SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31,June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to __________
Commission File Number 0-25581
PRICELINE.COMpriceline.com INCORPORATED
- ----------------------------------------------------------------------------------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 06-1528493
- -------------------------------- ----------------------------------------------------------------- -------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
800 Connecticut Avenue
Norwalk, Connecticut 06854
- --------------------------------------------------------------------------------------------------------------------------------------------------
(Address of principal executive offices)
(203)299-8000
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(Registrant's telephone number, including area code)
N/A
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(Former name, former address and former fiscal year, if
changed, since last report.)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports) and (2) has
been subject to such filing requirements for the past 90 days. YES |X|X . NO__.NO .
--- ---
Number of shares of Common Stock outstanding at MayAugust 10, 2000:
Common Stock, par value $0.008 per share 170,924,185166,633,201
- ---------------------------------------------- ---------------------------------------------
(Class) (Number of Shares)
PRICELINE.COM INCORPORATED
FORMpriceline.com Incorporated
Form 10-Q
FOR THE QUARTER ENDED MARCHFor the Quarter Ended June 30, 2000
PART I - UNAUDITED FINANCIAL
INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets at June 30, 2000
and December 31, 1999............................................3
Consolidated Statements of Operations For the
Three and Six Months Ended June 30, 2000 and 1999...........................4
Consolidated Statement of Changes in Stockholders'
Equity For the Six Months Ended June 30, 2000...............................5
Consolidated Statements of Cash Flows For the Six
Months Ended June 30, 2000 and 1999.........................................6
Notes to Unaudited Consolidated Financial Statements... ......................7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................10
Item 3. Quantitative and Qualitative Disclosures About Market Risk..........29
PART II - OTHER INFORMATION
Item 1. Legal Proceedings....................................................29
Item 2. Changes in Securities and Use of Proceeds............................29
Item 6. Exhibits and Reports on Form 8-k.....................................30
SIGNATURES...................................................................31
Part I - UNAUDITED FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS.............................3
CONDENSED BALANCE SHEETS AS OF DECEMBER 31, 1998 AND
SEPTEMBER 30, 1999.........................................3
CONSOLIDATED STATEMENTS
OF OPERATIONS FOR THE THREE
MONTHS ENDED MARCH 31, 2000 AND 1999.......................4
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2000..................5
CONSOLIDATED STATEMENTS OF CASH FLOW FOR THE THREE
MONTHS ENDED MARCH 31, 2000 AND 1999.......................6
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS..........7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS................................9
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS............................................28
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS....................28
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..........29
ITEM 5. OTHER INFORMATION............................................29
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.............................31
SIGNATURES............................................................32
PART I. - UNAUDITED FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
PRICELINE.COM INCORPORATEDpriceline.com Incorporated
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)(In thousands)
June 30, December 31,
2000 1999
---- ----
ASSETS (unaudited)
Current assets:
Cash and cash equivalents.......................... $95,434 $133,172
Short-term investments............................. 43,273 38,771
Accounts receivable, net of allowance
for doubtful accounts of $3,761 and $1,961... 38,993 21,289
Related party receivable........................... 3,771 508
Prepaid expenses and other current assets.......... 27,182 17,999
------ ------
Total current assets............................... 208,653 211,739
Property and equipment, net........................ 41,592 28,006
Related party receivable........................... 15,789 8,838
Warrants to purchase common stock of licensees..... 192,250 189,000
Other assets....................................... 34,554 4,303
------ -----
Total assets....................................... $492,838 $441,886
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................... $73,292 $24,302
Preferred stock dividends payable.................. 7,191
Accrued expenses................................... 15,998 13,695
Other current liabilities.......................... 4,454 1,253
----- -----
Total current liabilities.......................... 100,935 39,250
------- ------
Mandatorily redeemable convertible preferred
stock, $0.01 par value, authorized 6,000
shares; issued 6,000 and 0 shares, respectively.. 359,580
------- ------
Stockholders' equity:
Common stock, $0.008 par value, authorized
1,000,000 shares; issued 172,549 and 163,867
shares, respectively............................. 1,380 1,311
Treasury stock, at cost, 6,000 and 0 shares,
respectively....................................... (359,580)
Additional paid-in capital......................... 1,593,961 1,581,708
Accumulated other comprehensive income............. 2,224
Accumulated deficit................................(1,205,662) (1,180,383)
----------- -----------
Total stockholders' equity......................... 32,323 402,636
------ -------
Total liabilities and stockholders' equity......... $492,838 $441,886
======== ========
See notes to consolidated financial statements.
MARCH 31, DECEMBER 31,priceline.com Incorporated
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(In thousands, except per share data)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2000 1999 2000 1999
---- ---- ASSETS (UNAUDITED)---- ----
Current assets:
Cash
Revenues.................................... $ 352,095 $ 111,564 $ 665,893 $ 160,975
Cost of revenues:
Product costs............................... 296,919 100,664 561,690 144,323
Supplier warrant costs...................... 381 381 762 762
--------- -------- ------- --------
Total cost of revenues.................... 297,300 101,045 145,085
562,452
Gross profit................................ 54,795 10,519 103,441 15,890
--------- -------- ------- --------
Operating expenses:
Sales and cash equivalents................................. $125,855 $133,172
Short-term investments.................................... 23,625 38,771
Accounts receivable, net of allowance for doubtful
accounts of $3,075marketing........................ 37,617 17,733 78,066 34,871
General and $1,961......... 52,751 21,289
Related party receivable.................................. 108 508
Prepaid expensesadministrative................. 15,222 5,503 27,926 9,170
Payroll expense on employee
stock options.................................... 2,507 8,414
Systems and other current assets................. 15,782 17,999
------ ------
Total current assets.................................... 218,121 211,739
Property and equipment, net.................................. 37,130 28,006
Related party receivable..................................... 13,404 8,838
Warrants to purchase common stock of Priceline WebHouse Club,
Inc........................................................ 189,000 189,000
Other assets................................................. 25,062 4,303business development............ 6,695 3,469 12,563 5,653
----- ----- ------ -----
Total assets........................................... $482,717 $441,886
======== ========
LIABILITIES ANDoperating expenses................... 62,041 26,705 126,969 49,694
------ ------ ------- ------
Operating loss.............................. (7,246) (16,186) (23,528) (33,804)
Interest income, net........................ 2,725 1,929 5,440 2,387
----- ----- ----- -----
Net loss.................................... (4,521) (14,257) (18,088) (31,417)
Preferred stock dividend.................... (7,191) (7,191)
Accretion on preferred stock............... (8,354)
----- ----- ----- -----
Net loss applicable to common stockholders....
$ (11,712) $(14,257) $ (25,279) $(39,771)
========== =========== ========== =========
Net loss applicable to common stockholders
per basic and diluted common share...........
$ (0.07) $ (0.10) $ (0.15) $ (0.29)
========== ========== ========= =========
Weighted average number of basic and diluted
common shares outstanding.................... 165,399 142,320 166,051 137,436
========== ========== ========= =========
See notes to consolidated financial statements.
priceline.com Incorporated
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $59,411 $24,302
Accrued expenses.......................................... 13,766 13,695
Other current liabilities................................. 4,280 1,253
----- -----
Total current liabilities............................. 77,457 39,250
------ ------
Stockholders' equity:
Common stock, $0.008 par value, authorized 1,000,000 shares; issued
and outstanding, 170,162 and 163,867 shares,
respectively.......................................... 1,361 1,311
Additional paid-in capital.............................. 1,591,880 1,581,708
Accumulated other comprehensive income.................. 5,969
Accumulated deficit..................................... (1,193,950) (1,180,383)
----------- -----------
Total stockholders' equity.............................. 405,260 402,636
------- -------
Total liabilities and stockholders' equity............. $482,717 $441,886
======== ========
See notes to financial statements.
PRICELINE.COM INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED MARCH 31,
----------------------------
2000 1999
---- ----
Revenues.................................. $ 313,798 $ 49,411
Cost of revenues:
Product costs.......................... 264,771 43,659
Supplier warrant costs................. 381 381
--------- ---------
Total costs of revenues............. 265,152 44,040
Gross profit.............................. 48,646 5,371
--------- ---------
Operating expenses:
Sales and marketing.................... 40,449 17,138
General and administrative (including $5,907
of option payroll taxes in 2000)..... 18,611 3,667
Systems and business development....... 5,868 2,184
--------- ---------
Total operating expenses............ 64,928 22,989
--------- ---------
Operating loss............................ (16,282) (17,618)
Interest income, net...................... 2,715 458
--------- ---------
Net loss.................................. (13,567) (17,160)
Accretion on preferred stock.............. (8,354)
--------- ---------
Net loss applicable to common stockholders $ (13,567) $(25,514)
========== =========
Net loss applicable to common stockholders
per basic and diluted common share......... $ (0.08) $ (0.27)
========== =========
Weighted average number of basic and
diluted common shares outstanding.......... 166,467 94,939
========== =========
See notes to financial statements.
PRICELINE.COM INCORPORATED
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
AS OF MARCH 31, 2000
(UNAUDITED)
(IN THOUSANDS)
AS OF JUNE 30, 2000
(unaudited)
(In thousands)
ADDITIONAL OTHER
PAID-IN ACCUMULATED COMPREHENSIVE
TREASURY STOCK COMMON STOCK CAPITAL DEFICIT INCOME TOTAL
-------------------------- -------------- ------- ------- ------ -----
SHARES AMOUNT SHARES AMOUNT
------ ------- ------ -------
Balance, January 1, 2000.... 163,867 $1,311 $1,581,708 $(1,180,383) $402,636
Purchase of treasury
shares..................... 6,000 $(359,580) (359,580)
Exercise of warrants and
options to 6,295 50 10,172 10,222
purchase
common stock.....stock.............. 8,682 69 12,253 12,322
Comprehensive income:loss........
Net loss................. (13,567) (13,567)loss applicable to
common stockholders........ (25,279) (25,279)
Unrealized gain on
investments............ $5,969 5,969investments............... $2,224 2,224
------ ------ -----
Total comprehensive
loss................. $5,969 (7,598)loss.................... $(25,279) $2,224 (23,055)
------ ------- ------ ------- ------- --------- ------- --------
Balance, March 31, 2000 170,162 $1,361 $1,591,880 $(1,193,950) $5,969 $405,260June 30, 2000...... 6,000 $(359,580) 172,549 $1,380 $1,593,961 $(1,205,662) $2,224 $32,323
===== ========== ======= ====== ========== ============ ====== ===============
See notes to consolidated financial statements.
PRICELINE.COM INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
THREEpriceline.com Incorporated
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(In thousands)
SIX MONTHS ENDED
MARCH 31,JUNE 30,
2000 1999
---- ----
OPERATING ACTIVITIES:
OPERATING ACTIVITIES:
Net loss.................................... $(13,567) $(17,160)loss.......................................................... $(18,088) $(31,417)
Adjustments to reconcile net loss to net cash used inprovided by
(used in) operating activities:
Depreciation and amortization............. 2,672 748amortization..................................... 6,249 1,912
Provision for uncollectible accounts...... 1,114 399accounts.............................. 1,800 1,401
Warrant costs, net........................ 381 381costs..................................................... 762 762
Changes in assets and liabilities:
Accounts receivable..................... (36,742) (6,615)receivable........................................... (19,504) (19,909)
Related party receivables.................................... (10,214) (5,790)
Prepaid expenses and other current 1,836 (1,268)
assets....................................assets..................... (9,945) (3,382)
Accounts payable and accrued expenses... 35,180 7,757expenses......................... 51,293 23,703
Other assets............................ 617 (782)
Other current liabilities.............. 3,027 (587)....................................................... 1,652 (1,030)
----- -------
Net cash used inprovided by (used in) operating activities (5,482) (17,127)
-------activities............. 4,005 (33,750)
----- --------
INVESTING ACTIVITIES:
Additions to property and equipment...... (11,796) (4,830)equipment............................ (19,843) (11,285)
Purchase of investments................. (15,401)
Proceeds from salesconvertible notes and warrants of
short-term 15,146
investments.............................. ------licensees......................................................... (24,706)
Purchase of equity investments................................ (5,000)
Purchase of short term investments............................ (4,502) (9,308)
-------- -------
Net cash used in investing activities...... (12,051) (4,830)activities.......................... (54,051) (20,593)
-------- ---------------
FINANCING ACTIVITIES:
Principal payments underPayment of long-term debt and capital lease (6) (6)
obligations...............................obligations.... (14) (1,012)
Issuance of common stock and subscription
units..................................... 10,222
Deferred offering costs................... (1,036)
-------stock........................................ 12,322 144,565
------ -------
Net cash provided by (used in) financing 10,216 (1,042)activities............. 12,308 143,553
------ -------
activities
Net (decrease) increase in cash and cash equivalents... (7,317) (22,999)equivalents.............. (37,738) 89,210
Cash and cash equivalents, beginning of period.................... 133,172 53,593
period....................................
------- ------
Cash and cash equivalents, end of period.... $125,855 $30,594period.......................... $95,434 $142,803
======= ======== =======
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for interest..interest........................ $1 $2
========$50
======= =========
See notes to consolidated financial statements.
PRICELINE.COM INCORPORATED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
priceline.com Incorporated
Notes to Unaudited Consolidated Financial Statements
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10
of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all
adjustments, consisting of normal recurring accruals considered necessary
for a fair presentation, have been included in the accompanying unaudited
financial statements. Operating results for the three months and six months
ended March
31,June 30, 2000 are not necessarily indicative of the results that may
be expected for the full year ending December 31, 2000. For a summary of
significant accounting policies see the Company's Annual Report on Form
10-K for the year ended December 31, 1999.
2. NET LOSS PER SHARE
The Company computes basic and diluted earnings per share in
accordance with Statement of Financial Accounting Standards No. 128 ("SFAS
128"), "Earnings per Share". SFAS 128 requires the Company to report both
basic earnings per share, which is based on the weighted average number of
common shares outstanding, and diluted earnings per share, which is based
on the weighted average number of common shares outstanding and all
dilutive potential common shares outstanding. Since the Companycompany incurred
losses for all periods presented, the inclusion of options in the
calculation of weighted average common shares is anti-dilutive;anti-dilutive and
therefore there is no difference between basic and diluted earnings per
share.
3. NEW ACCOUNTING POLICY
In December 1999, the Securities and Exchange Commission ("SEC")
issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition
in Financial Statements." SAB 101 summarizes certain of the SEC's views in
applying generally accepted accounting principles to revenue recognition in
financial statements. In June 2000, the SEC issued SAB No. 101B to defer
for three quarters the effective date of implementation of SAB No. 101 with
earlier application encouraged. The Company is required to adopt SAB 101 in
the fourth quarter of 2000.
In July 2000, the Emerging Issues Task Force reached a consensus
with respect to EITF 99-19, "Reporting Revenue Gross as a Principal versus Net
as an Agent" ("EITF 99-19"). The Task Force addressed whether a company should
report revenue based on the gross amount billed to a customer because it
has earned revenue from the sale of the goods or services or the net amount
retained (that is, the amount billed to the customer less the amount paid
to a supplier) because it has earned a commission or fee. The accounting
principles in EITF 99-19 are consistent with the requirements of SAB 101. The
Company does not expect the adoption of SAB 101 or EITF 99-19 to have a
material effect on its financial position, results of operations or
presentation of its operating results.
4. OTHER ASSETS
Other assets consist of the following as of March 31,June 30, 2000:
Equity investments in publicly traded $12,969
companies $ 9,224
Convertible Notes 10,401notes of licensees 21,456
Other 1,692
-------
Long-term investments $25,0623,874
--------
Total $34,554
=======
In 2000, theThe Company has entered into several transactions with internet
businesses. The equity investments in two of these businesses,
Lastminute.com plc. and LendingTree.com, Inc., the stock of each of which
is publicly traded, are recorded at the closing market price of the shares
as of the balance sheet date. The cumulative unrealized gain of $2.2
million on these investments is included in accumulated other comprehensive
income.
The convertible notes of $6.8$11.1 million, $6.7 million and $3.6
million, inissued by Hutchison-Priceline Limited, MyPrice Pty. Ltd. and
Alliance Capital Partners, respectively, are recorded at cost.
The cumulative unrealized gain of $6.0 million on the publicly traded
equity investments is included in accumulated other comprehensive income.
The warrants to purchase shares of pricelinePriceline WebHouse Club, Inc.
and priceline.com europe Ltd. are carried at cost, $189 million and $3.2
million, respectively, which the Company believes is less than fair market value
at March 31,June 30, 2000. Neither the warrants nor the underlying shares are
publicly traded.
4.5. COMPREHENSIVE INCOME
Following are components of the Company's comprehensive income:
THREE MONTHS ENDED MARCH 31,SIX MONTHS ENDED
JUNE 30, 2000 ----JUNE 30, 2000
------------- --------------
Net loss $(13,567)applicable to common stockholders $(11,712) $(25,279)
Other comprehensive income:
Unrealized gain (loss) on investments 5,969(3,745) 2,224
----------- -----
Total comprehensive loss $ (7,598)
========
5.$(15,457) $(23,055)
========= =========
6. PREFERRED STOCK
In February 2000, the Board of Directors authorized an amendment
to the Company's certificate of incorporation to allow the Company to issue
a new series of preferred stock designated as Series A Convertible
Redeemable PIK Preferred Stock. The total number of Series A Preferred
shares which the Company is authorized to issue is six million shares, par
value $.01 per share. The Series A Preferred Stock has special voting
powers and preferences. Specifically, the Series A Preferred Stock has a
liquidation preference of $59.93 per share plus an amount equal to any
dividends accrued or cumulated but not paid. The Series A Preferred Stock
accrues dividends payable in shares of the Company's common stock at a rate
of 8% per annum commencing April 1, 2000. Dividends on the Series A
Preferred Stock are payable semi-annually on October 1st and April 1st of
each year starting October 1, 2000. Subject to certain limitations, payment
of the first six semi-annual dividend payments is assured.
The Series A Preferred Stock may be redeemed at the option of the
Company in whole or in part at any time after April 1, 2003 at $59.93 per
share in cash, plus accrued but unpaid dividends. The Series A Preferred
Stock is subject to mandatory redemption on April 1, 2010. The Series A
Preferred Stock is convertible at the option of the holder into shares of
the Company's common stock on a one-for-one basis at any time prior to
redemption, subject to certain anti-dilution adjustments. Holders of the
Series A Preferred Stock vote together with holders of common stock on all
matters and in certain limited circumstances are entitled to a separate
class vote. Holders of Series A Preferred Stock are entitled to specified
cash payments in the event of certain business combination transactions
involving the Company.
On June 30, 2000, the Company exchanged six million shares of the
Company's common stock held by Delta Air Lines, Inc. for six million shares
of the Series A Preferred Stock. The six million shares of common stock
received by the Company from Delta are included in Treasury Stock on the
Company's balance sheet.
7. COMMITMENTS AND CONTINGENCIES
On January 6, 1999, we received notice that a third party patent
applicant and patent attorney, Thomas G. Woolston, purportedly had filed in
December 1998 with the United States Patent and Trademark Office a request
to declare an interference between a patent application filed by Woolston
and our U.S. Patent 5,794,207. We are currently awaiting information from
the Patent Office regarding whether it will initiate an interference
proceeding.
On January 19, 1999, Marketel International Inc. (Marketel), a
California corporation, filed a lawsuit against us, among others. On
February 22, 1999, Marketel filed an amended and supplemental complaint. On
March 15, 1999, Marketel filed a second amended complaint. On May 9, 2000,
Marketel filed a third amended complaint against us and Priceline Travel,
Inc. The third amended complaint alleges causes of action for
misappropriation of trade secrets, conversion, false advertising of
trade secrets, conversion, false advertising and for
correction of inventorship inof U.S. Patent 5,794,207. In its third amended
complaint, Marketel alleges, among other things, that the defendants
conspired to misappropriate Marketel's business model, which allegedly was
provided in confidence approximately ten years ago. The third amended
complaint also alleges that four former Marketel employees are the actual
sole inventors or co-inventors of U.S. Patent 5,794,207, which was issued
on August 11, 1998 and has been assigned to priceline.com. Marketel asks
that the patent's inventorship be corrected accordingly.
On February 5, and February 10 and March 31, 1999, we filed an answer and amended
answer,answers
respectively, to the complaint, amended complaint and second amended
complaint, in which we denied the material allegations of liability inliability. On May
19, 2000, we filed a motion to dismiss the complaint.third amended complaint for
failure to state a complaint upon which relief can be granted. We strongly
dispute the material legal and factual allegations contained in Marketel's
third amended complaint and believe that the amended complaint is without
merit. In addition, on July 13, 2000, we filed a motion for summary
judgment alleging that Marketel has not identified legally protectable
trade secrets. On August 1, 2000, the Court ordered that Marketel's
oppositions to our motions will be due after discovery, and that our
motions will be heard on November 16, 2000. We intend to defend vigorously
against the action. Pursuant to the indemnification obligations contained
in the Purchase and Intercompany Services Agreement with Walker Digital,
Walker Digital has agreed to indemnify, defend and hold us harmless for
damages, liabilities and legal expenses incurred in connection with the
Marketel litigation.
On October 13, 1999, we filed a complaint in the United States
District Court for the District of Connecticut under the caption
Priceline.compriceline.com Incorporated v. Microsoft Corporation and Expedia, Inc., No.
399CV1991 (AWT) alleging that Microsoft Corporation and Expedia, Inc., a
subsidiary of Microsoft Corporation, infringe our U.S. Patent 5,794,207 by
operating the defendants' "Hotel Price Matcher" service, and that the
defendants' conduct toward us violated the Connecticut Unfair Trade
Practices Act. On December 20, 1999, defendants moved the Court to dismiss
the complaint for failure to name a necessary party, Marketel. On March 21,
2000, the presiding judge stated that he intends to deny defendant's motion
to dismiss, and that a decision will be forthcoming. On December 23, 1999,
the Court granted our motion to supplement the complaint to expressly
include defendant's "Flight Price Matcher" service.
On July 14, 2000, we filed a complaint in the United States
District Court for the District of Connecticut under the caption
priceline.com Incorporated v. Microsoft Corporation and Expedia, Inc.,
alleging that defendants infringe our U.S. Patent 6,085,169 by operating
the "Hotel Price Matcher" and "Flight Price Matcher" services. In the
lawsuit, we are seeking declaratory relief, permanent injunctive relief and
actual and punitive damages. Walker Digital has agreed to reimburse us for
a portion of the legal expenses incurred in connection with the Microsoft
litigations.
On June 6, 2000, Pannell-Christ Incorporated, an Indiana
corporation, filed a lawsuit against us in the United States District Court
for the District of Indiana under the caption Pannell-Christ Incorporated
v. priceline.com Incorporated, IP 00-0810 CT/G. The complaint alleges
federal and state common law service mark infringement based on
Pannell-Christ's federal trademark registration for "Name Your Price!" for
educational services and common law trademark rights. The complaint seeks
injunctive relief and damages. On June 29, 2000, we filed an Answer and
Counterclaim in which we denied the material allegations of liability in
the complaint and counterclaimed for cancellation of Pannell-Christ's
federal trademark registration. We strongly dispute the material legal and
factual allegations contained in the complaint and believe the complaint is
without merit.
From time to time, we have been and expect to continue to be
subject to legal proceedings and claims in the ordinary course of business,
including claims of alleged infringement of third party intellectual
property rights by us. Such claims, even if not meritorious, could result
in the expenditure of significant financial and managerial resources and
could adversely affect our stock price.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS. OVERVIEW
We have pioneered a unique e-commerce pricing system known as a
"demand collection system" that enables consumers to use the Internet to
save money on a wide range of products and services while enabling sellers
to generate incremental revenue. Using a simple and compelling consumer
proposition - Name Your Own PriceSM - we collect consumer demand, in the
form of individual customer offers guaranteed by a credit card, for a
particular product or service at a price set by the customer. We then
either communicate that demand directly to participating sellers or access
participating sellers' private databases to determine whether we can
fulfill the customer's offer. Consumers agree to hold their offers open for
a specified period of time and, once fulfilled, offers cannot be canceled.
We benefit consumers by enabling them to save money, while at the same time
benefiting sellers by providing them with an effective revenue management
tool capable of identifying and capturing incremental revenues. By
requiring consumers to be flexible with respect to brands, sellers and
product features, we enable sellers to generate incremental revenue without
disrupting their existing distribution channels or retail pricing
structures.
Our business model and brand are currently supporting several
productproducts and service offerings, including the following:
o leisure airline tickets, provided by 10 domestic and 2425
international airline participants;
o hotel rooms, in substantially all major United States markets with
more than 1520 leading national hotel chains as participants;
o rental cars, in substantially all major United States markets with
threefive leading rental car chains as participants;
o new automobiles, in substantially all major United States markets;
o home financing services, in substantially all major United States
markets, which includes home mortgage services, home equity loans
and refinancing services.services;
o Longlong distance telephone service, which was recently launchedprovided by three carriers, in
March
2000.substantially all United States markets.
Subsequent to the end of the second quarter, we announced the
addition of a new product offering for travel insurance. In addition, we
plan to offer Name Your Own PriceSM automobile insurance through our web
site starting in early 2001. We also are currently planning an expansion of
our core Name Your Own PriceSM business model to other areas of e-commerce,
including Business to Business, cruises and vacation packages.
Through the innovative use of "adaptive marketing programs," we also
market customer acquisition programs for third parties. These programs
facilitate the completion of a higher percentage of successful transactions
through the priceline.com service, while generating fee income for us. We
currently have nine adaptive marketing partners, compared to one at March
31, 1999, thus reducing our dependence on any one partner. We intend to
continue to add adaptive marketing programs so that consumers have a
variety of programs from which to choose and priceline.com has a
diversified source of adaptive marketing revenues.
Because the priceline.com system does not set minimum offer
thresholds, and consumers are not charged to make offers for our products,
it is expected that we will receive a significant number of unreasonable or
"fantasy offers." Accordingly, in addition to analyzing our actual
fulfillment rates, we also analyze the percentage of "reasonable" offers
that we are able to fill. We consider an offer for an airline ticket, hotel
room or rental car to be "reasonable" when it is no more than 30% lower
than the lowest generally available advance-purchase fare or price for the
same product or service.
We measure our "bind" rate as the percentage of reasonableunique offers that
we ultimately fulfill. Our bind rate forFor the quarter ended March 31,June 30, 2000, our bind rate
was 43.5%49.6%, 45.3% and 40.0% for all reasonableunique airline ticket, hotel room
and rental car offers.offers, respectively. For the quarter ended March 31, 2000,
our bind rate was 44.0%, 47.0% and 41.6% for all unique airline ticket,
hotel room and rental car offers, respectively.
When making offers for airline tickets through the priceline.com
service, consumers are permitted to make only one offer within a seven day
period unless they change some feature of their itinerary, such as the date
on which, or the airport from which, they are willing to fly. As a result
of our "checkstatus" feature, introduced in April 1999, consumers whose
initial requests are not satisfied are permitted to resubmit revised offers
that reflect at least one change to their itinerary. Effective with the
introduction of the checkstatus feature, each initial offer and any
resubmitted offers are treated as a single offer - a unique offer - for
purposes of measuring our total offer volume and our offer fulfillment
rates. Previously, each had been counted as a separate offer. Therefore,
comparisons with prior periods may not be meaningful.
We have announced several transactions pursuant to which third
parties license the priceline.com name and demand collection system for
offeringto
offer a particular product or service or for offeringto offer a number of products or
services in a distinct international region. Pursuant to the licensee
transactions, we generally receive a royalty under the license and may also
receive fees for services and reimbursement of certain expenses. We also
hold convertible securities or warrants entitling us to acquire a
significant percentage of such licensee's equity securities upon the
occurrence of certain events. Unless such securities or warrants are
converted or exercised, the results of our licensees will not be included
in our financial results.
In JanuaryJune 2000, we entered into an agreement in principledefinitive agreements with
a
subsidiarysubsidiaries of Hutchison Whampoa Limited to introduce the priceline.com
serviceour services to
several Asian markets. Under the terms of the agreement in
principle,agreements, we will license
our business model and provide our expertise in technology, marketing and
operations to the new company. The new companyHutchison-Priceline Limited. Hutchison-Priceline Limited will
pay us an annual licensing fee to use our intellectual property. In
addition, we will purchasehave purchased a convertible note allowing us to take up to a
50% equity stake in the new company under certain conditions. Completion of
the transaction is subject to approval by both company's Boards of
Directors and the execution of definitive agreements.Hutchison-Priceline Limited.
In MarchJune 2000, we entered into definitive agreements with
affiliates of General Atlantic Partners, LLC, to introduce our services to
several European markets. Under the terms of the agreements, we will
license our business model to MyPrice, a new company that will introduce our services
in Australia and New Zealand. We will provide our expertise in technology,
marketing and operations to MyPrice. MyPricepriceline.com europe Ltd., which will pay us an
annual licensing fee to use our intellectual property. In addition, we
purchased a warrant allowing us under certain conditions to take a majority
equity stake in priceline Europe Holdings, N.V., the parent of
priceline.com europe Ltd. Currently, priceline.com europe Ltd. plans to
begin offering products and services starting in the fourth quarter 2000.
In July 2000, we entered into a non-binding letter of intent with
SoftBank E-Commerce Corp. to introduce our services in Japan. We intend to
license our business model and provide our expertise in technology,
marketing and operations to priceline.com Japan, an entity to be formed
under the laws of Japan. priceline.com Japan will pay us an annual
licensing fee to use our intellectual property. Under the terms of the
proposed agreement, we will purchase a convertible notesecurity allowing us to
take up to a 50%significant equity stakeposition in MyPricepriceline.com Japan under certain
conditions. Completion of theThe transaction is subject to the negotiation and execution of
definitive agreements and to certain government approvals in Australia, which are expected in the
next several weeks. MyPriceother conditions. The actual launch
date for airline ticketing services is expectedsubject to launch its service in the second
half of 2000.
In March 2000, we entered into an agreementsuccessful negotiation
with Alliance Capital
Partners, pursuant to which Alliance formed an operating subsidiary,
Priceline Mortgage, for the primary purpose of actingairline companies as a broker and/or
lender of residential mortgage loans in connectionwell as compliance with our mortgage
service. We have agreed to provide $3.62 million of financing to an
affiliate of Alliance in the form of a convertible secured note and have
agreed to license the "priceline" name and business model for use by
Priceline Mortgage. Alliance has agreed to provide management services to
Priceline Mortgage, including the procurement of personnel and office space
and assistance in obtaining regulatory approvals. Following the October
1999 launch of a pilot program, Priceline Mortgage launched the mortgage
service nationally during March 2000.certain governmental
regulations.
We believe that our continued growth will depend in large part on
our ability to continue to promote the priceline.com brand and to apply the
priceline.com business model to a wide range of products and services. We
intend to continue to invest heavily in marketing and promotion, technology
and personnel. As a result, we expect to incur additional losses. However,
we planOur goal is to reduce operating losses and improve gross
margins in an effort to achieve profitability. Our limited operating
history makes the prediction of future results of operations difficult, and
accordingly, we cannot assure you that we will achieve or sustain revenue
growth or profitability.
RESULTS OF OPERATIONS
REVENUES
QUARTER ENDEDResults of Operations
Revenues
Quarter Ended % MARCH 31, CHANGE
---------Six Month Ended %
June 30, Change June 30, Change
-------- ------ -------- ------
($000) ($000)
2000 1999 2000 1999
---- ---- REVENUES.................................... $313,798 $49,411 535%---- ----
REVENUES...... $352,095 $111,564 216% $665,893 $160,975 314%
Revenues for the quarterthree and six months ended March 31,June 30, 2000
were comprisedconsisted primarily of: (1) transaction revenues representing the selling
price of airline tickets, hotel rooms, rental cars and rental cars;long distance
telephone service; and (2) fee based revenue. Fee based revenue was
comprised primarily of: (a) Worldspan reservation booking fees and customer
processing fees; (b) fee income from adaptive marketing programs offered in
connection with our product offerings; (3)
ancillary revenues consisting primarily of Worldspan reservation booking(c) fees from our long distance
telephone suppliers; and customer processing fees; and (4)(d) fee income from our home financing and auto
programs. Revenues for the three and six months ended June 30, 1999
consisted primarily of: (1) transaction revenues representing the selling
price of airline tickets and hotel rooms; and (2) fee income from marketing
programs offered in connection with our product offerings.
Revenues increased during the quarterthree and six months ended June 30,
2000 primarily as a result of the substantial development of our unique
customer base, to which we added 1.5 million and 3.0 million new customers
during the three and from whichsix months ended June 30, 2000, respectively. In
addition, we generated approximately 830,000964,000 and 1.8 million repeat
customer offers during the quarterthree and six months ended March 31, 2000.June 30, 2000,
respectively. As of March
31,June 30, 2000, we had a base of approximately 5.36.8
million unique customers, compared to approximately 1.22.0 million unique
customers at March 31,June 30, 1999. A unique customer is defined as someone who has
made a guaranteed offer for at least one of our products.
We believe our customer base grew during the three and six months
ended June 30, 2000 as a result of our aggressive advertising campaign during the
first half of 2000, and due to the availability of additional
airline product
inventory generated from adding three additional domestic air carriers
during the fourth quarter of 1999. In1999 and two additional major rental cars
companies during the firstsecond quarter we
also experienced the benefits of the seasonal strength in the leisure
travel industry.2000. The growth in our customer
base is also is attributable to theour continued expansion of our service into
new vertical markets. We continuedDuring the expansion ofthree and six months ended June 30, 2000,
we generated transactional revenues from our auto service during the first quarter, to 48 states by
March 31, 2000, and launched long distance telephone
service, launched during the second quarter. In addition, we received fee
income from our long distance telephone, auto and financial products
introduced in Marchthe first quarter of 2000. These services were not offered
during the same periodperiods of 1999. AncillaryTravel products, particularly airline
tickets, continue to account for the majority of our revenue. Seasonal
variations in our travel business, where the third and fourth calendar
quarters are typically weaker than the first two quarters, have
historically and are expected to continue to impact revenue growth from
travel products.
Fee revenues for the quarterthree and six months ended March 31,June 30, 2000
increased as a result of volume driven increases in Worldspan reservation
booking fees and the introduction of a customer processing feefees in the airline and hotel room and
rental car services. The processing fees for the airline and hotel room
services were introduced during the second quarter of 1999. Fee-based
income represented 7.3% and ancillary revenues represented
8.5% and 13.5%8.4% of total revenues for the quarters ended
March 31,June 30, 2000 and 1999, respectively, and 7.8% and 10.0% for the six months
ended June 30, 2000 and 1999, respectively. The decrease as a percentage of
total revenues is due to the rapid expansion of transactional revenues
throughout 1999 and the first half of 2000 and in the second quarter of
2000.
PRODUCT COSTS AND GROSS PROFIT
QUARTER ENDED2000 due to a reduction in fee revenue from adaptive marketing programs.
Cost of Revenues and Gross Profit
Quarter Ended % MARCH 31, CHANGE
---------Six Month Ended %
June 30, Change June 30, Change
-------- ------ -------- ------
($000) ($000)
2000 1999 2000 1999
---- ---- PRODUCT
COSTS.......................... $265,152 44,040 502%---- ----
Total Cost of
Revenues........ $297,300 101,045 194% $562,452 145,085 288%
% OF REVENUES..................of
Revenues........ 84% 89%
GROSS PROFIT................... $48,646 $5,371 806%
GROSS MARGIN...................91% 84% 90%
Gross Profit.... $54,795 $10,519 421% $103,441 $15,890 551%
Gross Margin.... 15.6% 9.4% 15.5% 10.9%9.9%
Cost of revenues consists of product costs and supplier warrant
costs. For the quarterthree and six months ended March 31,June 30, 2000, product costs
were comprisedconsisted of: (1) the cost of airline tickets from our suppliers, net of
the federal air transportation tax, segment fees and passenger facility
charges imposed in connection with the sale of airline tickets; (2) the
cost of hotel rooms from our suppliers, net of hotel tax; and (3) the cost of
rental cars from our suppliers; and (4) in the second quarter of 2000, the
cost of long distance telephone service provided by our suppliers. During
the first quarter ofthree and six months ended June 30, 1999, substantially all of our product costs were
comprised of (1) the cost of airline tickets from our suppliers, net of the
federal air transportation tax, segment fees and passenger facility charges
imposed in connection with the sale of airline tickets. Included in product costs for both periods aretickets; and (2) the cost of
hotel rooms from our suppliers, net of hotel tax. Our supplier warrant
costs offor the three and six month periods in both years were approximately
$381,000, and $762,000, respectively, which represent a non-cash expense
related to the issuance of common stock warrants to one of our airline
program participants in January 1999. We anticipate that we will recognize additional supplier
warrant costs in the amount of approximately $381,000 in each of the next
three fiscaltwo quarters.
Gross profit is comprisedconsists of revenues less the cost of revenues. For
the quarterthree and six months ended March 31,June 30, 2000, gross profit increased over
the same periodperiods in 1999 as a result of increased transactional sales
volume, increased Worldspan reservation booking and customer service fee
revenues, and increased fee-based revenues from our long distance
telephone, auto and financial services products. In addition to increasing
transactional volume, we also have increased adaptive marketing revenuesthe average margin on air
tickets and decreased percentagehotel rooms as compared to the same periods of tickets that were sold at a negative margin.1999. Because
fee-based and
ancillary revenues diddo not involve separate costs, these revenues have had a
disproportionately positive impact on total gross profit. Fee-based
income and ancillary revenues represented approximately 20%46% and 110%83% of total gross profit for
the quartersthree months ended March 31,June 30, 2000 and 1999, respectively.respectively, and 50% and
94% of total gross profit for the six months ended June 30, 2000.
For the quarterthree and six months ended March 31,June 30, 2000, gross margin
increased from the same period of 1999 as a result of increased sales volume,average
margin on air tickets and hotel rooms, increased fee-basedWorldspan and ancillary revenue,customer
fees, and decreased salesas a result of tickets that were
sold below cost. Fee-based revenues, such as adaptive marketing revenues,
ancillary revenuesthe introduction and revenues fromexpansion of additional
products for long distance telephone, financial services and automobiles
generate higher margins than transaction revenues, on which the gross
margin generated is derived from the spread between customer payments and
product costs.autos during
2000.
OPERATING EXPENSES
Sales and Marketing
QUARTER ENDEDQuarter Ended % MARCH 31, CHANGE
---------Six Month Ended %
June 30, Change June 30, Change
-------- ------ -------- ------
($000) ($000)
2000 1999 2000 1999
---- ---- SALES---- ----
Advertising........$13,826 $ 8,980 54% $34,164 $20,776 64%
Sales &
MARKETING................................... $40,449 $17,138 136%Marketing.......... 23,791 8,753 172% 43,902 14,095 211%
------ ----- --- ------ ------
Total..............$37,617 $17,733 112% $78,066 $34,871 124%
% OF SALES.................................. 12.9% 34.7%Of
Revenues........... 10.7% 15.9% 11.7% 21.7%
Sales and Marketingmarketing consists of advertising expenses and other
sales and marketing expenses. Advertising expenses consist primarily of:
(1) television and radio advertising; (2) agency fees and production costs
for television and radio commercials; and (3) on-line and print
advertisements. For the three and six months ended June 30, 2000,
advertising expenses increased over the same period in 1999 primarily due
to substantial expenses related to the television advertising campaign
launched in January 2000. We intend to continue to pursue an advertising
and promotion expenses; (2)branding campaign in order to continue to attract new users.
Sales and marketing expenses consist primarily of: (1) credit card
processing fees; (3)(2) fees paid to third-party service providers that
operate our call centers; (4)(3) provisions for customer credit card
charge-backs; and (5)(4) compensation for our sales and marketing personnel.
For the quarterthree and six months ended March 31,June 30, 2000, sales and marketing
expenses increased over the same periodperiods in 1999 due to substantial increases in advertising expenditures and increases in
telecommunications,increased costs to
run our customer service call centers, increased credit card processing
fees, and increased payroll expenses. All of theand related expenses resulting from growing our
employee base. The increases in sales and marketing expenses were driven by
substantial increases in customer offers and revenue.
We intend to
continue to pursue an aggressive advertising and branding campaign in order
to attract new users.
General and Administrative
QUARTER ENDEDQuarter Ended % MARCH 31, CHANGE
---------Six Month Ended %
June 30, Change June 30, Change
-------- ------ -------- ------
($000) ($000)
2000 1999 2000 1999
---- ---- GENERAL---- ----
General &
ADMINISTRATIVE...................... $18,611 $3,667 408%Administrative... $15,222 $5,503 177% $27,926 $9,170 205%
Payroll Expense
On Employee
Stock Options.... 2,507 N/A 8,414 N/A
----- ------ ----- -------
Total............ $17,729 $5,503 222% $36,340 $9,170 296%
% OF SALES.................................... 5.9% 7.4%REVENUES... 5.0% 4.9% 5.5% 5.7%
General and administrative expenses consist primarily of: (1)
compensation for personnel; (2) fees for outside professionals; (3)
telecommunications costs; and (4) occupancy expenses. General and
administrative expenses increased forduring the quarterthree and six months ended
March 31,June 30, 2000 over the same period ofperiods in 1999 as a result of increased
headcount and resulting payroll and overhead costs associated with the
expansion of our product offerings and increases in our revenue base. To a lesser extent,In
addition, for the increasethree and six months ended June 30, 2000, we incurred
charges of $2.5 and $8.4 million, respectively, for payroll taxes relating
to options exercised in accordance with our employee stock option plans.
There was dueno related expense in the three or six months ending June 30,
1999. Pursuant to moving expenses related to the relocation ofagreements we have entered into with our corporate officeslicensees and
Walker Digital, during the quarter. In addition,second quarter, we were reimbursed $7.1 million
by our licensees and Walker Digital for costs we incurred in connection
with providing information technology and other services to them and for
reimbursement by Walker Digital of certain legal expenses associated with
patent litigations. Such reimbursement amounts totaled $3.8 million for the
first quarter ended March
31, 2000of 2000. General and administrative expenses in the first and
second quarter also included a chargethe cost of $5.9 million relating to option payroll taxes
resulting from the exercise of employee stock options.providing such services.
Systems and Business Development
QUARTER ENDEDQuarter Ended % MARCH 31, CHANGE
---------Six Month Ended %
June 30, Change June 30, Change
-------- ------ -------- ------
($000) ($000)
2000 1999 2000 1999
---- ---- SYSTEMS---- ----
Systems & BUSINESS DEVELOPMENT................ $5,868 $2,184 169%Busines
Development......... $6,695 $3,469 93% $12,563 $5,653 122%
% OF SALES...................................of
Revenues............ 1.9% 4.4%3.1% 1.9% 3.5%
Systems and business development expenses for all periods consist
primarily ofof: (1) payments to outside contractors, (2) depreciation and
amortization on computer hardware and software, (3) compensation to our
information technology and product development staff, (2) payments to outside contractors, (3)and (4) data
communications and other expenses associated with operating our internet
site and (4) depreciation and amortization on computer hardware and
software.site. For the quarterthree and six months ended March 31,June 30, 2000, systems and
business development expenses increased over the same periodperiods in 1999 due
to increased headcountstaffing requirements and resulting consulting, payroll and
overhead costs. In addition,
we experienced increased depreciation and amortization expenses resulting
from increased capital expenditures and increased development costs associated withrelated to the expansion of our product offerings and
technological infrastructure. In addition, we recognized increased
depreciation and amortization expenses resulting primarily from capital
expenditures and increased internal software development costs incurred in
past and current quarters.
INTEREST INCOME, NET
QUARTER ENDEDQuarter Ended % MARCH 31, CHANGE
---------Six Month Ended %
June 30, Change June 30, Change
-------- ------ -------- ------
($000) ($000)
2000 1999 2000 1999
---- ---- ---- ----
INTEREST INCOME, (NET)........................... $2,715 $458 493%
InterestNET...$2,725 $1,929 41% $5,440 $2,387 128%
For the three months ending June 30, 2000, interest income on cash
and marketable securities increased from the prior year due to higher
interest rates realized on cash balances as compared to the prior year, and
as a result of interest income on a loan we made to MyPrice Pty. Ltd., our
Australian licensee, which was subsequently repaid. For six months ending
June 30, 2000, interest income on cash and marketable securities increased
primarily due to higher balances resulting from our initial public offering
of common stock in April of 1999 and our follow-on public offering of
common stock in August of 1999.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31,June 30, 2000, we had approximately $149.5$138.7 million in cash,
cash equivalents and short-term investments. We generally invest excess
cash, cash equivalents and short-term investments predominantly in debt
instruments that are highly liquid, of high-quality investment grade, and
predominantly have maturities of less than one year with the intent to make
such funds readily available for operating purposes.
Net cash provided by operating activities was $4.0 million for the
six months ended June 30, 2000. Net cash provided by operating activities
during 2000 was primarily attributable to expanding gross margin on
increasing revenues, which was partially offset by increasing operating
expenses. Net cash used in operating activities was $5.5 million and $17.1$33.8 million for the
threesix months ended March 31, 2000 and 1999, respectively.June 30, 1999. Net cash used in operating activities
during 1999 was primarily attributable to net losses from operations.
Net cash used in investing activities was $12.1$54.1 million and $4.8$20.6
million for the threesix months ended March 31,June 30, 2000 and 1999, respectively. Net
cash used in investing activities was primarily related to purchases of
property and equipment and, in the first quarterhalf of 2000, to makepurchase
convertible notes and warrrants in certain minoritylicensees and to purchase
certain equity investments, described more fully described below.
In February 2000, we provided $3.62 million of financing to an
affiliate of Alliance Capital Partners in the form of a convertible secured
note, in accordance with our agreement with Alliance to form Priceline
Mortgage.
In February 2000, we made an equity investment of $5.0 million in
Last Minute.com, a U.K. based e-commerce company.
In MarchFebruary 2000, we provided $6.8purchased a $3.6 million of financing to MyPrice in
the form of a convertible secured
note in accordance withan affiliate of Alliance Capital Partners, pursuant to our
agreement with MyPrice.Alliance.
During the second quarter, we purchased convertible notes in the
amounts of $11.1 million and $6.7 million in Hutchison-Priceline Limited
and MyPrice Pty. Ltd., respectively, pursuant to our agreements to develop our
products in certain Asian and Australian markets. In addition, we purchased
a warrant in the amount of $3.2 million from priceline.com europe Ltd.
pursuant to our agreements to develop our products in Europe.
We have certain commitments for capital expenditures as part of
our ongoing business cycle. None of these commitments are material to theour
financial statementsposition either individually or in the aggregate. As a result of
our rapid growth, we expect to continue to increase capital expenditures
for purchased computer hardware, internally developed software, other
equipment and leasehold improvements.
Net cash provided by financing activities was $10.2$12.3 million for
the threesix months ended March 31,June 30, 2000, primarily as a result of cash inflow
related to the exercise of employee stock options. Net cash used inprovided by
financing activities was $1.0$143.6 million for the threesix months ended March 31,June 30,
1999, primarily as a result of incurring deferred offering costs.proceeds from our initial public offering.
In the firstsecond quarter of 2000, we made loansa loan to twoan executive
officersofficer aggregating $5.0$3.0 million, which bearbears interest at 6.56% and 6.80%6.4%. Subject to
certain prepayment obligations and to forgiveness in the event of certain
changes of control, death, or termination without cause, pursuant to the
terms of these loans, accrued interest and principal are due after five
years, but are forgiven under certain circumstances if the executive
remains employed by us at that time.
Upon any forgivenessWe are subject to employer payroll taxes on employee exercises of
non-qualified stock options. Using the loans,closing price of our common stock on
August 8, 2000, which was $28.00 per share, employer payroll taxes on
unrealized gains related to in-the-money vested and unvested non-qualified
stock options would be approximately $4.5 million and $844,000,
respectively. These employer payroll taxes would be recorded as a charge to
operations in the period such options are exercised based on actual gains
realized by employees. Net proceeds that we would recognize as compensation expense an amount up toreceive upon the exercise
of such vested and unvested stock options would approximate $19.8 million
and $3.7 million, respectively. In addition, we would receive tax
deductions for gains realized by employees on the exercise of non-qualified
stock options. Our quarterly results of operations and cash flows could
vary significantly depending on the periods in which the stock options are
exercised by employees and, consequently, the amount of principal and interest forgiven.employer payroll
taxes assessed.
We believe that our existing cash balances and liquid resources
will be sufficient to fund our operating activities, capital expenditures
and other obligations through at least the next twelve months. However, if
during that period or thereafter, we are not successful in generating
sufficient cash flow from operations or in raising additional capital when
required in sufficient amounts and on terms acceptable to us, we may be
required to reduce our planned capital expenditures and scale back the
scope of our business plan, either of which could have a material adverse
effect on our projected financial condition or results of operation. If
additional funds arewere raised through the issuance of equity securities, the
percentage ownership of our then current stockholders would be diluted. We
cannot assure you that we will generate sufficient cash flow from
operations in the future, that anticipated revenue growth will be realized
or that future borrowings or equity contributions will be available in
amounts sufficient to make anticipated capital expenditures or finance our
business plan.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
The following risk factors and other information included in this
Form 10-Q should be carefully considered. The risks and uncertainties
described below are not the only ones we face. Additional risks and
uncertainties not presently known to us or that we currently deem
immaterial may also impair our business operations. If any of the following
risks occur, our business, financial condition, operating results and cash
flows could be materially adversely affected.
Our Limited Operating History Makes Evaluating Our Business Difficult
Priceline.compriceline.com was formed in July 1997 and began operations on
April 6, 1998. As a result, we have only a limited operating history on
which you can base an evaluation of our business and prospects. Our
prospects must be considered in the light of the risks, uncertainties,
expenses and difficulties frequently encountered by companies in their
early stages of development, particularly companies in new and rapidly
evolving markets, such as online commerce, using new and unproven business
models. To address these risks and uncertainties, we must, among other
things:
o attract leading sellers and consumers to the priceline.com
service;
o maintain and enhance our brand, and expand our product and service
offerings;
o attract, integrate, retain and motivate qualified personnel; and
o adapt to meet changes in our markets and competitive developments.
We may not be successful in accomplishing these objectives.
We Are Not Profitable and Expect toMay Continue to Incur Losses
As of March 31,June 30, 2000, we had an accumulated deficit of $1.2
billion, of which $1.07$1.08 billion related to certain non-cash charges arising
from equity issuances to a number of participating airlines, our chief executive
officerChairman
and other parties, which was partially offset by $188.8 million of income
representing the amount of estimated fair value of warrants received by us
in connection with our relationship with our licensee, Priceline WebHouse
Club, Inc. We have not achieved profitability and expect tomay continue to incur
losses.
The principal causes of our losses are likely to
continue to be significant brand development costs, marketing, personnel
and promotion costs and technology and systems development costs.
Almost allA substantial portion of our revenues to date have been derived
from airline, ticket sales, hotel room reservations and related adaptive marketing
programs.rental car products. As our business model evolves,
we have introduced and expect to continue to introduce a number of new products and services.
With respect to both current and future product and service offerings, we
expect to increase significantly our operating expenses in order to
increase our customer base, enhance our brand image and support our growing
infrastructure. For us to make a profit, our revenues and gross profit
margins will need to increase sufficiently to cover these and other future
costs. Otherwise, we may never achieve profitability.
Potential Fluctuations in Our Financial Results Make Financial Forecasting
Difficult
We expect our revenues and operating results to vary significantly
from quarter to quarter. As a result, quarter to quarter comparisons of our
revenues and operating results may not be meaningful. In addition, due to
our limited operating history and our new and relatively unproven business
model, we cannotit may be difficult to predict our future revenues or results of
operations accurately. It is likely that in one or more future quarters our
operating results will fall below the expectations of securities analysts
and investors. If this happens, the trading price of our common stock would
almost certainly be materially and adversely affected.
Our business has almost no backlog and almost all of our revenues
for a particular quarter are derived from transactions that are both
initiated and completed during that quarter. Our current and future expense
levels are based largely on our investment plans and estimates of future
revenues and are, to a large extent, fixed. Accordingly, we may be unable
to adjust spending in a timely manner to compensate for any unexpected
revenue shortfall, and any significant shortfall in revenues relative to
our planned expenditures could have an immediate adverse effect on our
business and results of operations.
Our limited operating history and rapid growth makes it difficult
for us to assess the impact of seasonal factors on our business.
Nevertheless, we expect our business to be subject to seasonal
fluctuations, reflecting a combination of seasonality trends for the
products and services offered by us and seasonality patterns affecting
Internet use. For example, with regard to our travel products, demand for
leisure travel may increase over summer vacations and holiday periods,
while Internet usage may decline during the summer months. Our results also
may be affected by seasonal fluctuations in the inventory made available to
the priceline.com service by participating sellers. Airlines, for example,
typically enjoy high demand for tickets through traditional distribution
channels for travel during Thanksgiving and the year-end holiday period. As
a result, during those periods, less excess airline ticket inventory would
be available to priceline.com. Our business also may be subject to cyclical
variations for the products and services offered; for example, leisure
travel and home mortgage financing tend to decrease in economic downturns.
We Are Dependent On the Airline Industry and Certain Airlines
Our near term, and possibly long term, our prospects are significantly
dependent upon our sale of leisure airline tickets. Sales of leisure
airline tickets represented a substantial majority of total revenue for the
year ended December 31, 1999 and the quartersix months ended March 31,June 30, 2000.
Leisure travel, including the sale of leisure airline tickets, is dependent
on personal discretionary spending levels. As a result, sales of leisure
airline tickets and other leisure travel products tend to decline during
general economic downturns and recessions. Unforeseen events, such as
political instability, regional hostilities, increases in fuel prices,
travel-related accidents and unusual weather patterns also may adversely
affect the leisure travel industry. As a result, our business also is
likely to be affected by those events. Significantly reducing our
dependence on the airline and travel industries is likely to take a long
time and there can be no guarantee that we will succeed in reducing that
dependence.
Sales of airline tickets from priceline.com's six largest airline
suppliers accounted for approximately 93% and 84%, respectively, of airline
ticket revenue for the year ended December 31, 1999 and the quartersix months
ended March 31,June 30, 2000, respectively. As a result, currently we are
substantially dependent upon the continued participation of these airlines
in the priceline.com service in order to maintain and continue to grow our
total airline ticket revenues. We currently have 3435 participating airlines.
However, our airline participation agreements:
o do not require the airlines to make tickets available for any
particular routes;
o do not require the airlines to provide any specific quantity of
airline tickets;
o do not require the airlines to provide particular prices or levels
of discount;
o do not require the airlines to deal exclusively with us in the
public sale of discounted airline tickets; and
o generally, can be terminated upon relatively short notice.
These agreements also outline the terms and conditions under which
ticket inventory provided by the airlines may be sold.
Our agreement with Delta contains certain restrictions relating to
the terms of participation in our service by other carriers and the
circumstances under which we may transfer or license our intellectual
property to other travel providers. It is possible that, as the
priceline.com service grows and becomes a significant channel of
distribution for airline tickets and as other carriers seek participation
in the priceline.com service, these competitively restrictive provisions of
the Delta agreement could raise issues under federal and state antitrust
laws. If that happened, either a federal or state government agency or
private party could initiate litigation seeking to enjoin us and Delta from
enforcing these provisions or seeking to collect treble damages. The
outcome of any such litigation would be uncertain. If, however, such a
lawsuit resulted in an injunction or subjected us to damages, our business
and financial condition could suffer.
Due to our dependence on the airline industry, we could be
severely affected by changes in that industry, and, in many cases, we will
have no control over such changes or their timing. For example, if the
Federal Aviation Administration grounded a popular aircraft model, excess
seat capacity could be dramatically reduced and, as a result, our source of
inventory could be significantly curtailed. In addition, given the
concentration of the airline industry, particularly in the domestic market,
major airlines that are not participating in the priceline.com service
could exert pressure on other airlines not to supply us with tickets.
Alternatively,Moreover, the airlines could attempt to establish their own buyer-driven
commerce service or participate or invest in other similar serviceservices being
established to compete with us. We also could be materially adversely
affected by the bankruptcy, insolvency or other material adverse change in
the business or financial condition of one or more of our airline
participants.
Our Business Model is Novel
and Relatively Unproven
The priceline.com service is based on a novel and relatively unprovennew
business model. We will be successful only if consumers and sellers
continue to actively use the priceline.com service. Prior to the launch of
the priceline.com service, consumers and sellers had never bought and sold
products and services through a demand collection system over the Internet.
Therefore, it is impossible to predict the degree to which consumers and
sellers will continue to use the priceline.com service.
Many of the factors influencing consumers' and sellers'
willingness to use the priceline.com service are outside our control. For
example, a labor dispute that disrupts airline service or an airline
accident could make consumers unwilling to use a service like priceline.com
that does not permit the customer to designate the airline on which the
customer purchases a ticket. In addition, a breach of security on the
Internet, even if we were not involved, could make consumers unwilling to
guaranteeplace orders online with a credit card. Consequently, it is possible that
consumers and sellers will never utilize the priceline.com service to the
degree necessary for us to achieve profitability.
We Need to Sell New Products and Services
We are unlikely to make significant profits unless we continue to
make new or complementary products and services and a broader range of
existing products and services available through the priceline.com service
or through services provided by our licensees. We will incur substantial
expenses and use significant resources in trying to continue to expand the
type and range of the products and services that we offer. However, we may
not be able to attract sellers, other participants and licensees to provide
such products and services or consumers to purchase such products and
services through the priceline.com service. In addition, if we or our
licensees launch new products or services that are not favorably received
by consumers, our reputation and the value of the priceline.com brand could
be damaged.
The great majority of our experience to date is in the travel
industry. The travel industry is characterized by "expiring" inventories.
For example, if not used by a specific date, an airline ticket, hotel room
reservation or rental car reservation has no value. The expiring nature of
the inventory creates incentives for airlines, hotels and rental car
companies to sell seats, hotel room reservations or rental car reservations
at reduced rates. Because we have only limited experience in selling
"non-
expiring""non-expiring" inventories on the priceline.com service, such as new cars
or financial services, we cannot predict whether the priceline.com business
model can be successfully applied to such products and services.
New Businesses We Are Evaluating May Not Be Successful
We intend to expand our current Name Your Own PriceSM business
model into other areas of e-commerce and to other regions, directly and
through licensees. We recently licensed our name and business model to
Priceline WebHouse Club, Inc., a privately held independent start-up
company affiliated with Walker Digital, Inc., for use in a business that
enables consumers to use the Internet to identify the purchase terms for
groceries and other retail merchandise which they would subsequently pick
up from participating retailers. We alsoPriceline WebHouse Club, Inc. recently
entered into a similar licensing
arrangement with Priceline Perfect Yard Sale, Inc., another privately held
independent start-up company affiliated with Walker Digital, Inc. for use
in a consumer-to-consumer business in which buyers would make conditional
purchase offersexpanded its service to acquire goods from other consumers.include gasoline. In addition, we have licensed our
name and business model to Alliance Capital Partners in connection with our
home financing services.services and to other third parties in connection with other
products. We also have entered into, and intend to continue to enter into,
similar licensing arrangements with third parties in connection with
international expansion of the priceline.com service.
These new businesses typically incur start-up costs and operating
losses and may not be successful. If these new businesses are not favorably
received by consumers, the association of our brand name and business model
with these new entities may adversely affect our business and reputation
and may dilute the value of our brand name. In addition, to the extent that
we need to service these licensees, our core business may suffer. Moreover,
expansion of our core business model will expose us to additional risks not
currently applicable to our existing operations. The additional risks
associated with the expansion of our core business could have a material
adverse effect on our business generally. In addition, as we expand our
business model to other areas of e-commerce, these new businesses will face
competition from established providers in those areas.
We Are Dependent on Adaptive Marketing Programs
Our adaptive marketing programs permit consumers to increase the
amount of their offers at no additional cost by participating in sponsor
promotions during the process of making an offer using the priceline.com
service. The fees paid to us by sponsors offering the promotions generate
significant revenues. Since these fees historically have involved limited
direct costs, they have had a disproportionately positive impact on our
gross profit margins. A significant reduction in consumer acceptance of our
adaptive marketing programs, significantly increased costs that we may
incur in connection with adaptive marketing programs, reductions in fees
paid to us in connection with such programs or any material decline in such
programs could result in a material reduction in our revenues and our gross
profit. We may not be able to replace such revenues through other programs
or through product sales.
We cannot guarantee that any of our adaptive marketing programs will
continue beyond their initial terms or, even if continued, that they will
be successful, or if additional adaptive marketing programs will be
initiated. If such programs are not successful, our gross profit and
results of operations could be adversely affected.
We May Be Unable to Effectively Manage Our Rapid Growth
We have rapidly and significantly expanded our operations and
anticipate that further expansion will be required to realize our growth
strategy. Our rapid growth has placed significant demands on our management
and other resources which, given our expected future growth rate, is likely
to continue. To manage our future growth, we will need to continue, among
other things, to improve existing systems and/or implement new systems for:
(1) transaction processing; (2) operational and financial management; and
(3) training, integrating and managing our growing employee base. Our
failure to effectively manage our rapid growth could have a material
adverse effect on our business, results of operations and financial
condition.
If We Lose Our Key Personnel or Cannot Recruit Additional Personnel,
Our Business May Suffer
Competition for personnel with experience in Internet commerce is
intense. We depend on the continued services and performance of our
executive officers and other key personnel. We do not have "key person"
life insurance policies. If we do not succeed in attracting new employees
or retaining and motivating current and future employees or executive
officers, our business could suffer significantly.
We Rely on Third-Party Systems
We rely on certain third-party computer systems and third-party
service providers, including the computerized central reservation systems
of the airline and hotel industries to satisfy demand for airline tickets
and hotel room reservations. Any interruption in these third-party services
systems or a deterioration in their performance could be disruptive to our
business. Our agreements with third-party service providers are terminable
upon short notice. In the event our arrangement with any of such third
parties is terminated, we may not be able to find an alternative source of
systems support on a timely basis or on commercially reasonable terms and,
as a result, our business and results of operations could be materially and
adversely affected.
Intense Competition Could Reduce Our Market Share and Harm Our
Financial Performance
We compete with both online and traditional sellers of the
products and services offered on priceline.com. Current and new competitors
can launch new sites at a relatively low cost. In addition, the traditional
retail industry for the products and services we offer is intensely
competitive.
We currently or potentially compete with a variety of companies
with respect to each product or service we offer. With respect to travel
products, these competitors include:
o Internet travel agents such as Microsoft's Expedia;
o traditional travel agencies;
o consolidators and wholesalers of airline tickets and other travel
products, including online consolidators such as Cheaptickets.com;
o individual or groups of airlines, hotels, rental car companies,
cruise operators and other travel service providers; and
o operators of travel industry reservation databases such as
Worldspan and Sabre.
Our current or potential competitors with respect to the
arrangement and sale of new automobiles in the online marketplace, include,
among others, Auto-by-Tel, Carsdirect.com, Autoweb.com, Greenlight.com and
CarPoint.com. To some extent, we compete for new car shoppers' attention
with retail new car dealers, many of which offer online shopping
capabilities.
With respect to financial service products, our competitors
include:
o banks and other financial institutions;
o online and traditional mortgage and insurance brokers, including
Quicken Mortgage, E-Loan and iOwn, Inc.; and
o insurance companies.
Our current or potential competitors with respect to rental cars
include, among others, rental car companies and traditional and online
travel agencies and travel service providers.
With respect to long distance services, our current or potential
competitors include long distance providers, local exchange providers that
may be entering the long distance market and Internet Protocol telephone
services.
We potentially face competition from a number of large Internet
companies and services that have expertise in developing online commerce
and in facilitating Internet traffic, including Amazon.com, America Online,
Microsoft and Yahoo!, who could choose to compete with us either directly
or indirectly through affiliations with other e-commerce or offline
companies. Other large companies with strong brand recognition, technical
expertise and experience in Internet commerce could also seek to compete
with us. We also believe that aA number of airlines intend to invest in and offer discount
airfares and travel services through a site or sites to be established and
similar steps may be under consideration by certain hotel companies and
travel service providers. Competition from these and other sources could
have a material adverse effect on our business, results of operations and
financial condition.
Many of our current and potential competitors, including Internet
directories and search engines and large traditional retailers, have longer
operating histories, larger customer bases, greater brand recognition and
significantly greater financial, marketing, technical and other resources
than we have. Some of these competitors may be able to secure products and
services on more favorable terms than we can. In addition, many of these
competitors may be able to devote significantly greater resources to: (1)
marketing and promotional campaigns, (2) attracting traffic to their Web
sites, (3) attracting and retaining key employees, (4) securing vendors and
inventory and (5) Web site and systems development.
Increased competition could result in reduced operating margins
and loss of market share and could damage our brand. There can be no
assurance that we will be able to compete successfully against current and
future competitors or that competition will not have a material adverse
effect on our business, results of operations and financial condition.
Our Success Depends on Our Ability to Protect Our Intellectual Property
We regard our intellectual property as critical to our success,
and we rely on trademark, copyright and patent law, trade secret protection
and confidentiality and/or license agreements with our employees,
customers, partners and others to protect our proprietary rights. If we are
not successful in protecting our intellectual property, there could be a
material adverse effect on our business.
While we believe that our issued patents and pending patent
applications help to protect our business, there can be no assurance thatthat:
o any patent can be successfully defended against challenges by
third parties;
o pending patent applications will result in the issuance of
patents;
o competitors or potential competitors of priceline.com will not
devise new methods of competing with us that are not covered by
our patents or patent applications;
o because of variations in the application of our business model to
each of our products and services, our patents will be effective
in preventing one or more third parties from utilizing a copycat
business model to offer the same product or service in one or more
categories;
o new prior art will not be discovered which may diminish the value
of or invalidate an issued patent; or
o a third party will not have or obtain one or more patents that
prevent us from practicing features of our business or will
require us to pay for a license to use those features.
There has been recent discussion in the press regarding the
examination and issuance of so called "business-method" patents. As a
result, the United States Patent and Trademark Office has indicated that it
intends to intensify the review process applicable to such patent
applications. The new procedures are not expected to have a direct effect
on patents already granted. We cannot anticipate what effect, if any, the
new process will have on our pending patent applications.
We pursue the registration of our trademarks and service marks in
the U.S. and internationally. However, effective trademark, service mark,
copyright and trade secret protection may not be available in every country
in which our services are made available online. We have licensed in the
past, and expect to license in the future, certain of our proprietary
rights, such as trademarks or copyrighted material, to third parties. These
licensees may take actions that might diminish the value of our proprietary
rights or harm our reputation.
Legal Proceedings
We are a party to the legal proceedings described in Item 1 of
Part II "Legal Proceedings." An adverse outcome in any of the actions
described in Item 1 of Part II could have a material adverse effect on our
business.business, results of operation and financial condition.
The Success of Our Business Will Depend on Continued Growth of
Internet Commerce
The market for the purchase of products and services over the
Internet is a new and emerging market. As an Internet commerce business,
our future revenues and profits are substantially dependent upon the
widespread acceptance and use of the Internet and other online services as
a medium for commerce by consumers and sellers. If widespread acceptance
and growth of Internet use does not occur, our business and financial
performance will suffer. Rapid growth in the use of and interest in the
Internet and other online services is a recent phenomenon. This growth may
not continue. A sufficiently broad base of consumers may not adopt, or
continue to use, the Internet as a medium of commerce. Demand for and
market acceptance of recently introduced products and services over the
Internet are subject to a high level of uncertainty, and there are few
proven products and services. For us to grow, consumers who historically
have purchased through traditional means of commerce, such as a travel
agent for airline tickets or a branch of a bank for home financings, will
need to elect to purchase online products and services. Sellers of products
and services will need to adopt or expand use of the Internet as a channel
of distribution.
The Internet has experienced, and is expected to continue to
experience, significant growth in the number of users and amount of
traffic. Our success will depend upon the development and maintenance of
the Internet's infrastructure to cope with this increased traffic. This
will require a reliable network backbone with the necessary speed, data
capacity and security, and the timely development of complementary
products, such as high-speed modems, for providing reliable Internet access
and services.
The Internet has experienced a variety of outages and other delays
as a result of damage to portions of its infrastructure and could face such
outages and delays in the future. Outages and delays are likely to affect
the level of Internet usage generally, as well as the processing of
transactions on the priceline.com Web site. It is unlikely that the level
of orders lost in those circumstances could be made up by increased phone
orders. In addition, the Internet could lose its viability due to delays in
the development or adoption of new standards to handle increased levels of
activity or due to increased government regulation. The adoption of new
standards or government regulation may, however, require us to incur
substantial compliance costs.
Capacity Constraints and System Failures Could Harm Our Business
If our systems cannot be expanded to cope with increased demand or
fail to perform, we could experience:
o unanticipated disruptions in service;
o slower response times;
o decreased customer service and customer satisfaction; or
o delays in the introduction of new products and services;
any of which could impair our reputation, damage the priceline.com brand
and materially and adversely affect our revenues. Publicity about a service
disruption also could cause a material decline in our stock price.
We use internally developed systems to operate the priceline.com
service, including transaction processing and order management systems that
were designed to be scaleable. However, if the number of users of the
priceline.com service increases substantially, we will need to
significantly expand and upgrade our technology, transaction processing
systems and network infrastructure. We do not know whether we will be able
to accurately project the rate or timing of any such increases, or expand
and upgrade our systems and infrastructure to accommodate such increases in
a timely manner.
Our ability to facilitate transactions successfully and provide
high quality customer service also depends on the efficient and
uninterrupted operation of our computer and communications hardware
systems. The priceline.com service has experienced periodic system
interruptions, which we believe will continue to occur from time to time.
Our systems and operations also are vulnerable to damage or interruption
from human error, natural disasters, power loss, telecommunication
failures, break-ins, sabotage, computer viruses, intentional acts of
vandalism and similar events. While we currently maintain redundant servers
at our Stamford, Connecticut premises to provide limited service during
system disruptions, we do not have fully redundant systems, a formal
disaster recovery plan or alternative providers of hosting services. In
addition, we do not carry sufficient business interruption insurance to
compensate for losses that could occur. Any system failure that causes an
interruption in service or decreases the responsiveness of the
priceline.com service could impair our reputation, damage our brand name
and materially adversely affect our revenues.
We May Not Be Able to Keep Up with Rapid Technological and Other Changes
The markets in which we compete are characterized by rapidly
changing technology, evolving industry standards, frequent new service and
product announcements, introductions and enhancements and changing consumer
demands. We may not be able to keep up with these rapid changes. In
addition, these market characteristics are heightened by the emerging
nature of the Internet and the apparent need of companies from many
industries to offer Internet-based products and services. As a result, our
future success will depend on our ability to adapt to rapidly changing
technologies, to adapt our services to evolving industry standards and to
continually improve the performance, features and reliability of our
service in response to competitive service and product offerings and the
evolving demands of the marketplace. In addition, the widespread adoption
of new Internet, networking or telecommunications technologies or other
technological changes could require us to incur substantial expenditures to
modify or adapt our services or infrastructure.
Online Security Breaches Could Harm Our Business
The secure transmission of confidential information over the
Internet is essential in maintaining consumer and supplier confidence in
the priceline.com service. Substantial or ongoing security breaches on our
system or other Internet-based systems could significantly harm our
business. We currently require buyers to guarantee their offers with their
credit card, either online or through our toll-free telephone service. We
rely on licensed encryption and authentication technology to effect secure
transmission of confidential information, including credit card numbers. It
is possible that advances in computer capabilities, new discoveries or
other developments could result in a compromise or breach of the technology
used by us to protect customer transaction data.
We incur substantial expense to protect against and remedy
security breaches and their consequences. However, we cannot guarantee that
our security measures will prevent security breaches. A party that is able
to circumvent our security systems could steal proprietary information or
cause significant interruptions in our operations. For instance, several
major Web sites recentlyhave experienced significant interruptions as a result of
improper direction of excess traffic to those sites, and computer viruses
have substantially disrupted e-mail and other functionality in a number of
countries, including the United States. Security breaches also could damage
our reputation and expose us to a risk of loss or litigation and possible
liability. Our insurance policies carry low coverage limits, which may not
be adequate to reimburse us for losses caused by security breaches.
We also face risks associated with security breaches affecting
third parties conducting business over the Internet. Consumers generally
are concerned with security and privacy on the Internet and any publicized
security problems could inhibit the growth of the Internet and, therefore,
the priceline.com service as a means of conducting commercial transactions.
Our Stock Price is Highly Volatile
The market price of our common stock is highly volatile and is
likely to continue to be subject to wide fluctuations in response to
factors such as the following, some of which are beyond our control:
o quarterly variations in our operating results;
o operating results that vary from the expectations of securities
analysts and investors;
o changes in expectations as to our future financial performance,
including financial estimates by securities analysts and
investors;
o changes in market valuations of other Internet or online service
companies;
o announcements of technological innovations or new services by us
or our competitors;
o announcements by us or our competitors of significant contracts,
acquisitions, strategic partnerships, joint ventures or capital
commitments;
o loss of a major seller participant, such as an airline or hotel
chain;
o changes in the status of our intellectual property rights;
o lack of success in the expansion of our business model
horizontally or geographically;
o announcements by third parties of significant claims or
proceedings against us or adverse developments in pending
proceedings;
o additions or departures of key personnel; and
o stock market price and volume fluctuations.
Sales of a substantial number of shares of our common stock could
adversely affect the market price of our common stock by introducing a
large number of sellers to the market. Given the volatility that exists for
our shares, such sales could cause the market price of our common stock to
decline.
In addition, the trading prices of Internet stocks in general,
including ours, have experienced extreme price and volume fluctuations.
These fluctuations often have been unrelated or disproportionate to the
operating performance of these companies. The valuations of many Internet
stocks, including ours, are extremely high based on conventional valuation
standards, such as price to earnings and price to sales ratios. The trading
price of our common stock has increased significantly from the initial public offering
price. These trading prices and valuations may not be sustained. Any
negative change in the public's perception of the prospects of Internet or
e-commerce companies could depress our stock price regardless of our
results. Other broad market and industry factors may decrease the market
price of our common stock, regardless of our operating performance. Market
fluctuations, as well as general political and economic conditions, such as
a recession or interest rate or currency rate fluctuations, also may
decrease the market price of our common stock.
In the past, securities class action litigation often has been
brought against a company following periods of volatility in the market
price of their securities. We may in the future be the target of similar
litigation. Securities litigation could result in substantial costs and
divert management's attention and resources.
Our Business is Subject to Tax Uncertainties
Potential Federal Air Transportation Tax on Airline Ticket Sales.
A Federal transportation tax is imposed upon the sale of airline tickets.
The tax is based on a percentage of the cost of transportation, which was
9% for periods prior to October 1, 1998, 8% for the period October 1, 1998
through September 30, 1999 and 7.5% thereafter. We have historically
interpreted the tax regulations as requiring that the tax be computed based
on the amount charged by the airline to us for the airline ticket and
participating airlines have collected and remitted the tax based on this
amount. We applied for a ruling from the Internal Revenue Service
confirming this interpretation. In December 1999, the Internal Revenue
Service indicated to us that it was unlikely that a favorable ruling would
be issued. We subsequently withdrew our ruling request because of the
uncertainty of the outcome. Because we anticipated the possibility of an
adverse ruling on this issue, we accrued approximately $1.9 million
relating to the balance of the tax liability for tickets sold prior to that
date. We believe this accrual to be adequate, but there can be no assurance
as to the final outcome because a formal ruling has not been issued by the
Internal Revenue Service.
State Taxes. We file tax returns in such states as required by law
based on principles applicable to traditional businesses. In addition, we
do not collect sales or other similar taxes in respect of transactions
conducted through the priceline.com service (other than the federal air
transportation tax referred to above). However, one or more states could
seek to impose additional income tax obligations or sales tax collection
obligations on out-of-state companies, such as ours, which engage in or
facilitate online commerce. A number of proposals have been made at state
and local levels that could impose such taxes on the sale of products and
services through the Internet or the income derived from such sales. Such
proposals, if adopted, could substantially impair the growth of e-commerce
and adversely affect our opportunity to become profitable.
Legislation limiting the ability of the states to impose taxes on
Internet-based transactions has been enacted by the United States Congress.
However, this legislation, known as the Internet Tax Freedom Act, imposes
only a three-year moratorium, which commenced October 1, 1998 and ends on
October 21, 2001, on state and local taxes on (1) electronic commerce where
such taxes are discriminatory and (2) Internet access unless such taxes
were generally imposed and actually enforced prior to October 1, 1998. It
is possible that the tax moratorium could fail to be renewed prior to
October 21, 2001. Failure to renew this legislation would allow various
states to impose taxes on Internet-based commerce. The imposition of such
taxes could adversely affect our ability to become profitable.
Regulatory and Legal Uncertainties Could Harm Our Business
The products and services we offer through the priceline.com
service are regulated by federal and state governments. Our ability to
provide such products and services is and will continue to be affected by
such regulations. The implementation of unfavorable regulations or
unfavorable interpretations of existing regulations by courts or regulatory
bodies could require us to incur significant compliance costs, cause the
development of the affected markets to become impractical and otherwise
adversely affect our financial performance.
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
Sections of this Form 10-Q may contain forward-looking statements.
Expressions of future goals and similar expressions including, without
limitation, "may," "will," "should," "could," "expects," "does not
currently expect," "plans," "anticipates," "believes," "estimates,"
"predicts," "potential," or "continue," reflecting something other than
historical fact are intended to identify forward-looking statements. The
following factors, among others, could cause our actual results to differ
materially from those described in the forward-looking statements:
inability to successfully expand our business model both horizontally and
geographically; management of our rapid growth; adverse changes in our
relationships with airlines and other product and service providers;
systems-related failures; our ability to protect our intellectual property
rights; the effects of increased competition; anticipated losses by us and our
licensees; legal and regulatory risks and the ability to attract and retain
qualified personnel. These factors and others are described in more detail
above in "Additional Factors That May Affect Future Results."
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Priceline.compriceline.com currently has no floating rate indebtedness, holds
no derivative instruments, and does not earn significant foreign-sourced
income. Accordingly, changes in interest rates or currency exchange rates
do not generally have a direct effect on priceline.com's financial
position. However, changes in currency exchange rates may affect the cost
of international airline tickets and international hotel reservations
offered through the priceline.com service, and so indirectly affect
consumer demand for such products and priceline.com's revenue.revenue and effect
the value of our investments in our foreign licensees. In addition, to the
extent that changes in interest rates and currency exchange rates affect
general economic conditions, priceline.com would also be affected by such
changes.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Please see Note 57 to the Notes to Unaudited Consolidated Financial
Statements included in the Form10-Q and Part I, Item 3 of priceline.com's
Annual Report on Form 10-K for the year ended December 31, 1999.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On June 30, 2000, we issued six million shares of Series A
Convertible Redeemable PIK Preferred Stock to Delta Air Lines, Inc. in
exchange for six million shares of our common stock held by Delta. The
exchange was part of an agreement between priceline.com and Delta in which
Delta agreed to restructure its existing equity in priceline.com in order
to facilitate the entrance of additional airlines into the priceline.com
program. We relied upon Section 3(a)(9) of the Securities Act of 1933, as
amended, to provide an exemption from registration for the issuance. No
commission or other remuneration was paid by us to any financial advisors
for the solicitation of such exchange. The preferred stock is convertible,
at the holder's option, into shares of our common stock on a one-for-one
basis at any time prior to redemption, subject to certain anti-dilution
adjustments.
On April 1, 1999, priceline.com completed an initial public
offering in which it sold 10,000,000 shares of its common stock, $0.008 par
value.
The managing underwriters in the offering were Morgan Stanley & Co.
Incorporated, Merrill Lynch, Pierce, Fenner & Smith Incorporated,
BancBoston Robertson Stephens Inc. and Donaldson, Lufkin & Jenrette
Securities Corporation. The shares of common stock sold in the offering
were registered under the Securities Act of 1933, as amended, on a
Registration Statement on Form S-1 (the "Registration Statement") (Reg. No.
333-69657) that was declared effective by the Securities and Exchange
Commission on March 29, 1999. All 10,000,000 shares of common stock
registered under the Registration Statement were sold at a price of $16.00
per share for gross proceeds of $160.0 million. Offering proceeds to priceline.com, net of approximately $11.2
million in aggregate underwriter discounts and commissions and $4.5 million
in other related expenses, were approximately $144.3 million. A portion of
the net offering proceeds received on April 1, 1999 from the initial public
offering were used for, and will continue to be usedin the second quarter for general corporate purposes,
including working capital to fund anticipated operating losses, expenses
associated with priceline.com's advertising campaigns, brand-name
promotions and other marketing efforts and capital expenditures. In addition, Priceline.com also may use a portionPriceline
has applied all of the net proceeds, currently intended for general corporate purposes, to
acquire or invest in businesses, technologies, products or services,
although no specific acquisitions are planned and no portion of the net
proceeds has been allocated for any acquisition. None of the net offering proceeds of priceline.com have been or will be paid directly or indirectly
to any director, officer, general partner of priceline.com or their
associates, persons owning 10% or more of any class of priceline.com's
equity securities, or an affiliate of priceline.com other than compensation
to officers of priceline.com in the ordinary course of business and
payments that were made in the ordinary course of business to Walker
Digital pursuant to a reciprocal services arrangement.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We held our Annual Meeting of Stockholders on April 24, 2000.
Following are descriptions of the maters voted on and the results of such
meeting:
Number of Stockholders
Broker
Matter Voted On For Against Abstaining No-Votes
--------------- --- ------- ---------- --------
1. Election of Directors
Richard S. Braddock....... 108,681,032 99,120 --
Jay S. Walker............. 108,684,945 95,207 --
Daniel H. Schulman........ 108,691,860 88,292 --
Paul A. Allaire........... 108,734,347 45,805 --
Ralph M. Bahna............ 108,733,865 46,287 --
Paul J. Blackney.......... 107,822,765 957,387 --
William E. Ford........... 108,734,705 45,447 --
Marshall Loeb............. 108,714,903 65,249 --
N.J. Nicholas, Jr......... 108,734,355 45,797 --
Nancy B. Peretsman........ 107,813,879 966,273
2. Approval of Amendments to
Priceline.com 1999 Omnibus
Plan...................... 98,103,918 8,779,591 93,158 1,803,485
3. Ratification of appointment
of Deloitte & Touche LLP
as independent auditors
for fiscal year ended
December 31, 2000......... 108,708,393 26,709 45,050 --
ITEM 5. OTHER INFORMATION
On May 15, 2000, our Board of Directors announced that Daniel
H. Schulman, who had been our President and Chief Operating Officer, had
been elevated to the additional role of Chief Executive Officer. In his new
role, Mr. Schulman succeeds Richard S. Braddock, who was Chief Executive
Officer. Mr. Braddock will continue as Chairman of our Board of Directors.proceeds.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits(A) EXHIBITS
Exhibit
Number Description
- ------ -----------
10.303.3 Certificate of Designation, Preferences and Rights of Series A
Convertible Redeemable PIK Preferred Stock of priceline.com
Incorporated.
10.1.3 priceline.com Incorporated 1999 Omnibus Plan, as amended.
10.31 Amended and Restated Promissory Note, dated May 18, 2000,
between priceline.com Incorporated and Daniel H. Schulman.
10.32 Amendment to Employment Agreement, dated December 3, 1999,June 12, 2000,
between the
Registrantpriceline.com Incorporated and Michael McCadden.
10.31 Employment Agreement,Richard Braddock.
10.33 Lease, dated December 30, 1999 between the
Registrant and Jeffery H. Boyd.
10.32 Employment Agreement, dated February 18,as of May 1, 2000, between the Registrantparties listed
therein, as Landlord, and Heidi G. Miller.
10.33 Promissorypriceline.com Incorporated, as
Tenant.
10.34 Convertible Note, dated February 10,June 27, 2000, between
Jeffery
H. BoydHutchison-Priceline Limited, as obligor, and the Registrant.
10.34 Amendment to Promissory Note, dated March 28, 2000,
between Jeffery H. Boyd and the Registrant.
10.35 Promissory Note, dated March 7, 2000, between Heidi G.
Miller and the Registrant.
10.36 Stock Option Agreement, dated February 18, 2000, by and
between the Registrant and Heidi G. Miller.
10.37 Amendment to Promissory Note, dated March 28, 2000,
between Daniel H. Schulman and the Registrant.
10.38 Amendment Number One to the Priceline.com Incorporated
1999 Omnibus Plan.
10.39 Formation and Funding Agreement, datedPCLN Asia, Inc.,
as of March 17,
2000, by and between the Registrant and Alliance
Partners, LP.*holder.
27.1 Financial Data Schedule.
- ----------------------------
* Certain portions of this document have been omitted pursuant to(b) Reports On Form 8-K
On June 30, 2000, we filed a confidential treatment request.
(b) Reportsreport on Form 8-K announcing the
launch of priceline.com europe and the issuance of Series A Convertible
Redeemable PIK Preferred Stock. On January 31,July 26, 2000, we filed a report on Form
8-K announcing our fourthsecond quarter 19992000 financial results that included
unaudited balance sheets at June 30, 2000 and December 31, 1999 and
statements of operations for the three-month period ending December 31, 1999.three and six months ended June 30, 2000.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
Date: May 15, 2000 PRICELINE.COM INCORPORATED
(Registrant)
By: /s/ Richard S. Braddock
---------------------------------------
Name: Richard S. Braddock
Title: Chairman and Chief Executive Officer
Date: May 15,August 14, 2000 By: /s//S/ Heidi G. Miller
--------------------------------------------------------------------
Name: Heidi G. Miller
Title: Executive Vice President,
Strategy, Planning & Administration,
and Chief Financial Officer