** **

**UNITED STATESSECURITIES 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 thequarterly period ended March 31, 2006**

** **

**OR**

** **
| **o** | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|------------|-----------------------------------------------------------------------------------------------|

 

**For thetransition 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          |       | (I.R.S. Employer  Identification No.) |
| incorporation or  organization)           |       |                                  |
|                                      |       |                                  |
| **300 Galleria Parkway, N.W.**            | ** ** | ** **                            |
| **Atlanta, Georgia**                      | ** ** | **30339**                             |
| (Address of principal  executive offices) |       | (Zip Code)                            |

 

Registrant’stelephone number, including area code **(770) 563-7400**

 

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

 

ý            Yes         o            No

 

Indicate by checkmark whether the Registrant is a large accelerated filer, an accelerated filer,or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

 
| Large accelerated filer | o | Accelerated Filer | o | Non-accelerated filer | ý |   |
|-------------------------|---|-------------------|---|-----------------------|--------|--------|

 

Indicate by check mark whether the Registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act). Yes  o   No  ý

 

As ofMay 12, 2006, Registrant’s parent had outstanding 83,257,698 shares of Class ACommon Stock and 11,000,000 shares of Class B Common Stock.

 

** **

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** **

**WORLDSPAN, L.P.**

**REPORT ON FORM 10-Q**

**FOR THE PERIOD ENDED MARCH 31, 2006**

 

**INDEX**

** **
| **PART I:**  | **FINANCIAL INFORMATION**                                                                                             | ** ** |
|--------------|-----------------------------------------------------------------------------------------------------------------------|------------|
| ** **   | ** **                                                                                                            | ** ** |
| **Item  1.** | **Condensed  Consolidated Financial Statements (Unaudited)**                                                          | ** ** |
| ** **   | ** **                                                                                                            | ** ** |
| ** **   | **Condensed Consolidated  Balance Sheets – March 31, 2006 and December 31, 2005**                                | ** ** |
| ** **   | ** **                                                                                                            | ** ** |
| ** **   | **Condensed Consolidated  Statements of Operations – Three months ended March 31, 2006 and March 31,  2005**     | ** ** |
| ** **   | ** **                                                                                                            | ** ** |
| ** **   | **Condensed Consolidated  Statements of Changes in Partners’ Capital – Three months ended March 31,  2006** | ** ** |
| ** **   | ** **                                                                                                            | ** ** |
| ** **   | **Condensed Consolidated  Statements of Cash Flows – Three months ended March 31, 2006 and March 31,  2005**     | ** ** |
| ** **   | ** **                                                                                                            | ** ** |
| ** **   | **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 Proceedings**                                                                                                 | ** ** |
| ** **   | ** **                                                                                                            | ** ** |
| **Item 1A.** | **Risk Factors**                                                                                                      | ** ** |
| ** **   | ** **                                                                                                            | ** ** |
| **Item 2.**  | **Unregistered  Sales of Equity Securities and Use of Proceeds**                                                      | ** ** |
| ** **   | ** **                                                                                                            | ** ** |
| **Item  6.** | **Exhibits**                                                                                                          | ** ** |

 

2

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**PART I.  FINANCIAL INFORMATION**

 

**ITEM1.  FINANCIAL STATEMENTS**

 

**Worldspan,L.P.**

**CondensedConsolidated Balance Sheets**

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

 
| ** **                                      | ** ** | **March 31, 2006** | ** ** | **December 31, 2005** | ** ** |
|-------------------------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| **Assets**                                      | ** ** | ** **                   | ** ** | ** **                      | ** ** |
| Current assets                                  |       |                         |       |                            |       |
| Cash and cash equivalents                       |       | $                            | 70,211     |                            | $          | 58,093 |   |
| Trade accounts receivable, net                  |       | 118,490                      |       | 97,984                          |       |
| Prepaid expenses and other current assets       |       | 15,479                       |       | 16,992                          |       |
| Total current assets                            |       | 204,180                      |       | 173,069                         |       |
| Property and equipment, net                     |       | 83,893                       |       | 91,283                          |       |
| Deferred charges                                |       | 27,180                       |       | 24,392                          |       |
| Debt issuance costs, net                        |       | 13,596                       |       | 14,626                          |       |
| Supplier and agency relationships, net          |       | 226,780                      |       | 236,981                         |       |
| Developed technology, net                       |       | 177,834                      |       | 183,254                         |       |
| Trade name                                      |       | 72,142                       |       | 72,142                          |       |
| Goodwill                                        |       | 111,803                      |       | 111,803                         |       |
| Other intangible assets, net                    |       | 28,404                       |       | 29,106                          |       |
| Other long-term assets                          |       | 54,230                       |       | 52,194                          |       |
| Total assets                                    |       | $                            | 1,000,042  |                            | $          | 988,850 |   |
|                                            |       |                         |       |                            |       |
| **Liabilities and Partners’ Capital**      | ** ** | ** **                   | ** ** | ** **                      | ** ** |
| Current liabilities                             |       |                         |       |                            |       |
| Accounts payable                                |       | $                            | 19,482     |                            | $          | 16,847 |   |
| Accrued expenses                                |       | 158,942                      |       | 144,738                         |       |
| Current portion of capital lease  obligations   |       | 16,389                       |       | 17,863                          |       |
| Current portion of long-term debt               |       | 4,000                        |       | 4,000                           |       |
| Total current liabilities                       |       | 198,813                      |       | 183,448                         |       |
| Long-term portion of capital lease  obligations |       | 33,757                       |       | 36,555                          |       |
| Long-term debt                                  |       | 627,500                      |       | 667,500                         |       |
| Pension and postretirement benefits             |       | 58,883                       |       | 60,238                          |       |
| Other long-term liabilities                     |       | 10,030                       |       | 9,510                           |       |
| Total liabilities                               |       | 928,983                      |       | 957,341                         |       |
| Commitments and contingencies                   |       |                         |       |                            |       |
| Partners’ capital                          |       | 71,059                       |       | 31,509                          |       |
| Total liabilities and Partners’ capital    |       | $                            | 1,000,042  |                            | $          | 988,850 |   |

 

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

 

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**Worldspan,L.P.**

**CondensedConsolidated Statements of Operations**

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

 
| ** **                                                    | ** ** | **Three months ended** | ** ** |
|---------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                    | ** ** | **March 31, 2006**     | ** ** | **March 31, 2005** | ** ** |
|                                                          |       |                             |       |   |   |
| **Revenues**                                                  | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Electronic travel distribution                                |       | $                                | 242,728    |   | $ | 241,958 |   |
| Information technology services                               |       | 19,371                           |       | 18,624 |   |
| Total revenues                                                |       | 262,099                          |       | 260,582 |   |
| **Operating Expenses**                                        | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Cost of revenues                                              |       |                             |       |   |   |
| Cost of revenues excluding developed  technology amortization |       | 163,822                          |       | 178,141 |   |
| Developed technology amortization                             |       | 5,420                            |       | 5,698 |   |
| Total cost of revenues                                        |       | 169,242                          |       | 183,839 |   |
| Selling, general and administrative                           |       | 27,644                           |       | 32,616 |   |
| Amortization of intangible assets                             |       | 10,903                           |       | 9,135 |   |
| Total operating expenses                                      |       | 207,789                          |       | 225,590 |   |
| Operating income                                              |       | 54,310                           |       | 34,992 |   |
| **Other Income (Expense)**                                    | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Interest expense, net                                         |       | (16,264                          | )          | (12,329 | ) |
| Loss on extinguishment of debt                                |       | —                           |       | (55,597 | ) |
| Other, net                                                    |       | (946                             | )          | (210 | ) |
| Total other expense, net                                      |       | (17,210                          | )          | (68,136 | ) |
| Income (loss) before provision for income  taxes              |       | 37,100                           |       | (33,144 | ) |
| Income tax expense                                            |       | 643                              |       | 918 |   |
| **Net income (loss)**                                         |       | $                                | 36,457     |   | $ | (34,062 | ) |

 

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

 

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**Worldspan,L.P.**

**CondensedConsolidated Statements of Changes in Partners’ Capital**

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

 
| ** **                                                   | ** ** | **Partners’  Capital** | ** ** | **Accumulated  Other  Comprehensive  Income** | ** ** | **Total** | ** ** |
|--------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------------------------|------------|-----------|------------|
|                                                         |       |                        |       |                                          |       |      |       |
| Balance at December 31, 2005                                 |       | $                           | 30,892     |                                          | $          | 617       |       | $ | 31,509 |   |
| Comprehensive income:                                        |       |                        |       |                                          |       |      |       |
| Net income                                                   |       | 36,457                      |       | —                                        |       | 36,457    |       |
| Change in fair value of derivative  accounted for as a hedge |       | —                      |       | 2,431                                         |       | 2,431     |       |
| Comprehensive income                                         |       |                        |       |                                          |       | 38,888    |       |
| Stock-based compensation                                     |       | 662                         |       | —                                        |       | 662       |       |
| Balance at March 31, 2006                                    |       | $                           | 68,011     |                                          | $          | 3,048     |       | $ | 71,059 |   |

 

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

 

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**Worldspan,L.P.**

**CondensedConsolidated Statements of Cash Flows**

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

 
| ** **                                                                                | ** ** | **Three months ended** | ** ** |
|-------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                | ** ** | **March 31, 2006**     | ** ** | **March 31, 2005** | ** ** |
| Cash flows from operating activities:                                                     |       |                             |       |   |   |
| Net income (loss)                                                                         |       | $                                | 36,457     |   | $ | (34,062 | ) |
| Adjustments to reconcile net income (loss)  to net cash provided by operating activities: |       |                             |       |   |   |
| Depreciation and amortization                                                             |       | 25,820                           |       | 24,880 |   |
| Amortization of debt issuance costs                                                       |       | 1,030                            |       | 760 |   |
| Loss on extinguishment of debt                                                            |       | —                           |       | 55,597 |   |
| Stock-based compensation                                                                  |       | 662                              |       | 644 |   |
| Loss on disposal of property and equipment,  net                                          |       | 77                               |       | 250 |   |
| Changes in operating assets and  liabilities:                                             |       |                             |       |   |   |
| Trade accounts receivable, net                                                            |       | (20,506                          | )          | (38,019 | ) |
| Prepaid expenses and other current assets                                                 |       | 1,513                            |       | 970 |   |
| Deferred charges                                                                          |       | (2,788                           | )          | 1,684 |   |
| Other long-term assets                                                                    |       | 397                              |       | 486 |   |
| Accounts payable                                                                          |       | 2,635                            |       | 1,093 |   |
| Accrued expenses                                                                          |       | 14,204                           |       | 12,664 |   |
| Pension and postretirement benefits                                                       |       | (1,445                           | )          | (1,251 | ) |
| Other long-term liabilities                                                               |       | 519                              |       | (643 | ) |
| Net cash provided by operating activities                                                 |       | 58,575                           |       | 25,053 |   |
| Cash flows from investing activities:                                                     |       |                             |       |   |   |
| Purchase of property and equipment                                                        |       | (2,080                           | )          | (1,574 | ) |
| Proceeds from sale of property and  equipment                                             |       | 66                               |       | 54 |   |
| Net cash used in investing activities                                                     |       | (2,014                           | )          | (1,520 | ) |
| Cash flows from financing activities:                                                     |       |                             |       |   |   |
| Proceeds from issuance of debt, net of debt  issuance costs                               |       | —                           |       | 734,864 |   |
| Principal payments on capital leases                                                      |       | (4,443                           | )          | (4,737 | ) |
| Principal payments on debt                                                                |       | (40,000                          | )          | (58,488 | ) |
| Repurchase 9 5/8% senior notes                                                            |       | —                           |       | (327,481 | ) |
| Distributions to WTI, net                                                                 |       | —                           |       | (425,678 | ) |
| Net cash used in financing activities                                                     |       | (44,443                          | )          | (81,520 | ) |
| Net increase (decrease) in cash and cash  equivalents                                     |       | 12,118                           |       | (57,987 | ) |
| Cash and cash equivalents at beginning of  period                                         |       | 58,093                           |       | 100,474 |   |
| Cash and cash equivalents at end of period                                                |       | $                                | 70,211     |   | $ | 42,487 |   |

 

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

 

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**Worldspan,L.P.**

**Notes toCondensed Consolidated Financial Statements**

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

 

**1.  AccountingPolicies**

 

*Nature of Business.* Worldspan, L.P. (the “Partnership”) is a Delaware limited partnershipformed in 1990. On June 30, 2003, Worldspan Technologies Inc. (“WTI”), formerlynamed Travel Transaction Processing Corporation, formed by Citigroup VentureCapital Equity Partners, L.P. (“CVC”) and Ontario Teachers’ Pension Plan Board(“OTPP”), indirectly acquired 100% of the outstanding partnership interests ofthe Partnership from affiliates of Delta Air Lines, Inc. (“Delta”), NorthwestAirlines, Inc. (“Northwest”) and American Airlines, Inc. (“American”) (the “Acquisition”).WTI owns all of the general partnership interests in the Partnership. WSHoldings LLC (“WS Holdings”), which is owned by WTI, is the sole limitedpartner of the Partnership, owning all of the limited partnership interests.

 

The Partnership provides information, reservations,transaction processing and related services for airlines, travel agencies andother travel-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 airlines, hotels, car rental companiesand others for the use of the GDS.

 

*Basis of Presentation.*  The accompanying unaudited condensedconsolidated financial statements have been prepared in accordance withaccounting principles generally accepted in the United States for interimfinancial information and with the instructions to Form 10-Q and Article 10 ofRegulation S-X. Accordingly, they do not include all of the information andfootnotes required by accounting principles generally accepted in the UnitedStates for complete financial statements. In the opinion of management thesefinancial statements contain all adjustments, consisting of normal recurringaccruals, necessary to present fairly the financial position, results ofoperations and cash flows for the periods indicated. The preparation offinancial statements in accordance with accounting principles generallyaccepted in the United States requires management to make estimates andassumptions that affect the amounts reported in the financial statements andthe accompanying notes. Operating results for the three months ended March 31,2006 and March 31, 2005 are not necessarily indicative of results that may beexpected for any other interim period or for the year ending December 31, 2006.** **ThePartnership’s quarterly financial data should be read in conjunction with itsconsolidated financial statements for the year ended December 31, 2005(including the notes thereto), set forth in its annual report on Form 10-Kfiled with the Securities and Exchange Commission on March 3, 2006.

 

*Derivative Instruments.*  All derivatives are measured at fair valueand recognized as either assets or liabilities on our consolidated balancesheets. Changes in the fair values of derivative instruments that do notqualify as hedges and/or any ineffective portion of hedges are recognized as again or loss in our condensed consolidated statement of operations in thecurrent period.  Changes in the fairvalues of derivative instruments used effectively as fair value hedges arerecognized in earnings, along with the change in the value of the hedged item.Changes in the fair value of the effective portions of cash flow hedges arereported in other comprehensive income and recognized in earnings when thehedged item is recognized in earnings.

 

*Risks and Uncertainties.*  ThePartnership derives substantially all of its revenues from the travel industry.Accordingly, events, circumstances and changes affecting the travel industry,particularly changes in airline travel and the financial well-being of theparticipating airlines, can significantly affect the Partnership’s business,financial condition and results of operations. The Partnership’s customers areprimarily located in the United States and Europe.

 

Travel agencies are the primary channel ofdistribution for the services offered by travel vendors. If the Partnershipwere to lose all or part of the transactions generated by any significanttravel agency and not replace such transactions, its business, financialcondition and results of operations could be adversely affected.  One online agency subscriber, Expedia, generatedtransactions in the Partnership’s electronic travel distribution segment whichresulted in revenues of approximately $75,586 and $73,362 for the three monthsended March 31, 2006 and March 31, 2005, respectively. These amountsrepresented 29% and 28% of total revenues for the three months ended March 31,2006 and March 31, 2005, respectively.

 

On May 5, 2004, thePartnership announced that it had been informed by Expedia of its intention tomove a portion of its transactions to another GDS provider in order to diversifyits GDS relationships beyond using a single provider to process substantiallyall of its GDS transactions. Expedia has not specified the volumes orpercentages of volumes it intends to process through this other GDS. ThroughMarch 31, 2006, the announced movement of Expedia’s transactions has not yet occurred;however, based on recent announcements by Expedia, the Partnership believessome movement of Expedia’s transactions may occur in the second half of 2006.Currently, the Partnership cannot forecast the magnitude of any such movementof transactions and therefore is unable to estimate the impact on its financialposition, results of operations and cash flows. Also, in October 2005,Expedia notified the Partnership of its intention to move some portion but notall of its European transactions to another GDS provider in 2006. Expediaannounced in May 2006 that it has commenced booking at select points of salecertain European segments through another GDS as previously announced.Currently, the Partnership cannot forecast the magnitude of any such movementof transactions and therefore is unable to estimate the impact on its financialposition, results of operations and cash flows. Additionally, Priceline, one ofthe Partnership’s largest online travel agency customers, has signed anagreement with

 

7

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another GDS; however, wehave not received any notification from Priceline as to the timing and volumeof transactions that it intends to move. Furthermore, if we are unable tosatisfactorily resolve the claims asserted against us by Orbitz, our secondlargest online travel agency, (see Note 5) and its lawsuit against us issuccessful, there would be few or no restrictions to prevent Orbitz from movinga significant portion of its business from our GDS. If Expedia, Priceline orOrbitz were to move a material portion of their respective transactions toother GDS providers, the Partnership’s business would be negatively andmaterially impacted.

 

Adevelopment within the GDS industry over the past several years involves thecompetitive need for GDSs to maintain full content, including web fare content,for distribution to traditional and online agency subscribers.  We have recently entered into long-term contentagreements with American, Continental and United.  Subject to termination rights, these newagreements continue until 2011.  Shouldwe fail to maintain competitive content, our traditional and online agencysubscribers could move transactions to competitors with access to this content,thus negatively affecting the Partnership’s business, financial condition andresults of operations. See Note 11 for a discussion of our content agreements.

 

Furthermore, the Partnership charges airlinecarriers, rental car companies, hotels and other providers of travel productsand services (collectively referred to as “suppliers”) for electronic traveldistribution services and information technology services.

 

Effective September 14, 2005, Delta and Northwest, both significant suppliersof the Partnership, entered bankruptcy protection. Revenues generated by Deltaand Northwest were $62,389 and $75,849 for the three months ended March 31,2006 and 2005, respectively. These amounts represented approximately 24% and29% of total revenues for the three months ended March 31, 2006 and 2005,respectively. Delta and Northwest accounted for 14% and 10%, respectively, oftotal revenue for the three months ended March 31, 2006.

 

Pre-bankruptcy petition accounts receivable at March 31, 2006 under thePartnership’s two primary agreements with Delta and Northwest are $16,402,collectively. Post-bankruptcy petition accounts receivable at March 31, 2006under the Partnership’s two primary agreements with Delta and Northwest are$31,199, collectively. The Partnership believes that its pre-bankruptcypetition accounts receivable will likely be realized over an extended period oftime. The Partnership believes it will continue to provide the services to theairlines and, absent further significant deterioration in the financialcondition of the airlines, post-bankruptcy petition accounts receivable areexpected to be collected in accordance with the terms of the Partnership’scurrent commercial agreements.

 

While under bankruptcy protection, Delta and Northwest could petitionthe court to reject certain or all of the existing agreements with thePartnership, subject to Northwest’s restrictions in the new content agreementreferred to in Note 11 below. The Partnership is not aware of an action by eitherDelta or Northwest to reject any agreements with it and, accordingly continuesto operate with the two airlines under its existing commercial agreements. SeeNote 11 for a discussion of the new five-year content agreement signed withNorthwest. Additional facts could become known or actions taken by eitherairline in bankruptcy that could impact the Partnership’s assessment of thecollectibility and thus result in a charge to earnings in future periods.Furthermore, the Partnership is not yet in a position to ultimately determinewhether payments previously made to it will be challenged or unwound in thebankruptcy proceedings.

 

The Partnership maintainedan allowance for doubtful accounts of approximately $8,283 and $8,110 at March31, 2006 and December 31, 2005, respectively.

 

*AccountingPronouncements*. In December 2004, the Financial Accounting Standards Board (“FASB”)issued SFAS No. 123R, *Share-Based Payment*.The Statement requires an entity to measure the cost of employee servicesreceived in exchange for an award of equity instruments based on the grant-datefair value of the award. That cost will be recognized over the period duringwhich an employee is required to provide service in exchange for the award,known as the requisite service period. SFASNo. 123(R) became applicable to the Partnership beginning January 1, 2006. SeeNote 10 for a discussion of the impact of adopting SFAS No. 123(R).

 

In May 2005, the FASB issuedSFAS No. 154, “Accounting Changes and Error Corrections” (“SFAS No. 154”) whichsupersedes APB Opinion No. 20, “Accounting Changes” and SFAS No. 3 “ReportingAccounting Changes in Interim Financial Statements”. SFAS No. 154 changes therequirements for accounting for and reporting of changes in accountingprinciples. The statement requires the retroactive application to prior periods’financial statements of changes in accounting principles, unless it isimpracticable to determine either the period specific effects or the cumulativeeffect of the change. SFAS No. 154 does not change the guidance for reportingthe correction of an error in previously issued financial statements or thechange in an accounting estimate. SFAS No. 154 became effective for accountingchanges and corrections of errors

 

8

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made in fiscal years beginning after December 15, 2005. As of and forthe three months ended March 31, 2006, SFAS No. 154 did not impact thePartnership’s consolidated financial position or results of operations.

 

InFebruary 2006, the Financial Accounting Standards Board (“FASB”) issuedstatement No. 155, “Accounting for Certain Hybrid Financial Instruments” (“SFASNo. 155”). Under current generally accepted accounting principles anentity that holds a financial instrument with an embedded derivative mustbifurcate the financial instrument, resulting in the host and the embeddedderivative being accounted for separately. SFAS No. 155 permits, but doesnot require, entities to account for financial instruments with an embeddedderivative at fair value thus negating the need to bifurcate the instrumentbetween its host and the embedded derivative. SFAS No. 155 is effective asof the beginning of the first annual reporting period that begins afterSeptember 15, 2006. We expect that SFAS No. 155 will not have amaterial effect on our consolidated financial condition or results ofoperations.

 

InMarch 2006, the FASB issued statement No. 156, “Accounting forServicing of Financial Assets” (“SFAS No. 156”). SFAS No. 156 amendsFASB Statement No. 140, “Accounting for Transfers and Servicing ofFinancial Assets and Extinguishments of Liabilities,” to require that allseparately recognized servicing assets and servicing liabilities be initiallymeasured at fair value, if practicable. SFAS No. 156 permits, but does notrequire, the subsequent measurement of separately recognized servicing assetsand servicing liabilities at fair value. An entity that uses derivativeinstruments to mitigate the risks inherent in servicing assets and servicingliabilities is required to account for those derivative instruments at fairvalue. SFAS No. 156 is effective as of the beginning of the first annualreporting period that begins after September 15, 2006. We expect that SFASNo. 156 will not have a material effect on our financial condition orresults of operations.

 

**2.  Debt**

 

OnFebruary 11, 2005, the Partnership, WS Financing Corp. (“WS Financing”),the wholly-owned domestic subsidiaries of the Partnership, as guarantors (the “GuarantorSubsidiaries”) and The Bank of New York Trust Company, N.A., as trustee,entered into an Indenture (the “Indenture”). Pursuant to the Indenture, theGuarantor Subsidiaries issued $300,000 of Senior Second Lien Secured FloatingRate Notes due 2011 (the “Floating Rate Notes”), secured on a second prioritybasis by substantially all of the assets of the Partnership, WS Financing andthe Guarantor Subsidiaries. In addition, the Partnership, as borrower, WTI, andWS Holdings entered into a new credit agreement (the “Credit Agreement”) with asyndicate of financial institutions as lenders. In connection with the closingunder the Credit Agreement, a new senior credit facility (the “2005 SeniorCredit Facility”), consisting of a five-year revolving credit facility in theamount of $40,000 and a new term loan facility due 2010 (the “Term Loan under2005 Senior Credit Facility”) in the amount of $450,000, was made available tothe Partnership. Obligations under the 2005 Senior Credit Facility and theguarantees are secured by a perfected first priority security interest in allof the Partnership’s tangible and intangible assets and all of the tangible andintangible assets of WTI and each of the Guarantor Subsidiaries, subject tocustomary exceptions, and a pledge of (i) all of the membership interests of WSHoldings LLC owned by WTI, (ii) all of the partnership interests owned by WTIand WS Holdings LLC, and (iii) all of the capital stock of the Partnership’sGuarantor Subsidiaries and significant portions of the Partnership’s holdingsin foreign subsidiaries.

 

At the Partnership’soption, the interest rate applied to borrowings under the 2005 Senior CreditFacility is based on the LIBOR rate (as defined in the Credit Agreement) plusthe initial applicable margin of 2.75%. The alternative rate is a base rate(generally defined as the sum of (i) the higher of (x) the primerate and (y) the federal funds effective rate, plus one half percent(0.50%) per annum and (ii) an initial applicable margin of 1.75%).Theinterest rate applicable to borrowings under the Floating Rate Notes is basedon the three-month LIBOR rate plus 6.25%. At March 31, 2006, thethree-month LIBOR rate was 5.0%. Borrowings under the 2005 Senior CreditFacility are subject to quarterly interest payments with respect to loansbearing interest at the base rate described above or at the end of each one,two, three or six month interest period for loans bearing interest at the LIBORrate described above. 

 

The net proceeds fromthe sale of the Floating Rate Notes and the closing of the Term Loan under 2005Senior Credit Facility, along with available cash of the Partnership, were usedto (collectively referred to as the “Refinancing Transactions”):

 

•      repay approximately $57,488 of theoutstanding balance of the then-existing senior term loan due 2007 includingany accrued and unpaid interest then outstanding under the then existing seniorcredit facility,

 

•      purchase pursuant to a cash tender offerof $279,500 of the Partnership’s outstanding 9 5/8% Senior Notes due 2011,

 

•      distribute funds to WTI to redeem WTI’soutstanding Preferred Stock at a redemption price equal to the face amount of WTI’sPreferred Stock plus accrued and unpaid dividends to the redemption date for atotal redemption price of approximately $375,729,

 

•      distribute funds to WTI to pay a consentfee of $8,638 (the “Consent Fee”) to certain related parties of CVC inconnection with the Holdco Notes described below, and

 

9

----

 

•      pay fees and expenses related to theRefinancing Transactions.

 

In connection with theRefinancing Transactions, on February 16, 2005, WTI issued $43,630 in new11% Subordinated Notes due 2013 (the “Holdco Notes”) to certain related partiesof CVC and paid $365 in accrued and unpaid interest in exchange for thesurrender and cancellation of all of the obligations owing by WTI related tothe then outstanding subordinated notes due 2012.

 

As a result of the Refinancing Transactionsdescribed above, the Partnership recorded a loss on extinguishment of debt of $55,597during the three months ended March 31, 2005.

 

On March 4, 2005,the Partnership entered into an interest rate swap with a notional amount that beganat $508,370 on November 15, 2005 and is amortized on a quarterly basis to$102,250 at November 15, 2008. The reset dates on the swap areFebruary 15, May 15, August 15 and November 15 of each yearuntil maturity on November 15, 2008. The notional amount as of March 31,2006 is $480,530. This agreement, which has been designated as a cash flowhedge, is being used to convert the variable component of the interest rates oncertain indebtedness to a fixed rate of 4.3%, effective November 15, 2005.Because the critical terms of the swap match those of the debt it is hedging,the swap is considered a perfect hedge against changes in the fair value of thedebt and the hedge has resulted in no ineffectiveness being recognized inoperations. Changes in the fair value of the swap are recognized as a componentof accumulated other comprehensive income in each reporting period. As of March31, 2006, the fair value of this swap was an asset of $5,812, which is includedin other long-term assets in the condensed consolidated balance sheet.

 

The 2005 Senior CreditFacility requires the Partnership to meet financial tests, including withoutlimitation, a minimum interest coverage ratio and a maximum total leverageratio.  Also, the Indenture requires theGuarantor Subsidiaries to maintain a minimum fixed charge coverage ratio. Inaddition, certain non-financial covenants restrict the activities of theGuarantor Subsidiaries.

 

Long-term debt consisted of the following:

 
| ** **                                       | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|--------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
|                                             |       |                     |       |                        |       |
| Term loan under 2005 Senior Credit Facility  (1) |       | $                        | 331,000    |                        | $          | 371,000 |   |
| Floating Rate Notes (2)                          |       | 300,000                  |       | 300,000                     |       |
| 95/8% Senior Notes  (1)                          |       | 500                      |       | 500                         |       |
|                                             |       | 631,500                  |       | 671,500                     |       |
| Less current portion of long-term debt           |       | 4,000                    |       | 4,000                       |       |
| Long-term debt, excluding current portion        |       | $                        | 627,500    |                        | $          | 667,500 |   |

 

----

(1)     Based onborrowing rates currently available to the Partnership, the carrying value ofthe debt obligation approximates fair value.

 

(2)     $290,000 of theFloating Rate Notes are publicly traded and at May 11, 2006 had a marketvalue of approximately $284,925 based on the quoted market price for suchnotes.  The remaining $10,000 of FloatingRate Notes have not yet been registered.with the Securities and ExchangeCommission.

 

During the three months endedMarch 31, 2006, the Partnership paid $40,000 in principal on the term loan, ofwhich $1,000 was a scheduled principal payment.

 

**3.  Employee Benefit Plans**

 

The components of netpension and postretirement costs were as follows:

 

10

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| ** **                                     | ** ** | **Pension Benefits**                          | ** ** | **Postretirement Benefits**                   | ** ** |
|------------------------------------------------|------------|----------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                     | ** ** | **Three months  ended  March 31,  2006** | ** ** | **Three months  ended  March 31,  2005** | ** ** | **Three months  ended  March 31,  2006** | ** ** | **Three months  ended  March 31,  2005** | ** ** |
| Service cost                                   |       | $                                                  | —     |                                               | $          | — |   | $ | 59 |   | $ | 66 |   |
| Interest cost                                  |       | 2,923                                              |       | 2,892                                              |       | 380 |   | 407 |   |
| Expected return on plan assets                 |       | (3,948                                             | )          | (3,656                                             | )          | — |   | — |   |
| Amortization of transition obligation          |       | —                                             |       | —                                             |       | — |   | — |   |
| Amortization of prior service cost             |       | —                                             |       | —                                             |       | — |   | — |   |
| Recognized net actuarial loss                  |       | 32                                                 |       | 27                                                 |       | — |   | — |   |
| Net periodic pension benefit (income)  expense |       | $                                                  | (993       | )                                                  | $          | (737 | ) | $ | 439 |   | $ | 473 |   |

 

EffectiveJanuary 1, 2002, the defined benefit pension plan was amended to excludeemployees hired on or after January 1, 2002. Effective December 31,2003, the Partnership froze all further benefit accruals under the definedbenefit pension plan.

 

**4.  RelatedParty Transactions**

 

InFebruary 2005, the Partnership entered into the Refinancing Transactions.  Certain of the parties to these transactionswere related parties, including WTI, CVC and OTPP.  See Note 2 for a full description of thesematters.

 

In connection with theRefinancing Transactions, on February 16, 2005, the Partnership enteredinto an amendment to its Advisory Agreement with WTI to terminate all advisoryand other fees payable under that agreement as of January 1, 2005 inreturn for a prepayment of $7,700 payable on or before December 15, 2005.The prepaid advisory fees are included in “Prepaid expenses and other currentassets” and “Other long-term assets” in the accompanying consolidated balancesheets. The prepaid advisory fees are being amortized on a straight line basisover the remaining term that the services are provided. The agreement expiresin June 2013. During the three months ended March 31, 2006, thePartnership recognized $227 of expense in connection with this agreement.  During the three months ended March 31, 2005the Partnership recognized a total of $601 of expense related to advisory fees.

 

OnJanuary 10, 2005, WTI entered into a Note Redemption Agreement (the “NoteRedemption Agreement”) with Delta. Pursuant to the Note Redemption Agreement, WTI redeemed the 10%Subordinated Note due 2012 in an original principal amount of $45,000 issued byWTI to Delta on June 30, 2003, the additional notes issued in lieu of cashinterest and all accrued and unpaid interest up to January 10, 2005 for $36,137.  The Partnership distributed $36,137 to WTI tofinance this transaction.

 

Duringthe quarter ended March 31, 2005, the Partnership distributed $4,700 to WTI toenable WTI to cover income taxes that it owed on the income generated by thePartnership in the United States. There were no distributions to WTI for anypurpose in the quarter ended March 31, 2006.

 

Under the WTI stockincentive plan, WTI offers restricted shares of its Common Stock and grantsoptions to purchase shares of its Common Stock to certain employees of thePartnership. As the options and restricted shares are being granted toemployees of the Partnership, the Partnership recognizes this value as anexpense over the period in which the options and restricted shares vest.

 

In2005 the Partnership entered into a master services agreement for technologyservices with Calleo Distribution Technologies Pvt. Ltd (“Calleo”).  Additionally in 2005, the Partnership’sUnited Kingdom domiciled subsidiary, Worldspan Services Limited, entered into adistributor agreement with Calleo for the distribution of our services in theIndia sub-continent and other countries. In 2006, the master services agreementfor technology services with Calleo was terminated and the Partnership enteredinto a similar master services agreement for technology services withInterGlobe Technologies, Pvt. Ltd. (“IGT”). Mr. Rakesh Gangwal, Chairman,President and Chief Executive Officer of the Partnership, has a greater than10%  equity ownership interest in both Calleoand IGT.  The master services agreementhas an initial term of ten years, subject to termination rights, and isexpected to generate payments of approximately $7 million annually for thetechnology services.  The distributor agreementalso has an initial ten year term, subject to termination rights.  Payments under the agreements are contingentupon bookings generated by Calleo.  ThePartnership has paid $250 and $487 to Calleo and IGT, respectively, during thethree months ended March 31, 2006, and has approximately $155 and $203 ofaccrued expenses owed to Calleo and IGT, respectively, as of March 31, 2006.

 

11

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**5.  Commitments and Contingencies**

 

On September19, 2005, the Partnership filed a lawsuit against Orbitz in the United StatesDistrict Court, Northern District of Illinois, Eastern Division (“Federal Suit”).Orbitz is one of the Partnership’s largest online travel agency customers andrepresented approximately 9% of its transaction volume for the three month periodended March 31, 2006. The Federal Suit alleged that Orbitz accessed and usedthe Partnership’s seat map data in violation of the Federal Computer Fraud andAbuse Act (“FCFAA”) and in breach of the Partnership’s agreement with Orbitz. The Federal Suit contained several additional state-law claims.  OnApril 19, 2006, the court considering the Federal Suit dismissed thePartnership’s claim under the FCFAA and relinquished jurisdiction over thePartnership’s state-law claims against Orbitz without prejudice to Worldspanrefiling its state-law claims in state court.

 

On April 24, 2006, Worldspan filed its state-law claims in the CircuitCourt of Cook County, Illinois, County Department, Law Division.  The complaintalleges that Orbitz’s improper accessing and use of the Partnership’s seat mapdata violates the agreements with Orbitz, and that Orbitz’s use of Galileo andITA, competing computer reservation systems, constitutes breaches of thePartnership’s agreement with Orbitz.  The Partnership is seeking injunctiverelief to prevent the unauthorized accessing and use of its seat map data aswell as to prevent Orbitz’s use of the services or data of Galileo and ITA. ThePartnership also seeks monetary damages from Orbitz in excess of $50,000 andreimbursement for its attorneys’ fees and costs.

 

After filing its Federal Suit, the Partnership learned that Orbitzfiled suit against it on September 16, 2005, in the Circuit Court of CookCounty, Illinois, County Department, Law Division, purporting to assert two causesof action against the Partnership for violation of the Illinois Consumer FraudAct and equitable estoppel. Orbitz has claimed that certain exclusivity,minimum segment fee and 100% booking requirement provisions in the Partnership’sagreement were illegal and in violation of public policy. In its suit, Orbitzseeks a court order precluding Worldspan from pursuing its breach of contractclaims against Orbitz, an order terminating and rescinding the first and secondamendments of its contract with Orbitz (which include, among other things,provisions containing commitments from Orbitz with respect to its usage of thePartnerhsip’s GDS through 2011), monetary damages in excess of $50, punitivedamages and reimbursement for attorneys’ fees and costs. The Partnershipbelieves that the allegations in the Orbitz complaint are without merit and itintends to defend against this action vigorously. In addition, the Partnershipbelieves that Orbitz’s filing of its lawsuit against it constitutes anotherviolation of the contract between the parties, and the Partnership hasinstituted the dispute resolution process to resolve this issue as required bythe contract. If the Partnership is unable to satisfactorily resolve the claimsasserted by Orbitz and its lawsuit against the Partnership is successful, therewould be few or no restrictions to prevent Orbitz from moving a significantportion of its business from the Partnership’s GDS, which would have a materialadverse effect on the Partnerhsip’s business, financial condition and resultsof operations.

 

In September 2003,the Partnership received multiple assessments totaling €39,503 from the taxauthorities of Greece relating to tax years 1993-2002. The Partnership filedappeals of these assessments. Pursuant to a formal tax amnesty program with theGreek authorities, the Partnership reached a settlement of the outstandingassessments in an amount of approximately €7,775. The Partnership InterestPurchase Agreement, dated March 3, 2003, provides that each of Delta,Northwest and American (collectively, our “founding airlines”)  shall severally indemnify WTI and hold WTIharmless on a net after-tax basis from and against any and all taxes of thePartnership and its subsidiaries related to periods prior to the Acquisition.The Partnership informed the founding airlines of the receipt of theseassessments and the indemnity obligation of the founding airlines under thePartnership Interest Purchase Agreement. As of March 31, 2006, the balance ofthe amounts due from the founding airlines was $2,384 based on the March 31,2006 exchange rate. Because of the indemnity provision and other remediesavailable under the applicable agreements, the Partnership believes thatamounts paid to settle the Greek assessment will be recovered from the foundingairlines and will not have an effect on the Partnership’s financial position orresults of operations.

 

Additionally,in connection with the Acquisition of the Partnership in 2003, Delta, Northwestand American agreed to retain the rights and obligations of all tax matters relatingto tax periods prior to June 30, 2003. However, the exercise of theserights could be successfully challenged in bankruptcy court.

 

In addition,the Partnership is currently involved in various claims related to mattersarising from the ordinary course of business. Management believes the ultimatedisposition of these actions will not materially affect the financial positionor results of operations of the Partnership.

 

12

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**6.  Other Events**

 

In the first quarter of2006, the Partnership collected outstanding disputed amounts regarding minimumbooking fees with certain former online travel agencies. The settlementresulted in the receipt of approximately $11,290 in minimum booking fees.  The receipts were classified in theaccompanying statement of operations as a reduction in cost of revenues inaccordance with EITF 01-9. No revenue was recognized related to these amountsin prior periods as the revenue was not fixed and determinable andcollectibility was not assured. Thecontracts with these agencies have been terminated.

 

**7.  BusinessSegment Information**

** **

The Partnership’s operationsare classified into two reportable business segments: electronic traveldistribution and information technology services. The Partnership’s tworeportable business segments are managed separately based on fundamentaldifferences in their operations. In addition, each business segment offersdifferent products and services. The electronic travel distribution segmentdistributes travel services of its suppliers to subscribers of the WorldspanGDS. By having access to the Worldspan GDS, subscribers are able to bookreservations with the suppliers. The information technology services segmentprovides technology services to Delta and Northwest and other companies in thetravel industry.

 

The Partnership evaluates segmentperformance and allocates resources based on operating income plus depreciationand amortization. The accounting policies of the reportable segments are thesame as those described in the summary of significant accounting policies.There are no intersegment sales.

 
| ** **                          | ** ** | **Three months ended** | ** ** |
|-------------------------------------|------------|----------------------------------|------------|
| ** **                          | ** ** | **March 31,  2006**         | ** ** | **March 31,  2005** | ** ** |
|                                |       |                             |       |   |   |
| Revenues                            |       |                             |       |   |   |
| Electronic travel distribution      |       | $                                | 242,728    |   | $ | 241,958 |   |
| Information technology services     |       | 19,371                           |       | 18,624 |   |
| Total revenues                      |       | $                                | 262,099    |   | $ | 260,582 |   |
| Operating income                    |       |                             |       |   |   |
| Electronic travel distribution      |       | $                                | 60,052     |   | $ | 41,783 |   |
| Information technology services     |       | (5,742                           | )          | (6,791 | ) |
| Total operating income              |       | $                                | 54,310     |   | $ | 34,992 |   |
| Depreciation and amortization       |       |                             |       |   |   |
| Electronic travel distribution      |       | $                                | 20,648     |   | $ | 19,656 |   |
| Information technology services     |       | 5,172                            |       | 5,224 |   |
| Total depreciation and amortization |       | $                                | 25,820     |   | $ | 24,880 |   |

 

The Partnership’sprincipal administrative, marketing, product development and technicaloperations are located in the United States. Areas of operation outside ofNorth America include EMEA, Asia and Latin America which are primarily composedof selling and marketing functions.

 

The following table includesselected interim financial information for the three months endedMarch 31, 2006 and March 31, 2005, respectively, related to ourgeographic areas. 

 
| ** **        | ** ** | **Three months ended** | ** ** |
|-------------------|------------|----------------------------------|------------|
| ** **        | ** ** | **March 31,  2006**         | ** ** | **March 31,  2005** | ** ** |
|              |       |                             |       |   |   |
| Geographic areas  |       |                             |       |   |   |
| Total revenues    |       |                             |       |   |   |
| United States     |       | $                                | 241,767    |   | $ | 223,166 |   |
| Foreign           |       | 20,332                           |       | 37,416 |   |
| Total             |       | $                                | 262,099    |   | $ | 260,582 |   |
| Long-lived assets |       |                             |       |   |   |
| United States     |       | $                                | 768,814    |   | $ | 836,892 |   |
| Foreign           |       | 27,048                           |       | 33,615 |   |
| Total             |       | $                                | 795,862    |   | $ | 870,507 |   |

 

13

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

 

In conjunction with theclosing of the Refinancing Transactions discussed in Note 2, the Term Loanunder 2005 Senior Credit Facility became fully and unconditionally guaranteedon a senior secured basis by the domestic operations and assets of thePartnership (referred to as “Worldspan, L.P.—Guarantor” in the accompanyingfinancial information). Included in Worldspan, L.P.—Guarantor are Worldspan,L.P. and all of its wholly-owned domestic subsidiaries including WSFinancing.  These domestic subsidiariesalso fully and unconditionally guarantee on a second priority basis the FloatingRate Notes.  These domestic subsidiariescollectively represent less than one percent of the Partnership’s total assets,Partners’ capital, total revenues, net income, and cash flows from operatingactivities. The guarantees of each of the legal entities comprised byWorldspan, L.P.—Guarantor are joint and several.  The foreign subsidiaries (referred to as “Non-GuarantorSubsidiaries” in the accompanying financial information) represent the foreignoperations of the Partnership. WS Financing does not have any substantialoperations, assets or revenues. The following financial information presentscondensed consolidating balance sheets, statements of operations and statementsof cash flows for Worldspan, L.P.—Guarantor and Non-Guarantor Subsidiaries. Theinformation has been presented as if Worldspan, L.P.—Guarantor accounted for itsownership of the Non-Guarantor Subsidiaries using the equity method ofaccounting.

 

14

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##### ** **

##### **Condensed Consolidating BalanceSheets**

**as of March31, 2006**

 
| ** **                                      | ** ** | **Worldspan, L.P.—  Guarantor** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Eliminating  Entries** | ** ** | **Worldspan  Consolidated** | ** ** |
|-------------------------------------------------|------------|-------------------------------------------|------------|---------------------------------|------------|--------------------------|------------|-----------------------------|------------|
|                                            |       |                                      |       |                            |       |                     |       |                        |       |
| **Assets**                                      |       |                                      |       |                            |       |                     |       |                        |       |
| Current  assets                                 |       |                                      |       |                            |       |                     |       |                        |       |
| Cash and cash equivalents                       |       | $                                         | 65,084     |                            | $          | 5,127                    |       | $                           | —     |   | $ | 70,211 |   |
| Trade accounts receivable, net                  |       | 113,453                                   |       | 5,037                           |       | —                   |       | 118,490                     |       |
| Prepaid expenses and other current assets       |       | 14,749                                    |       | 730                             |       | —                   |       | 15,479                      |       |
| Total current assets                            |       | 193,286                                   |       | 10,894                          |       | —                   |       | 204,180                     |       |
| Property and equipment, net                     |       | 78,584                                    |       | 5,309                           |       | —                   |       | 83,893                      |       |
| Deferred charges                                |       | 15,968                                    |       | 11,212                          |       | —                   |       | 27,180                      |       |
| Debt issuance costs, net                        |       | 13,596                                    |       | —                          |       | —                   |       | 13,596                      |       |
| Goodwill                                        |       | 111,803                                   |       | —                          |       | —                   |       | 111,803                     |       |
| Other intangible assets, net                    |       | 505,160                                   |       | —                          |       | —                   |       | 505,160                     |       |
| Investments in subsidiaries                     |       | 29,067                                    |       | —                          |       | (29,067                  | )          | —                      |       |
| Other long-term assets                          |       | 43,703                                    |       | 10,527                          |       | —                   |       | 54,230                      |       |
| Total assets                                    |       | $                                         | 991,167    |                            | $          | 37,942                   |       | $                           | (29,067    | ) | $ | 1,000,042 |   |
|                                            |       |                                      |       |                            |       |                     |       |                        |       |
| **Liabilities and Partners’ Capital**      |       |                                      |       |                            |       |                     |       |                        |       |
| Current liabilities                             |       |                                      |       |                            |       |                     |       |                        |       |
| Accounts payable                                |       | $                                         | 17,102     |                            | $          | 2,380                    |       | $                           | —     |   | $ | 19,482 |   |
| Intercompany accounts payable (receivable)      |       | 22,797                                    |       | (22,797                         | )          | —                   |       | —                      |       |
| Accrued expenses                                |       | 129,554                                   |       | 29,388                          |       | —                   |       | 158,942                     |       |
| Current portion of capital lease  obligations   |       | 16,389                                    |       | —                          |       | —                   |       | 16,389                      |       |
| Current portion of senior debt                  |       | 4,000                                     |       | —                          |       | —                   |       | 4,000                       |       |
| Total current liabilities                       |       | 189,842                                   |       | 8,971                           |       | —                   |       | 198,813                     |       |
| Long-term portion of capital lease  obligations |       | 33,757                                    |       | —                          |       | —                   |       | 33,757                      |       |
| Long-term debt                                  |       | 627,500                                   |       | —                          |       | —                   |       | 627,500                     |       |
| Pension and postretirement benefits             |       | 58,925                                    |       | (42                             | )          | —                   |       | 58,883                      |       |
| Other long-term liabilities                     |       | 10,084                                    |       | (54                             | )          | —                   |       | 10,030                      |       |
| Total liabilities                               |       | 920,108                                   |       | 8,875                           |       | —                   |       | 928,983                     |       |
| Commitments and contingencies                   |       |                                      |       |                            |       |                     |       |                        |       |
| Partners’ capital                          |       | 71,059                                    |       | 29,067                          |       | (29,067                  | )          | 71,059                      |       |
| Total liabilities and Partners’ capital    |       | $                                         | 991,167    |                            | $          | 37,942                   |       | $                           | (29,067    | ) | $ | 1,000,042 |   |

 

15

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**CondensedConsolidating Balance Sheets**

**as ofDecember 31, 2005**

 
| ** **                                      | ** ** | **Worldspan, L.P.— Guarantor** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Eliminating  Entries** | ** ** | **Worldspan  Consolidated** | ** ** |
|-------------------------------------------------|------------|-----------------------------------------------|------------|---------------------------------|------------|--------------------------|------------|-----------------------------|------------|
|                                            |       |                                          |       |                            |       |                     |       |                        |       |
| **Assets**                                      |       |                                          |       |                            |       |                     |       |                        |       |
| Current assets                                  |       |                                          |       |                            |       |                     |       |                        |       |
| Cash and cash equivalents                       |       | $                                             | 55,238     |                            | $          | 2,855                    |       | $                           | —     |   | $ | 58,093 |   |
| Trade accounts receivable, net                  |       | 95,475                                        |       | 2,509                           |       | —                   |       | 97,984                      |       |
| Prepaid expenses and other current assets       |       | 16,196                                        |       | 796                             |       | —                   |       | 16,992                      |       |
| Total current assets                            |       | 166,909                                       |       | 6,160                           |       | —                   |       | 173,069                     |       |
| Property and equipment, net                     |       | 85,311                                        |       | 5,972                           |       | —                   |       | 91,283                      |       |
| Deferred charges                                |       | 12,984                                        |       | 11,408                          |       | —                   |       | 24,392                      |       |
| Debt issuance costs, net                        |       | 14,626                                        |       | —                          |       | —                   |       | 14,626                      |       |
| Goodwill                                        |       | 111,803                                       |       | —                          |       | —                   |       | 111,803                     |       |
| Other intangible assets, net                    |       | 521,483                                       |       | —                          |       | —                   |       | 521,483                     |       |
| Investments in subsidiaries                     |       | 27,811                                        |       | —                          |       | (27,811                  | )          | —                      |       |
| Other long-term assets                          |       | 41,444                                        |       | 10,750                          |       | —                   |       | 52,194                      |       |
| Total assets                                    |       | $                                             | 982,371    |                            | $          | 34,290                   |       | $                           | (27,811    | ) | $ | 988,850 |   |
|                                            |       |                                          |       |                            |       |                     |       |                        |       |
| **Liabilities and Partners’ Capital**      |       |                                          |       |                            |       |                     |       |                        |       |
| Current liabilities                             |       |                                          |       |                            |       |                     |       |                        |       |
| Accounts payable                                |       | $                                             | 12,477     |                            | $          | 4,370                    |       | $                           | —     |   | $ | 16,847 |   |
| Intercompany accounts payable (receivable)      |       | 31,461                                        |       | (31,461                         | )          | —                   |       | —                      |       |
| Accrued expenses                                |       | 111,089                                       |       | 33,649                          |       | —                   |       | 144,738                     |       |
| Current portion of capital lease  obligations   |       | 17,863                                        |       | —                          |       | —                   |       | 17,863                      |       |
| Current portion of long-term debt               |       | 4,000                                         |       | —                          |       | —                   |       | 4,000                       |       |
| Total  current liabilities                      |       | 176,890                                       |       | 6,558                           |       | —                   |       | 183,448                     |       |
| Long-term portion of capital lease  obligations |       | 36,555                                        |       | —                          |       | —                   |       | 36,555                      |       |
| Long-term debt                                  |       | 667,500                                       |       | —                          |       | —                   |       | 667,500                     |       |
| Pension and postretirement benefits             |       | 60,370                                        |       | (42                             | )          | —                   |       | 60,328                      |       |
| Other long-term liabilities                     |       | 9,547                                         |       | (37                             | )          | —                   |       | 9,510                       |       |
| Total liabilities                               |       | 950,862                                       |       | 6,479                           |       | —                   |       | 957,341                     |       |
| Commitments and contingencies                   |       |                                          |       |                            |       |                     |       |                        |       |
| Partners’ capital                          |       | 31,509                                        |       | 27,811                          |       | (27,811                  | )          | 31,509                      |       |
| Total liabilities and Partners’ capital    |       | $                                             | 982,371    |                            | $          | 34,290                   |       | $                           | (27,811    | ) | $ | 988,850 |   |

 

16

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**CondensedConsolidating Statements of Operations**

**for theThree Months Ended March 31, 2006**

 
| ** **                     | ** ** | **Worldspan, L.P.—  Guarantor** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Eliminating  Entries** | ** ** | **Worldspan  Consolidated** | ** ** |
|--------------------------------|------------|-------------------------------------------|------------|---------------------------------|------------|--------------------------|------------|-----------------------------|------------|
|                           |       |                                      |       |                            |       |                     |       |                        |       |
| Revenues                       |       | $                                         | 241,767    |                            | $          | 20,332                   |       | $                           | —     |   | $ | 262,099 |   |
| Operating expenses             |       | 190,337                                   |       | 17,452                          |       | —                   |       | 207,789                     |       |
| Operating income               |       | 51,430                                    |       | 2,880                           |       | —                   |       | 54,310                      |       |
| Other income (expense)         |       |                                      |       |                            |       |                     |       |                        |       |
| Interest (expense) income, net |       | (16,281                                   | )          | 17                              |       | —                   |       | (16,264                     | )          |
| Income from subsidiaries       |       | 1,256                                     |       | —                          |       | (1,256                   | )          | —                      |       |
| Other, net                     |       | 52                                        |       | (998                            | )          | —                   |       | (946                        | )          |
| Total other expense, net       |       | (14,973                                   | )          | (981                            | )          | (1,256                   | )          | (17,210                     | )          |
| Income before income taxes     |       | 36,457                                    |       | 1,899                           |       | (1,256                   | )          | 37,100                      |       |
| Provision for income taxes     |       | —                                    |       | 643                             |       | —                   |       | 643                         |       |
| Net income                     |       | $                                         | 36,457     |                            | 1,256      |                     | (1,256     | )                           | 36,457     |   |
|                                |            |                                           |            |                                 |            |                          |            |                             |            |  |  |  |  |

 

**CondensedConsolidating Statements of Operations**

**for theThree Months Ended March 31, 2005**

 
| ** **                        | ** ** | **Worldspan, L.P.—  Guarantor** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Eliminating  Entries** | ** ** | **Worldspan  Consolidated** | ** ** |
|-----------------------------------|------------|-------------------------------------------|------------|---------------------------------|------------|--------------------------|------------|-----------------------------|------------|
|                              |       |                                      |       |                            |       |                     |       |                        |       |
| Revenues                          |       | $                                         | 223,166    |                            | $          | 37,416                   |       | $                           | —     |   | $ | 260,582 |   |
| Operating expenses                |       | 190,101                                   |       | 35,489                          |       | —                   |       | 225,590                     |       |
| Operating income                  |       | 33,065                                    |       | 1,927                           |       | —                   |       | 34,992                      |       |
| Other income (expense)            |       |                                      |       |                            |       |                     |       |                        |       |
| Interest (expense) income, net    |       | (12,389                                   | )          | 60                              |       | —                   |       | (12,329                     | )          |
| Loss on extinguishment of debt    |       | (55,597                                   | )          | —                          |       | —                   |       | (55,597                     | )          |
| Income from subsidiaries          |       | 533                                       |       | —                          |       | (533                     | )          | —                      |       |
| Other, net                        |       | 326                                       |       | (536                            | )          | —                   |       | (210                        | )          |
| Total other expense, net          |       | (67,127                                   | )          | (476                            | )          | (533                     | )          | (68,136                     | )          |
| (Loss) income before income taxes |       | (34,062                                   | )          | 1,451                           |       | (533                     | )          | (33,144                     | )          |
| Income tax expense                |       | —                                    |       | 918                             |       | —                   |       | 918                         |       |
| Net (loss) income                 |       | $                                         | (34,062    | )                               | 533        |                     | (533       | )                           | (34,062    | ) |
|                                   |            |                                           |            |                                 |            |                          |            |                             |            |  |  |  |  |

 

17

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**CondensedConsolidating Statements of Cash Flows**

**for theThree Months Ended March 31, 2006**

 
| ** **                                                  | ** ** | **Worldspan, L.P.—  Guarantor** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Eliminating  Entries** | ** ** | **Worldspan  Consolidated** | ** ** |
|-------------------------------------------------------------|------------|-------------------------------------------|------------|---------------------------------|------------|--------------------------|------------|-----------------------------|------------|
|                                                        |       |                                      |       |                            |       |                     |       |                        |       |
| Net cash provided by operating activities                   |       | $                                         | 57,471     |                            | $          | 1,104                    |       | $                           | —     |   | $ | 58,575 |   |
| Cash flows from investing activities:                       |       |                                      |       |                            |       |                     |       |                        |       |
| Purchase of property and equipment                          |       | (1,948                                    | )          | (132                            | )          | —                   |       | (2,080                      | )          |
| Proceeds from sale of property and  equipment               |       | 22                                        |       | 44                              |       | —                   |       | 66                          |       |
| Investment in subsidiaries                                  |       | (1,256                                    | )          | —                          |       | 1,256                    |       | —                      |       |
| Net cash used in investing activities                       |       | (3,182                                    | )          | (88                             | )          | 1,256                    |       | (2,014                      | )          |
| Cash flows from financing activities:                       |       |                                      |       |                            |       |                     |       |                        |       |
| Proceeds from issuance of debt, net of debt  issuance costs |       | —                                    |       | —                          |       | —                   |       | —                      |       |
| Principal payments on capital leases                        |       | (4,443                                    | )          | —                          |       | —                   |       | (4,443                      | )          |
| Principal payments on debt                                  |       | (40,000                                   | )          | —                          |       | —                   |       | (40,000                     | )          |
| Repurchase old notes                                        |       | —                                    |       | —                          |       | —                   |       | —                      |       |
| Distribution to WTI, net                                    |       | —                                    |       | —                          |       | —                   |       | —                      |       |
| Contributions to subsidiaries                               |       | —                                    |       | 1,256                           |       | (1,256                   | )          | —                      |       |
| Net cash (used in) provided by financing  activities        |       | (44,443                                   | )          | 1,256                           |       | (1,256                   | )          | (44,443                     | )          |
| Net increase in cash and cash equivalents                   |       | 9,846                                     |       | 2,272                           |       | —                   |       | 12,118                      |       |
| Cash and cash equivalents at beginning of  period           |       | 55,238                                    |       | 2,855                           |       | —                   |       | 58,093                      |       |
| Cash and cash equivalents at end of period                  |       | $                                         | 65,084     |                            | $          | 5,127                    |       | $                           | —     |   | $ | 70,211 |   |

 

18

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**CondensedConsolidating Statements of Cash Flows**

**for the Three Months Ended March 31, 2005**

 
| ** **                                                  | ** ** | **Worldspan,  L.P.—  Guarantor** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminating  Entries** | ** ** | **Worldspan  Consolidated** | ** ** |
|-------------------------------------------------------------|------------|---------------------------------------|------------|-----------------------------------|------------|--------------------------|------------|-----------------------------|------------|
|                                                        |       |                                  |       |                              |       |                     |       |                        |       |
| Net cash provided by (used in) operating  activities        |       | $                                     | 28,244     |                              | $          | (3,191                   | )          | $                           | —     |   | $ | 25,053 |   |
| Cash flows from investing activities:                       |       |                                  |       |                              |       |                     |       |                        |       |
| Purchase of property and equipment                          |       | (1,267                                | )          | (307                              | )          | —                   |       | (1,574                      | )          |
| Proceeds from sale of property and  equipment               |       | 54                                    |       | —                            |       | —                   |       | 54                          |       |
| Investments in subsidiaries                                 |       | (3,329                                | )          | —                            |       | 3,329                    |       | —                      |       |
| Net cash used in investing activities                       |       | (4,542                                | )          | (307                              | )          | 3,329                    |       | (1,520                      | )          |
| Cash flows from financing activities:                       |       |                                  |       |                              |       |                     |       |                        |       |
| Proceeds from issuance of debt, net of debt  issuance costs |       | 734,864                               |       | —                            |       | —                   |       | 734,864                     |       |
| Principal payments on capital leases                        |       | (4,737                                | )          | —                            |       | —                   |       | (4,737                      | )          |
| Principal payments on debt                                  |       | (58,488                               | )          | —                            |       | —                   |       | (58,488                     | )          |
| Repurchase old notes                                        |       | (327,481                              | )          | —                            |       | —                   |       | (327,481                    | )          |
| Distribution to WTI, net                                    |       | (425,678                              | )          | —                            |       | —                   |       | (425,678                    | )          |
| Contributions to subsidiaries                               |       | —                                |       | 3,329                             |       | (3,329                   | )          | —                      |       |
| Net cash (used in) provided by financing  activities        |       | (81,520                               | )          | 3,329                             |       | (3,329                   | )          | (81,520                     | )          |
| Net decrease in cash and cash equivalents                   |       | (57,818                               | )          | (169                              | )          | —                   |       | (57,987                     | )          |
| Cash and cash equivalents at beginning of  period           |       | 96,504                                |       | 3,970                             |       | —                   |       | 100,474                     |       |
| Cash and cash equivalents at end of period                  |       | $                                     | 38,686     |                              | $          | 3,801                    |       | $                           | —     |   | $ | 42,487 |   |

 

19

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**9.  Goodwill and Other Intangible Assets**

 

Goodwill andother intangible assets consisted of the following:

 
| ** **                                | ** ** | ** **                      | ** ** | **March 31, 2006** | ** ** | **December 31, 2005** | ** ** |
|-------------------------------------------|------------|---------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| ** **                                | ** ** | **Estimated  Useful Life** | ** ** | **Cost**                     | ** ** | **Accumulated  Amortization**   | ** ** | **Cost** | ** ** | **Accumulated  Amortization** | ** ** |
| Supplier and agency relationships         |       | 8-11 years                      |       | $                            | 318,467    |                            | $          | 91,687 |   | $ | 321,618 |   | $ | 84,637 |   |
| Information technology services contracts |       | 5-15 years                      |       | 36,126                       |       | 7,722                           |       | 36,126 |   | 7,020 |   |
| Developed technology                      |       | 5-11 years                      |       | 238,979                      |       | 61,145                          |       | 238,979 |   | 55,725 |   |
| Goodwill                                  |       | Indefinite                      |       | 111,803                      |       | —                          |       | 111,803 |   | — |   |
| Trade name                                |       | Indefinite                      |       | 72,142                       |       | —                          |       | 72,142 |   | — |   |
|                                      |       |                            |       | $                            | 777,517    |                            | $          | 160,554 |   | $ | 780,668 |   | $ | 147,382 |   |

 

During the three months endedMarch 31, 2006, the Partnership recorded $1,615 acceleration of amortization ofagency relationship intangibles related to two online agencies. The contractswith the Partnership were terminated by the agencies.  The write-off was recorded as additionalamortization in the statement of operations.

 

As discussed in Note 1,Delta and Northwest, both significant suppliers of the Partnership, enteredbankruptcy protection in September 2005. In connection with the Acquisition, the Partnership recorded anintangible asset in the amount of $33,152 related to its founding airlineservices agreements (“FASAs”) with Delta and Northwest.  As of March 31, 2006, the unamortized portionof the intangible asset related to the Delta and Northwest FASAs was $27,080.  This amount is included in “Other intangibleassets, net” in the accompanying consolidated balance sheets.  The services provided to Delta and Northwestunder the terms of their respective FASAs include internal reservationservices, development services and other support services.  The Partnership continues to provide servicesto the airlines in accordance with the terms of the respective FASA. ThePartnership believes that these services are essential to the continuedoperation of the airlines. In addition, the Partnership believes that the costof the services provided to Delta and Northwest are competitive to currentmarket rates for these services given the cost formula and the monthly creditthe airlines receive as a part of the FASA. The Partnership does not believethat the long term value of the FASA has changed based solely on the bankruptcyfilings and any additional facts currently available to it. Additional factscould become known or actions taken by the airlines in bankruptcy that couldimpact the long term value of the FASA and possibly result in an impairment ofthe intangible asset in the future.

 

In connection with theAcquisition, the Partnership also recorded additional intangible assets ofapproximately $318,467 related to the value of its exisiting relationships withonline travel agencies, traditional travel agencies and travel suppliers. ThePartnership believes to date that the Delta and Northwest bankruptcy filings arenot expected to have a materially adverse impact on cash flows because thetravel customer would be able to select another supplier if Delta and Northwestwere to selectively reduce their flight capacity. Alternatively, in connectionwith their bankruptcy related restructuring, Delta and Northwest could pursue aGDS alternative allowing them to bypass the Worldspan GDS.  If either Delta or Nothwest were successfulin bypassing the Worldspan GDS or significantly reducing their flight capacity,the Partnership’s cash flow and financial condition could be materially,adversely affected and possibly result in an impairment of the intangible assetin the future.

 

Of the $318,467 recordedfor the Parnership’s existing relationships with travel agencies and travelsuppliers, the Partnership estimates that $35,234, $76,174 and $14,223 were relatedto the Expedia, Orbitz and Priceline contracts, respectively. Based on these estimates,the portions of these intangible assets that were unamortized as ofMarch 31, 2006 were $23,122, $49,989 and $9,334. Upon determination of thespecific volumes, percentage of volumes or timing relating to Expedia’s orPriceline’s announced agreements with another GDS provider and the outcome ofthe Orbitz claims against us, the Partnership will further assess the impact,if any, on the overall financial condition as prescribed by Statement ofFinancial Accounting Standards (“SFAS”) No. 144, *Accounting for the Impairment or Disposal ofLong-Lived Assets*, and SFAS No. 142, *Goodwill and Other Intangible Assets*. SeeNote 1 for a discussion of the potential movement of Expedia, Priceline andOrbitz transactions to another GDS.

 

20

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The Partnership recorded amortization expense for its intangible assetsof $16,323 and $14,679 for the three months ended March 31, 2006 and 2005,respectively. Estimated amortization expense for the Partnership’s intangibleassets, excluding the $16,323 amortization recorded for the three months endedMarch 31, 2006, is as follows:

 
| **Year Ended December 31,** | ** ** | ** ** | ** ** |
|-----------------------------|------------|------------|------------|
| Remaining in  2006          |       | $          | 43,328     |   |
| 2007                        |       | 57,771     |       |
| 2008                        |       | 56,871     |       |
| 2009                        |       | 57,171     |       |
| 2010                        |       | 57,171     |       |
| Thereafter                  |       | 160,722    |       |
|                        |       | $          | 433,034    |   |

 

**10.Stock-Based Compensation**

 

Under the WTI stock incentive plan, WTI offersrestricted shares of its Class A Common Stock and grants options topurchase shares of its Class A Common Stock to selected managementemployees of the Partnership. WTI has reserved 12,580,000 shares of itsClass A Common Stock for issuance under the stock incentive plan. Up to6,580,000 shares may be offered as restricted stock, and up to 6,000,000 sharesmay be subject to options. The securities underlying the options are not tradedon an established exchange. The exercise price of anyoptions granted or the purchase price for restricted stock offered under thestock incentive plan is determined by the Board of Directors. Restricted stockawards and options vest over a five-year period which is deemed to be theservice period over which the stock-based compensation expense is recognized.Options expire ten years from date of grant. Option grants consist of “Series 1” and “Series 2” options.

 

In the event of an employee termination, WTI has theright to repurchase all or any of the shares of Common Stock acquired by anemployee under the WTI stock incentive plan for a cash payment equal to thefair market value (as determined by the Board of Directors) of the shares ofCommon Stock on the day of repurchase. If, however, the employee is terminatedfor cause, then the cash payment will be the lower of the fair market value andthe employee’s original purchase price.

 

Prior to January 1, 2006, WTI accounted for employeestock options and restricted stock awards in accordance with SFAS No. 123, *Accounting for Stock- Based Compensation* (“SFAS No. 123”).Under SFAS No. 123, WTI valued the stock options based upon a binomialoption-pricing model. As the options to purchase Class A Common Stock werebeing granted to employees of the Partnership, the Partnership recognized thegrant-date fair value as an expense ratably over the period in which theoptions vest, with a corresponding increase in Partners’ capital.

 

In December 2004, the FASB issued SFAS No. 123(R), *Share-Based Payment*(“SFAS No. 123(R)”),**which is a revision of SFAS No.123. The Partnership adopted the provisions of SFAS No. 123(R) effective at thebeginning of 2006. The Partnership elected to use the modified-prospectivetransition method which had no significant impact on income before incometaxes, net income, cash flow from operations or cash flow from financingactivities.

 

21

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Stock option activity under the WTI stock incentiveplan for the three-month period ended March 31, 2006 is summarized as follows:

 
| ** **                             | ** ** | **Series 1**              | ** ** | **Series 2**                         | ** ** |
|----------------------------------------|------------|--------------------------------|------------|-------------------------------------------|------------|
| ** **                             | ** ** | **Number of Shares** | ** ** | **Weighted-Average  Exercise Price** | ** ** | **Number of Shares** | ** ** | **Weighted-  Average  Exercise Price** | ** ** |
| Outstanding at December 31, 2005  |       | 2,102,500                      |       | $                                         | 1.48       |   | 2,102,500 |   | $ | 6.49 |   |
| Granted (1)                            |       | 7,500                          |       | 3.79                                      |       | 7,500 |   | 7.79 |   |
| Exercised (2)                          |       | (280,000                       | )          | 1.20                                      |       | — |   | — |   |
| Forfeited                              |       | (8,500                         | )          | 1.40                                      |       | (8,500 | ) | 6.26 |   |
| Unexercised                            |       | (3,000                         | )          | 1.20                                      |       | (3,000 | ) | 6.42 |   |
|                                   |       |                           |       |                                      |       |   |   |   |   |
| Outstanding at March 31, 2006 (3) |       | 1,818,500                      |       | 1.33                                      |       | 2,098,500 |   | 6.34 |   |
|                                   |       |                           |       |                                      |       |   |   |   |   |
| Exercisable at March 31, 2006 (4)      |       | 596,500                        |       | 1.22                                      |       | 876,500 |   | 6.41 |   |
|                                        |            |                                |            |                                           |            |  |  |  |  |  |  |

 

----

(1)   As allowed under SFAS No. 123(R), WTI hascontinued to apply the binomial option-pricing model in valuing the optionsgranted in the first quarter of 2006 with the resulting fair value beingamortized straight-line over the service period. The weighted-average exerciseprice and weighted-average grant-date fair value of the Series 1 optionsreflected above as being granted during the quarter were $3.79 and $2.05,respectively, per share. These options were granted with an exercise pricelower than the market value of the underlying Class A Common Stock. Theweighted-average exercise price and weighted-average grant-date fair value ofthe Series 2 options reflected above as being granted during the quarterwere $7.79 and $0, respectively, per share. These options were granted with anexercise price higher than the market value of the underlying Class A CommonStock. During the quarter ended March 31, 2005, there were 77,500 Series 1options granted with a weighted-average exercise price of $1.83 and aweighted-average grant-date fair value of $0.31; additionally, there were77,500 Series 2 options granted with a weighted-average exercise price of $6.06and a weighted-average grant-date fair value of $0.

 

(2)   WTI received $336 in cash upon exercise ofthese options. The intrinsic value of the 280,000 Series 1 options exercisedduring the quarter ended March 31, 2006 was approximately $865, whichrepresents the amount by which the market value of the underlying stock exceedsthe exercise price of the option. The market value of the underlying stock wasapproximately $4.29 on the date of exercise. There were no options exercisedduring the quarter ended March 31, 2005.

 

(3)   The aggregate intrinsic value of the Series 1and Series 2 options expected to vest at March 31, 2006 was approximately$3,387 and $0, respectively. See item (2) above regarding the definition of“intrinsic value.” The weighted-average exercise prices of the Series 1 andSeries 2 options expected to vest were $1.39 and $6.30, respectively. Theweighted-average remaining contractual term of the Series 1 and Series 2options expected to vest at March 31, 2006 was 8.0 years for both Series. The totalcompensation cost to be recognized under SFAS 123(R) related to Series 1 andSeries 2 options at March 31, 2006 expected to vest is approximately $547 and$114, respectively, which will be expensed over the remaining weighted-averagevesting period of 3.0 years for both Series.

 

(4)   The total fair value of Series 1 and Series 2options vested at March 31, 2006 was approximately $356 and approximately $106,respectively. At March 31, 2005, there were 516,000 Series 1 options vestedwith a total fair value of approximately $151 and 516,000 Series 2 optionsvested with a total fair value of approximately $44. The aggregate intrinsicvalue of the Series 1 and Series 2 options vested at March 31, 2006 wasapproximately $1,834 and $0, respectively. See item (2) above regarding thedefinition of “intrinsic value.”  Theweighted-average remaining contractual term of the Series 1 and Series 2options exercisable at March 31, 2006 was 7.5 years for both Series.

 

For grants of options awarded during the quartersended March 31, 2006 and 2005, the weighted-average assumptions used inthe binomial option-pricing model were as follows:

 
| ** ** | ** ** | **Risk-Free  Interest Rate  (1)** | ** ** | **Expected  Life (2)** | ** ** | **Expected  Volatility (3)** | ** ** | **Expected  Dividend Yield** | ** ** |
|------------|------------|----------------------------------------|------------|-----------------------------|------------|-----------------------------------|------------|-----------------------------------|------------|
| 2006       |       | 4.61                                   | %          | 6.5  years                  |       | 35.22                             | %          | 0                                 | %          |
| 2005       |       | 4.00                                   | %          | 5 years                     |       | 0                                 | %          | 0                                 | %          |

 

----

 

(1)   Represents the rate of a U.S. Treasurysecurity maturing from the grant date over a period of time approximating theexpected life of the option.

(2)   Prior to January 1, 2006, the Partnershipestimated the expected life to approximate the vesting period. However, due toa lack of substantial history regarding the timing of exercises (thePartnership was formed only recently – June 30, 2003), the Partnership haselected to use the simplified method allowed by Staff Accounting Bulletin (SAB)No. 107*, Share-Based Payment*, for estimatingthe expected term equal to the midpoint between the vesting period and thecontractual term. This change of estimate was effective January 1, 2006.

(3)   Prior to January 1, 2006, the Partnershipestimated expected volatility to approach zero as the underlying stock is notpublicly traded. Effective January 1, 2006, as required under SFAS No. 123 (R),the Partnership has estimated the volatility of the underlying stock. ThePartnership has determined that the historical volatility experienced by one ofits major competitor’s publicly-traded stock reflects a more accurate forecastof volatility.

 

22

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Non-vested restricted share activity under the WTIstock incentive plan for the three-month period ended March 31, 2006 issummarized as follows:

 
| ** **                                                                      | ** ** | **Number of Shares** | ** ** | **Weighted-  Average  Grant-Date Fair  Value (1)** | ** ** |
|---------------------------------------------------------------------------------|------------|--------------------------------|------------|--------------------------------------------------------------|------------|
| Non-vested restricted shares of Class A Common Stock at December 31,  2005 |       | 3,139,046                      |       | $                                                            | 2.54       |   |
| Granted                                                                         |       | —                         |       | —                                                       |       |
| Vested (2)                                                                      |       | (40,000                        | )          | 0.88                                                         |       |
| Forfeited                                                                       |       | —                         |       | —                                                       |       |
|                                                                            |       |                           |       |                                                         |       |
| Non-vested restricted shares of Class A  Common Stock at March 31, 2006 (3)     |       | 3,099,046                      |       | $                                                            | 2.56       |   |

 

----

(1)   Under both SFAS No. 123(R) and SFAS No. 123,the fair value of restricted stock awards is measured as being the intrinsicvalue of the shares on the day of grant – i.e. the amount by which the marketvalue of the shares on the day of grant exceeds the exercise/purchase price ofthe shares.

 

(2)   The fair value of restricted stock awardsvested during the three months ended March 31, 2006 was approximately $35. Norestricted stock awards vested during the three months ended March 31, 2005.

 

(3)   Of the non-vested shares at March 31, 2006,3,099,046 are expected to vest. The total compensation cost to be recognizedunder SFAS 123(R) related to the shares at March 31, 2006 expected to vest isapproximately $7,492, which will be expensed over the remainingweighted-average service period of 2.8 years.

 

During the three months ended March 31, 2006 andMarch 31, 2005, the Partnership recorded $662 and $644, respectively, in totalstock-based employee compensation expense, of which $219 and $116,respectively, was attributable to stock options. The Partnership recognizedstock-based compensation expense of $43 and $64 during the three month periodsended March 31, 2006 and 2005 attributable to restricted stock grants. ThePartnership recognized stock-based compensation expense of $400 and $464 duringthe three month periods ended March 31, 2006 and 2005,respectively, attributable to restricted stock subscription agreements.

 

WTI did not issue any restricted stock awards duringthe quarter ended March 31, 2006. On February 28, 2005, WTI entered into astock subscription agreement in connection with the exercise by a member ofmanagement of his option to purchase 16,000 shares of Class A Common Stock foran aggregate purchase price of $25. This sale was exempt from registrationunder the Securities Act in reliance on Rule 506 promulgated thereunder. OnMarch 21, 2005, WTI entered into a restricted stock subscription agreementunder which one of our executive officers purchased an aggregate of 200,000restricted shares of WTI Class A Common Stock at a price of $1.00 per share,for an aggregate purchase price of $200. These restricted shares vest overapproximately five years, which is deemed to be the service period over whichthe stock-based compensation expense is recognized. This sale was exempt fromregistration under the Securities Act in reliance on Rule 506 promulgatedthereunder and was made without registration pursuant to the exemption providedby Rule 701 of the Securities Act.

 

**11.Airline Content Agreements**

 

InMarch and April 2006, the Partnership signed five-year content agreements withAmerican, Continental and United. In May 2006, the Partnership signed afive-year content agreement with Northwest. The terms of these agreements willbecome effective in the third quarter of 2006 with the exception of theNorthwest agreement which must also receive Bankruptcy Court approval. Inconjunction with the agreements, Worldspan has developed two new optionalproducts to introduce into the marketplace. Through these new agreements,travel agencies will have the opportunity to access the airlines' comprehensivepublished fares and inventory. The Partnership expects that our new contentagreements will result in reduced transaction fees from participating airlineswhich could have a material adverse effect on revenue, however, the Partnershipcannot predict at this time the ultimate impact of these agreements onearnings.

 

**12.Subsequent Events**

 

OnApril 10, 2006 the Partnership made a $10 million discretionary payment on theTerm Loan.

 

InMay 2006, the Partnership received approximately $10,450 in previously disputedexcess messaging fees from a certain former online travel agency. The receiptof these fees will be included in the Partnership’s second quarter 2006 resultsof operations as the amount of the fees was not fixed and determinable andcollectibility was not reasonably assured at March 31, 2006.

 

 

23

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**ITEM 2.**      MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS

** **

*Referencesto “WTI” refer to Worldspan Technologies Inc. References to the “company”or “partnership” refer to Worldspan, L.P. The terms “we”, “us”, “our” and othersimilar terms refer to the consolidated businesses of the company and all ofits subsidiaries. References to the “Acquisition” refer to the acquisition byWTI, of our general partnership interests and, through its wholly-ownedsubsidiaries, limited partnership interests. 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 3, 2006.*

 

**Overview**

** **

Weare a provider of mission-critical transaction processing and informationtechnology services to the global travel industry. We provide subscribers(including traditional travel agencies, online travel agencies and corporatetravel departments) with real-time access to schedule, price, availability andother travel information and the ability to process bookings and issue ticketsfor the products and services of over 700 travel suppliers (such as airlines,hotels, car rental companies, tour companies and cruise lines) throughout theworld. Globally, we are the largest transaction processor for online travelagencies, having processed approximately 59% of all global distribution system,or GDS, online air transactions during the twelve months ended March 31, 2006.In the United States (the world’s largest travel market), we are the secondlargest transaction processor for travel agencies, accounting for approximately32% of GDS air transactions and approximately 63% of online GDS airtransactions processed during the twelve months ended March 31, 2006. Duringthe twelve months ended March 31, 2006, we processed approximately 202 milliontransactions. We also provide information technology services to the travelindustry, primarily airline internal reservation systems, flight operationstechnology and software development.

 

Wedepend upon a relatively small number of airlines and online travel agenciesfor a significant portion of our revenues. Our five largest airlinerelationships represented an aggregate of approximately 51% and 52% of ourtotal revenues for the twelve months ended March 31, 2006 and December 31,2005, respectively, while our top ten largest airline relationships representedan aggregate of approximately 63% and 64% of our total revenues for the twelvemonths ended March 31, 2006 and December 31, 2005, respectively. Ourrelationships with four online travel agencies, Expedia, Orbitz, Hotwire andPriceline, represented 50% of our total transactions during the twelve monthsended March 31, 2006. We expect to continue to depend upon a relativelysmall number of airlines and online travel agencies for a significant portionof our revenues.

 

InSeptember 2005, we and Orbitz LLC (“Orbitz”) each filed separatecomplaints against the other with respect to certain disputes arising under ouronline agreement with Orbitz. See “Item 1. Legal Proceedings” in Part II. Inaddition, both Expedia and Priceline have signed agreements with other GDSproviders. While we are unable to estimate the volume of Expedia transactionsthat could move to the other GDS, based on recent statements made by Expedia,we believe some portion of Expedia volume could move in the second half of2006. In fact, Expedia announced in May 2006 that it has commenced booking atselect points of sale certain European segments through another GDS aspreviously announced. Currently, we cannot forecast the magnitude of any suchmovement of transactions and therefore are unable to estimate the impact on ourfinancial position, results of operations and cash flows. We have not receivedany notification from Priceline as to the timing and volume of transactionsthat it intends to move.

 

EffectiveSeptember 14, 2005, Delta and Northwest, both significant suppliers ofours, entered bankruptcy protection. For a more complete discussion of thebankruptcies, see the section captioned “Liquidity and Capital Resources.”

 

***Supplier Content and Transaction Fees***

*** ***

Adevelopment within the GDS industry over the past several years involves thecompetitive need for GDSs to maintain full content for distribution totraditional and online agency subscribers. Historically, we have increased thetransaction fees we collect from our airline suppliers. As our business evolvesand we continue to explore new ways to offer effective distribution options toour travel suppliers and travel agencies, we are entering into new contentarrangements that depart from our traditional business model. As a result, wedo not anticipate that the historic trend

 

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of annual transactionfee increases will continue in the future. Recently, we have entered intolong-term content agreements with American Airlines, Continental Airlines,United Air Lines and Northwest Airlines. The Northwest agreement is subject to BankruptcyCourt approval. Generally, in these agreements, the airlines commit (subject tothe exceptions contained in the agreements) to provide the traditional andonline travel agencies covered by the agreements in the territories covered bythe agreements with full content subject to certain restrictions in exchangefor payments from us and/or discounts in transaction fees to each airline. Inaddition, pursuant to these agreements, the airlines mentioned above haveagreed, among other things, to commit to the highest level of participation inour GDS. Subject to termination rights, the obligations continue until 2011.These content agreements are intended to provide our travel agencies in theterritories covered by the agreements with access to improved contentconcerning the flights and fares of the participating airlines and other formsof non-discriminatory treatment. We are currently in discussions with certainother airlines, including Delta and U.S. Airways, regarding the renewal oftheir content agreements that are due to expire by the end of 2006. Inaddition, we expect to negotiate new content agreements with our other majorairline suppliers as the original content agreements with these airlines expirein 2006 and 2007. As we continue to enter into these new agreements, we believethat transaction fees paid to us by the airlines will be lower than the termsof our current agreements. The nature and extent of any reductions in suppliertransaction fees could be impacted by the actions of some of our GDScompetitors whose content agreements generally expire in advance of ours and isalso dependent on the rate at which travel agencies elect to participate in thevarying levels of content availability in the future. The outcome of thesenegotiations and the financial impact they may have are difficult to predictand could be material to our revenues, operating profit, financial conditionand cash flows. The inability to renegotiate our content agreements with Delta,U.S. Airways and other airlines could have a material adverse effect on ourbusiness, financial condition and results of operations.

 

Webelieve that obtaining similar content from our other major airline travelsuppliers is important to our ability to compete, since other GDSs have alsoentered into content agreements with various airlines. We expect that futurecontent agreements will require us to make, in the aggregate, significantpayments or other concessions to the participating airlines, which we expectwill reduce our revenues. Further, should we fail to maintain competitivecontent, our traditional and online agency subscribers could move transactionsfrom us to competitors with access to this content, thus negatively affectingthe Partnership’s business, financial condition and results of operation.

 

***Financial Conditions in the Airline Industry***

*** ***

Thedownturn in the commercial airline market, together with, and resulting from,the ongoing threat of terrorist acts, the global economic downturn, thecontinuing conflict in Iraq and rising fuel costs for commercial airlines,among other issues, have adversely affected the financial condition of manycommercial airlines. Several major airlines are experiencing liquidityproblems, some have sought bankruptcy protection and still others areconsidering, or may consider, bankruptcy relief. We derive a substantialportion of our revenues from transaction fees received directly from airlinesand from the sale of products and services directly to airlines. Incircumstances where an airline declares bankruptcy, we may be unable to collectour outstanding accounts receivable from the airline. In addition, thebankruptcy of the airline might result in reduced transaction fees and otherrevenues from the airline, a rejection by the airline of some or all of ouragreements with it, or loss of the revenue by other means such as an airlineliquidation, all of which could have a material adverse effect on our business,financial condition and results of operation. In September 2005, Delta andNorthwest entered bankruptcy protection. For further discussion of thepotential impact of these bankruptcy filings, see “Management’s Discussion andAnalysis of Financial Condition and Results of Operations—Liquidity and CapitalResources.”

 

***Channel Shift***

*** ***

Anincreasing number of travel transactions are being made online. During both thetwelve months ended March 31, 2006 and December 31, 2005, airline transactionsgenerated through online travel agencies accounted for approximately 34% of allairline transactions in the United States processed by a GDS, up from approximately31% in 2004, approximately 28% in 2003, and approximately 23% in 2002. Between2002 and 2005, the number of airline transactions in the United Statesgenerated through online travel agencies and processed by us increased at acompound annual growth rate of 11.6%. We believe that this shift to onlinetravel agency bookings will continue, but the extent and pace of the shift isdifficult to anticipate. Other industry developments, such as Expedia’sannouncement that it intends to move a portion of its transactions to otherGDSs, compound our difficulty in forecasting the growth of our transactionsfrom online travel agencies. We typically pay a higher inducement pertransaction to our large online travel agency customers than our traditionalagencies.

 

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***Uncertainty in Transaction Volumes from OnlineTravel Agencies***

*** ***

Althoughwe have historically processed most of the airline transactions for our onlinetravel agencies, these agencies may move a portion of their business to othertechnologies and technology providers, subject to some contractual limitations.For example, Expedia announced in May 2004 that it intends to diversifyits GDS relationships beyond using a single provider to process substantially allof its GDS transactions and that it intends to move a portion of itstransactions to another GDS provider. Expedia has not specified the volumes orpercentages of volumes it intends to process through this other GDS. To date,the anticipated movement of Expedia’s transactions has not occurred; however,based on recent statements made by Expedia, we believe some movement oftransactions may occur in the second half of 2006. Also, in October 2005, Expedianotified us of its intention to move some portion but not all of its Europeantransactions to another GDS provider in 2006. In fact, Expedia announced in May2006 that it has commenced booking at select points of sale certain Europeansegments through another GDS as previously announced. Currently, we cannotforecast the magnitude of any such movement of transactions and therefore areunable to estimate the impact on our financial position, results of operationsand cash flows. In addition, on February 10, 2006, Priceline announcedthat it had signed an agreement with another GDS. Currently, we are unable toestimate the magnitude and timing of any movement of transactions to the otherGDS by Priceline. In addition, Orbitz has developed direct connections withtravel suppliers which bypass our GDS. Further, Cendant Corporation acquiredOrbitz in February 2005. Cendant’s Travel Distribution Services Divisionincludes Galileo, which is a competitor of ours. Orbitz is one of our largestonline travel agency customers. Our contract with Orbitz extends into 2011 subjectto standard termination rights held by Orbitz including for-cause terminationrights. Also, in September 2005, we and Orbitz each filed separatecomplaints against the other with respect to certain disputes arising under ouronline agreement with Orbitz. See “Item 1. Legal Proceedings” in Part II. Furthermore,in connection with the Acquisition we recorded an intangible asset related toonline customer contracts of $131.9 million, of which we estimate$35.2 million, $76.2 million and $14.2 million were related tothe Expedia, Orbitz and Priceline contracts, respectively. Based on theseestimates, the portions of these intangible assets that were unamortized as ofMarch 31, 2006 were $23.1 million, $50.0 million and$9.3 million. Upon determination of the specific volumes, percentage ofvolumes or timing relating to Expedia's or Priceline's announced agreementswith other GDS providers and the outcome of the Orbitz claims against us, wewill further assess the impact, if any, on the overall financial condition asprescribed by Statement of Financial Accounting Standards ("SFAS")No. 144, *Accounting for the Impariment or Disposal of Long-LivedAssets*, and SFAS No. 142, *Goodwill and OtherIntangible Assets*.

 

Althoughwe currently continue to operate under these agreements, it is uncertain as towhether or not these and our other major online travel agencies will notattempt to terminate their respective agreements with us or otherwise movebusiness to another GDS in the future. With this uncertainty, we cannotreliably forecast the volume of such transactions and may experiencetransaction volume decreases that result in a material adverse effect on ourfinancial condition and operating results.

 

***Neutrality***

*** ***

Wedo not own an online travel agency. Unlike our competitors, we haveintentionally not pursued a strategy of vertical integration and instead haveforged strategic partnerships with leading online travel agencies. Given thehighly competitive 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 not owned by a GDS. However,to the extent that such agencies are acquired by or become affiliated with oneof our competitors, the likelihood of our capturing additional business fromthose agencies may be reduced and our existing business with those agencies maybe at risk.

 

***FASA Credits***

*** ***

Pursuantto the terms of our founder airline services agreements, or FASAs, we provideFASA credits to Delta and Northwest to be applied against FASA service feepayments due from these airlines to us. The FASA credits are structured andwill be applied through June 2012 in scheduled monthly installments up toan aggregate total of approximately $79.2 million to each of Delta andNorthwest as of March 31, 2006, and are reflected as reductions of FASArevenue in the corresponding periods. In the event that the monthly FASAcredits deliverable by us to Delta or Northwest are more than the FASA servicefee payments due from the applicable airline, then we will be obligated to paysuch excess to such airline in cash. See the section captioned “Liquidity andCapital Resources” below for further information on the FASA credits. At thistime we cannot predict how the Delta and Northwest bankruptcies may affect theFASAs. Our agreements with Delta and Northwest provide that we have the rightto recoup service fees owed to us by Delta and Northwest against our FASAcredit obligations. We will continue to exercise our recoupment rights forservice fees owed to us for the period preceding the Delta and Northwestbankruptcies, although we cannot

 

26

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assure you that theexercise of these rights will not be successfully challenged by the airlines inbankruptcy court. The rejection of those agreements in bankruptcy by one orboth airlines could have a material adverse effect on our business, financialcondition and results of operations.

 

**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 aregenerated by charging a fee per transaction, which is generally paid by thetravel supplier, based upon the number of transactions involved in the booking.We record and charge one transaction for each segment of an air travelitinerary (e.g., four transactions for a round-trip airline ticket with oneconnection each way). We record and charge one transaction for each car rental,hotel, cruise or tour company booking, regardless of the length of timeassociated with the booking. Fees paid by travel suppliers vary according tothe levels of functionality at which they can participate in our GDS. Theselevels of functionality generally depend upon the type of communications andreal-time access allowed with respect to the particular travel supplier’sinternal systems. Revenues are based on the volume of transactions and are notdependent on the revenue earned by the supplier for that booking. We recognizerevenue for airline travel transactions in the month the transactions areprocessed, net of current actual and estimated future cancellations fortransactions processed in that month. Revenues for other types of traveltransactions are recognized at the time the booking is used by the traveler.Although the substantial majority of our electronic travel distributionrevenues are derived from transaction fees paid by travel suppliers, we have anagreement with Hotwire which does not follow this traditional business model.Under our agreement with Hotwire, we generally derive revenues from a service feepayable by Hotwire (rather than the travel supplier) based upon the number oftravel transactions booked.

 

Set forth below is a chartillustrating the flow of payments in a typical consumer travel bookingprocessed by us pursuant to our traditional business model.

 
| 1  roundtrip airline ticket (one connection each way) |   | 4  transactions |
|-------------------------------------------------------|--------|-----------------|
| 1  car rental (3 days)                                |   | 1  transaction  |
| 1  hotel reservation (3 days)                         |   | 1  transaction  |
|                                                  |   | 6  transactions |

 

 

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*       Transaction and inducement fees are forillustrative purposes only.

 

•  Information technology services revenuesare generated by charging a fee for hosting travel supplier inventory,reservations, flight operations and other computer applications within our datacenter and by providing software development and maintenance services on thoseapplications. Fees paid by hosted travel suppliers are generally based upon thevolume of messages processed on behalf of the travel supplier or softwaredevelopment hours performed on the travel supplier’s applications. In some cases,we charge fees for access to and usage of certain of our proprietaryapplications on a per transaction basis. Revenues for information technologyservices are recognized in the month that the services are provided and arerecorded net of the value of the FASA credits earned by Delta and Northwest inthe corresponding month.

 

Ourcosts and expenses consist of the cost of electronic travel distribution andinformation technology services revenues, selling, general and administrativeexpenses and depreciation and amortization:

 

•  Cost of electronic travel distributionrevenues consists primarily of inducements paid to travel agencies, technologydevelopment and operations personnel, software costs, network costs, hardwareleases,

 

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maintenance of computerand network hardware, the data center building, help desk and other travelagency support headcount. As our transactions from online travel agenciesincrease as a percent of our total transactions, we incur additional inducementand technology costs due to the average inducement paid to our large onlinecustomers typically exceeding the average inducement that we pay to traditionaltravel agencies and due to a higher volume of messages processed per transactionin the online channel compared to traditional travel agency transactions. Costof information technology services revenues consists primarily of technologydevelopment and operations personnel, software costs, network costs, hardwareleases, depreciation of computer hardware and the data center building,amortization of capitalized software and maintenance of computer and networkhardware.

 

•  Selling, general and administrativeexpenses consist primarily of sales and marketing, labor and associated costs,advertising services, professional fees, a portion of the expenses associatedwith our facilities, depreciation of computer equipment, furniture and fixturesand leasehold improvements, internal management costs and expenses for finance,legal, human resources and other administrative functions.

 

**Critical AccountingPolicies**

** **

The discussion and analysisof our financial condition and results of operations is based on ourconsolidated financial statements, which have been prepared in accordance withaccounting principles generally accepted in the United States. The preparationof these financial statements requires us to make estimates and judgments thataffect our reported assets and liabilities, revenues and expenses, and otherfinancial information. Actual results may differ significantly from theseestimates, and our reported financial condition and results of operations couldvary under different assumptions and conditions. In addition, our reportedfinancial condition and results of operations could vary due to a change in theapplication of a particular accounting standard.

 

We regard an accountingestimate underlying our financial statements as a “critical accountingestimate” if the accounting estimate requires us to make assumptions aboutmatters that are highly uncertain at the time of estimation and if differentestimates that reasonably could have been used in the current period, orchanges in the estimate that are reasonably likely to occur from period toperiod, would have had a material effect on the presentation of financialcondition, changes in financial condition, or results of operations.

 

Prior to January 1, 2006, the Partnership accountedfor employee stock options and restricted stock awards in accordance with SFASNo. 123, *Accounting for Stock- Based Compensation*(“SFAS No. 123”). In December 2004, the FASB issued SFAS No. 123(R), *Share-Based Payment*(“SFAS No. 123(R)”),**which is a revision of SFAS No.123. The Partnership adopted the provisions of SFAS No. 123(R) effectiveJanuary 1, 2006. Like SFAS No. 123, SFAS No. 123(R) requires the use of variousassumptions in determining the amount of compensation expense to recognize.Upon adoption of SFAS No. 123(R), the Partnership changed certain of itsassumptions, including the following:

 

•      Forfeiture rates – The Partnership changed from using actualforfeitures as allowed by SFAS No. 123 to using estimated forfeitures asrequired by SFAS No. 123(R).

 

•      Expected life – Due to a lack of substantial historyregarding the timing of exercises (the Partnership was formed only recently –June 30, 2003), the Partnership changed from using an estimate approximatingthe vesting period to using the simplified method allowed by Staff AccountingBulletin (SAB) No. 107*, Share-Based Payment*,for estimating the expected term equal to the midpoint between the vestingperiod and the contractual term.

 

•      Expected volatility - Prior to January 1, 2006, the Partnershipestimated expected volatility to approach zero as the underlying stock is notpublicly traded. As required by SFAS No. 123(R), the Partnership has estimatedthe volatility of the underlying stock using the historical volatilityexperienced by one of its major competitor’s publicly-traded stock, an estimatewhich the Partnership has determined reflects a more accurate forecast ofvolatility.

 

The Partnership elected to use themodified-prospective transition method in adopting SFAS No. 123(R). Theadoption of SFAS No. 123(R), including the changes in the above assumptions,had no significant impact on income before income taxes, net income, cash flowfrom operations or cash flow from financing activities.

 

Other than as discussedabove regarding the adoption of SFAS No. 123(R), there have been no changes toour critical accounting policies or significant changes in assumptions orestimates that would affect such policies in the three months ended March 31,2006. Our critical accounting policies are described in Item 7, “ *Management’s Discussion and Analysis of FinancialCondition and Results of Operations*“ in our Annual Report on Form10-K for the year ended December 31, 2005.

 

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**Results of Operations**

** **

Thefollowing table shows information derived from our consolidated statements ofoperations expressed as a percentage of revenues for the periods presented.

 
| ** **                                                    | ** ** | **Three months  ended   March 31,   2006** | ** ** | **Three months  ended  March 31,  2005** | ** ** |
|---------------------------------------------------------------|------------|----------------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                    | ** ** | ** **                                                     | ** ** | ** **                                         | ** ** |
| Revenues:                                                     |       |                                                           |       |                                               |       |
| Electronic travel distribution                                |       | 92.6                                                           | %          | 92.9                                               | %          |
| Information technology services                               |       | 7.4                                                            |       | 7.1                                                |       |
| Total revenues                                                |       | 100.0                                                          |       | 100.0                                              |       |
| Operating expenses:                                           |       |                                                           |       |                                               |       |
| Cost of revenues excluding developed  technology amortization |       | 62.5                                                           |       | 68.4                                               |       |
| Developed technology amortization                             |       | 2.1                                                            |       | 2.2                                                |       |
| Total cost of revenues                                        |       | 64.6                                                           |       | 70.6                                               |       |
| Selling, general and administrative expenses                  |       | 10.5                                                           |       | 12.5                                               |       |
| Amortization of intangible assets                             |       | 4.2                                                            |       | 3.5                                                |       |
| Total operating expenses                                      |       | 79.3                                                           |       | 86.6                                               |       |
| Operating income                                              |       | 20.7                                                           |       | 13.4                                               |       |
| Total other expense, net                                      |       | (6.6                                                           | )          | (26.1                                              | )          |
| Income (loss) before provision for income  taxes              |       | 14.1                                                           |       | (12.7                                              | )          |
| Income tax expense                                            |       | 0.2                                                            |       | 0.4                                                |       |
| Net income (loss)                                             |       | 13.9                                                           | %          | (13.1                                              | )%         |

 

Thefollowing table shows total transactions using the Worldspan GDS for theperiods presented. The historical transaction data set forth below reflects thedesignations which were in effect for each period presented. We evaluate theclassification of our travel agencies periodically and reclassify asappropriate.

 

**WorldspanTransaction Summary(in millions)**

** **
| ** **         | ** ** | **Three  months  ended  March 31,  2006** | ** ** | **Three  months  ended  March 31,  2005** | ** ** | **%  Change** | ** ** |
|--------------------|------------|------------------------------------------------|------------|------------------------------------------------|------------|---------------|------------|
| Traditional        |       | 27.2                                           |       | 27.6                                           |       | (1.4          | )%         |
| Online             |       | 28.8                                           |       | 29.5                                           |       | (2.4          | )%         |
| Total transactions |       | 56.0                                           |       | 57.1                                           |       | (1.9          | )%         |

 

**WorldspanRevenue Summary(in millions)**

** **
| ** **                       | ** ** | **Three months  ended  March 31,  2006** | ** ** | **Three months  ended  March 31,  2005** | ** ** | **%  Change** | ** ** |
|----------------------------------|------------|----------------------------------------------------|------------|----------------------------------------------------|------------|---------------|------------|
| Electronic travel  distribution  |       | $                                                  | 242.7      |                                               | $          | 242.0         |       | 0.3 | % |
| Information technology  services |       | 19.4                                               |       | 18.6                                               |       | 4.3           | %          |
| Total revenue                    |       | $                                                  | 262.1      |                                               | $          | 260.6         |       | 0.6 | % |

 

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**WorldspanRevenue per Transaction Summary**

 
| ** **                   | ** ** | **Three  months  ended  March 31,  2006** | ** ** | **Three  months  ended  March 31,  2005** | ** ** | **%  Change** | ** ** |
|------------------------------|------------|------------------------------------------------|------------|------------------------------------------------|------------|---------------|------------|
| Revenue per transaction  (1) |       | $                                              | 4.33       |                                           | $          | 4.24          |       | 2.1 | % |
|                              |            |                                                |            |                                                |            |               |            |  |  |

** **

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**(1) Revenue per transaction calculated as Electronic traveldistribution revenue divided by total transactions.**

 

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***Comparison of the Three Months Ended March 31, 2006and March 31, 2005***

** **

*Revenues*

* *

Total revenues increased$1.5 million or 0.6% to $262.1 million from $260.6 million for the threemonths ended March 31, 2006 and 2005, respectively. The increase wasattributable to higher average fees per transaction processed by bothtraditional and online travel agencies and an increase in subscription-basedtechnology services, partially offset by a decrease in the volume oftransactions processed by both traditional and online travel agencies.

 

Electronic traveldistribution revenues increased $0.7 million or 0.3% to $242.7 million from$242.0 million for the three months ended March 31, 2006 and 2005,respectively. This increase was due to a 2.1% increase in the average fee pertransaction, partially offset by a 1.1 million or 1.9% decrease in transactionsgenerated by traditional and online travel agencies.

 

Information technologyservices revenues increased $0.8 million or 4.3% to $19.4 million from$18.6 million for the three months ended March 31, 2006 and 2005,respectively. The increase was primarily attributable to increased revenueassociated with the use of Worldspan Rapid Reprice SM and ElectronicTicketing, partially offset by lower FASA revenue.

 

*Costof Revenues Excluding Developed Technology Amortization*

* *

Cost of revenuesexcluding developed technology amortization decreased $14.3 million or 8.0% to$163.8 million from $178.1 million for the three months endedMarch 31, 2006 and 2005, respectively. Cost of revenues excludingdeveloped technology amortization as a percentage of total revenues decreasedto 62.5% from 68.4% for the three months ended March 31, 2006 and 2005,respectively. The $14.3 million decrease was primarily driven by a reduction intravel agency inducement expense related to minimum booking fees that werereceived from certain former online travel agencies towards the settlement ofdisputed amounts, lower network and communication costs and employee costs,partially offset by higher outside services costs.

 

Cost of electronictravel distribution revenues excluding developed technology amortizationdecreased $13.7 million or 8.8% to $142.8 million from $156.5 million forthe three months ended March 31, 2006 and 2005, respectively. Cost ofelectronic travel distribution revenues excluding developed technologyamortization as a percentage of total electronic travel distribution revenuedecreased to 58.8% from 64.7% for the three months ended March 31, 2006and 2005, respectively. The $13.7 million decrease was primarily attributableto a $10.4 million or 10.2% decrease in inducements paid to travel agencies, a$2.7 million or 44.1% decrease in network and communication costs, and a $2.3million or 12.1% decrease in employee costs, partially offset by a $2.9 millionor $44.5% increase in outside service costs. Inducements decreased due to $11.3million of minimum booking fees that were received from certain former online travelagencies towards the settlement of disputed amounts. This agency revenue hasbeen reclassified to inducement expense in accordance with Emerging Issues TaskForce Issue No. 01-9, *Accounting forConsideration Given by a Vendor to a Customer (Including a reseller of theVendor’s Products).* Excluding this agency revenue, inducementexpense would have increased $0.9 million primarily due to higher inducementrates for traditional travel agencies, partially offset by lower volume fromonline agencies. Network and communication costs decreased due to the continuedmigration of traditional travel agencies to third-party owned equipment andnetworks and the migration of supplier connections to less expensive IP-basedconnections. Employee related costs declined due to lower headcount as a resultof improved organizational effectiveness and efficiency and workforcereductions that were implemented throughout 2005. This was partially offset byan increase in outside service costs which was primarily caused by a higher volumeof transactions in distributor markets globally.

 

Cost of informationtechnology services revenues excluding developed technology amortizationdecreased $0.6 million or 2.8% to $21.1 million from $21.7 million for thethree months ended March 31, 2006 and 2005, respectively. Cost ofinformation technology services revenues excluding developed technologyamortization was 108.8% of information technology services revenue for thethree months ended March 31, 2006 as compared to 116.7% for the threemonths ended March 31, 2005. This decrease was primarily caused by thereduced costs attributable to the hosting operations and development resources forDelta and Northwest.

 

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*DevelopedTechnology Amortization*

* *

Developed technologyamortization decreased $0.3 million or 5.3% to $5.4 million from$5.7 million for the three months ended March 31, 2006 and 2005,respectively. Developed technology amortization was 2.1% of total revenue forthe three months ended March 31, 2006 as compared to 2.2% for the three monthsended March 31, 2005. The $0.3 million decrease was primarily the resultof a lower balance of amortizable intangibles due to the write-down in thesecond quarter of 2005 of certain purchased software to be enhanced andultimately used in multi-hosting services for smaller carriers. The carryingvalue of the software was written down as a result of management’s decision topursue other third party solutions as a means to provide these services tosmaller carriers as well as management’s current evaluation of the current andpotential revenue stream of the software, among other factors.

 

*Selling,General and Administrative Expenses*

* *

Selling, general andadministrative expenses decreased $5.0 million or 15.3% to $27.6 million from$32.6 million for the three months ended March 31, 2006 and 2005,respectively. The decrease was primarily attributable to a $1.8 million or 9.5%decline in employee costs, a $1.5 million or 40.7% decline in rent andutilities and a $1.2 million or 27.4% decline in outside services. Employeecosts declined due to lower headcount from the prior year as a result of therestructuring activities in 2005. Rent and utilities declined due to areduction in the amount of office spaced leased. The reduction in outsideservices is due to lower professional fees and lower advisory fee expense dueto the amortization of prepaid advisory fees paid to WTI as a result of theamendment to our Advisory Agreement entered into in connection with theRefinancing Transactions (as defined below under the heading “Liquidity andCapital Resources—Use of Proceeds”) in February 2005. As a percentage of totalrevenue, selling, general and administrative expenses decreased to 10.5% in thethree months ended March 31, 2006 from 12.5% in the prior year.

 

*Amortizationof Intangible Assets*

* *

Amortization ofintangible assets increased $1.8 million or 19.8% to $10.9 million from$9.1 million for the three months ended March 31, 2006 and 2005,respectively. As a percentage of total revenue, amortization of intangibleassets increased to 4.2% for the three months ended March 31, 2006 ascompared to 3.5% in the prior year. The $1.8 million increase is due to the accelerationof amortization of $1.6 million in March 2006 of intangible assets related totwo online agencies with whom we no longer have an agreement with.

 

*OperatingIncome*

* *

Operating incomeincreased $19.3 million or 55.1% to $54.3 million from $35.0 million forthe three months ended March 31, 2006 and 2005, respectively. As apercentage of total revenue, operating income increased to 20.7% from 13.4% forthe three months ended March 31, 2006 and 2005, respectively. The increaseis due to a decline in operating expenses of $17.8 million or 7.9% and a $1.5million or 0.6% increase in total revenue.

 

*NetInterest Expense*

* *

Net interest expenseincreased $4.0 million or 32.5% to $16.3 million from $12.3 million forthe three months ended March 31, 2006 and 2005, respectively. The increasein net interest expense was primarily related to the increase in debtoutstanding that was issued in connection with the Refinancing Transactions inFebruary 2005.

 

*TotalOther Expense, Net*

* *

Total other expense, netdecreased $50.9 million to $17.2 million from $68.1 million for the threemonths ended March 31, 2006 and 2005, respectively. The increase wasprimarily due to a $55.6 million loss on extinguishment of debt related to thedebt issued in connection with the Refinancing Transactions inFebruary 2005.

 

*IncomeTax Expense*

* *

Income tax expenseattributable to foreign jurisdictions decreased $0.3 million to $0.6 millionfrom $0.9 million for the three months ended March 31, 2006 and 2005,respectively. The decrease in income tax expense primarily relates to adecrease in taxable income of our foreign subsidiaries during the three months endedMarch 31, 2006.

 

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*NetIncome*

* *

Net income increased $70.6million or 207.0% to $36.5 million from net loss of $34.1 million for thethree months ended March 31, 2006 and 2005, respectively. The increase wasprimarily due to a $55.6 million loss on the extinguishment of debt associatedwith the Refinancing Transactions in 2005 and improved operating income.

 

**Liquidityand Capital Resources**

** **

Our principal source ofliquidity will be cash flow generated from operations, borrowings under capitallease obligations and borrowings under our 2005 Senior Credit Facility (asdefined below). Our principal uses of cash will be to fund our plannedoperating expenditures which include operating expenses, capital expenditures,investments in our current as well as future products and offerings, interestpayments on our debt and any mandatory or discretionary principal payments ofour debt. Based on our current level of operations, we believe that our cashflow from operations, available cash of $70.2 million and available borrowingsunder our 2005 Senior Credit Facility will be adequate to meet our futureliquidity needs for the next 12 months, although no assurance can begiven. Our future operating performance and ability to extend or refinance ourindebtedness will be dependent on future economic conditions and financial,business and other factors that are beyond our control. Risk factors that couldpossibly affect the ability of our internally generated funds include, amongother things:

 

•  reduced sales due to declines intransaction volumes or movement of transactions to another GDS,

 

•  acts of global terrorism, and

 

•  bankruptcy filings of any of the airlinesthat comprise a significant portion of our revenues.

 

Effective September 14,2005, Delta and Northwest, two of our significant suppliers, entered bankruptcyprotection. Revenues generated by Delta and Northwest were $62.4 million and$75.8 million for the three months ended March 31, 2006 and 2005, respectively.These amounts represented approximately 24% and 29% of total revenues for thethree months ended March 31, 2006 and 2005, respectively. Delta and Northwestaccounted for 14% and 10%, respectively, of total revenue for the three monthsended March 31, 2006.

 

Pre-bankruptcy petitionaccounts receivable at March 31, 2006 under our two primary agreements withDelta and Northwest are $16.4 million, collectively. Post-bankruptcy petitionaccounts receivable at March 31, 2006 under our two primary agreements withDelta and Northwest are $31.2 million, collectively. We believe that ourpre-bankruptcy petition accounts receivable will likely be realized over anextended period of time. We believe we will continue to provide the services tothe airlines and, absent further significant deterioration in the financialcondition of the airlines, post-bankruptcy petition accounts receivable areexpected to be collected in accordance with the terms of our current commercialagreements

 

While under bankruptcyprotection, Delta and Northwest could petition the court to reject certain orall of the existing agreements with us subject to Northwest’s restrictions inthe new content agreement referred in Note 11 below. We are not aware of anaction by either Delta or Northwest to reject any agreements with us and,accordingly, continue to operate with the two airlines under our existingcommercial agreements. See Note 11 for a discussion of the  new five-year content agreement signed withNorthwest. Additional facts could become known or actions taken by eitherairline in bankruptcy that could impact our assessement of the collectibilityand thus result in a charge to earnings in future periods. Furthermore, we arenot yet in a position to ultimately determine whether payments previously madeto us will be challenged or unwound in the bankruptcy proceedings.

 

Additionally, it is notpossible for us to determine the long term impacts of the Delta and Northwestbankruptcies at this time. Actions taken in the future by the airlines in thebankruptcy proceedings, such as the rejection of the Participating CarrierAgreements (“PCA”), which represent $49.4 million or 79% of total revenuegenerated by Delta and Northwest for the three months ended March 31, 2006,would have a material, adverse impact on our financial condition and cashflows.

 

There can be noassurance that our cash flow from operations and borrowings available under oursenior credit facility would be adequate to meet our future liquidity needswithout additional capital. Such capital may or may not be available to us. Fora more complete discussion of risk factors that might affect the availabilityof our internally generated funds, see “Item 1A. Risk Factors” in this reportand in our annual report on Form 10-K for the year ended December 31, 2005.

 

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At March 31, 2006,we had cash and cash equivalents of $70.2 million and working capital of $5.4 millionas compared to $42.5 million in cash and cash equivalents and a workingcapital deficit of $4.4 million at March 31, 2005. The $27.7 million increasein cash was primarily the result of increased operating income and decreased costsassociated with the Refinancing Transactions that occurred inFebruary 2005 and the receipt of payments for international airlinereceivables from an international clearing house before March 31, 2006. Untilrecently, these payments were not received until the middle of the subsequentmonth. The $9.8 million increase in working capital is primarily the result of highercash, lower accrued taxes and other expenses, partially offset by loweraccounts receivable and higher accrued interest.

 

Historically, we havefunded our operations through internally generated cash. We generated cash fromoperating activities of $58.6 million for the three months endedMarch 31, 2006 as compared to $25.1 million for the three monthsended March 31, 2005. The $33.5 million increase in cash flows fromoperating activities during the first quarter of 2006 as compared to the firstquarter of 2005 is a result of increased operating income and decreased costsassociated with the Refinancing Transactions that occurred inFebruary 2005 and the receipt of monthly payments for internationalairline receivables before March 31, 2006.

 

We used cash forinvesting activities of approximately $2.0 million for the three monthsended March 31, 2006 as compared to $1.5 million for the three monthsended March 31, 2005. The $0.5 million increase in cash used for investingactivities during the first quarter of 2006 as compared to the first quarter of2005 primarily resulted from increased capital expenditures.

 

We used cash forfinancing activities of approximately $44.4 million for the three monthsended March 31, 2006 as compared to $81.5 million for the threemonths ended March 31, 2005. The $37.1 million decrease in cash used forfinancing activities during the first quarter of 2006 as compared to the firstquarter of 2005 primarily resulted from the Refinancing Transactions that occurredin February 2005. To finance the redemption of the WTI Preferred Stock andthe payment of the Consent Fee (as defined below under the heading “—Use ofProceeds”), we distributed $375.7 million and $8.6 million, respectively, toWTI. In addition, WTI redeemed the Delta subordinated note in January 2005and we distributed $36.1 million to WTI to finance this transaction.

 

*Floating Rate Notes and Senior CreditFacility*

 

OnFebruary 11, 2005, we, WS Financing Corp. (“WS Financing”), ourwholly-owned domestic subsidiaries, as guarantors (the “Guarantor Subsidiaries”)and The Bank of New York Trust Company, N.A., as trustee, entered into anIndenture (the “Indenture”). Pursuant to the Indenture, the GuarantorSubsidiaries issued $300.0 million of Senior Second Lien Secured Floating RateNotes due 2011 (the “Floating Rate Notes”), secured on a second priority basisby substantially all of our assets and those of WS Financing and the GuarantorSubsidiaries. In addition, we, as borrower, WTI, and WS Holdings entered into anew credit agreement (the “Credit Agreement”) with a syndicate of financialinstitutions as lenders. In connection with the closing under the CreditAgreement, a new senior credit facility (the “2005 Senior Credit Facility”),consisting of a five-year revolving credit facility in the amount of $40.0million and a new term loan facility due 2010 (the “Term Loan under 2005 SeniorCredit Facility”) in the amount of $450.0 million, was made available to us. Obligationsunder the 2005 Senior Credit Facility and the guarantees are secured 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 the Guarantor Subsidiaries, subject to customary exceptions, and a pledge of(i) all of the membership interests of WS Holdings LLC owned by WTI, (ii) allof the partnership interests owned by WTI and WS Holdings LLC, and (iii) all ofthe capital stock of our Guarantor Subsidiaries and significant portions of ourholdings in foreign subsidiaries.

 

At our option, the interest rate applied to borrowingsunder the 2005 Senior Credit Facility is based on the LIBOR rate (as defined inthe Credit Agreement) plus the initial applicable margin of 2.75%. Thealternative rate is a base rate (generally defined as the sum of (i) thehigher of (x) the prime rate and (y) the federal funds effectiverate, plus one half percent (0.50%) per annum and (ii) an initialapplicable margin of 1.75%). The interest rate applicable to borrowings underthe Floating Rate Notes is based on the three-month LIBOR rate plus 6.25%. AtMarch 31, 2006, the three-month LIBOR rate was 5.0%. Our borrowings underthe 2005 Senior Credit Facility are subject to quarterly interest payments withrespect to loans bearing interest at the base rate described above or at theend of each one, two, three or six month interest period for loans bearinginterest at the LIBOR rate described above.

 

On March 4, 2005,we entered into an interest rate swap with a notional amount that started at$508.4 million on November 15, 2005 and is amortized on a quarterly basisto $102.3 million at November 15, 2008. The reset dates on the swap areFebruary 15, May 15, August 15 and November 15 of each yearuntil maturity on November 15, 2008. The notional amount as of March 31,2006 is $480.5 million. This agreement, which has been designated as a cashflow hedge, is being used to convert the variable component of the interestrates on certain indebtedness to a fixed rate of 4.3%, effectiveNovember 15, 2005. Because the critical terms of the swap match those ofthe debt it is hedging, the

 

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swap is considered aperfect hedge against changes in the fair value of the debt and the hedge hasresulted in no ineffectiveness being recognized in operations. Changes in thefair value of the swap are recognized as a component of accumulated othercomprehensive income in each reporting period. As of March 31, 2006, the fairvalue of this swap was an asset of $5.8 million, which is included in otherlong-term assets in the condensed consolidated balance sheet.

 

On April 10, 2006 wemade a $10 million discretionary payment on our Term Loan. For the remainingmonths of 2006, assuming mandatory scheduled payments only and using theinterest rate swap fixed rate of 4.3%, we expect the cash principal andinterest payments related to the $450.0 million borrowed under the termloan facility portion of the 2005 Senior Credit Facility to be$3.0 million and approximately $17.0 million, respectively. Theactual amounts to be paid for cash principal and interest during the remainingmonths of 2006 may differ significantly from these amounts depending on theLIBOR rate in effect at the time and any additional discretionary payments thatwe may elect to make during the year.

 

The 2005 Senior CreditFacility requires us to meet financial tests, including without limitation, aminimum interest coverage ratio and a maximum total leverage ratio. Also, theIndenture requires the Guarantor Subsidiaries to maintain a minimum fixedcharge coverage ratio. In addition, the 2005 Senior Credit Facility containscustomary covenants which, among other things, limit the incurrence ofadditional indebtedness, prepayments of other indebtedness, liens andencumbrances and other matters customarily restricted in a senior creditfacility. The Indenture also includes certain restrictions on distributionsfrom certain of our subsidiaries. As of March 31, 2006, we believe we were incompliance with the applicable covenants.

 

*Useof Proceeds*

 

The net proceeds fromthe sale of the Floating Rate Notes and the closing of the Term Loan under 2005Senior Credit Facility, along with available cash, were used to (collectivelyreferred to as the “Refinancing Transactions”):

 

•      repay approximately $57.5 million of theoutstanding balance of the then-existing senior term loan due 2007 includingany accrued and unpaid interest then outstanding under the then existing seniorcredit facility,

 

•      purchase pursuant to a cash tender offerof $279.5 million of our outstanding 9 5/8% Senior Notes due 2011,

 

•      distribute funds to WTI to redeem WTI’soutstanding Preferred Stock at a redemption price equal to the face amount ofWTI’s Preferred Stock plus accrued and unpaid dividends to the redemption datefor a total redemption price of approximately $375.7 million,

 

•      distribute funds to WTI to pay a consentfee of $8.6 million (the “Consent Fee”) to certain related parties of CVC inconnection with the Holdco Notes described below, and

 

•      pay fees and expenses related to theRefinancing Transactions.

 

As a result of theRefinancing Transactions described above, we recorded a loss on extinguishmentof debt of $55.6 million during the three months ended March 31, 2005.

 

Also in connection withthe Refinancing Transactions, on February 16, 2005, we entered into anamendment to our Advisory Agreement with WTI to terminate all advisory andother fees payable under that agreement as of January 1, 2005 in return fora prepayment of $7.7 million payable on or before December 15, 2005**.**We paid a total of $7.7 million in the third and fourthquarters of 2005.

 

*HoldcoNotes*

 

In connection with theRefinancing Transactions, on February 16, 2005, WTI issued $43.6 millionin new 11% Subordinated Notes due 2013 (the “Holdco Notes”) to certain relatedparties of CVC and paid $0.4 million in accrued and unpaid interest in exchangefor the surrender and cancellation of all of the obligations owing by WTI relatedto the then outstanding subordinated notes due 2012. We periodically distributefunds to WTI to pay the interest on the Holdco notes. During the three monthsended March 31, 2006 and 2005 we made no distributions to WTI for this purpose.For 2006 we expect to distribute $4.8 million to WTI for this purpose.

 

*CapitalLease Obligations*

* *

We lease equipment andsoftware under capital lease obligations. As of March 31, 2006, ourobligations under capital leases totaled $50.1 million. The interest rateused in computing the present value of the minimum lease payments ranges fromapproximately 4.5% to 12.0% depending on the asset being leased.

 

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*FASAs*

* *

Pursuant to the terms ofthe FASAs, we provide FASA credits to Delta and Northwest to be applied againstFASA service fee payments due from these airlines to us. The FASA credits arestructured and will be applied through June 2012 in an amount up to anaggregate total of $79.2 million to each of Delta and Northwest as ofMarch 31, 2006, and are reflected as reductions to our FASA revenues inthe corresponding periods. The FASA credits are provided to Delta and Northwestin monthly installments, with an annual amount of $16.7 million scheduledto be provided to each of these founding airlines during the first six years ofthe respective FASA term, an annual amount of $9.2 million scheduled to beprovided to each of these founding airlines during the seventh and eighth yearsof the respective FASA term and an annual amount of $6.7 million scheduledto be provided to each of these founding airlines during the ninth year of therespective FASA term. In the event that the monthly FASA credits deliverable byus to Delta or Northwest are more than the FASA service fee payments due fromthe applicable airline, then we will be obligated to pay such excess to suchairline in cash.

 

Delta or Northwest mayterminate its FASA due to a failure by us to satisfy the mainframe processingtime, system availability or critical production data performance standardsunder that agreement (which represent performance standards which we havehistorically met under our predecessor services agreements with Delta andNorthwest). Furthermore, such a termination by Delta or Northwest of its FASAconstitutes an event of default under our 2005 Senior Credit Facility. In theevent that the event of default is waived by the applicable lenders under oursenior credit facilities (as defined in the subordination agreement executed bythe founding airlines) or our senior credit facilities are no longeroutstanding, then any remaining FASA credits deliverable by us to theterminating airline will not be provided according to the initial nine yearschedule specified above and will instead be payable in cash to suchairline as and when, and only to the extent that, we are permitted to make suchpayments as “Restricted Payments” under the restricted payment covenant testcontained in the indenture governing our 9 5/8% Senior Notes and the FloatingRate Notes. If a FASA is otherwise terminated in accordance with its termsprior to the expiration of its term, such as a termination by either Delta orNorthwest without cause, or is rejected by Delta or Northwest in bankruptcy,then the obligation to provide the remaining FASA credits or to make theremaining FASA credit payments then deliverable or payable to the airline underthe applicable FASA will terminate. See discussion of the Delta and Northwestbankruptcies under “Item 2. Management’s Discussion and Analysis ofFinancial Condition and Results of Operations—Overview.” Our obligations toprovide FASA credits or to make the FASA credit payments will not terminate ifeither or both of Delta and Northwest reduce or cease operations in a way thatreduces or eliminates the amount of airline services either founding airlineobtains under the FASAs, although an airline’s failure to comply with itssoftware development minimum and exclusivity obligations would constitute abreach of its agreement. If we terminate a FASA other than as expressly permittedby the agreement, then we will be obligated to provide the scheduled FASAcredits to the applicable airline by way of a monthly cash payment rather thanapplying the FASA credits against FASA service fee payments due from theairline. 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 the event of our bankruptcy or insolvency, holders of oursenior debt (as defined in the subordination agreement executed by the foundingairlines), including the 9 5/8% Senior Notes and the Floating Rate Notes, willbe entitled to receive payments in full in cash before we may make any FASAcredit payments in cash. In that event, Delta and Northwest will, however,retain their rights to apply the scheduled FASA credit payments against theirobligations to pay us fees for our services under the FASAs. In the event thatwe wrongfully terminate a FASA, we will remain obligated to deliver the FASAcredits to the applicable airline by paying the credit amounts to theapplicable airline in cash on a monthly basis according to the nine-yearschedule described above. However, if we reject a FASA in a bankruptcy ofthe company, our FASA credit payment obligations to the applicable airline willmatch the obligations described above in a termination of a FASA by suchairline due to our failure to satisfy performance standards. Any FASA creditpayment obligations by us to an airline in such a bankruptcy will besubordinated to our senior debt (as defined in the subordination agreementexecuted by the founding airlines), including the 9 5/8% Senior Notes and theFloating Rate Notes. Our agreements with Delta and Northwest provide that wehave the right to recoup service fees owed to us by Delta and Northwest againstour FASA credit obligations, although Delta and Northwest or other parties ininterest in their bankruptcy proceedings may elect to challenge that right. Wewill continue to exercise our recoupment rights for service fees owed to us forthe period preceding the Delta and Northwest bankruptcies, although we cannotassure you that the exercise of these rights will not be successfullychallenged by the airlines in bankruptcy court.

 

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*Taxes*

* *

Because we are a limitedpartnership, our partners will owe taxes on all of the income that we generatein the United States. We expect that WTI will cause us to make distributions toit from time to time sufficient to cover all income taxes owed by WTI. Underthe terms of our 2005 Senior Credit Facility and the indentures governing our 95/8% Senior Notes and the Floating Rate Notes, we are specifically permitted tomake these tax distributions. During 2006, we expect to distribute $8.9 millionto WTI, although actual results of operations could cause this amount to differmaterially. There were no tax distributions to WTI during the three monthsended March 31, 2006.

 

**CapitalExpenditures**

** **

Capital expenditures forproperty and equipment, including both purchased assets and assets acquiredunder capital leases, as well as capitalized software, totaled $2.3 millionfor the three months ended March 31, 2006, a increase of $0.6 million fromcapital expenditures of $1.7 million for the three months ended March 31, 2005.We have estimated approximately $17.7 million for capital expenditures in2006, which relates to normal growth in capacity requirements and routine replacementand upgrades of equipment.

 

**Off-BalanceSheet Arrangements**

** **

At March 31, 2006and 2005, we did not have any relationships with unconsolidated entities orfinancial partnerships, such as entities often referred to as structuredfinance or special purpose entities, which would have been established for thepurpose of facilitating off-balance sheet arrangements or other contractuallynarrow or limited purposes. We are, therefore, not materially exposed to anyfinancing, liquidity, market or credit risk that could arise if we had engagedin such relationships.

 

**Effectof Inflation**

** **

Inflation generallyaffects us by increasing our costs of labor, equipment and new materials. We donot believe that inflation has had any material effect on our results of operationsduring the three months ended March 31, 2006.

 

**AirlineContent Agreements**

** **

In March and Aril 2006,we signed five-year content agreements with American, Continental and United.In May 2006, we signed a five-year content agreement with Northwest. The termsof these agreements will become effective in the third quarter of 2006 with theexception of the Northwest agreement which must also receive Bankruptcy Courtapproval. In conjunction with the agreements, Worldspan has developed two newoptional products to introduce into the marketplace. Through these newagreements, travel agencies will have the opportunity to access the airlines'comprehensive published fares and inventory. We expect that our new contentagreements will result in reduced transaction fees from participating airlineswhich could have a material adverse effect on revenue, however, we cannotpredict at this time the ultimate impact of these agreements on earnings.

 

**SubsequentEvents**

** **

On April 10, 2006 wemade a $10 million discretionary payment on our Term Loan.

 

In May 2006, we receivedapproximately $10.5 million in previously disputed excess messaging fees from acertain former online travel agency. The receipt of these fees will be includedin our second quarter 2006 results of operations as the amount of the fees wasnot fixed and determinable and collectibility was not reasonably assured atMarch 31, 2006.

 

**WorldspanCautionary Statement**

** **

Statements in thisreport and the exhibits hereto which are not purely historical facts, includingstatements about forecasted financial projections or other statements aboutanticipations, beliefs, expectations, hopes, intentions or strategies for thefuture, may be forward-looking statements within the meaning ofSection 27A of the Securities Act and Section 21E of the ExchangeAct. Readers are cautioned not to place undue reliance on forward-lookingstatements. All forward-looking statements are based upon information availableto the company on the date this report was submitted. We undertake noobligation to publicly update or revise any forward-looking statements, whetheras a result of new information, future events or otherwise. Any forward-lookingstatements involve risks and uncertainties that could cause actual events orresults to differ materially from the events or results described in theforward-looking statements, including, but not limited to, risks oruncertainties related to: our revenues being highly

 

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dependent on the traveland transportation industries; airlines limiting their participation in travelmarketing and distribution services; airlines altering their content orchanging the pricing of such content; or other changes within, or affecting,the travel industry. We may not succeed in addressing these and other risks.

 

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**ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

Market risk represents the risk of changes in valueof a financial instrument, derivative or non-derivative, caused by fluctuationsin interest rates, foreign exchange rates and equity prices. Changes in thesefactors could cause fluctuations in the results of our operations and cashflows. In the ordinary course of business, we are exposed to foreign currencyand interest rate risks. These risks primarily relate to the sale of productsand services to foreign customers and changes in interest rates on ourlong-term debt.

 

**Foreign Exchange Rate Market Risk**

 

We consider the U.S. dollar to be the functionalcurrency for all of our entities. Substantially all of our net sales and themajority of our expenses during the three months ended March 31, 2006 and 2005were denominated in U.S. dollars. Therefore, foreign currency fluctuations didnot materially impact our financial results in those periods. We have foreigncurrency exposure arising from the remeasurement 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 March 31, 2006 levels.

 

**Interest Rate Market Risk**

 

Our 2005 Senior Credit Facility is variable ratedebt. Interest rate changes therefore generally do not affect the market valueof such debt but do impact the amount of our interest payments and, therefore,our future earnings and cash flows, assuming other factors are held constant.As of March 31, 2006, we had variable rate debt of approximately $631.0 million,of which $480.5 million was hedged through an interest rate swap. Holding othervariables constant, including levels of indebtedness, a one hundred basis pointincrease in interest rates on our variable debt would have an estimated impacton 2006 pre-tax earnings and cash flows of approximately $1.5 million.

 

On March 4, 2005, we entered into an interestrate swap with a notional amount that will start at $508.4 million onNovember 15, 2005 and amortize on a quarterly basis to $102.2 millionat November 15, 2008. The reset dates on the swap are February 15,May 15, August 15 and November 15 each year until maturity onNovember 15, 2008. The notional amount as of March 31, 2006 is$480.5 million. This agreement,which has been designated as a cash flow hedge, is being used to convert thevariable component of interest rates on certain indebtedness to a fixed rate of4.3%. As of March 31, 2006, the fair value of the interest rate swap was $5.8million.

 

**ITEM 4. CONTROLS AND PROCEDURES**

 

As of the end of theperiod covered by this report, we conducted an evaluation, under thesupervision and with the participation of our principal executive officer andprincipal financial officer, of the effectiveness of the design and operationof our disclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) under the Exchange Act). Based on this evaluation, our principalexecutive officer and principal financial officer concluded that our disclosurecontrols and procedures are effective. There were no changes in our internalcontrol over financial reporting that occurred during the quarter endedMarch 31, 2006 which have materially affected, or are reasonably likely tomaterially affect, our internal control over financial reporting.

 

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**PART II. OTHER INFORMATION**

 

**ITEM 1.LEGAL PROCEEDINGS**

 

On September 19, 2005, we filed a lawsuit against Orbitz in the UnitedStates District Court, Northern District of Illinois, Eastern Division (“FederalSuit”). Orbitz is one of our largest online travel agency customers andrepresented approximately 9% of our transaction volume for the three monthperiod ended March 31, 2006. Our Federal Suit alleged that Orbitz accessed andused our seat map data in violation of the Federal Computer Fraud and Abuse Act(“FCFAA”) and in breach of our agreement with Orbitz.  Our Federal Suitcontained several additional state-law claims.  On April 19, 2006, thecourt considering our Federal Suit dismissed our claim under the FCFAA andrelinquished jurisdiction over our state-law claims against Orbitz withoutprejudice to Worldspan refiling its state-law claims in state court.

 

On April 24, 2006, Worldspan filed itsstate-law claims in the Circuit Court of Cook County, Illinois, CountyDepartment, Law Division.  Our complaint alleges that Orbitz’s improperaccessing and use of our seat map data violates our agreements with Orbitz, andthat Orbitz’s use of Galileo and ITA, competing computer reservation systems,constitutes breaches of our agreement with Orbitz.  We are seekinginjunctive relief to prevent the unauthorized accessing and use of our seat mapdata as well as to prevent Orbitz’s use of the services or data of Galileo andITA. We also seek monetary damages from Orbitz in excess of $50.0 million andreimbursement for our attorneys’ fees and costs.

 

After filing our Federal Suit, we learnedthat Orbitz filed suit against us on September 16, 2005, in the Circuit Courtof Cook County, Illinois, County Department, Law Division, purporting to asserttwo causes of action against us for violation of the Illinois Consumer FraudAct and equitable estoppel. Orbitz has claimed that certain exclusivity, minimumsegment fee and 100% booking requirement provisions in our agreement wereillegal and in violation of public policy. In its suit, Orbitz seeks a courtorder precluding Worldspan from pursuing its breach of contract claims againstOrbitz, an order terminating and rescinding the first and second amendments ofour contract with Orbitz (which include, among other things, provisionscontaining commitments from Orbitz with respect to its usage of our GDS through2011), monetary damages in excess of $0.05 million, punitive damages andreimbursement for attorneys’ fees and costs. We believe that the allegations inthe Orbitz complaint are without merit and we intend to defend against thisaction vigorously. In addition, we believe that Orbitz’s filing of its lawsuitagainst us constitutes another violation of the contract between the parties,and we have instituted the dispute resolution process to resolve this issue asrequired by the contract. If we are unable to satisfactorily resolve the claimsasserted by Orbitz and its lawsuit against us is successful, there would be fewor no restrictions to prevent Orbitz from moving a significant portion of itsbusiness from our GDS, which would have a material adverse effect on ourbusiness, financial condition and results of operations.

 

**ITEM 1A.RISK FACTORS**

 

***As furtherdescribed herein, our performance and financial results are subject to risksand uncertainties including, but not limited to, the following specific risks.There are no material changes to the risk factors included in our annual reporton Form 10-K filed with the Securities and Exchange Commission on March 3, 2006other than the risk foctors below entitled****”Dependence on the Travel Industry in General andthe Airline Industry in Particular—Our revenues are highly dependent on thetravel industry, and particularly on the airlines, and a substantial decreasein travel transactions could adversely affect our electronic traveldistribution revenues.**“ and**“ContentAgreements—Our efforts to obtain more comprehensive content through airlinecontent agreements may cause downward pressure on pricing and adversely affectour electronic travel distribution revenues.**”*

** **

**RisksRelating to Our Business**

** **

**Dependenceon the Travel Industry in General and the Airline Industry in Particular—Ourrevenues are highly dependent on the travel industry, and particularly on theairlines, and a substantial decrease in travel transactions could adverselyaffect our electronic travel distribution revenues***.*

 

Substantially all of ourrevenues are derived from airlines, hotel operators, car rental companies andother suppliers in the travel industry. Our revenues increase and decrease withthe level of travel activity and are therefore highly subject to

 

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declines in or disruptionsto travel. In particular, because a significant portion of our revenues arederived from transaction fees generated by airline transactions and airlineoutsourcing services, our revenues and earnings are especially sensitive toevents that affect airline travel, the airlines that participate in our GDS andthe airlines that obtain travel information technology services from us. Ourbusiness could also be adversely affected by a reduction in transactions on theairlines that participate in our GDS as a result of those airlines losingbusiness for other reasons, including losing market share to other airlines,such as low-cost carriers, that do not participate in our GDS. In addition,travel expenditures are seasonal and are sensitive to business and personaldiscretionary spending levels and tend to decline during general economicdownturns, which could also reduce our revenues and profits.

 

The downturn in thecommercial airline market, together with and resulting from the ongoing threatof terrorist attacks after September 11, 2001, the global economic downturn,the continuing conflict in Iraq, rising fuel costs for commercial airlines andavian influenza or bird flu concerns, among other issues, have adversely affected,or could further affect, the financial condition of many commercial airlinesand other travel suppliers. Several major airlines are experiencing liquidityproblems, some have sought bankruptcy protection and still others may considerbankruptcy relief. A substantial portion of our revenues is derived fromtransaction fees received directly from airlines and from the sale of productsand services directly to airlines. If an airline declared bankruptcy, we may beunable to collect our outstanding accounts receivable from the airline. Inaddition, the bankruptcy of the airline might result in reduced transactionfees and other revenues from the airline or a rejection by the airline of someor all of our agreements with it, all of which could have a material adverseeffect on our business, financial condition and results of operations.

 

Effective September 14,2005, Delta and Northwest, both significant suppliers of ours, enteredbankruptcy protection. See “Customers” under “Business,” where this item isdiscussed.

 

**Content Agreements—Our efforts to obtain morecomprehensive content through airline content agreements may cause downwardpressure on pricing and adversely affect our electronic travel distributionrevenues.**

** **

Someairlines have differentiated the content that they provide to us and to our GDScompetitors. Some content has been provided to GDSs at no additional chargeunder standard participation agreements, and other content, such as web fares,has been withheld unless the GDS agrees to provide discounts, payments or otherbenefits to the airline. We have existing content agreements with most majorcarriers in the United States. Generally, in these agreements, the airlinescommit (subject to the exceptions contained in the agreements) to provide traditionaland online travel agencies covered by the agreements in the territories coveredby the agreements with substantially the same content (including web fares) itprovides to the travel agencies of other GDSs in exchange for payments from usand/or discounts to transaction fees to each airline and subject to us keepingsteady the average transaction fees paid by each airline for travel agencytransactions in the territories covered by the agreements. Further, we haveexecuted a three-year content agreement with British Airways to provide accessto virtually all of their published fares (including web fares) to some of ourU.K. travel agencies. We believe that obtaining similar content from othermajor airline travel suppliers and renewing existing content agreements isimportant to our ability to compete, since other GDSs have also entered intocontent agreements with various airlines. Most of the content agreements weoriginally entered into were for an initial three year period, and expire in2006 and early 2007. We are actively in discussions with our airline suppliersto renew or extend these agreements. In fact, in March 2006 we entered into anew five-year content agreement with American Airlines. Additionally, in April2006 we entered into new five-year content agreements with Continental Airlinesand United Air Lines. Further, in May 2006 we entered into a new five-yearcontent agreement with Northwest. The Northwest agreement must receiveBankruptcy Court approval. There is no way to predict our ability to renew theremaining agreements with major airline suppliers that are due to expire; theloss of which would competitively disadvantage us from other GDSs, and couldmaterially weaken our financial results. We expect that our new contentagreements will require us to make, in the aggregate, significant concessionsto the participating airlines, typically in the form of reduced transactionfees to us, which could have a material adverse effect on our business,financial condition and results of operations in the future. In addition, ourcontent agreements, both existing and new, are subject to several conditions,exceptions, term limitations and termination rights. As existing contentagreements come up for renewal, there is no guarantee that the participatingairlines will continue to provide their content to us to the same extent asthey do at the current time. The loss or substantial reduction in the amount ofcontent received from the participating airlines could negatively affect ourelectronic travel distribution revenues and financial condition. Further,should we fail to maintain competitive content and/or make acceptableinducement payments, our traditional and online agency subscribers could movetransactions from us to competitors, thus negatively affecting our business,financial condition and results of operations. In addition, at the present timewe cannot predict how the Delta and Northwest bankruptcies may affect ourability to renegotiate our content agreements with them (as noted above, theNorthwest content agreement is subject to Bankruptcy Court approval). Theinability to renegotiate our content agreements or the rejection of theexisting agreements in bankruptcy by either or both airlines could have a 

 

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material adverse effecton our business, financial condition and results of operations. See “SupplierContent and Transaction Fees” under “Item 2. Management’s Discussion andAnalysis of Financial Condition and Results of Operations” for further detail.

 

**ITEM 2. UNREGISTERED SALES OF EQUITYSECURITIES AND USE OF PROCEEDS**

 

We are wholly-owned by Worldspan Technologies Inc., or WTI, a privatelyowned corporation. There is no public trading market for our equity securitiesor for those of WTI. As of May 12, 2006, there were 44 holders of WTI Class ACommon Stock and 1 holder of WTI Class B Common Stock.

 

On March 31, 2006, WTI****entered into a stock subscription agreement in connectionwith the exercise by one of our directors, who is also a former member ofmanagement, of his option to purchase 180,000 shares of WTI Class A CommonStock for an aggregate purchase price of $216,000. This sale was exempt fromregistration under the Securities Act in reliance on Rule 506 promulgatedthereunder.

 

**ITEM 6. EXHIBITS**

 

***Exhibits:***

 

10.87       ContentAgreement, dated as of March 28, 2006, by and between Worldspan, L.P. andAmerican Airlines, Inc.***

31.1         Certificationof the Principal Executive Officer pursuant to Section 302 of theSarbanes-Oxley Act of 2002.

31.2         Certificationof the Principal Financial Officer pursuant to Section 302 of theSarbanes-Oxley Act of 2002.

32.1         Certificationspursuant to 18 U.S.C. Section 1350, as adopted pursuant toSection 906 of the Sarbanes-Oxley Act of 2002.

 

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***         Certain portions of this document have beenomitted pursuant to a confidential treatment request.

 

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**SIGNATURES**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 
|         | WORLDSPAN, L.P. |   |
|--------------|-----------------|--------|
|         |            |   |   |
|         |            |   |   |
| May 12, 2006 |            |   | /s/ Rakesh Gangwal |
| DATE         |            | By:    | Rakesh Gangwal |
|         |            |   | Chairman, President and Chief Executive Officer |
|         |            |   | (principal executive officer) |
|         |            |   |   |
|         |            |   |   |
| May 12, 2006 |            |   | /s/ Kevin W. Mooney |
| DATE         |            | By:    | Kevin W. Mooney |
|         |            |   | Chief Financial Officer |
|         |            |   | (principal financial and accounting officer) |
|              |                 |        |  |  |

 

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