | 5,632                    |       | 28,558                      |       |
| Income tax expense                |       | —                               |       | 144                             |       | —                   |       | 144                         |       |
| Net income (loss)                 |       | $                                    | 28,414     |                            | $          | (5,632                   | )          | $                           | 5,632      |   | $ | 28,414 |   |

 

17

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**Condensed Consolidating Statements of CashFlows**

**for the Six Months Ended June 30, 2004**

**(Successor Basis)**

 
| ** **                                            | ** ** | **Worldspan, L.P.—  Guarantor** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Eliminating  Entries** | ** ** | **Worldspan  Consolidated** | ** ** |
|-------------------------------------------------------|------------|--------------------------------------|------------|---------------------------------|------------|--------------------------|------------|-----------------------------|------------|
|                                                  |       |                                 |       |                            |       |                     |       |                        |       |
| Net cash provided by (used in) operating  activities  |       | $                                    | 96,753     |                            | $          | (6,341                   | )          | $                           | —     |   | $ | 90,412 |   |
| Cash flows from investing activities:                 |       |                                 |       |                            |       |                     |       |                        |       |
| Purchase of property and equipment                    |       | (5,614                               | )          | (1,745                          | )          | —                   |       | (7,359                      | )          |
| Proceeds from sale of property and equipment          |       | 82                                   |       | 10                              |       | —                   |       | 92                          |       |
| Capitalized software for internal use                 |       | (744                                 | )          | —                          |       | —                   |       | (744                        | )          |
| Investments in subsidiaries                           |       | (7,793                               | )          | —                          |       | 7,793                    |       | —                      |       |
| Net cash used in investing activities                 |       | (14,069                              | )          | (1,735                          | )          | 7,793                    |       | (8,011                      | )          |
| Cash flows from financing activities:                 |       |                                 |       |                            |       |                     |       |                        |       |
| Distribution to WTI                                   |       | (3,464                               | )          | —                          |       | —                   |       | (3,464                      | )          |
| Principal payments on capital leases                  |       | (10,969                              | )          | —                          |       | —                   |       | (10,969                     | )          |
| Principal payments on debt                            |       | (38,256                              | )          | —                          |       | —                   |       | (38,256                     | )          |
| Contributions to subsidiaries                         |       | —                               |       | 7,793                           |       | (7,793                   | )          | —                      |       |
| Net cash (used in) provided by financing  activities  |       | (52,689                              | )          | 7,793                           |       | (7,793                   | )          | (52,689                     | )          |
| Net increase (decrease) in cash and cash  equivalents |       | 29,995                               |       | (283                            | )          | —                   |       | 29,712                      |       |
| Cash and cash equivalents at beginning of  year       |       | 41,615                               |       | 2,131                           |       | —                   |       | 43,746                      |       |
| Cash and cash equivalents at end of year              |       | $                                    | 71,610     |                            | $          | 1,848                    |       | $                           | —     |   | $ | 73,458 |   |

 

**Condensed Consolidating Statements of CashFlows**

**for the Six Months Ended June 30, 2003**

**(Predecessor Basis)**

 
| ** **                                           | ** ** | **Worldspan, L.P.—  Guarantor** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Eliminating  Entries** | ** ** | **Worldspan  Consolidated** | ** ** |
|------------------------------------------------------|------------|--------------------------------------|------------|---------------------------------|------------|--------------------------|------------|-----------------------------|------------|
|                                                 |       |                                 |       |                            |       |                     |       |                        |       |
| Net cash provided by (used in) operating  activities |       | $                                    | 44,815     |                            | $          | (3,792                   | )          | $                           | —     |   | $ | 41,023 |   |
| Cash flows from investing activities:                |       |                                 |       |                            |       |                     |       |                        |       |
| Purchase of property and equipment                   |       | (2,102                               | )          | (2,134                          | )          | —                   |       | (4,236                      | )          |
| Proceeds from sale of property and  equipment        |       | 396                                  |       | —                          |       | —                   |       | 396                         |       |
| Capitalized software for internal use                |       | (1,367                               | )          | —                          |       | —                   |       | (1,367                      | )          |
| Investments in subsidiaries                          |       | (55                                  | )          | —                          |       | 55                       |       | —                      |       |
| Net cash used in investing activities                |       | (3,128                               | )          | (2,134                          | )          | 55                       |       | (5,207                      | )          |
| Cash flows from financing activities:                |       |                                 |       |                            |       |                     |       |                        |       |
| Distribution to founding airlines                    |       | (110,000                             | )          | —                          |       | —                   |       | (110,000                    | )          |
| Principal payments on capital leases                 |       | (13,986                              | )          | —                          |       | —                   |       | (13,986                     | )          |
| Contributions to subsidiaries                        |       | —                               |       | 55                              |       | (55                      | )          | —                      |       |
| Net cash (used in) provided by financing  activities |       | (123,986                             | )          | 55                              |       | (55                      | )          | (123,986                    | )          |
| Net decrease in cash and cash equivalents            |       | (82,299                              | )          | (5,871                          | )          | —                   |       | (88,170                     | )          |
| Cash and cash equivalents at beginning of  period    |       | 125,140                              |       | 6,961                           |       | —                   |       | 132,101                     |       |
| Cash and cash equivalents at end of period           |       | $                                    | 42,841     |                            | $          | 1,090                    |       | $                           | —     |   | $ | 43,931 |   |

 

18

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** **

**ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

*Management’s discussion and analysis of ourresults of operations includes periods prior to the consummation of theAcquisition. Accordingly, the discussion and analysis of historical periodsprior to July 1, 2003 does not reflect the significant impact that theAcquisition has had and will have on us, including increased leverage andincreased liquidity requirements. References to “WTI” refer to WorldspanTechnologies Inc.  References to the“company” refer to Worldspan, L.P. The terms “we”, “us”, “our” and other similarterms refer to the consolidated businesses of the company and all of itssubsidiaries. References to the “Acquisition” refer to the acquisition by WTI,through its wholly-owned subsidiaries, of the general partnership interests andlimited partnership interest of Worldspan, L.P. The following discussion andanalysis of the financial condition and results of operations should be read inconjunction with the consolidated financial statements and related notesincluded in our annual report on Form 10-K filed with the Securities andExchange Commission on March 30, 2004.*

 

*In accordance with the requirements ofpurchase accounting, the assets and liabilities of the Company were adjusted totheir estimated fair values and the resulting goodwill computed for theAcquisition.  The application of purchaseaccounting generally results in higher depreciation and amortization expense inperiods following an acquisition. Accordingly, and because of other effects of purchase accounting, theresults discussed for the three and six months ended June 30, 2004 are notcomparable with the three and six months ended June 30, 2003.*

 

**Overview**

 

Weare a provider of mission-critical transaction processing and informationtechnology services to the global travel industry. Globally, we are the largesttransaction processor for online travel agencies, having processed 64% of allglobal distribution system, or GDS, online air transactions during the twelvemonths ended June 30, 2004. In the United States (the world’s largest travelmarket), we are the second largest transaction processor for travel agencies,accounting for 31% of GDS air transactions and over 67% of online GDS airtransactions processed during the twelve months ended June 30, 2004. We providesubscribers (including traditional travel agencies, online travel agencies andcorporate travel departments) with real-time access to schedule, price,availability and other travel information and the ability to processreservations and issue tickets for the products and services of approximately800 travel suppliers (such as airlines, hotels, car rental companies, tourcompanies and cruise lines) throughout the world. During the twelve monthsended June 30, 2004, we processed approximately 201 million transactions.We also provide information technology services to the travel industry,primarily airline internal reservation systems, flight operations technologyand software development.

 

Ourbusiness is highly dependent upon the air travel industry. During the firsthalf of 2003, travel booking volumes were significantly depressed industrywide, affected primarily by the war and on-going conflict in Iraq and concernsover severe acute respiratory syndrome, or SARS. Our leading position inprocessing online travel transactions provided for growth in our businessduring the second half of 2003. The recovery that we saw in travel transactionsbeginning late in the second quarter of 2003 continued during the later part ofthe year, particularly for our online business. Our relationships with four ofthe largest online travel agencies in the world have positioned us well to takeadvantage of the continuing shift to the online travel agency channel, where wehave a higher market share. In addition, airlines have responded to thedifficult operating conditions by offering lower prices on tickets distributedthrough direct and online channels, resulting in an increase in airline traveltransactions generated through online travel agencies relative to traditionaltravel agencies. We believe our strong position in the online travel agencychannel has allowed us to increase our airline transactions market share,despite the decrease in the number of total transactions since the beginning of2001. Total transactions for the six months ended June 30, 2004,including airline and hospitality and destination services, were up 8.4%compared to the same period in 2003.

 

Asa result of the market conditions and industry pressures described above, wetook steps to reduce our operating expenses. For example, effectiveDecember 31, 2003, we froze all further benefit accruals under our definedbenefit pension plan. In addition, we restructured our medical benefits in thefirst quarter of 2004 by increasing employee contributions and co-pays,implementing charges for working spouses, consolidating and changing providers,and eliminating medical benefits for future retirees, except for a limitedgrandfathered group of employees. We anticipate that these changes to ouremployee benefits will result in cost savings in 2004. During the first quarterof 2004, we also

 

19

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renegotiatedour network and communication contracts with our primary providers. Weanticipate that these new agreements will result in reduced telecommunicationcharges during 2004. We have also recently renegotiated our technologyagreement with IBM and our headquarters office lease, which we expect to reduceour costs, as well. Each of these steps has started to generate cost savingswhich are expected to continue in future years; however, the actual amount ofour ongoing expenses may ultimately be impacted by future changes in healthcareand technology costs and usage, which we are unable to predict.

 

We depend upon a relatively small number of airlines and online travelagencies for a significant portion of our revenues. Our five largest airlinerelationships represented an aggregate of approximately 52% and 54% of ourtotal revenues for the twelve months ended June 30, 2004 and December 31,2003, respectively, while our top ten largest airline relationships representedan aggregate of approximately 64% and 66% of our total revenues for the twelvemonths ended June 30, 2004 and December 31, 2003, respectively. Ourrelationships with four online travel agencies, Expedia, Hotwire, Orbitz and Priceline,represented 45% of our total transactions during the twelve months ended June30, 2004. We expect to continue to depend upon a relatively small number ofairlines and online travel agencies for a significant portion of our revenues.

 

*Supplier Content and Transaction Fees*

 

Duringthe five-year period ending December 31, 2003, we increased thetransaction fees we collect from our airline suppliers, which pay a substantialportion of our transaction fees. We anticipate that this historic trend of annualtransaction fee increases could be reduced in the future due to our plan toenter into fare content agreements with major airlines. For instance, we haverecently entered into fare content agreements with Continental Airlines, Delta,Northwest, United Air Lines and US Airways. Generally, in these agreements, theairlines commit (subject to the exceptions contained in the agreements) toprovide the traditional and online travel agencies covered by the agreements inthe territories covered by the agreements with substantially the same farecontent it provides to the travel agency subscribers of other GDSs (includingweb fares) in exchange for payments from us to each airline and subject to uskeeping steady the average transaction fees paid by each airline for travelagency transactions in the territories covered by the agreements. In addition,pursuant to these agreements, each airline has agreed, among other things, tocommit to the highest level of participation in our GDS. Subject to terminationrights, these obligations continue until late 2005 (in the case of US Airways)or 2006 (with respect to the other contracted airlines). Further, inFebruary 2004, we executed a three-year fare content agreement withBritish Airways to provide access to virtually all of their published fares(including web fares) to some of our U.K. travel agencies. We expect that thesefare content agreements will provide our travel agencies in the territoriescovered by the agreements with access to improved content concerning theflights and fares of the participating airlines and other forms ofnon-discriminatory treatment. We believe that obtaining similar fare contentfrom our other major airline travel suppliers is important to our ability tocompete, since other GDSs have also entered into fare content agreements withvarious airlines. Consequently, we plan to pursue agreements similar to thesefare content agreements with other major airlines in order to obtain access tosuch content. We expect that the fare content agreements will require us tomake, in the aggregate, significant payments or other concessions to theparticipating airlines which we expect will reduce our revenues.

 

*Channel Shift*

 

Anincreasing number of travel transactions are being made online. During the twelvemonths ended June 30, 2004, airline transactions generated through onlinetravel agencies accounted for approximately 29% of all airline transactions inthe United States processed by a GDS, up from approximately 28% in 2003,approximately 23% in 2002 and approximately 17% in 2001. Between 2001 and 2003,the number of airline transactions in the United States generated throughonline travel agencies and processed by us increased at a compound annualgrowth rate of 24.3%. We believe that this shift to online travel agencybookings will continue, but the extent and pace of the shift is difficult toanticipate. Other industry developments, such as Expedia’s announcement that itintends to move a portion of its transactions to another GDS provider, compoundour difficulty in forecasting the growth of our transactions from online travelagencies. We typically pay a higher inducement per transaction to our largeonline travel agency customers than our traditional agencies. Accordingly, aswe continue to experience significant channel shift, we expect our inducementscost to continue to grow and direct costs related to supporting traditionaltravel agencies to continue to decline.

 

20

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Since2001, the combination of channel shift, declines in the global economy,terrorist actions and threats, wars in Afghanistan and Iraq, and healthconcerns over SARS has resulted in annual declines in transactions generated bytraditional travel agencies. As a result of these declines, we have completedrestructuring activities in 2001, 2002, 2003, and 2004 which have largely beenfocused on reducing the operating costs associated with servicing traditionaltravel agencies in areas such as labor, network, agency hardware, and advertising.

 

*Uncertainty in Transaction Volumes fromOnline Travel Agencies*

 

Although we havehistorically processed most of the airline transactions for our online travelagencies, these agencies may move a portion of their business to othertechnologies and technology providers, subject to some contractual limitations.For example, Expedia has announced that it intends to move a portion of itstransactions to another GDS provider. In connection with the Acquisition, werecorded an intangible asset related to online customer contracts of$131.9 million, of which we estimate $35.2 million was related to theExpedia contract. Based on that estimate, the portion of this intangible assetthat was unamortized as of June 30, 2004 was $30.8 million. Upondetermination of the specific volumes, percentage of volumes or timing relatingto Expedia’s announced agreement with Sabre, we will further assess the impact,if any, on our overall financial condition as prescribed by SFAS No. 144,“Accounting for the Impairment or Disposal of Long-Lived Assets”, and SFASNo. 142, “Goodwill and Other Intangible Assets”. In addition, Orbitz hasdeveloped direct connections with travel suppliers which bypass our GDS.

 

Although we currentlycontinue to operate under these agreements, it is uncertain as to whether ornot these and our other major online travel agencies will attempt to terminatetheir respective agreements with us or otherwise move business to another GDSin the future. With this uncertainty, we cannot reliably forecast the volume ofsuch transactions and may experience transaction volume decreases that resultin a material adverse effect on our financial condition and operating results.

 

*Neutrality*

 

Wedo not own an online travel agency. Unlike our competitors, we have intentionallynot pursued a strategy of vertical integration and instead have forgedstrategic partnerships with leading online travel agencies. Given the highlycompetitive nature of the travel agency business, we believe our customersvalue our neutrality. As the shift towards the online travel agency channelcontinues, we believe the traditional travel agencies will increasingly viewthe GDS-owned online travel agencies as competitive to their core business. Asa result, our neutrality gives us an opportunity to capture additional businessfrom both online and traditional travel agencies.

 

*FASA Credits*

 

Pursuant to the terms of ourfounder airline services agreements, or FASAs, we provide FASA credits to Deltaand Northwest to be applied against FASA service fee payments due from theseairlines to us. The FASA credits are structured and will be applied throughJune 2012 in scheduled monthly installments up to an aggregate total ofapproximately $108.3 million to each of Delta and Northwest as of June 30,2004, and are reflected as reductions of FASA revenue in the correspondingperiods. In the event that the monthly FASA credits deliverable by us to Deltaor Northwest are more than the FASA service fee payments due from theapplicable airline, then we will be obligated to pay such excess to suchairline in cash. In connection with a proposed initial public offering by WTIof shares of its common stock, we recently entered into amendments of our FASAswith Delta and Northwest to provide that the FASA credits will terminate uponthe closing of an initial public offering of WTI’s common stock with grossproceeds above $200 million on or before September 30, 2004, inexchange for a one-time payment from us to each of Delta and Northwest ofapproximately $77 million. The one-time payments would be capitalized andamortized as a reduction of FASA revenue in the corresponding periods. On June29, 2004, WTI announced that it had elected to postpone the previouslyannounced offering.  The FASA credits aredescribed in additional detail under the heading “Liquidity and CapitalResources.”

 

21

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*Impacts of the Acquisition*

 

Wewere initially founded by Delta, Northwest and TWA. Although we were owned byDelta, Northwest and American (as successor of TWA) since our inception untilthe Acquisition, we operated as an autonomous entity during that time. Theexpenses reflected in our historical financial statements do not reflect anyallocation of overhead costs incurred by our founding airlines. For the periodsfollowing the Acquisition, our expenses changed as a result of the purchaseaccounting treatment of the Acquisition and the costs associated with financingthe Acquisition. Under the rules of purchase accounting, we adjusted the valueof our assets and liabilities to their respective estimated fair values, andany excess of the purchase price over the fair market value of the net assetsacquired was allocated to goodwill. As a result of these adjustments to ourasset basis, our depreciation and amortization expenses increased. In addition,for the periods following the Acquisition, our revenues have been affected bythe accounting treatment of our obligation to provide FASA credits and makeFASA credit payments under the FASAs with Delta and Northwest. These paymentsare accounted for as a reduction to our gross information technology servicesrevenues.

 

**Business Segment Summary**

 

Ourrevenues are primarily derived from transaction fees paid by our travelsuppliers for electronic travel distribution services, and to a lesser extent,other transaction and subscription fees from our information technologyservices operations:

 

•                  Electronic travel distribution revenues are generated by charging a feeper transaction, which is generally paid by the travel supplier, based upon thenumber of transactions involved in the booking. We record and charge onetransaction for each segment of an air travel itinerary (e.g., fourtransactions for a round-trip airline ticket with one connection each way). Werecord and charge one transaction for each car rental, hotel, cruise or tourcompany booking, regardless of the length of time associated with the booking.Fees paid by travel suppliers vary according to the levels of functionality atwhich they can participate in our GDS. These levels of functionality generallydepend upon the type of communications and real-time access allowed withrespect to the particular travel supplier’s internal systems. Revenues arebased on the volume of transactions and are not dependent on the revenue earnedby the supplier for that booking. We recognize revenue for airline traveltransactions in the month the transactions are processed, net of cancellationsprocessed in that month. Revenues for other types of travel transactions arerecognized at the time the booking is used by the traveler. Although thesubstantial majority of our electronic travel distribution revenues are derivedfrom transaction fees paid by travel suppliers, we have an agreement withHotwire which does not follow this traditional business model. Under ouragreement with Hotwire, we generally derive revenues from a service fee payableby Hotwire (rather than the travel supplier) based upon the number of traveltransactions booked.

 

## •                  Information technology services revenues are generatedby charging a fee for hosting travel supplier inventory, reservations, flightoperations and other computer applications within our data center and byproviding software development and maintenance services on those applications.Fees paid by travel suppliers are generally based upon the volume of messagesprocessed on behalf of the travel supplier or software development hoursperformed on the travel supplier’s applications. In some cases, we charge feesfor access to and usage of certain of our proprietary applications on a pertransaction basis. Revenues for information technology services are recognizedin the month that the services are provided and are recorded net of the valueof the FASA credits earned by Delta and Northwest in the corresponding month.

##  

## Our costs and expensesconsist of the cost of electronic travel distribution and informationtechnology services revenues, selling, general and administrative expenses anddepreciation and amortization:

##  

## •                  Cost of electronic travel distribution revenuesconsists primarily of inducements paid to travel agencies, technologydevelopment and operations personnel, software costs, network costs, hardwareleases, maintenance of computer and network hardware, the data center building,help desk and other travel agency support headcount. As our transactions fromonline travel agencies increase as a percent of our total transactions, weincur additional inducement and technology costs due to the average inducementpaid to our large on-line customers typically exceeding the average inducementthat we pay to traditional travel agencies 

 

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## and due to a higher volume of messages processed pertransaction in the online channel compared to traditional travel agencytransactions. Cost of information technology services revenues consistsprimarily of technology development and operations personnel, software costs,network costs, hardware leases, depreciation of computer hardware and the datacenter building, amortization of capitalized software and maintenance ofcomputer and network hardware.

##  

## •                  Selling, general and administrative expenses consistprimarily of sales and marketing, labor and associated costs, advertisingservices, professional fees, a portion of the expenses associated with ourfacilities, depreciation of computer equipment, furniture and fixtures andleasehold improvements, internal management costs and expenses for finance,legal, human resources and other administrative functions.

##  

**Critical Accounting Policies**

 

Therehave been no material changes to our critical accounting policies from theinformation provided in Item 7. Management’s Discussion and Analysis ofFinancial Condition and Results of Operations included in our annual report onForm 10-K filed with the Securities and Exchange Commission on March 30, 2004.

 

**Results of Operations**

 

The following table shows information derived from our consolidatedstatements of operations for the three and six months ended June 30, 2004 and2003 expressed as a percentage of revenue for the periods presented.

 
| ** **                                                    | ** ** | **Successor Basis**                    | ** ** | **Predecessor Basis**                  | ** ** | **Successor Basis**                  | ** ** | **Predecessor Basis**                | ** ** |
|---------------------------------------------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|--------------------------------------|------------|--------------------------------------|------------|
| ** **                                                    | ** ** | **Three months  ended  June 30, 2004** | ** ** | **Three months  ended  June 30, 2003** | ** ** | **Six months  ended  June 30, 2004** | ** ** | **Six months  ended  June 30, 2003** | ** ** |
|                                                          |       |                                   |       |                                   |       |                                 |       |                                 |       |
| Revenues:                                                     |       |                                   |       |                                   |       |                                 |       |                                 |       |
| Electronic travel distribution                                |       | 93.4                                   | %          | 89.2                                   | %          | 93.5                                 | %          | 88.8                                 | %          |
| Information technology services                               |       | 6.6                                    |       | 10.8                                   |       | 6.5                                  |       | 11.2                                 |       |
| Total revenues                                                |       | 100.0                                  |       | 100.0                                  |       | 100.0                                |       | 100.0                                |       |
| Operating expenses:                                           |       |                                   |       |                                   |       |                                 |       |                                 |       |
| Cost of revenues excluding  developed technology amortization |       | 69.7                                   |       | 73.6                                   |       | 69.1                                 |       | 71.5                                 |       |
| Developed technology  amortization                            |       | 2.2                                    |       | 1.5                                    |       | 2.2                                  |       | 1.6                                  |       |
| Total cost of revenues                                        |       | 71.9                                   |       | 75.1                                   |       | 71.3                                 |       | 73.1                                 |       |
| Selling, general and administrative  expenses                 |       | 11.9                                   |       | 15.4                                   |       | 13.2                                 |       | 16.3                                 |       |
| Amortization of intangible  assets                            |       | 3.7                                    |       | —                                 |       | 3.7                                  |       | —                               |       |
| Total operating expenses                                      |       | 87.5                                   |       | 90.5                                   |       | 88.2                                 |       | 89.4                                 |       |
| Operating income                                              |       | 12.5                                   |       | 9.5                                    |       | 11.8                                 |       | 10.6                                 |       |
| Total other expense, net                                      |       | (3.8                                   | )          | (8.2                                   | )          | (4.1                                 | )          | (4.5                                 | )          |
| Income before provision for  income taxes                     |       | 8.7                                    |       | 1.3                                    |       | 7.7                                  |       | 6.1                                  |       |
| Income tax expense                                            |       | —                                 |       | —                                 |       | 0.1                                  |       | —                               |       |
| Net income                                                    |       | 8.7                                    | %          | 1.3                                    | %          | 7.6                                  | %          | 6.1                                  | %          |

 

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***Comparison of Three MonthsEnded June 30, 2004 and June 30, 2003***

 

*Revenues*

 

Total revenues were $248.8 million for the three months ended June 30,2004, a $15.7 million or 6.7% increase from the three months ended June 30,2003 revenues of $233.1 million. This increase was primarily attributable tohigher average fees per transaction and an increase in the volume oftransactions processed during the second quarter of 2004 when compared to thesame period in the prior year.

 

Electronic travel distribution revenues were $232.5 million for thethree months ended June 30, 2004, a $24.5 million or 11.8% increase from thethree months ended June 30, 2003 revenues of $208.0 million. The increase inrevenues was largely attributable to a 4.8% higher average fee per transactioncoupled with a 1.7 million or 3.9% increase in transactions generated from airtravel suppliers during the period. The increase was also attributable to a3.0% higher average fee per transaction coupled with a 0.6 million or 12.4%increase in the volume of car and hotel transactions processed.

 

Information technology services revenues were $16.3 million for thethree months ended June 30, 2004, an $8.8 million or 35.1% decrease from thethree months ended June 30, 2003 revenues of $25.1 million. The decrease wasprimarily driven by $8.3 million of FASA credits, which are provided under theterms of the FASAs, and a reduction in certain operating expenses which arepassed through to customers on a cost-plus basis.

 

*Cost of Revenues Excluding Developed Technology Amortization*

 

Cost of revenues excluding developed technology amortization was $173.4million for the three months ended June 30, 2004, a $1.8 million increase fromthe three months ended June 30, 2003 cost of revenues of $171.6 million. Costof revenues excluding developed technology amortization as a percentage oftotal revenues decreased to 69.7% for the three months ended June 30, 2004compared to 73.6% for the three months ended June 30, 2003.  This decrease was primarily driven by loweremployee costs, network costs, software expenses and depreciation on hardwareprovided to traditional travel agencies, partially offset by higher inducementspaid to travel agencies.

 

Cost of electronic travel distribution revenues excluding developedtechnology amortization was $151.9 million for the three months ended June 30,2004, a $3.0 million or 2.0% increase from the three months ended June 30, 2003cost of electronic travel distribution revenues excluding developed technologyamortization of $148.9 million. Cost of electronic travel distribution revenuesexcluding developed technology amortization as a percentage of total revenuesdecreased to 61.1% for the three months ended June 30, 2004 compared to 63.9%for the three months ended June 30, 2003. This decrease was primarily driven bya 20.7% decline in employee costs, a 27.7% reduction in network andcommunication charges, a 36.3% decrease in software costs and a 12.5% reductionin depreciation, principally on hardware provided to traditional travelagencies, which was partially offset by a 26.1% increase in inducements paid totravel agencies. Employee costs declined as a result of the April 2003workforce reductions.  In addition, aspart of a cost savings initiative, we reduced the salaries of U.S. and Canada employeesby 5%, which was effective May 1, 2003. We also froze all further benefitaccruals under the defined benefit pension plan effective December 31, 2003,which reduced the pension benefits net periodic costs during the three monthsended June 30, 2004. Network costs decreased due to migration of customers toInternet-based products rather than dedicated circuits. In addition, during thefirst quarter of 2004, we renegotiated our network and communication contractswith our primary providers. Software expenses decreased as a result of our exercisingour right to terminate agreements with two technology providers, for whichthere was no corresponding charge during the three months ended June 30,2004.  Depreciation on hardware providedto traditional travel agencies decreased during the period due to the decreasein capital expenditures for this type of hardware. As traditional travelagencies purchase their own equipment, our need to continue this capitalexpenditure decreases.  Inducements grewdue to the growth in transaction volumes and the continuing shift toward onlinetravel agency transactions, which tend to have higher inducement costs thantraditional travel agency transactions.

 

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Cost of information technology servicesrevenues excluding developed technology amortization was $21.5 million or 8.7%of total revenues for the three months ended June 30, 2004, a $1.2 million or5.3% decrease from the three months ended June 30, 2003 cost of informationtechnology revenues excluding developed technology amortization of $22.7million or 9.7% of total revenues. This decrease was primarily driven by thereduced costs attributable to the hosting operations for Delta and Northwest.

 

*Developed Technology Amortization*

 

Developed technology amortization was $5.5 million or 2.2% of totalrevenues for the three months ended June 30, 2004, a $2.1 million or 62.1%increase from the three months ended June 30, 2003 developed technologyamortization of $3.4 million or 1.5% of total revenues. This increase was aresult of the Acquisition. Purchase accounting requires intangible assets to berecorded at their fair value and amortized over their estimated useful lives.

 

*Selling, General and Administrative Expenses*

 

Selling, general and administrative expenses were $29.6 million or11.9% of total revenues for the three months ended June 30, 2004, a $6.3million or 17.5% decrease from the three months ended June 30, 2003 selling,general and administrative expenses of $35.9 million or 15.4% of totalrevenues. The decrease was primarily driven by a restructuring charge of $4.6million recorded during the three months ended June 30, 2003, for which therewas no corresponding charge during the three months ended June 30, 2004.  The 2003 workforce reduction, which affectedapproximately 200 employees, was a result of decreased travel, and relatedbooking volumes, caused by several factors including the war in Iraq, concernsover SARS and the weakened economy.  The$4.6 million charge included $4.0 million for the electronic traveldistribution segment and $0.6 million for the information technology servicessegment.  The annual labor costsrepresented by the employees terminated in the 2003 workforce reduction wasapproximately $11.1 million.  We expectthat the 2003 workforce reduction will decrease our labor costs in the future,although other factors, including any future expansion of our workforce, willalso impact our ongoing labor costs.

 

*Amortization of Intangible Assets*

 

Amortization of intangible assets was $9.1 million or 3.7% of totalrevenues for the three months ended June 30, 2004, a $9.1 million increase fromthe three months ended June 30, 2003. This increase was a result of theAcquisition. Purchase accounting requires intangible assets to be recorded at theirfair value and amortized over their estimated useful lives.

 

*Operating Income*

 

Operating income was $31.1 million for thethree months ended June 30, 2004, an $8.8 million or 39.8% increase from thethree months ended June 30, 2003 operating income of $22.3 million. Operatingincome as a percentage of total revenues increased to 12.6% for the threemonths ended June 30, 2004 compared to 9.5% in the three months ended June 30,2003. The increase in operating income primarily resulted from an 11.0% increasein electronic travel distribution revenues, a 20.7% decrease in employee costs,a 27.7% decrease in network costs and a 36.3% decrease in software costs,partially offset by a 26.1% increase in inducements paid to travel agencies andincreased amortization of the fair value of amortizing intangible assets as aresult of the Acquisition.

 

*Net Interest Expense*

 

Net interest expense was $10.0 million for the three months ended June30, 2004, a $8.8 million increase from the three months ended June 30, 2003 netinterest expense of $1.2 million. This increase in net interest expense wasprimarily due to the interest expense associated with the debt issued inconnection with the Acquisition.

 

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*Income Tax Expense*

 

Income tax expense attributable to foreign jurisdictions was $0.1million for the three months ended June 30, 2004, consistent with the threemonths ended June 30, 2003 income tax expense of $0.1 million. As a limitedpartnership, we have historically not been subject to federal and state incometaxes in the United States.

 

*Net Income*

 

Net income was $21.5 million for the three months ended June 30, 2004,an $18.4 million increase from the three months ended June 30, 2003 net incomeof $3.1 million. This increase was primarily as a result of a $8.9 millionincrease in operating income and a $17.3 million change-in-control expenserecorded during the three months ended June 30, 2003, for which there was nocorresponding charge during the three months ended June 30, 2004.  These amounts were partially offset by an$8.8 million increase in net interest expense associated with the debt issuedin connection with the Acquisition.

 

***Comparison of Six Months EndedJune 30, 2004 and June 30, 2003***

 

*Revenues*

 

Total revenues were $497.3 million for the six months ended June 30,2004, a $29.8 million or 6.4% increase from the six months ended June 30, 2003revenues of $467.5 million. This increase was primarily attributable to higheraverage fees per transaction and an increase in the volume of transactionsprocessed during the first six months of 2004 when compared to the same periodin the prior year.

 

Electronic travel distribution revenues were $465.0 million for the sixmonths ended June 30, 2004, a $50.1 million or 12.1% increase from the sixmonths ended June 30, 2003 revenues of $414.9 million. The increase in revenueswas largely attributable to a 4.3% higher average fee per transaction coupledwith a 6.3 million or 7.1% increase in transactions generated from air travelsuppliers during the period. The increase was also attributable to a 2.8%higher average fee per transaction coupled with a 1.0 million or 11.1% increasein the volume of car and hotel transactions processed.

 

Information technology services revenues were $32.3 million for the sixmonths ended June 30, 2004, a $20.2 million or 38.5% decrease from the sixmonths ended June 30, 2003 revenues of $52.5 million. The decrease wasprimarily driven by $16.7 million of FASA credits, which are provided under theterms of the FASAs, and a reduction in certain operating expenses which arepassed through to customers on a cost-plus basis.

 

*Cost of Revenues Excluding Developed Technology Amortization*

 

Cost of revenues excluding developed technology amortization was $343.8million for the six months ended June 30, 2004, a $9.3 million increase fromthe six months ended June 30, 2003 cost of revenues excluding developedtechnology amortization of $334.5 million. Cost of revenues excluding developedtechnology amortization as a percentage of total revenues decreased to 69.1%for the six months ended June 30, 2004 compared to 71.5% for the six monthsended June 30, 2003.  This decrease wasprimarily driven by lower employee costs, network costs, software expenses anddepreciation on hardware provided to traditional travel agencies, partiallyoffset by higher inducements paid to travel agencies.

 

Cost of electronic travel distribution revenues excluding developedtechnology amortization was $300.8 million for the six months ended June 30,2004, a $12.7 million or 4.4% increase from the six months ended June 30, 2003cost of electronic travel distribution revenues excluding developed technologyamortization of $288.1 million. Cost of electronic travel distribution revenuesexcluding developed technology amortization as a percentage of total revenuesdecreased to 60.5% for the six months ended June 30, 2004 compared to 61.6% forthe six months ended June 30, 2003. This decrease was primarily driven by a21.5% decline in employee costs, a 23.6% reduction in network and communicationcharges, a 22.6% decrease in software costs and a 22.8% reduction indepreciation, principally on hardware provided to traditional travel agencies,which was partially offset by a 27.8% increase in inducements paid to

 

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travel agencies. Employee costs declined as a result of the April 2003workforce reductions.  In addition, aspart of a cost savings initiative, we reduced the salaries of U.S. and Canadaemployees by 5%, which was effective May 1, 2003. We also froze all furtherbenefit accruals under the defined benefit pension plan effective December 31,2003, which reduced the pension benefits net periodic costs during the sixmonths ended June 30, 2004. Network costs decreased due to migration ofcustomers to Internet-based products rather than dedicated circuits. Inaddition, during the first quarter of 2004, we renegotiated our network andcommunication contracts with our primary providers. Software expenses decreasedas a result of our exercising our right to terminate agreements with twotechnology providers, for which there was no corresponding charge during thesix months ended June 30, 2004.  Depreciationon hardware provided to traditional travel agencies decreased during the perioddue to the decrease in capital expenditures for this type of hardware. Astraditional travel agencies purchase their own equipment, our need to continuethis capital expenditure decreases. Inducements grew due to the growth in transaction volumes and thecontinuing shift toward online travel agency transactions, which tend to havehigher inducement costs than traditional travel agency transactions.

 

Cost of information technology services revenues excluding developedtechnology amortization was $43.0 million or 8.7% of total revenues for the sixmonths ended June 30, 2004, a $3.4 million or 7.3% decrease from the six monthsended June 30, 2003 cost of information technology revenues excluding developedtechnology amortization of $46.4 million or 9.9% of total revenues. Thisdecrease was primarily driven by the reduced costs attributable to the hostingoperations for Delta and Northwest.

 

*Developed Technology Amortization*

 

Developed technology amortization was $11.0 million or 2.2% of totalrevenues for the six months ended June 30, 2004, a $3.6 million or 48.6%increase from the six months ended June 30, 2003 developed technologyamortization of $7.4 million or 1.6% of total revenues. This increase was aresult of the Acquisition. Purchase accounting requires intangible assets to berecorded at their fair value and amortized over their estimated useful lives.

 

 *Selling,General and Administrative Expenses*

 

Selling, general and administrative expenses were $65.8 million or13.2% of total revenues for the six months ended June 30, 2004, a $10.3 millionor 13.5% decrease from the six months ended June 30, 2003 selling, general andadministrative expenses of $76.1 million or 16.3% of total revenues. Thedecrease was driven by a 73.2% reduction in advertising and promotionalactivities and a restructuring charge of $4.6 million recorded during the sixmonths ended June 30, 2003, an increase of $3.3 million from the restructuringcharge of $1.3 recorded during the six months ended June 30, 2004.  The 2003 workforce reduction, which affectedapproximately 200 employees, was a result of decreased travel, and relatedbooking volumes, caused by several factors including the war in Iraq, concernsover SARS and the weakened economy.  The$4.6 million charge included $4.0 million for the electronic traveldistribution segment and $0.6 million for the information technology servicessegment.  The annual labor costsrepresented by the employees terminated in the 2003 workforce reduction wasapproximately $11.1 million.  We expectthat the 2003 workforce reduction will decrease our labor costs in the future,although other factors, including any future expansion of our workforce, willalso impact our ongoing labor costs.

 

*Amortization of Intangible Assets*

 

Amortization of intangible assets was $18.3 million or 3.7% of totalrevenues for the six months ended June 30, 2004, a $18.3 million increase fromthe six months ended June 30, 2003. This increase was a result of theAcquisition. Purchase accounting requires intangible assets to be recorded attheir fair value and amortized over their estimated useful lives.

 

*Operating Income*

 

Operating income was $58.5 million for thesix months ended June 30, 2004, a $9.0 million or 18.2% increase from the sixmonths ended June 30, 2003 operating income of $49.5 million. Operating incomeas a percentage of total revenues increased to 11.8% for the six months endedJune 30, 2004 compared to 10.6% in the six months ended June 30, 2003. Theincrease in operating income primarily resulted from an 11.7% increase inelectronic travel distribution

 

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revenues, a 21.5% decrease in employee costs,a 23.6% decrease in network costs and a 22.6% decrease in software costs,partially offset by a 27.8% increase in inducements paid to travel agencies andincreased amortization of the fair value of amortizing intangible assets as aresult of the Acquisition.

 

*Net Interest Expense*

 

Net interest expense was $20.7 million for the six months ended June30, 2004, an $18.3 million increase from the six months ended June 30, 2003 netinterest expense of $2.4 million. This increase in net interest expense wasprimarily due to the interest expense associated with the debt issued inconnection with the Acquisition.

 

*Income Tax Expense*

 

Income tax expense attributable to foreign jurisdictions was $0.3million for the six months ended June 30, 2004, a $0.2 million increase fromthe six months ended June 30, 2003 income tax expense of $0.1 million. As alimited partnership, we have historically not been subject to federal and stateincome taxes in the United States.

 

*Net Income*

 

Net income was $37.7 million for the six months ended June 30, 2004, a$9.3 million increase from the six months ended June 30, 2003 net income of$28.4 million. This increase was primarily as a result of a $9.0 millionincrease in operating income and a $17.3 million change-in-control expenserecorded during the six months ended June 30, 2003, for which there was nocorresponding charge during the six months ended June 30, 2004.  These amounts were partially offset by an$18.3 million increase in net interest expense associated with the debt issuedin connection with the Acquisition.

 

**Liquidity and Capital Resources**

 

Our principal source of liquidity will be cash flow generated fromoperations and borrowings under our senior credit facility. Our principal usesof cash will be to meet debt service requirements, finance our capitalexpenditures, make any FASA credit payments and provide working capital. Basedon our current level of operations, we believe that our cash flow fromoperations, available cash and available borrowings under our senior creditfacility will be adequate to meet our future liquidity needs for at least thenext 12 months, although no assurance can be given. Our future operatingperformance and ability to extend or refinance our indebtedness will bedependent on future economic conditions and financial, business and otherfactors that are beyond our control. We have historically generated significantcash flow from operations.  During thefourth quarter of 2003 and the first half of 2004, we used this cash flow toprepay an aggregate of $45.0 million of our term loan in addition to the mandatoryrepayment schedule.

 

At June 30, 2004, we had cash and cash equivalents of $73.5 million andworking capital of $0.3 million as compared to $43.9 million in cash and cashequivalents and working capital of ($20.1) million at June 30, 2003. The $20.4million increase in working capital and the $29.6 million increase in cash wereprimarily the result of increases in net income.

 

Historically, we have funded our operations through internallygenerated cash. We generated cash from operating activities of $90.4 millionand $41.0 million for the six months ended June 30, 2004 and 2003,respectively. The $49.4 million increase in cash provided by operatingactivities during the first six months of 2004 as compared to the first sixmonths of 2003 primarily resulted from a $9.3 million increase in net income, a$18.4 million increase for changes in operating assets and liabilities and anincrease in non-cash charges of $21.8 million.

 

We used cash for investing activities of approximately $8.0 million and$5.2 million in the six months ended June 30, 2004 and 2003, respectively. Theincrease in cash used for investing activities during the first six months of2004 as compared to the first six months of 2003 primarily resulted fromincreased purchases of computer hardware.

 

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We used cash for financing activities ofapproximately $52.7 million and $124.0 million in the six months ended June 30,2004 and 2003, respectively. The decrease in cash used for financing activitiesduring the first six months of 2004 as compared to the first six months of 2003primarily resulted from a $110.0 million decrease in distributions to ourfounding airlines, partially offset by $38.3 million of payments associatedwith the senior credit facility.

 

*Senior Credit Facility*

 

In June 2003, we entered into a senior credit facility with a syndicateof financial institutions as lenders. The senior credit facility provides foraggregate borrowings by us of up to $175.0 million, consisting of:

 

•                                          afour-year revolving credit facility of up to $50.0 million in revolving creditloans and letters of credit which is available until June 30, 2007, and

 

•                                          afour-year term loan facility of $125.0 million which matures on June 30, 2007.

 

We borrowed $125.0 million under the term loan facility in connectionwith the Acquisition. The revolving credit facility is available for workingcapital and general corporate needs.

 

Obligations under the senior credit facility and the guarantees aresecured by:

 

•                                          aperfected first priority security interest in all of our tangible andintangible assets and all of the tangible and intangible assets of WTI and eachof its direct and indirect domestic subsidiaries and certain foreignsubsidiaries, subject to customary exceptions, and

 

•                                          apledge of (i) all of the membership interests of WS Holdings LLC owned by WTI,(ii) all of our partnership interests owned by WTI and WS Holdings LLC, (iii)all of the capital stock of our domestic subsidiaries and some of our foreignsubsidiaries and (iv) 65% of the capital stock of other of our first-tierforeign subsidiaries.

 

Borrowings under the senior credit facility bear interest at a rateequal to, at our option:

 

•                                          abase rate generally defined as the sum of (i) the higher of (x) the prime rate(as quoted on the British Banking Association Telerate Page 5) and (y) thefederal funds effective rate, plus one half percent (0.50%) per annum) and (ii)an applicable margin, or

 

•                                          aLIBOR rate generally defined as the sum of (i) the rate at which euro depositsfor one, two, three or six months (as selected by us) are offered in theinterbank euro market as set forth on page 3750 of the Dow Jones TelerateScreen and (ii) an applicable margin.

 

The initial applicable margin for the base rate revolving loans is2.75% and the applicable margin for the euro revolving loans is 3.75%. Theapplicable margin for the loans is subject to reduction based upon the ratio ofour consolidated total bank debt to consolidated EBITDA. We are also required topay a commitment fee of 0.50% per annum on the difference between committedamounts and amounts actually utilized under the revolving credit facility. Feesfor letters of credit are based on the face amount of each letter of creditoutstanding under the senior credit facility multiplied by to the applicablemargin for LIBOR borrowings under the revolving credit facility and are payablequarterly in arrears. In addition, we must pay each letter of credit bank afronting fee to be determined based upon the face amount of all outstandingletters of credit issued by it.

 

Total cash principal and interest paymentsrelated to the $125.0 million borrowed under the term loan facility portion ofour senior credit facility were $11.3 million and $1.5 million, respectively,for the three months ended June 30, 2004. The remaining principal paymentschedules will require payments over a four-year period for the term loan,totaling to the following principal payments: $2.5 million in 2004, $15.7million in 2005, $15.7 million in 2006 and $40.8 million in 2007.

 

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The senior credit facility requires us tomeet financial tests, including without limitation, a minimum fixed chargecoverage ratio, a minimum interest coverage ratio, a maximum senior securedleverage ratio and a maximum total leverage ratio. The minimum fixed chargeratio will be 1.00 to 1.00 until the end of the second quarter of 2005 and willbe 1.10 to 1.00 thereafter. The minimum interest coverage ratio will be 2.15 to1.00 until the end of the second quarter of 2005 and will increase to 3.00 to1.00 by the end of the term of the senior credit facility. The maximum seniorsecured leverage ratio will be 1.65 to 1.00 through the second quarter of 2004and will decrease to 1.00 to 1.00 by the end of the term of the senior creditfacility. The maximum total leverage ratio will be 3.85 to 1.00 until the endof the second quarter of 2004 and will decrease to 2.75 to 1.00 by the end ofthe term of the senior credit facility. In addition, the senior credit facilitycontains customary covenants which, among other things, limit the incurrence ofadditional indebtedness, investments, dividends, transactions with affiliates,asset sales, acquisitions, capital expenditures, mergers and consolidations,prepayments of other indebtedness, liens and encumbrances and other matterscustomarily restricted in a senior credit facility. As of June 30, 2004, wewere in compliance with these covenants.

 

*9  5/8% Senior NotesDue 2011*

 

On June 30, 2003, we issued $280.0 million aggregate principal amountof 95/8% Senior Notes Due 2011 (“Senior Notes”). Interest on thenotes accrues at 95/8% per annum.

 

We cannot redeem the notes before June 15, 2007 except that, until June15, 2006, we can choose to redeem up to an aggregate of 35% of the originalprincipal amount of the notes, or $98.0 million, at a redemption price of109.625% of the principal amount of the notes we redeem with funds raised incertain equity offerings.

 

The notes are unsecured senior obligations, are equal in right ofpayment to all of our existing and future unsecured senior debt, and are seniorin right of payment to all of our future subordinated debt. The notes areguaranteed by each subsidiary guarantor (as defined in the indenture governingthe notes).

 

If we experience a change of control (as defined in the indenturegoverning the notes), each holder of notes may require us to repurchase all orany portion of the holder’s notes at a purchase price equal to 101% of theprincipal amount plus accrued and unpaid interest to the date of purchase.

 

The indenture governing the notes contains certain covenants that,among other things, limit (i) the incurrence of additional debt by us andcertain of our subsidiaries, (ii) the payment of dividends and the purchase,redemption or retirement of capital stock or subordinated indebtedness, (iii)investments, (iv) certain transactions with affiliates, (v) sales of assets,including capital stock of subsidiaries and (vi) certain consolidations,mergers and transfers of assets. As of June 30, 2004, we were in compliancewith these covenants. The indenture also prohibits certain restrictions ondistributions from certain subsidiaries.

 

Depending on capital market conditions, we may elect to repurchase ouroutstanding Senior Notes in open market purchases or otherwise.

 

*Capital Lease Obligations*

 

We lease equipment and software under capital lease obligations.  As of June 30, 2004, our obligations undercapital leases totaled $81.4 million. The interest rate used in computing the present value of the minimumlease payments ranges from approximately 4.0% to 12.0% depending on the assetbeing leased.

 

*Subordinated Notes*

 

As part of the Acquisition, WTI issued to American and Delta subordinatedseller notes in the original principal amounts of $39.0 million and $45.0million, respectively. The subordinated seller notes mature on July 31, 2012;provided that to the extent that any portion of the subordinated seller notesare not prepaid by WTI by June 30, 2011, a 5% premium will be payable by WTI onthe outstanding principal amount and accrued and unpaid interest thereon whichis prepaid or repaid following June 30, 2011 at the time of such prepayment orrepayment. The subordinated seller notes are unsecured obligations of WTI, arenot our debt obligations and are contractually and structurally subordinated toour

 

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senior notes and our senior credit facility and structurallysubordinated to all of our other debt. The subordinated seller note originallyissued to American bears interest at an annual rate equal to 12.0% and thesubordinated seller note originally issued to Delta bears interest at an annualrate equal to 10.0%. So long as we are not in default under, and are incompliance with all financial covenants of, our senior credit facility, theindenture governing our senior notes and other permitted senior debt andcontinue to maintain a fixed charge coverage ratio (as defined in the indenture)of 2.25x or better, WTI will pay interest equal to 5% of the then outstandingprincipal amount of the subordinated seller notes in cash, with the remaininginterest payable in cash or in kind at WTI’s option. During a default under oursenior credit facility, the indenture governing our senior notes and/or otherpermitted senior debt, WTI will be permitted to pay all interest on thesubordinated seller notes in kind. While the subordinated seller notes are notour debt obligations, so long as we are not in default under, and are incompliance with all financial covenants of, our senior credit facility and theindenture governing our senior notes and continue to maintain a fixed chargecoverage ratio (as defined in the indenture) of 2.25x or better, we will bepermitted to distribute funds to WTI sufficient to pay the 5% cash interestcomponent of the subordinated seller notes. During the six months ended June30, 2004, we distributed $2.2 million to WTI for this purpose.

 

*FASAs*

 

Pursuant to the terms of the FASAs, we provide FASA credits to Deltaand Northwest to be applied against FASA service fee payments due from theseairlines to us. The FASA credits are structured and will be applied throughJune 2012 in an amount up to an aggregate total of approximately $108.3 millionto each of Delta and Northwest as of June 30, 2004, and are reflected asreductions to our FASA revenues in the corresponding periods. The FASA creditsare provided to Delta and Northwest in monthly installments, with an annualamount of $16.7 million scheduled to be provided to each of these foundingairlines during the first six years of the respective FASA term, an annualamount of $9.2 million scheduled to be provided to each of these foundingairlines during the seventh and eighth years of the respective FASA term and anannual amount of $6.7 million scheduled to be provided to each of thesefounding airlines during the ninth year of the respective FASA term. In theevent that the monthly FASA credits deliverable by us to Delta or Northwest aremore than the FASA service fee payments due from the applicable airline, thenwe will be obligated to pay such excess to such airline in cash. In connectionwith a proposed initial public offering by WTI of shares of its common stock,we recently entered into amendments of our FASAs with Delta and Northwest toprovide that the FASA credits will terminate upon the closing of an initialpublic offering of WTI’s common stock with gross proceeds above$200 million on or before September 30, 2004, in exchange for aone-time payment from us to each of Delta and Northwest of approximately$77 million. The one-time payments would be capitalized and amortized as areduction of FASA revenue in the corresponding periods. On June 29,2004, WTI announced that it had elected to postpone the previously announcedoffering.

 

Delta or Northwest may terminate its FASA due to a failure by us tosatisfy the mainframe processing time, system availability or criticalproduction data performance standards under that agreement (which representperformance standards which we have historically met under our predecessorservices agreements with Delta and Northwest). Furthermore, such a terminationby Delta or Northwest of its FASA will constitute an event of default under oursenior credit facility and may constitute a default under any other of ourfuture senior credit facilities. In the event that the event of default iswaived by the applicable lenders under our senior credit facilities (as definedin the subordination agreement executed by the founding airlines) or our seniorcredit facilities are no longer outstanding, then any remaining FASA creditsdeliverable by us to the terminating airline will not be provided according tothe initial eight-year schedule specified above and will instead be payable incash to such airline as and when, and only to the extent that, we are permittedto make such payments as “Restricted Payments” under the restricted paymentcovenant test contained in the indenture governing our senior notes. If a FASAis otherwise terminated in accordance with its terms prior to the expiration ofits term, such as a termination by either Delta or Northwest without cause, oris rejected by Delta or Northwest in bankruptcy, then the obligation to providethe remaining FASA credits or to make the remaining FASA credit payments thendeliverable or payable to the airline under the applicable FASA will terminate.Our obligations to provide FASA credits or to make the FASA credit paymentswill not terminate if either or both of Delta and Northwest reduce or ceaseoperations in a way that reduces or eliminates the amount of airline serviceseither founding airline obtains under the FASAs, although an airline’s failureto comply with its software development minimum and exclusivity obligationswould constitute a breach of its agreement. If we terminate a FASA other thanas expressly permitted by the agreement, then we will be obligated to providethe scheduled FASA credits to the applicable airline by way of a monthly

 

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cash payment rather than applying the FASA credits against FASA servicefee payments due from the airline. In the event that the monthly FASA creditsdeliverable by us to Delta or Northwest are more than the FASA service feepayments due from the applicable airline, then we will be obligated to pay suchexcess to such airline in cash. In the event of our bankruptcy or insolvency,holders of our senior debt (as defined in the subordination agreement executedby the founding airlines), including the senior notes, will be entitled toreceive payment in full in cash before we may make any FASA credit payments incash. In that event, Delta and Northwest will, however, retain their rights toapply the scheduled FASA credit payments against their obligations to pay usfees for our services under the FASAs. In the event that we wrongfullyterminate a FASA, we will remain obligated to deliver the FASA credits to theapplicable airline by paying the credit amounts to the applicable airline incash on a monthly basis according to the eight-and-a-half-year scheduledescribed above. However, if we reject a FASA in a bankruptcy of the company,our FASA credit payment obligations to the applicable airline will match theobligations described above in a termination of a FASA by such airline due toour failure to satisfy performance standards. Any FASA credit paymentobligations by us to an airline in such a bankruptcy will be subordinated toour senior debt (as defined in the subordination agreement executed by thefounding airlines), including the senior notes.

 

*Taxes*

 

Because we are a limited partnership, our partners will owe taxes onall of the income that we generate in the United States. We expect that WTIwill cause us to make distributions to it from time to time sufficient to coverall income taxes owed by WTI. Under the terms of our senior credit facility andthe indenture governing our senior notes, we are specifically permitted to makethese tax distributions.

 

**Capital Expenditures**

 

Capital expenditures for property andequipment, including both purchased assets and assets acquired under capitalleases, as well as capitalized software, totaled $29.3 million for the sixmonths ended June 30, 2004, an increase of $8.0 million from capitalexpenditures of $22.8 million for the six months ended June 30, 2003. We haveforecasted approximately $54.5 million for capital expenditures in 2004. Ofthat amount, approximately $19.5 million relates to a significant upgrade of mainframecomputer equipment at our data center. The upgraded equipment is expected to bein use through June 2008. The remaining $35.0 million represents normal growthin capacity requirements as well as routine replacement of older equipment.

 

**Contractual Obligations**

 

In March 2004, we entered into an agreement to purchase data networkservices for our U.S. and Canadian offices and travel agency customers thatexpires in 2007. In addition, the agreement includes voice services for ourU.S. and Canadian offices. The minimum commitment over the term of theagreement is $30.0 million

 

**Off-Balance Sheet Arrangements**

 

At June 30, 2004 and December 31, 2003, we did not have anyrelationships with unconsolidated entities or financial partnerships, such asentities often referred to as structured finance or special purpose entities,which would have been established for the purpose of facilitating off-balancesheet arrangements or other contractually narrow or limited purposes. We are,therefore, not materially exposed to any financing, liquidity, market or creditrisk that could arise if we had engaged in such relationships.

 

**Effect of Inflation**

 

Inflation generally affects us by increasing our costs of labor,equipment and new materials. We do not believe that inflation has had anymaterial effect on our results of operations during the six months ended June30, 2004 and 2003.

 

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**Forward-Looking Statements**

 

Statements in this report and the exhibits hereto which are not purelyhistorical facts, including statements about forecasted financial projectionsor other statements about anticipations, beliefs, expectations, hopes,intentions or strategies for the future, may be forward-looking statementswithin the meaning of Section 27A of the Securities Act of 1933, as amended,and Section 21E of the Securities Exchange Act of 1934, as amended. Readers arecautioned not to place undue reliance on forward-looking statements. Allforward-looking statements are based upon information available to us on thedate this report was submitted. We undertake no obligation to publicly updateor revise any forward-looking statements, whether as a result of newinformation, future events or otherwise. Any forward-looking statements involverisks and uncertainties that could cause actual events or results to differmaterially from the events or results described in the forward-lookingstatements, including, but not limited to, risks or uncertainties related to:the computer reservation system rules of the Department of Transportation; ourrevenues being highly dependent on the travel and transportation industries;airlines limiting their participation in travel marketing and distributionservices; or other changes within the travel industry. We may not succeed inaddressing these and other risks.

 

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**ITEM 3.  QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

 

Market risk represents the risk of changes in value of a financialinstrument, derivative or non-derivative, caused by fluctuations in interestrates, foreign exchange rates and equity prices. Changes in these factors couldcause fluctuations in the results of our operations and cash flows. In theordinary course of business, we are exposed to foreign currency and interestrate risks. These risks primarily relate to the sale of products and servicesto foreign customers and changes in interest rates on our long-term debt.

 

**Foreign Exchange Rate Market Risk**

 

We consider the U.S. dollar to be the functional currency for all ofour entities. Substantially all of our net sales and the majority of ourexpenses during the six months ended June 30, 2004 and 2003 were denominated inU.S. dollars. Therefore, foreign currency fluctuations did not materiallyimpact our financial results in those periods. We have foreign currencyexposure arising from the translation of our foreign subsidiaries’ financialstatements into U.S. dollars. The primary currencies to which we are exposed tofluctuations include the euro and the British pound sterling. The fair value ofour net foreign investments would not be materially affected by a 10% adversechange in foreign currency exchange rates from June 30, 2004 levels.

 

**Interest Rate Market Risk**

 

Our senior credit facility is variable rate debt. Interest rate changestherefore generally do not affect the market value of such debt but do impactthe amount of our interest payments and, therefore, our future earnings andcash flows, assuming other factors are held constant. As of June 30, 2004, wehad variable rate debt of approximately $74.7 million. Holding other variablesconstant, including levels of indebtedness, a one hundred basis point increasein interest rates on our variable debt would have had an estimated impact onpre-tax earnings and cash flows for the next year of approximately $0.7million. Under the terms of our senior credit facility, we are required to haveat least 50% of our total indebtedness subject to either a fixed interest rateor interest rate protection for a period of not less than three years.

 

**ITEM 4.  CONTROLS AND PROCEDURES**

 

As of the end of the period covered by this report, we conducted anevaluation, under the supervision and with the participation of the principalexecutive officer (“CEO”) and principal financial officer (“CFO”), of theeffectiveness of the design and operation of our disclosure controls andprocedures (as defined in Rules 13a-15(e) and 15d-15(e) under the SecuritiesExchange Act of 1934 (the “Exchange Act”)). Based on this evaluation, the CEOand CFO concluded that our disclosure controls and procedures are effective toprovide reasonable assurance that information required to be disclosed by us inreports that it files or submits under the Exchange Act is recorded, processed,summarized and reported within the time periods specified in Securities andExchange Commission rules and forms. There was no change in our internalcontrol over financial reporting during our most recently completed fiscalquarter that has materially affected, or is reasonably likely to materiallyaffect, our internal control over financial reporting.

 

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**PART II. OTHER INFORMATION**

 

**ITEM1.  LEGALPROCEEDINGS**

 

As describedin our Quarterly Report on Form 10-Q for the quarter ended March 31, 2004, wehave received assessments totaling €39.5 million from the tax authorities ofGreece and are in the process of filing appeals.  There have been no material changes to thismatter since our last periodic report.

 

We are involved in various other litigation proceedings as bothplaintiff and defendant. In the opinion of our management, none of these otherlitigation matters, individually or in the aggregate, if determined adverselyto us, would have a material adverse effect on our business, financialcondition or results of operations.

 

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

 

On June 28,2004, WTI filed an amendment to its certificate of incorporation to effect areverse stock split of each of WTI’s classes of common stock at a ratio of 1 toapproximately 2.80.

 

**ITEM 5. OTHER INFORMATION**

 

Recently, WTI filed a registration statement with the Securities andExchange Commission relating to a proposed initial public offering of shares ofits common stock. WTI indicated in that registration statement that it intendedfor us to use a portion of the proceeds of the offering to exercise our rightunder the indenture to redeem up to 35% of the aggregate principal amount ofthe Senior Notes. WTI also indicated in that registration statement that itintended to use a portion of the proceeds of the offering to redeem thesubordinated seller notes and to prepay and terminate the FASA credits payableto Delta and Northwest. On June 29, 2004, WTI announced that it had elected topostpone the proposed offering.

 

We have filed a registration statement on Form S-1 to register theresale from time to time by an affiliate of CVC of up to $30,000,000 aggregateprincipal amount of our 9-5/8% Senior Notes due 2011. Under the terms ofa registration rights agreement that we, WS Financing Corp. and our subsidiaryguarantors entered into with the initial purchasers of our Senior Notes, wewere obligated to prepare a registration statement on Form S-1 to register theresale from time to time by an affiliate of CVC of up to $30,000,000 aggregateprincipal amount of our 9-5/8% Senior Notes due 2011. On August 6, 2004, thisregistration statement was declared effective by the Securities and ExchangeCommission.  We will not receive any ofthe proceeds from the sale of our Senior Notes by the CVC affiliate.

 

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**ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K**

 

***Exhibits:***

 
| 10.79 |   | Amendment, dated as of May 12, 2004, to Employment Agreement among  Worldspan Technologies Inc., Rakesh Gangwal and Worldspan, L.P. (1)                            |
|-------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.80 |   | Amendment, dated as of May 12, 2004, to Employment Agreement among  Worldspan Technologies Inc., M. Gregory O’Hara and Worldspan, L.P. (1)                    |
| 10.81 |   | Amendment No. 1 to Restricted Stock Subscription Agreement, dated as  of June 21, 2004, by and between Worldspan Technologies Inc. and Rakesh  Gangwal (1)         |
| 10.82 |   | Amendment No. 1 to Restricted Stock Subscription Agreement, dated as  of June 21, 2004, by and between Worldspan Technologies Inc. and M. Gregory  O’Hara (1) |
| 31.1  |   | Certification of the Principal Executive Officer pursuant to Section  302 of the Sarbanes-Oxley Act of 2002.                                                       |
| 31.2  |   | Certification of the Principal Financial Officer pursuant to Section  302 of the Sarbanes-Oxley Act of 2002.                                                       |
| 32.1  |   | Certifications pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                          |

 

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(1)          Filed as a like numbered exhibit to ourRegistration Statement on Form S-1 (File No. 333-115732) and incorporated hereinby reference.

 

***Reports on Form 8-K:***

 

Form 8-K filed April 6, 2004 pursuant to Item 5 in connection with ourentry, on March 31, 2004, into Amendment 9 to the CRS Marketing, Services andDevelopment Agreement, dated as of March 11, 2004, among the Company andExpedia Inc.

 

Form 8-K filed May 14, 2004 pursuant to Item 12 in connection with ourpress release on May 13, 2004 regarding the Company’s financial results for thequarter ended March 31, 2004.

 

Form 8-K filed May 17, 2004 pursuant to Item 12 in connection with ourpress release on May 17, 2004 regarding a conference call the Company will beholding to discuss its financial results for the quarter ended March 31, 2004.

 

Form 8-K filed June 10, 2004 pursuant to Item 5 in connection with theCompany’s voluntary prepayment, made on June 10, 2004, of $10,000,000 on theterm loan portion of its senior credit facility.

 

Form 8-K filed June 30, 2004 pursuant to Item 5 in connection with theannouncement on June 29, 2004 of Worldspan Technologies Inc. (“WTI”), theparent of Worldspan, L.P., that WTI had elected to postpone the previouslyannounced public offering of its common stock.

 

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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 theundersigned thereunto duly authorized.

 

 
|                        | WORLDSPAN, L.P. |
|-----------------------------|-----------------|
|                        |            |   |
|                        |            |   |
|   August 10, 2004 |            |   | /s/ Rakesh Gangwal |   |
| DATE                        | By:             | Rakesh Gangwal  Chairman, President & Chief Executive  Officer and Director  (principal executive officer) |
|                        |            |   |
|                        |            |   |
|   August 10, 2004 |            |   | /s/ Michael S. Wood |   |
| DATE                        | By:             | Michael S. Wood  Senior Vice President and  Chief Financial Officer  (principal financial and accounting officer) |

 

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