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 September 30, 1999
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.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)
Five High Ridge Park
Stamford, Connecticut 06905
(Address of principal executive offices)
(203) 705-3000
(Registrant's telephone number, including area code)
N/A
(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 . NO .
Number of shares of Common Stock outstanding at September 30, 1999:
Common Stock, par value $0.008 per share 146,427,410
- ------------------------------------------------ ------------------
(Class) (Number of Shares)
PRICELINE.COM INCORPORATED
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
PART I - UNAUDITED FINANCIAL INFORMATION......................................................1
Item 1. Condensed Financial Statements................................................1
Condensed Balance Sheets as of December 31, 1998
and September 30, 1999..................................................1
Condensed Statements of Operations For the Three and Nine
Months Ended September 30, 1998 and 1999................................2
Condensed Statement of Changes in Stockholders' Equity
For the Nine Months Ended September 30, 1999............................3
Condensed Statements of Cash Flows For the Nine Months
Ended September 30, 1998 and 1999.......................................4
Notes to Unaudited Condensed Financial Statements.............................5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations..................................................12
Item 3. Quantitative and Qualitative Disclosures About Market Risk...................40
PART II - OTHER INFORMATION..................................................................41
Item 1. Legal Proceedings............................................................41
Item 2. Changes in Securities and Use of Proceeds....................................42
Item 6. Exhibits and Reports on Form 8-K.............................................42
SIGNATURES...........................................................................43
PART I - UNAUDITED FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS.
PRICELINE.COM INCORPORATED
CONDENSED BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND SEPTEMBER 30, 1999
(UNAUDITED)
DECEMBER 31, September 30,
ASSETS 1998 1999
----------------- ----------------
CURRENT ASSETS:
Cash and cash equivalents................................... $ 53,593,026 $ 115,469,578
Short-term investments...................................... - 77,446,102
Accounts receivable, net of allowance for uncollectible
accounts of $290,823 and $1,624,287 at December 31, 1998
and September 30, 1999, respectively...................... 4,176,980 27,486,459
Related party receivable.................................... - 3,371,384
Prepaid expenses and other current assets................... 2,427,042 10,462,599
----------------- ----------------
Total current assets...................................... 60,197,048 234,236,122
PROPERTY AND EQUIPMENT - net................................... 5,926,877 20,611,244
RELATED PARTY RECEIVABLE....................................... 6,500 9,113,272
OTHER ASSETS................................................... 442,060 3,104,894
----------------- ----------------
TOTAL ASSETS................................................... $ 66,572,485 $ 267,065,532
================= ================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable............................................ $ 5,268,430 $ 32,873,492
Related party payable....................................... 32,447 -
Accrued expenses............................................ 4,258,641 10,177,267
Other current liabilities................................... 722,030 651,433
----------------- ----------------
Total current liabilities................................. 10,281,548 43,702,192
LONG-TERM DEBT - net........................................... 989,018 -
CAPITAL LEASE OBLIGATIONS - net of current portion............. 26,074 4,981
----------------- ----------------
Total liabilities.............................................. 11,296,640 43,707,173
----------------- ----------------
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDERS' EQUITY
Preferred stock............................................. 311,262 -
Common stock................................................ 745,802 1,171,420
Additional paid-in capital.................................. 171,158,186 481,112,931
Accumulated deficit......................................... (116,939,405) (258,925,992)
----------------- ----------------
Total stockholders' equity................................ 55,275,845 223,358,359
----------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY..................... $ 66,572,485 267,065,532
================= ================
See accompanying notes to unaudited condensed financial statements.
PRICELINE.COM INCORPORATED
CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
1998 1999 1998 1999
-------------- --------------- ---------------- ----------------
Revenues......................... $ 9,222,094 $ 152,222,252 $ 16,243,733 $ 313,196,643
Cost of Revenues:
Product costs................. 8,850,957 133,628,153 16,793,797 277,951,680
Supplier warrant costs........ - 380,759 - 1,142,277
-------------- --------------- ---------------- ----------------
Total cost of revenues........... 8,850,957 134,008,912 16,793,797 279,093,957
Gross profit (loss)........... 371,137 18,213,340 (550,064) 34,102,686
-------------- --------------- ---------------- ---------------
Expenses:
Supplier start-up warrant
costs....................... - 88,389,011 - 88,389,011
Sales and marketing........... 8,160,624 21,413,328 15,925,101 56,284,414
General and administrative,
including $1,546,866 of
option payroll taxes in
the three and nine months
ended September 30, 1999.... 9,399,785 8,390,104 14,198,661 17,559,973
Systems and business
development................. 2,800,770 4,593,232 8,168,984 10,245,655
-------------- --------------- ---------------- ----------------
Total expenses................... 20,361,179 122,785,675 38,292,746 172,479,053
-------------- --------------- ---------------- ----------------
Operating loss................... (19,990,042) (104,572,335) (38,842,810) (138,376,367)
Interest income, net............. 141,928 2,356,649 304,259 4,743,753
-------------- --------------- ---------------- ----------------
Net loss......................... (19,848,114) (102,215,686) (38,538,551) (133,632,614)
Accretion on preferred stock..... - - - (8,353,973)
-------------- --------------- ---------------- ----------------
Net loss applicable to common
stockholders.................. $ (19,848,114) $ (102,215,686) $ (38,538,551) $ (141,986,587)
============== =============== ================ ================
Per share basic and diluted net
loss applicable to common
stockholders.................. $ (0.19) $ (0.71) $0 (0.47) $ (1.02)
============== =============== ================ ================
Weighted average common shares
outstanding................... 105,410,860 144,501,284 81,720,566 139,816,683
See accompanying notes to unaudited condensed financial statements.
PRICELINE.COM INCORPORATED
CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(UNAUDITED)
PREFERRED STOCK COMMON STOCK ADDITIONAL
PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
-----------------------------------------------------------------------------------------
Balance, January 1, 1999.. 31,126,184 $ 311,262 93,225,199 $ 745,802 $ 171,158,186 $ (116,939,405) $ 55,275,845
Conversion of Series A
convertible
preferred stock.........(17,288,684) (172,887) 21,610,853 172,887 - - -
Conversion of Series B
convertible
preferred stock......... (13,837,500) (138,375) 17,296,875 138,375 - - -
Accretion on preferred
stock.................. - - - - 8,353,973 (8,353,973) -
Issuance of common stock.. - - 11,000,000 88,000 207,212,787 - 207,300,787
Exercise of warrants...... 2,004,614 16,037 1,715,684 - 1,731,721
Exercise of options....... - - 1,289,869 10,319 1,237,217 - 1,247,536
Issuance of warrants to
purchase common stock... - - - - 91,435,084 - 91,435,084
Net loss.................. - - - - - (133,632,614) (133,632,614)
------------ -------- ---------- --------- ----------- -------------- ------------
Balance, September 30,
1999................... - $ - 146,427,410 $1,171,420 $481,112,931 (258,925,992) $223,358,359
============ ========= =========== ========== ============ ============== ============
See accompanying notes to unaudited condensed financial statements.
PRICELINE.COM INCORPORATED
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999
(UNAUDITED)
Nine Months Ended
September 30, September 30,
1998 1999
------------------ ----------------
OPERATING ACTIVITIES:
Net loss....................................................... $ (38,538,551) $ (133,632,614)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization............................. 1,626,427 3,507,962
Provision for uncollectible accounts...................... 168,002 2,158,776
Equity-based compensation................................. 6,815,517 -
Supplier warrant costs.................................... - 1,142,277
Supplier start-up warrant costs........................... - 88,389,011
Changes in assets and liabilities:
Receivables............................................... (3,042,970) (25,468,255)
Related party receivables................................. (7,150) (12,510,603)
Prepaid expenses and other current assets................. (869,666) (4,512,520)
Accounts payable and accrued expenses..................... 3,434,753 32,998,289
Other..................................................... 213,909 (2,297,103)
------------------ ----------------
Net cash used in operating activities................... (30,874,194) (50,224,780)
INVESTING ACTIVITIES:
Additions of property and equipment....................... (5,915,163) (17,974,968)
Minority equity investment................................ - (2,000,000)
Purchases of short-term investments....................... - (77,446,102)
------------------ ----------------
Net cash used in investing activities................... (5,915,163) (97,421,070)
FINANCING ACTIVITIES:
Issuance of long-term debt................................ 1,000,000 -
Payment of long-term debt and capital lease obligations... (16,153) (1,018,458)
Proceeds from issuance of common stock.................... - 210,540,860
Issuance of common stock and subscription units........... 25,620,364 -
Payment received on stockholder note...................... 250,000 -
Issuance of Series A convertible preferred stock.......... 20,000,000 -
------------------ ----------------
Net cash provided by financing activities............... 46,854,211 209,522,402
NET INCREASE IN CASH AND CASH EQUIVALENTS...................... 10,064,854 61,876,552
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD................. 16,459 53,593,026
------------------ ----------------
CASH AND CASH EQUIVALENTS, END OF PERIOD....................... $ 10,081,313 $ 115,469,578
================== ================
SUPPLEMENTAL CASH FLOW INFORMATION -
Cash paid during the year for interest...................... $ 40,717 $ 56,718
See accompanying notes to unaudited condensed financial statements.
PRICELINE.COM INCORPORATED
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
1. BUSINESS DESCRIPTION
Priceline.com Incorporated ("priceline.com") has pioneered a new
type of e-commerce 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.
Priceline.com collects 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. Priceline.com then either communicates that
demand directly to participating sellers or accesses participating sellers'
private databases to determine whether the customer's offer can be
fulfilled on the basis of the pricing information and rules established by
the sellers. Consumers agree to hold their offers open for a specified
period of time, and once fulfilled, offers cannot be cancelled. By
requiring customers to be flexible with respect to brands, sellers and/or
product features, priceline.com enables sellers to generate incremental
revenue without disrupting their existing distribution channels or retail
pricing structures.
2. 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 and nine months ended
September 30, 1999 are not necessarily indicative of the results that may
be expected for the full year ending December 31, 1999.
3. PUBLIC OFFERING OF COMMON STOCK
On August 17, 1999, priceline.com completed a public offering in
which it sold 1,000,000 shares of common stock and certain stockholders of
priceline.com sold 3,500,000 shares of common stock at a price of $67.00
per share, raising approximately $67.0 million in gross proceeds to
priceline.com. Offering proceeds to priceline.com, net of approximately
$2.5 million in aggregate underwriters discounts and commissions and $1.2
million in related expenses, were approximately $63.3 million.
Priceline.com did not receive any of the proceeds from the sale of shares
of common stock by the selling stockholders. As of September 30, 1999,
approximately 146.4 million shares of common stock were outstanding.
4. NET LOSS PER SHARE
Priceline.com computes net loss per share in accordance with
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
which requires dual presentation of basic earnings per share ("EPS") and
diluted EPS.
Basic earnings per share is computed using the weighted average
number of common shares outstanding during the period. Diluted earnings per
share is computed using the weighted average number of common shares and
potentially dilutive shares outstanding during the period. The effect of
the conversion of priceline.com's Series A and Series B convertible
preferred stock, which was automatically converted into shares of
priceline.com common stock in connection with its initial public offering,
is included in the weighted average number of shares outstanding during the
period commencing on the conversion date, March 29, 1999. The effect of the
preferred stock conversion for the period prior to March 29, 1999 has not
been included in the computation of diluted net loss per share as the
impact would have been antidilutive for the periods presented. Potential
common shares consist of the incremental common shares issuable upon the
exercise of stock options and warrants (using the treasury stock method).
At September 30, 1999, options and warrants to purchase 46,675,566 shares
of common stock were outstanding. Outstanding warrants and options could
potentially dilute basic earnings per share in the future but have not been
included in the computation of diluted net loss per share as the impact
would have been antidilutive for the periods presented.
Net loss applicable to common stockholders for the three- and
nine-month periods ended September 30, 1999 was $102.2 million and $142.0
million, respectively. The nine-month period ended September 30, 1999
includes (1) a non-recurring, non-cash charge associated with the accretion
on the Series B convertible preferred stock that was outstanding during
such period of $8.4 million, (2) non-cash charge of $88.4 million for the
issuance to an airline participant of a warrant to purchase one million
shares of priceline.com common stock, (3) non-cash charge of $1,142,277 for
supplier warrant costs and (4) charge of approximately $1.5 million in
option payroll taxes resulting from the exercise of employee stock options.
Based on the weighted average number of 144.5 and 139.8 million shares of
common stock outstanding during the three- and nine-month periods ended
September 30, 1999, the per share basic and diluted net loss applicable to
common stockholders was $.71 and $1.02 per share, respectively.
5. COMMITMENTS AND CONTINGENCIES
On January 6, 1999, priceline.com 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 describing an electronic market for used and
collectible goods and priceline.com's core buyer-driven commerce patent.
Priceline.com has received a copy of a Petition for Interference from
Woolston, the named inventor of at least three United States Patent
applications titled "Consignment Nodes," one of which has issued as a
patent. Woolston announced an agreement to license his issued patent and
pending patent applications to the owner of an Internet travel service.
Priceline.com currently is awaiting information from the Patent
Office regarding whether it will initiate an interference proceeding
concerning Woolston's patent application and priceline.com's core
buyer-driven commerce patent. While the interference process is still at an
early stage, priceline.com believes that it has meritorious defenses to
Woolston's claim, which it intends to pursue vigorously. Among other
things, priceline.com believes that the Woolston patent application does
not disclose the inventions covered by the priceline.com patent claims.
However, it is impossible to predict the outcome of an interference with
certainty. While Woolston claims to have an earlier invention date by a
period of approximately sixteen months, the final decision as to priority
of invention would be made by the Patent Office after considering facts
provided by each party during the interference proceeding. If an
interference is declared and thereafter resolved in favor of Woolston, such
resolution could result in an award of some or all of the disputed patent
claims to Woolston. If, following such award, Woolston were successful in a
patent infringement action against priceline.com, including prevailing over
all defenses available to priceline.com such as those of non-infringement
and invalidity, this could require priceline.com to obtain licenses from
Woolston at a cost which could significantly adversely affect
priceline.com's business. If Woolston prevailed in both an interference and
an infringement action, then priceline.com could be enjoined from
conducting business through the priceline.com service to the extent covered
by the patent claims awarded to Woolston. In addition, defense of the
interference action may be expensive and may divert management attention
away from priceline.com's business.
On January 19, 1999, Marketel International Inc. ("Marketel"), a
California corporation, filed a lawsuit against priceline.com and Priceline
Travel, Inc. among others. On February 22, 1999, Marketel filed an amended
and supplemental complaint, and on March 17, 1999, Marketel filed a second
amended complaint. The second amended complaint filed by Marketel alleges
causes of action for, among other things, misappropriation of trade
secrets, breach of contract, conversion, breach of confidential
relationship, copyright infringement, fraud, unfair competition and false
advertising, and seeks injunctive relief and damages in an unspecified
amount. In its second amended complaint, Marketel alleges, among other
things, that the defendants conspired to misappropriate Marketel's business
model, which it describes as a buyer-driven electronic marketplace for
travel services and its appurtenant techniques, market research, forms,
plans, and processes, which allegedly were provided in confidence to some
of the defendants approximately ten years ago. The second amended complaint
also alleges that three former Marketel employees are the actual sole
inventors or co-inventors of a patent which was issued on August 11, 1998
and which patent has been assigned to priceline.com. Marketel asks that the
patent's inventorship be corrected accordingly.
On February 5, 1999, February 10, 1999 and March 31, 1999, the
defendants filed their answer, amended answer and answer to the second
amended complaint, respectively in which they denied the material
allegations of liability in the second amended complaints. Priceline.com
and all other defendants strongly dispute the material legal and factual
allegations contained in Marketel's second amended complaint and believe
that the second amended complaint is without merit. Discovery had been
staged pending Marketel's retention of new counsel and its identification
of trade secrets allegedly misappropriated by priceline.com. The discovery
stays have been lifted, and priceline.com anticipates moving forward with
discovery.
Defending the Marketel litigation may involve significant expense
and, due to the inherent uncertainties of litigation, there can be no
certainty as to the ultimate outcome. 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 harmless priceline.com for damages, liabilities and legal expenses
incurred in connection with the Marketel litigation.
From time to time priceline.com has been and expects 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. Such claims, even if not meritorious, could
result in the expenditure of significant financial and managerial
resources.
6. SUBSEQUENT EVENTS
On September 24, 1999, and November 3, 1999, respectively,
priceline.com entered into Participating Rental Car Company Agreements with
Budget Rent A Car Corporation and National Car Rental System, Inc. as the
first rental car companies to participate in priceline.com's "name your
price" rental car service which is expected to launch in the first quarter
of 2000. As with its other travel services, priceline.com will recognize
and record as revenues the amount it receives from the customer, net of
taxes, and will record as the cost of revenue the amount it pays to the
rental car company. Both companies also entered into separate co-marketing
agreements with priceline.com in connection with a co-marketing program
that is scheduled to launch on a test basis in Orlando, Florida before the
end of the 1999. In connection with Budget's participation in
priceline.com's rental car service, Budget entered into a license agreement
with priceline.com pursuant to which priceline.com licensed to Budget
certain patented technology for use by Budget in the operation of its
BidBudget Web site.
In October 1999, priceline.com entered into a lease for office
space in Norwalk, Connecticut to which priceline.com intends to relocate
its corporate headquarters in December of this year.
On October 12, 1999, priceline.com entered into a non-binding
letter of intent with Alliance Capital Partners, pursuant to which Alliance
has formed an operating subsidiary, PricelineMortgage, for the primary
purpose of acting as a broker and/or lender of residential mortgage loans
in connection with the priceline.com mortgage service. Priceline.com has
agreed to provide $3.62 million of financing to an affiliate of Alliance in
the form of a convertible secured note and has agreed to license the
"priceline" name and business model for use by PricelineMortgage. Alliance
has agreed to provide management services to Priceline Mortgage, including
the procurement of personnel and office space and assistance in obtaining
regulatory approvals. A pilot program was launched in early October 1999
and currently is operating in Florida, New York, New Jersey and
Connecticut. Priceline.com intends to enter into definitive agreements with
Alliance during the fourth quarter of 1999 and anticipates that
PricelineMortgage will be fully operational by the end of the year.
On October 13, 1999, priceline.com 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., No.
399CV1991 AWT alleging that Microsoft Corporation and Expedia, Inc., a
subsidiary of Microsoft, infringe priceline.com's U.S. Patent 5,794,207 by
operating the defendants' "Hotel Price Matcher" service, and that the
defendants' conduct toward priceline.com violated the Connecticut Unfair
Trade Practices Act. The defendants have requested and were granted a
45-day extension of time to answer the complaint. The defendants' Answer
currently is due on December 20, 1999.
On October 26, 1999, priceline.com granted Priceline WebHouse Club,
Inc. a worldwide license to use the "priceline" name and business model,
certain patent rights and other intellectual property for the sale of
groceries and other retail merchandise to consumers over the Internet. The
license is exclusive with respect to the sale of groceries, health and
beauty items and household supplies. The license also provides that
priceline.com's Home Page will be the exclusive link to the WebHouse Club
Home Page. Priceline.com receives a royalty payment under the license that
is based upon the net revenues of WebHouse Club. In addition, priceline.com
received a warrant to purchase up to 137.5 million shares of WebHouse
Club's common stock, which on a pro forma basis after giving effect to the
exercise of the warrant currently represents more than 80 percent of its
outstanding common stock. The warrant is exercisable upon the occurrence of
certain events, one of which is the achievement by WebHouse Club of a
certain minimum level of net revenues. The exercise price of the warrant is
$3 per share. In connection with the grant of the license and the issuance
of the warrant, priceline.com and WebHouse Club also entered into a
marketing and technology agreement and services agreement pursuant to which
priceline.com provides certain marketing, technology and other services to
WebHouse Club for a fee. Walker Digital and a financial investor currently
own a majority of the outstanding common stock of WebHouse Club. Prior to
the exercise of the warrant, the financial results of Priceline WebHouse
Club will not be included in priceline.com's financial statements.
On October 27, 1999, priceline.com entered into an agreement with
Ford Motor Company regarding the test of a priceline.com and Ford
co-branded Web site for the sale of new Ford automobiles using our "name
your price" service. The co-branded service will be made available for a
ninety day test period to consumers requesting vehicle deliveries in the
State of Florida. On or before December 31, 1999, Ford has the option to
expand the co-branded service throughout the United States on an exclusive
basis. Any exercise by Ford of its option, however, would not prevent
priceline.com from establishing a co-branded service with foreign
automotive manufacturers. Priceline.com anticipates that it will be paid an
annual fee in connection with the operation of this co-branded Website.
On October 27, 1999, priceline.com entered into an Adaptive
Marketing Agreement and an Affiliate Agreement with AT&T Corp. Under the
Adaptive Marketing Agreement, priceline.com will collect applications for
AT&T telecommunications products and services from customers who elect to
purchase such products and services while making offers for airline
tickets, hotel reservations and other products offered by priceline.com and
will be paid a fee based upon the submission of such applications. Under
the Affiliate Agreement, priceline.com will have hyperlink placements on
AT&T's Internet Web site through which consumers will be able to link to
priceline.com's Web site.
On November 4, 1999, priceline.com entered into a Memorandum of
Understanding with Net2Phone, Inc. for the establishment of a priceline.com
"name your price" service for long distance telephone services. The
services are anticipated to launch during the first quarter of 2000. Under
the terms of the Memorandum of Understanding, priceline.com will establish
a service with multiple providers that enables consumers to set their own
terms for blocks of minutes for domestic and international telephone to
telephone calls. Priceline.com will also jointly establish with Net2Phone
an offer by phone service under which consumers will be able to name their
own price per telephone call on calls originating from their home
telephones. Net2Phone will be the exclusive provider under this service.
Priceline.com will also provide Net2Phone with preferential participation
rights in future promotions surrounding the "name your price"
telecommunications services. Priceline.com anticipates entering into one or
more definitive agreements with Net2Phone defining each of the services.
Priceline.com also entered into a short-term Co-Marketing Agreement with
Net2Phone that is expected to run through December 31, 1999. In connection
with the various services, priceline.com will earn a combination of fixed
and performance-based fees over three years.
On November 12, 1999, priceline.com amended the Participation
Warrant Agreement originally issued to Delta Air Lines, Inc. on August 31,
1998, to provide Delta with a cashless exercise right under such agreement.
Following the amendment, Delta effected a cashless exercise of the full
amount of warrants exercisable under the Participation Warrant Agreement.
The cashless exercise resulted in Delta's acquiring a total of 16,525,834
shares of common stock of priceline.com.
On November 15, 1999, priceline.com entered into an Airline
Participation Agreement and a Participation Warrant Agreement with United
Air Lines, Inc. for United's inclusion in priceline.com's leisure airline
ticket service. With the addition of United, priceline.com's airline
service includes 8 domestic carriers and 20 international carriers. Under
the Participation Warrant Agreement, United was granted warrants to
purchase 5.5 million shares of priceline.com common stock at an exercise
price of $52.625 per share. The warrants were fully vested on the date of
grant, but generally are not exercisable until November 12, 2005. However,
under certain circumstances, including United's achievement of performance
targets, United will have the right to exercise up to 33% of the warrants
during each year following the grant date. Priceline.com will incur
additional non-cash supplies start-up warrant costs of approximately $238.2
million during the fourth quarter as a result of the issuances of the
warrant.
PRICELINE.COM INCORPORATED
FORM 10-Q
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
This "Management's Discussion and Analysis of Financial Condition
and Results of Operations" contains forward-looking statements. In some
cases, readers can identify forward-looking statements by terminology such
as "may," "will," "should," "could," "expects," "plans," "anticipates,"
"believes," "estimates," "predicts," "potential," or "continue," or the
negative of such terms or other comparable terminology. These statements
involve known and unknown risks, uncertainties and other factors that may
cause our actual results, levels of activity, performance, or achievements
to be materially different from any future results, levels of activity,
performance, or achievements expressed or implied by such forward-looking
statements. Such factors include, among other things, those set forth under
"Overview," "Liquidity and Capital Resources," and "Additional Factors that
May Affect Future Results" included in this section, and those set forth in
the "Risk Factors" section of priceline.com's Registration Statement on
Form S-1 (File No. 333-83513), as amended, filed with the Securities and
Exchange Commission on July 23, 1999. Although we believe that the
expectations reflected in the forward-looking statements are reasonable, we
cannot guarantee future results, levels of activity, performance, or
achievements. We undertake no duty to update any of the forward-looking
statements, whether as a result of new information, future events or
otherwise.
OVERVIEW
Priceline.com has 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 price" - 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 on the basis of the pricing information and
rules established by the sellers. 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 benefitting 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.
Priceline.com was formed in July 1997 and our primary activities
during the period prior to launch consisted of recruiting and training
employees, developing our business model, implementing systems to support
our business model, developing relationships with seller participants and
developing the priceline.com brand. We commenced operations in April 1998
with the sale of leisure airline tickets. Since that time, our business has
grown significantly and the priceline.com service includes the following
products and services:
o leisure airline tickets, provided by 8 domestic and 20
international airline participants;
o new automobiles, which was launched on a test basis in the
New York metropolitan area in July 1998 and has been
expanded to cover 16 states;
o hotel room reservations, which was launched in October 1998,
offers hotel rooms in substantially all major United States
markets and includes as participants more than 12 leading
national hotel chains; and
o home financing services, which was launched in January 1999
with home mortgage services and now also includes home
equity loans and refinancing services.
We are in the process of adding rental cars and long distance
telephone services to the products and services offered through the
priceline.com service. We also have licensed the priceline.com name and our
"name your price" business model to Priceline WebHouse Club, Inc. to use in
connection with the retail sale of groceries and other retail merchandise
over the Internet. 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. The number of our full-time employees increased from 10
to 274 during the period from inception to September 30, 1999.
We recognize and record revenues in a variety of ways depending on
the product or service sold. With respect to our airline ticket and hotel
room reservation services, we recognize as revenue the amount we receive
from the customer, net of taxes, and record as the cost of revenue the
amount that we pay the selling airline or hotel. With respect to our
automobile service, we earn a fixed fee from both the customer and the
seller after the transaction is consummated. With respect to our home
financing service, we receive marketing fees equal to a percentage of the
net revenue generated by the service, which is presently operated in
conjunction with LendingTree, Inc. We also generate revenues through
adaptive marketing programs with third parties that pay us fees for
marketing their customer acquisition programs. Additionally, we generate
revenues from third party sources, including airline ticket processing fees
from consumers and ancillary reservation booking fees from the Worldspan
reservation system for our booking of airline flight segments and hotel
reservations through the Worldspan system. Consumer fees are payable and
recognized only upon completion of successful transactions.
All offers made through the priceline.com service are guaranteed by
a customer credit card and credit cards are the only form of payment that
we accept. The manner in which and time at which revenues are recognized
differs depending on the product or service sold through the priceline.com
service. With respect to airline ticket and hotel room reservation
services, revenues are generated by transactions with customers who make
offers to purchase airline tickets and reserve hotel rooms supplied by
participating sellers. Revenues and related costs are recognized if, and
when, we accept the customer's offer and charge the customer's credit card.
Because we are the merchant of record in these transactions, revenue for
these services includes the offer price paid by the customer, net of
certain taxes and fees. Airline and hotel revenues also may include fees
from third parties for adaptive marketing programs. With respect to
automobile services, fees or other payments payable by the seller and /or
the customer are recognized as revenue. With respect to home financing
services, we receive no fees from consumers. We recognize revenue from
marketing fees paid directly by LendingTree through the operation of our
home financing services. Because we act as an intermediary between the
customer and the seller in auto and home financing transactions, revenues
for these products and services recorded at the amount of the fee received,
and not on the value of the underlying transaction, are when the
transaction is completed. Automobile and home financing services revenues
also may include fees from third parties for adaptive marketing programs.
When making offers 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. Consumers whose initial
requests are not satisfied are permitted to resubmit revised offers that
reflect at least one change to their itinerary. We treat each initial offer
and any resubmitted offer as a single offer for purposes of measuring our
total offer volume and our offer fulfillment rates.
Because the priceline.com system does not set minimum offer
thresholds, and consumers are not charged to make offers for airline
tickets and other products, it is expected that we will receive a
significant number of unreasonable or fantasy offers. Accordingly, we also
analyze the percentage of "reasonable" offers that we are able to fill. We
consider an offer for an airline ticket to be "reasonable" when it is no
more than 30% lower than the lowest generally available advance-purchase
fare for the same route. Using this standard, the overall percentage of
offers considered reasonable for the nine-month period ended September 30,
1999 was approximately 50.0%. The tickets sold through the priceline.com
service during the nine-month period represented approximately 52.0% of the
combined reasonable offers and 25.8% of total offers for domestic and
international flights. For domestic routes, where our airline participants
have strong coverage, those percentages were higher, with approximately
59.2% of all reasonable offers and 28.4% of total offers fulfilled for the
same nine-month period. The percentage of offers that we are able to fill
can also vary depending on the particular route.
As of September 30, 1999, we had an accumulated deficit of $258.9
million, of which $158.2 million related to certain non-cash charges
arising from equity issuances to a number of our participating airlines,
our Chief Executive Officer and other parties, as more fully described
below. 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.
Accordingly, we intend to continue to invest heavily in marketing and
promotion, technology and personnel. As a result, we expect to incur
additional losses for at least the next two years. See "Additional Factors
that May Affect Future Results - We are Not Profitable and Expect to
Continue to Incur Losses." In addition, our limited operating history makes
the prediction of future results of operations difficult, and accordingly,
there can be no assurance that we will achieve or sustain revenue growth or
profitability. See "Additional Factors that May Affect Future Results -
Potential Fluctuations in Our Financial Results makes Financial Forecasting
Difficult."
As of September 30, 1999, we also had outstanding non-qualified
stock options to purchase 26,685,778 shares issued to various employees,
consultants and directors pursuant to the 1997 Omnibus Plan and the 1999
Omnibus Plan. The options entitle the holders to purchase common stock at a
weighted average exercise price of approximately $12.61 per share, subject
to adjustment in accordance with the 1997 Omnibus Plan and the 1999 Omnibus
Plan.
RESULTS OF OPERATIONS
Revenues
Quarter Ended % Nine-months
September 30, Change Ended September 30
1999 1998 1999 1998
---- ---- ---- ----
Revenues $152,222,252 $9,222,094 1,551% $313,196,643 $16,243,733
Revenues for the quarter and nine-month period ended September 30,
1999 were comprised primarily of (1) transaction revenues representing the
selling price of airline tickets and hotel room reservations; (2) fee
income from adaptive marketing programs offered in connection with our
product offerings; (3) ancillary revenues consisting primarily of Worldspan
reservation booking fees and customer processing fees; and (4) fee income
from our home financing and auto programs. Revenues for the quarter ended
September 30, 1998 were comprised of transaction revenues representing the
selling price of airline tickets and fee income from adaptive marketing
programs. Priceline.com did not offer adaptive marketing programs prior to
August of 1998. For the quarter and nine-month period ended September 30,
1999, revenues increased over the same period in 1998 as a result of a
substantial increase in our customer base, repeat purchases by existing
customers and the inclusion of the hotel service, the automobile service,
the home financing service and adaptive marketing programs. Priceline.com's
customer base increased 557.2% from 433,722 customers as of September 30,
1998 to 2,850,489 customers as of September 30, 1999. A customer is defined
as someone who has made a guaranteed offer for at least one of
priceline.com's products. Our total customer offers increased 383.0% from
273,319 for the three months ended September 30, 1998 to 1,320,090 for the
three months ended September 30, 1999.
Fee-based income and ancillary revenues represented 6.5% of total
revenues for the quarter ended September 30, 1999 and 8.3% of total revenue
for the nine-month period ended September 30, 1999. Fee-based income and
ancillary revenues represented 7.6% of total revenues for the quarter ended
September 30, 1998 and 4.3% of total revenue for the nine-month period
ended September 30, 1998.
PRODUCT COSTS AND GROSS PROFIT
Quarter Ended % Nine-months
September 30, Change Ended September 30
1999 1998 1999 1998
---- ---- ---- ----
Product
Costs $134,008,912 $8,850,957 1,414% $279,093,957 $16,793,797
% of
Revenues 88% 96% 89.1% 103.4%
Gross
Profit $ 18,213,340 $371,137 4,807% $34,102,686 ($550,064)
Gross
Margin 12.0% 4.0% 10.9% -3.4%
For the quarter and nine months ended September 30, 1999, 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 and
(2) the cost of hotel rooms from our suppliers, net of hotel tax. During
the first nine months of 1998, substantially all of our product costs were
comprised of 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. Supplier warrant
costs 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 five fiscal quarters.
Gross profit is comprised of revenues less cost of revenues.
Excluding the effect of non-cash supplier warrant costs for the three and
nine months ended September 30, 1999, we would have had gross profit of
$18.6 million and $35.2 million, respectively. For the quarter and
nine-month period ended September 30, 1999, gross profit increased over the
same period in 1998 as a result of increased sales volume, increased
fee-based revenues and decreased sales of tickets that were sold at a
negative margin. Because fee-based and ancillary revenues did not involve
separate costs, these revenues had a disproportionately positive impact on
total gross margins and made a substantial contribution to our gross profit
for the quarter and nine-month periods ended September 30, 1999 and
September 30, 1998.
For the quarter and nine-month period ended September 30, 1999,
gross margin increased over the same period in 1998 as a result of improved
product costs, decreased sales of tickets that were sold at a negative
margin and higher percentage of fee-based revenue in relation to
transaction-based revenue. Fee-based revenues, such as adaptive marketing
revenues, ancillary revenues and revenues from 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.
OPERATING EXPENSES
Quarter Ended % Nine-months
September 30, Change Ended September 30
1999 1998 1999 1998
---- ---- ---- ----
Supplier
Start-up
Warrant Costs $88,389,011 $0 NM $88,389,011 $0
Supplier start-up warrant costs consist of non-cash charges
representing the fair value of warrants issued to certain of our
participating airlines in connection with securing priceline.com's
relationship with those airlines. For the quarter and nine-month periods
ended September 30, 1999, our supplier start-up warrant costs were incurred
as a result of the issuance to Continental Airline of a warrant to purchase
one million shares of priceline.com's common stock at a strike price of
$97.41 per share. We will incur additional supplier start-up warrant costs
of approximately $238.2 million during the fourth quarter of 1999 as a
result of the issuance to United Airlines of a warrant to purchase 5.5
million shares of common stock at an exercise price of $52.625 per share.
There were no supplier start-up warrant costs for the quarter and
nine-month periods ended September 30, 1998.
Sales and Marketing.
Quarter Ended % Nine-months
September 30, Change Ended September 30,
1999 1998 1999 1998
---- ---- ---- ----
Sales &
Marketing $21,413,328 $8,160,624 162.4% $56,284,414 $15,925,101
% of Sales 14.1% 88.5% 18.0% 98.0%
Sales and Marketing expenses consist primarily of (1) advertising
and promotion expenses; (2) fees payable to a third-party service provider
that operates our call center; (3) credit card processing fees; (4)
provisions for customer credit card charge-backs (based upon a percentage
reflecting our historical experience); and (5) compensation for our sales
and marketing personnel. For the quarter and nine-month periods ended
September 30, 1999, sales and marketing expenses increased over the same
periods in 1998 due to substantial increases in advertising expenditures
and increases in telecommunications, customer service, credit card
processing and payroll expenses. All of the increases in sales and
marketing expenses were driven by substantial increases in customer offers
and revenue. The Company intends to continue to pursue an aggressive
advertising and branding campaign in order to attract new users.
General and Administrative.
Quarter Ended % Nine-months
September 30, Change Ended September 30,
1999 1998 1999 1998
---- ---- ---- ----
General & $8,390,104 $9,399,785 -11% $17,559,973 $14,198,661
Admin.
% of Sales 5.5% 101.9% 5.6% 87.4%
General and administrative expenses for the quarter and nine-month
periods ended September 30, 1999 and September 30, 1998 were comprised
primarily of compensation for personnel, fees for outside professionals,
telecommunications and other overhead costs, including occupancy expense.
The quarter and nine-month periods ended September 30, 1999 included a
charge of $1,546,866 relating to option payroll taxes resulting from the
exercise of employee stock options. Excluding this expense, general and
administrative expense was 4.5% of sales for the quarter ended September
30, 1999 and 5.1% for the nine-month period ended September 30, 1999. The
quarter and nine-month periods ended September 30, 1998 included a one-time
non-cash charge related to a stock-based compensation arrangement with
priceline.com's Chief Executive Officer. Excluding this charge, general and
administrative expenses increased for the quarter and nine-month periods
ended September 30, 1999 over the same periods of 1998 as a result of
increased payroll and overhead costs associated with the expansion of our
product offerings and increases in our revenue base.
Systems and Business Development.
Quarter Ended % Nine-months
September 30, Change Ended September 30,
1999 1998 1999 1998
---- ---- ---- ----
Systems &
Business
Develop. $4,593,232 $2,800,770 64% $10,245,655 $8,168,984
% of Sales 3.0% 30.4% 3.3% 50.3%
Systems and business development expenses for all periods were
comprised primarily of (1) compensation to our information technology and
product development staff, (2) payments to outside contractors, (3) data
communications and other expenses associated with operating priceline.com's
Web site and (4) depreciation and amortization on computer hardware and
software. For the quarter and nine-month periods ended September 30, 1999,
systems and business development expenses increased over the same periods
in 1998 due to increased payroll costs, increased depreciation and
amortization resulting from increased capital expenditures and increased
development costs associated with the expansion of priceline.com's product
offerings and technological infrastructure.
In March 1998, the American Institute of Certified Public
Accountants issued Statement of Position ("SOP") 98-1, "Accounting for
Costs of Computer Software Developed or Obtained for Internal Use." This
SOP requires capitalization of certain costs of computer software developed
or obtained for internal use. We adopted this SOP on January 1, 1999 and,
during the quarter and nine-month periods ended September 30, 1999, we
capitalized approximately $3.6 million and $9.3 million respectively of
computer software developed or obtained for internal use. There was no such
amortization expense during the 1998 fiscal year.
INTEREST INCOME, NET
Quarter Ended % Nine-months
September 30, Change Ended September 30,
1999 1998 1999 1998
---- ---- ---- ----
Interest
Income (Net) $2,356,649 $141,928 1561% $4,743,753 $304,259
Interest income on cash and marketable securities increased 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.
RECENT EVENTS
On September 24, 1999, and November 3, 1999, respectively, we
entered into Participating Rental Car Company Agreements with Budget Rent A
Car Corporation and National Car Rental System, Inc. as the first rental
car companies to participate in our "name your price" rental car service
which is expected to launch in the first quarter of 2000. See Note 6 to the
Notes to Unaudited Condensed Financial Statements.
In October 1999, we entered into a lease for office space in
Norwalk, Connecticut into which we intend to relocate our corporate
headquarters in December of this year.
On October 12, 1999, we entered into a non-binding letter of intent
with Alliance Capital Partners, pursuant to which Alliance has formed an
operating subsidiary, PricelineMortgage, for the primary purpose of acting
as a broker and/or lender of residential mortgage loans in connection with
the priceline.com mortgage service. See Note 6 to the Notes to Unaudited
Condensed Financial Statements.
On October 26, 1999, we granted Priceline WebHouse Club, Inc. a
worldwide license to use the "priceline" name and business model, certain
patent rights and other intellectual property for the sale of groceries and
other retail merchandise to consumer over the Internet. See Note 6 to the
Notes to Unaudited Condensed Financial Statements.
On October 27, 1999, we entered into an agreement with Ford Motor
Company regarding the test of a priceline.com and Ford co-branded Web site
for the sale of new Ford automobiles using our "name your price" service.
See Note 6 to the Notes to Unaudited Condensed Financial Statements.
On October 27, 1999, we entered into an Adaptive Marketing
Agreement and an Affiliate Agreement with AT&T Corp. See Note 6 to the
Notes to Unaudited Condensed Financial Statements.
On November 4, 1999, we entered into a Memorandum of Understanding
with Net2Phone, Inc. for the establishment of a priceline.com "name your
price" service for long distance telephone services. See Note 6 to the
Notes to Unaudited Condensed Financial Statements.
On November 12, 1999, we amended the Participation Warrant
Agreement originally issued to Delta Air Lines, Inc. on August 31, 1998, to
provide Delta with a cashless exercise right under such agreement.
Following the amendment, Delta effected a cashless exercise of the full
amount of warrants exercisable under the Participation Warrant Agreement
which resulted in it acquiring a total of 16,525,834 shares of our common
stock. See Note 6 to the Notes to Unaudited Condensed Financial Statements.
On November 15, 1999, we entered into an Airline Participation
Agreement and a Participation Warrant Agreement with United Air Lines, Inc.
for United's inclusion in our leisure airline ticket service. See Note 6 to
the Notes to Unaudited Condensed Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1999, we had approximately $192.9 million in
cash, cash equivalents and short term investments.
On August 17, 1999, we completed a public offering in which we sold
1,000,000 shares of our common stock at a price of $67.00 per share,
raising approximately $67.0 million in gross proceeds. The offering
proceeds, net of approximately $2.5 million in aggregate underwriters
discounts and commissions and $1.2 million in related expenses, were
approximately $63.3 million.
Net cash used in operating activities was $50.2 million for the
nine months ended September 30, 1999. Net cash used in operating activities
was primarily attributable to net losses.
Net cash used in investing activities was $97.4 million for the
nine months ended September 30, 1999. Net cash used in investing activities
was primarily related to purchases of property and equipment and short term
investment instruments.
Net cash provided by financing activities was $209.5 million for
the nine months ended September 30, 1999. Net cash provided by financing
activities resulted primarily from our (1) initial public offering of
10,000,000 shares of our common stock, for which we received approximately
$149.0 million in cash, net of underwriting discounts and commissions on
April 1, 1999 and (2) secondary public offering of 1,000,000 shares of our
common stock, for which we received approximately $64.5 million in cash,
net of underwriting discounts and commissions, on August 17, 1999.
We had commitments for capital expenditures as of September 30,
1999 of approximately $0.5 million. Capital expenditures were $18.0 million
for the nine months ended September 30, 1999, and we expect such
expenditures to be at least $25.0 million for the full year of 1999. As a
result of our rapid growth, we expect to increase capital expenditures for
purchased software, internally developed software, computer equipment and
leasehold improvements.
We believe that, based upon our current operating plan, our
existing cash and cash equivalents, the net proceeds from our initial
public offering, the net proceeds from the pending concurrent public
offerings of common stock and notes and any cash generated from operations
will be sufficient to fund our operating activities, capital expenditures
and other obligations through at least the next three years. 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, these
failures could have a material adverse effect on our business, results of
operations and financial condition. If additional funds are raised through
the issuance of equity securities, the percentage ownership of our
then-current stockholders would be diluted.
TAX MATTERS
FEDERAL AIR TRANSPORTATION TAX ON AIRLINE TICKET SALES
A federal air transportation tax is imposed upon the sale of
airline tickets and generally is collected by the airlines selling the
tickets. The tax is based upon a percentage of the cost of transportation,
which was 9% for periods prior to October 1, 1998 and 8% thereafter.
Because of the unique pricing structures employed in the priceline.com
service, such as the amount paid by the customer for a ticket being
different than the amount charged by the airline for the same ticket with
the excess payment, if any, going to us as a charge for the use of our
proprietary business method, it is not clear how this federal tax should be
calculated when sales occur using the priceline.com service. We have been
calculating this tax based on the fare paid to the airline for a ticket,
rather than the price paid by the customer. There is a possibility that
current law requires computation of the tax based on the price paid by the
customer to us. Due to the uncertainty of how the federal air
transportation tax applies to sales of airline tickets using the
priceline.com service, we have submitted a written request to the United
States Internal Revenue Service seeking a determination of our federal air
transportation tax obligations. Such determination may not be favorable and
may require us to collect federal air transportation tax on the total
amount paid by consumers for air travel.
If the determination of the Internal Revenue Service is
unfavorable, we could owe $1,668,593 in additional taxes as of September
30, 1999. We have accrued for such potential liability in our condensed
balance sheet as of September 30, 1999 and are providing for such potential
liability on an ongoing basis. We have agreed to indemnify and hold
harmless certain of our participating airlines from any liability with
respect to such taxes as well as to secure the payment of such taxes by a
letter of credit.
NON-QUALIFIED STOCK OPTIONS
As of September 30, 1999, we had outstanding non-qualified stock
options to purchase 26,685,778 shares issued to various employees,
consultants and directors pursuant to the 1997 Omnibus Plan and the 1999
Omnibus Plan. The options entitle holders to purchase common stock at a
weighted average exercise price of approximately $12.61 per share, subject
to adjustment in accordance with the 1997 Omnibus Plan and the 1999 Omnibus
Plan.
YEAR 2000 READINESS DISCLOSURE
OUR STATE OF READINESS
We have defined Year 2000 compliance as follows:
Information technology time and date data processes, including, but
not limited to, calculating, comparing and sequencing data from, into and
between the 20th and 21st centuries contained in our products and services
offered through the priceline.com service, will function accurately,
continuously and without degradation in performance and without requiring
intervention or modification in any manner that will or could adversely
affect the performance of such products or the delivery of such services as
applicable at any time hereafter.
Our internal systems include both our information technology
systems and non-information technology systems. We have initiated an
assessment of our proprietary information technology systems, and expect to
complete any remediation and testing of all information technology systems
during 1999. With respect to information technology systems provided by
third-party vendors, we have sought assurances from such vendors that their
technology is Year 2000 compliant. All of our material information
technology system vendors have replied to inquiry letters sent by us
stating that they either are Year 2000 compliant or expect to be so in a
timely manner.
We are evaluating our non-information technology systems for Year
2000 compliance. We have not, to date, discovered any material Year 2000
issues with respect to our non-information technology systems.
We are in the process of contacting our material seller
participants whose products or services are sold through the priceline.com
service to determine if they are Year 2000 compliant. To date, all such
seller participants have stated that they are, or expect to be, Year 2000
compliant in a timely manner.
Our customers are individual Internet users, and, therefore, we do
not have any individual customers who are material to an evaluation of Year
2000 compliance issues.
THE COSTS TO ADDRESS YEAR 2000 ISSUES
We have expensed amounts incurred in connection with Year 2000
compliance since our formation through September 30, 1999. Such amounts
have not been material. The additional costs to make any other products or
services Year 2000 compliant will be expensed as incurred, but are not
expected to be material.
We are not currently aware of any material operational issues or
costs associated with preparing our systems for the Year 2000. Nonetheless,
we may experience material unexpected costs caused by undetected errors or
defects in the technology used in our systems or because of the failure of
a material seller participant to be Year 2000 compliant.
RISKS ASSOCIATED WITH YEAR 2000 ISSUES
Notwithstanding our Year 2000 compliance efforts, the failure of a
material system or vendor, including a seller participant in the
priceline.com service, a reservation system used by us, such as Worldspan,
or the Internet generally, to be Year 2000 compliant could harm the
operation of the priceline.com service or prevent certain products and
services being offered through the priceline.com service, or have other
unforeseen, adverse consequences to us.
Finally, we also are subject to external Year 2000-related failures
or disruptions that might generally affect industry and commerce, such as
utility or transportation company Year 2000 compliance failures and related
service interruptions. Moreover, participating sellers in priceline.com
services might experience substantial slow-downs in business if consumers
avoid products and services such as air travel both before and after
January 1, 2000 arising from concerns about reliability and safety because
of the Year 2000 issue. All of these factors could have a material adverse
effect on our business, financial condition and results of operations.
CONTINGENCY PLANS
We have developed a contingency plan to address situations that we
believe would arise if we fail to be Year 2000 compliant. We have not
developed a contingency plan to address situations that may result if our
suppliers are unable to achieve Year 2000 compliance. The cost of
developing and implementing such a plan, if necessary, could be material.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
OUR LIMITED OPERATING HISTORY MAKES EVALUATING OUR BUSINESS DIFFICULT
Priceline.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 TO CONTINUE TO INCUR LOSSES
We have incurred net losses of $100.7 million during the period
from July 18, 1997 (inception) through September 30, 1999, before giving
effect to $158.2 million of non-cash charges arising from equity issuances
to a number of our participating airlines, our chief executive officer and
other parties, which resulted in total net losses of $258.9 million for
such period. We have not achieved profitability and expect to continue to
incur losses for at least the next two years. The principal causes of our
losses are likely to continue to be significant brand development costs,
marketing and promotion costs and technology and systems development costs.
Almost all of our revenues to date have been derived from airline
ticket sales, hotel room reservations and related adaptive marketing
programs. 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.
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 through the priceline.com
service. The fees paid to us by sponsors offering the promotions generally
involve no direct costs and have a disproportionately positive impact on
our gross profit margins. A significant reduction in consumer acceptance of
our adaptive marketing programs, 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 gross profit. We may not be able to replace
such revenues through other programs or through product sales.
During 1998 and the first three quarters of 1999, a substantial
majority of our adaptive marketing revenues were derived from fees paid by
credit card issuers for qualifying credit card applications submitted over
the priceline.com service in connection with customer offers for airline
tickets. Through May 1, 1999, almost all of our adaptive marketing revenues
were derived from fees related to a credit card adaptive marketing program
with Capital One Bank. In May 1999, we replaced Capital One Bank with First
USA Bank, a leading national credit card issuer. Since that time, our
credit card adaptive marketing program revenues have been primarily
attributable to our adaptive marketing relationship with First USA. In
October 1999, we also began offering our customers the Discover credit card
in connection with a new adaptive marketing program with Discover Financial
Services, Inc.
In addition to our credit card adaptive marketing programs, we have
adaptive marketing programs with Sprint Communications Company L.P.,
NetMarket, Talk.com, New Sub Services, Columbia House, Net2Phone, AT&T and
others. Most of our adaptive marketing programs may be terminated on short
notice.
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. If they are not successful, our gross profit and
results of operations could be adversely affected.
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 unproven business model, we
cannot 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 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 the priceline.com service 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, airlines may
have less excess inventory to offer through the priceline.com service at
discounted prices. 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, 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
nine months ended September 30, 1999. 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 five largest airline
suppliers accounted for approximately 90% of airline ticket revenue for the
nine months ended September 30, 1999. As a result, currently we are
substantially dependent upon the continued participation of these five
airlines in the priceline.com service in order to maintain and continue to
grow our total airline ticket revenues. We currently have 28 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, subject to various exceptions, requires
Delta's approval of the addition of new carriers to the priceline.com
service, restricts the routes for which tickets may be offered by specified
carriers through the priceline.com service and imposes limitations on the
code share arrangements of specified carriers. Delta also may require the
exclusion of specific markets in order for certain other airlines to
participate. These provisions could limit our ability to expand our airline
ticket service. In addition, our ability to transfer or license our
intellectual property to other travel providers is limited in the manner
set forth in the agreement.
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, the airlines could attempt to establish their own
buyer-driven commerce service or other similar service 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 UNPROVEN
The priceline.com service is based on a novel and unproven business
model. We will be successful only if consumers and sellers 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 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 guarantee 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 make new or
complementary products and services and a broader range of existing
products and services available through the priceline.com service. We will
incur substantial expenses and use significant resources in trying to
expand the type and range of the products and services that we offer. For
example, we have entered into agreement to expand the priceline.com service
to include rental cars and long distance phone service. Expansion into
these and other areas utilizes management resources and requires
expenditure of significant funds particularly in areas such as technology
and marketing.
While we continue to expand our product and service offerings, we
may not be able to attract sellers and other participants to provide such
products and services or consumers to purchase such products and services
through the priceline.com service. In addition, if we launch new products
or services and they are not favorably received by consumers, our
reputation and the value of the priceline.com brand could be damaged.
Moreover, almost all 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 or hotel room
reservation has no value. The expiring nature of the inventory creates
incentives for airlines and hotels to sell seats or room reservations at
reduced rates. Because we have only limited experience in selling
"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.
EXPANSION OF "NAME YOUR PRICE" BUSINESS MODEL MAY NOT BE SUCCESSFUL
In addition to broadening the products and services offered through
the priceline.com service, we are expanding our current "name your price"
business model into other areas of e-commerce. We recently licensed our
name and business model to Priceline WebHouse Club, Inc., a privately held
start-up company affiliated with Walker Digital, 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 also are currently evaluating a similar
licensing arrangement with another privately held start-up company
affiliated with Walker Digital that is developing a consumer-to-consumer
business in which buyers would make conditional purchase offers to acquire
goods from other consumers. These new businesses may not be successful and
we may never realize value from any equity interests or derivative equity
interest that we have or may have in such businesses. 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 may need to invest funds and/or management
resources for the development of these entities, 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.
For example, our licensee, Priceline WebHouse, faces significant
competition from traditional sources of discounts for retail groceries such
as in-store promotions, coupons and newspaper advertisements and faces
competition from on-line grocers that may divert consumers from in-store
shopping on which WebHouse Club is premised. If we expand into the
consumer-to-consumer market either directly or through a licensing
arrangement, we will face competition from established web site operators
such as eBay.
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 attract, hire and
retain highly skilled and motivated officers and employees and 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.
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. If we do not succeed in attracting new employees or retaining and
motivating our current and future employees, our business could suffer
significantly.
Since our formation in July 1997, we have expanded from 10 to 274
full-time employees as of September 30, 1999. We also have employed many
key personnel since our launch in April 1998, including our Chairman and
Chief Executive Officer and our President and Chief Operating Officer, and
a number of key managerial, marketing, planning, financial, technical and
operations personnel. We expect to continue to add additional key personnel
in the near future. We do not have "key person" life insurance policies on
any of our key personnel.
We believe our performance is substantially dependent on:
o our ability to retain and motivate our senior management and
other key employees; and
o our ability to identify, attract, hire, train, retain and
motivate other highly skilled technical, managerial,
marketing and customer service personnel.
WE RELY ON THIRD-PARTY SYSTEMS
We rely on certain third-party computer systems or third-party
service providers, including:
o the computerized central reservation systems of the airline
and hotel industries to satisfy demand for airline tickets
and hotel room reservations;
o the computer systems of LendingTree, Inc. to satisfy offers
for home financing services;
o Exodus Communications to host our systems infrastructure,
web and database servers; and
o CallTech Communications Incorporated to operate our call
center.
Any interruption in these third-party services, or a deterioration
in their performance, could be disruptive to our business. We currently do
not have any contractual arrangement with Exodus Communications and our
agreements with CallTech Communications and LendingTree 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.
INTENSE COMPETITION COULD REDUCE OUR MARKET SHARE AND HARM OUR FINANCIAL
PERFORMANCE
The markets for the products and services offered on the
priceline.com service are intensely competitive. We compete with both
traditional distribution channels and online services. Increased
competition could diminish our ability to become profitable or result in
loss of market share and damage the priceline.com brand.
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 Travelocity, Preview Travel
and 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 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 new
automobiles include traditional and online auto dealers, including newly
developing auto superstores such as AutoNation, Auto-by-Tel and Microsoft's
CarPoint. With respect to financial service products, our competitors
include:
o banks and other financial institutions;
o online and traditional mortgage and insurance brokers,
including mortgage.com, Quicken Mortgage, E-Loan and iOwn,
Inc.; and
o insurance companies.
We also potentially face competition from a number of large online
services that have expertise in developing online commerce and in
facilitating Internet traffic. These potential competitors include
Amazon.com, America Online, Microsoft, and Yahoo! who could choose to
compete with us either directly or indirectly through affiliations with
other e-commerce companies. Other large companies with strong brand
recognition, technical expertise and experience in online commerce and
direct marketing could also seek to compete in the buyer-driven commerce
market.
Many of our competitors have significant competitive advantages.
For example, airlines, hotels, financial institutions and other suppliers
also sell their products and services directly to consumers and have
established Web sites. Internet directories, search engines and large
traditional retailers have significantly greater operating histories,
customer bases, technical expertise, brand recognition and/or online
commerce experience than us. In addition, certain competitors may be able
to devote significantly greater resources than us to:
o marketing and promotional campaigns;
o attracting traffic to their Web sites;
o attracting and retaining key employees; and
o Web site and systems development.
OUR SUCCESS DEPENDS ON OUR ABILITY TO PROTECT OUR INTELLECTUAL PROPERTY
We have developed a comprehensive program for securing and
protecting rights in patentable inventions, trademarks, trade secrets and
copyrightable materials. If we are not successful in protecting our
intellectual property, there could be a material adverse effect on our
business.
PATENTS
We currently hold one issued United States patent directed to a
unique Internet-based buyer-driven commerce method and system underlying
our business model. We also hold one issued United States patent directed
to a method and system for pricing and selling airline ticket options and
one issued United States patent directed to methods and systems for
generating airline-specified time tickets. In addition, we have pending
over 25 United States and numerous international patent applications
directed to different aspects of our technology and business
processes. We also have instituted an invention development program to
identify and protect new inventions and a program for international filing
of selected patent applications. Nevertheless, it is possible that:
o our core buyer-driven commerce patent and any other issued
patents could be successfully challenged by one or more
third parties, which could result in our loss of the right
to prevent others from exploiting the buyer-driven commerce
system claimed in the patent or the inventions claimed in
any other issued patents;
o because of variations in the application of our business
model to each of our products and services, our core
buyer-driven commerce patent may not 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 our ability to practice our core buyer-driven commerce
patent through offering one or more of our products or
services could be successfully prevented if one or more
third parties prevail in an interference action in the U.S.
Patent and Trademark Office and thereby obtain priority of
invention for the subject matter claimed in our core
buyer-driven commerce patent;
o newly discovered prior art could diminish the value of or
invalidate an issued patent;
o our pending patent applications may not result in the
issuance of patents; and
o current and future competitors could devise new methods of
competing with our business that are not covered by our
issued patents or patent applications.
While our core patent is directed to a unique buyer-driven commerce
system and method, it does not necessarily prevent competitors from
developing and operating Internet commerce businesses that use
customer-offer-based business models. It may be possible for a competitor
to develop and utilize a business model that appears similar to our
patented buyer-driven commerce system, but which has sufficient
distinctions that it does not fall within the scope of our patent. For
example, we are aware of Internet travel services that appear to use
customer-offer based transaction models, but based on the information we
have obtained to date, may not infringe our patent.
Walker Digital currently owns assets and intellectual property
related a new area of e-commerce into which we may expand our "name your
price" business model involving consumer-to-consumer sales. We may license
our brand name and "name your price" business model to a new company formed
to develop this business. Walker Digital may contribute assets and
intellectual property to this company in return for an equity interest.
Walker Digital owns the intellectual property rights underlying the
technology associated with our adaptive marketing programs. Walker Digital
has licensed to priceline.com the right to use these intellectual property
rights under a perpetual, non-exclusive, royalty-free license agreement.
Walker Digital has pending several United States patent applications
directed to different aspects of the processes and technology supporting
adaptive marketing programs.
We are currently subject to a potential interference action
relating our core buyer-drive commerce patent. See Note 5 to the Notes to
Unaudited Condensed Financial Statements.
TRADEMARKS, COPYRIGHTS AND TRADE SECRETS
We regard the protection of our copyrights, service marks,
trademarks, trade dress and trade secrets as critical to our future
success. We rely on a combination of laws and contractual restrictions,
such as confidentiality agreements, to establish and protect our
proprietary rights. However, laws and contractual restrictions may not be
sufficient to prevent misappropriation of our technology or deter others
from developing similar technologies. We also attempt to register our
trademarks and service marks in the United States and internationally.
However, effective trademark, service mark, copyright and trade secret
protection may not be obtainable and/or available in every country in which
our services are made available online.
PENDING LITIGATION
Current pending litigation against priceline.com and various other
defendants alleges causes of action for, among other things,
misappropriation of trade secrets, breach of contract, conversion, breach
of confidential relationship, copyright infringement, fraud, unfair
competition, and false advertising, and seeks injunctive relief and damages
in an unspecified amount. See Notes 5 and 6 to the Notes to Unaudited
Condensed Financial Statements.
DOMAIN NAMES
We currently hold the Internet domain name "priceline.com," as well
as various other related names. Domain names generally are regulated by
Internet regulatory bodies. The regulation of domain names in the United
States and in foreign countries is subject to change. Regulatory bodies
could establish additional top-level domains, appoint additional domain
name registrars or modify the requirements for holding domain names. As a
result, we may not acquire or maintain the "priceline.com" domain name in
all of the countries in which we conduct business.
The relationship between regulations governing domain names and
laws protecting trademarks and similar proprietary rights is unclear.
Therefore, we could be unable to prevent third parties from acquiring
domain names that infringe or otherwise decrease the value of our
trademarks and other proprietary rights.
LICENSES
We may continue to license portions of our intellectual property,
including our issued patents, to third parties or to joint ventures or
other entities in which we may have an interest. We recently granted
Priceline WebHouse Club, Inc. a license to use certain of our intellectual
property for the sale of groceries and other retail merchandise. In
addition, we recently granted Budget Rent A Car Corporation a license to
use certain of our intellectual property for use in the operation of its
BidBudget Web site. Further, we have granted a small business providing
online travel services immunity from suit under our core Internet-based
buyer-driven commerce system patent, on the condition that the nature and
scope of such business is not significantly changed. If the nature or scope
of such immunity were disputed, we would need to institute proceedings to
enforce our rights either under the immunity agreement or under the patent.
Subject to the final agreements, we will license certain intellectual
property to PricelineMortgage, the operating subsidiary of Alliance Capital
Partners for use on our mortgage service, and Ford Motor Company for use on
the Web site co-branded with priceline.com.
WE MAY NOT BE ABLE TO KEEP UP WITH THE 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.
YEAR 2000 RISKS MAY HARM OUR BUSINESS
The risks posed by Year 2000 issues could adversely affect our
business in a number of significant ways. Although we believe that our
internally developed systems and technology are Year 2000 compliant, our
information technology systems nevertheless could be substantially impaired
or cease to operate due to Year 2000 problems. Additionally, we rely on
information technology supplied by third parties, and our participating
sellers also are heavily dependent on information technology systems and on
their own third party vendors' systems. Year 2000 problems experienced by
us or any of such third parties could materially adversely affect our
business. Additionally, the Internet could face serious disruptions arising
from the Year 2000 problem.
We are evaluating our internal information technology systems and
contacting our information technology suppliers and participating sellers
to ascertain their Year 2000 status. However, we cannot guarantee that our
own systems will be Year 2000 compliant in a timely manner, that any of our
participating sellers or other Web site vendors will be Year 2000 compliant
in a timely manner, or that there will not be significant interoperability
problems among information technology systems. We also cannot guarantee
that consumers will be able to visit our Web site without serious
disruptions arising from the Year 2000 problem. Given the pervasive nature
of the Year 2000 problem, we cannot guarantee that disruptions in other
industries and market segments will not adversely affect our business.
Further, the costs related to Year 2000 compliance could be significant.
Moreover, participating sellers in priceline.com services could experience
substantial slow-downs in business if consumers avoid products and services
such as air travel both before and after January 1, 2000 arising from
concerns about reliability and safety because of the Year 2000 issue.
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 interruptions in our operations. 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 analysis 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 loss of a major adaptive marketing partner;
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;
o future sales of our common stock; and
o stock market price and volume fluctuations.
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 LIABILITY
A federal air transportation tax is imposed upon the sale of
airline tickets and generally is collected by the airlines selling the
tickets. The tax is based upon a percentage of the cost of transportation,
which was 9% for periods prior to October 1, 1998 and 8% thereafter.
Because of the unique pricing structures employed in the priceline.com
service, such as the amount paid by the customer for a ticket being
different than the amount charged by the airline for the same ticket with
the excess payment, if any, going to us as a charge for the use of our
proprietary business method, it is not clear how this federal tax should be
calculated when sales occur using the priceline.com service. We have been
calculating this tax based on the price charged by the airline for a
ticket, rather than the price paid by the customer. There is a possibility
that current law requires computation of the tax based on the price paid by
the customer to us.
Due to the uncertainty of how the federal air transportation tax
applies to sales of airline tickets using the priceline.com service, we
have submitted a written request to the United States Internal Revenue
Service seeking a determination of our federal air transportation tax
obligations. We have met with representatives of the Internal Revenue
Service to informally discuss our submission. A new ruling request
addressing certain factual and legal inquiries raised during our meeting
was recently submitted to the Internal Revenue Service. The actual ruling
by the Internal Revenue Service may not be favorable and may require us to
collect the federal air transportation tax on the total amount paid by
consumers for air travel.
If the determination of the Internal Revenue Service is
unfavorable, we could owe approximately $1,668,593 in additional taxes as
of September 30, 1999. We have accrued for such potential liability in our
condensed balance sheet as of September 30, 1999 and are providing for such
potential liability on an ongoing basis. We have agreed to indemnify and
hold harmless certain of our participating airlines from any liability with
respect to such taxes, as well as to secure the payment of such taxes by a
letter of credit.
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 recently 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.
PAYROLL TAXES RELATED TO OPTION EXERCISES
As of September 30, 1999, we had outstanding non-qualified stock
options to purchase 26,685,778 shares issued to various employees,
consultants and directors pursuant to the 1997 Omnibus Plan and the 1999
Omnibus Plan. The options entitle the holders to purchase common stock at a
weighted average exercise price of approximately $12.61 per share, subject
to adjustment in accordance with the 1997 Omnibus Plan and the 1999 Omnibus
Plan. Upon exercise of an option, we will be required to make payments on
behalf of the option holders for certain payroll related taxes such as
Social Security and Medicare. These payroll taxes will appear as a general
and administrative expense on our statement of operations and will amount
to approximately 1.5% to 2.0% of the difference between the exercise price
and the then fair market value of the common stock at the time of exercise.
However, upon exercise of outstanding options, we will be paid the exercise
price of the options that are exercised. We also will be entitled to an
income tax deduction equal to the sum of (1) the difference between the
exercise price of the option and the then fair market value of the common
stock at the time of exercise and (2) the total amount of payroll related
tax payments. As the calculation of this expense is directly dependent upon
our stock price and the exercise of options is in the sole discretion of
the holder of the options, the amount and timing of the expense and the
timing of the corresponding income tax deduction are not currently able to
be determined and are not within our control.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Priceline.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. 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.
Priceline.com is subject to a potential interference action
relating to its core buyer-driven commerce patent. See Note 5 to the Notes
to Unaudited Condensed Financial Statements included in this Form 10-Q and
Part II, Item 1 of priceline.com's Quarterly Report on Form 10-Q for the
Quarterly Period Ended March 31, 1999 and Quarterly Report on Form 10-Q for
the Quarterly Period Ended June 30, 1999.
Current pending litigation against priceline.com and various other
defendants under the caption Marketel International Inc. v. priceline.com,
et al., No. C-99-1061 (N.D. Cal. 1999), alleges causes of action for, among
other things, misappropriation of trade secrets, breach of contract,
conversion, breach of confidential relationship, copyright infringement,
fraud, unfair competition, and false advertising, and seeks injunctive
relief and damages in an unspecified amount. Discovery in this litigation
had been stayed pending the plaintiff's retention of new counsel and the
plaintiff's identification of alleged trade secrets. The discovery stays
have been lifted, and priceline.com anticipates moving forward with
discovery. Defending the lawsuit may involve significant expense and, due
to the inherent uncertainties of litigation, there can be no certainty as
to the ultimate outcome. Pursuant to the terms of the indemnification
obligations contained in the Purchase and Intercompany Agreement with
Walker Digital, Walker Digital has agreed to indemnify priceline.com for
damages, liability and legal expenses incurred in connection with the this
litigation. See Note 5 to the Notes to Unaudited Condensed Financial
Statements included in this Form 10-Q and Part II, Item 1 of
priceline.com's Quarterly Report on Form 10-Q for the Quarterly Period
Ended March 31, 1999 and Quarterly Report on Form 10-Q for the Quarterly
Period Ended June 30, 1999.
On October 13, 1999, priceline.com 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., No.
399CV1991 AWT alleging that Microsoft Corporation and Expedia, Inc., a
subsidiary of Microsoft, infringe priceline.com's U.S. Patent 5,794,207 by
operating the defendants' "Hotel Price Matcher" service, and that the
defendants' conduct toward priceline.com violated the Connecticut Unfair
Trade Practices Act. The defendants have requested and were granted a
45-day extension of time to answer the complaint. The defendants' Answer
currently is due on December 20, 1999.
From time to time priceline.com has been and expects 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 the company. Such claims, even if not
meritorious, could result in the expenditure of significant financial and
managerial resources.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
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 $4.4 million in other related expenses, were
approximately $144.4 million.
Net offering proceeds received on April 1, 1999 from the initial
public offering were used for general corporate purposes, including working
capital to fund anticipated operating losses, expenses associated with its
advertising campaigns, brand-name promotions and other marketing efforts
and capital expenditures. Priceline.com also may use a portion 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
Corporation pursuant to a reciprocal services arrangement.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit
Number Description
10.31 License Agreement, dated July 20, 1999 between Walker
Digital Corporation and the Registrant.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
On July 19, 1999, priceline.com filed a Current Report on Form 8-K.
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: November 15, 1999 PRICELINE.COM INCORPORATED
(Registrant)
By: /s/ Richard S. Braddock
-----------------------------
Name: Richard S. Braddock
Title: Chairman and Chief Executive
Officer
Date: November 15, 1999 By: /s/ Paul E. Francis
-----------------------------
Name: Paul E. Francis
Title: Chief Financial Officer
EXHIBIT LIST
Exhibit
Number Description
------- -----------
10.31 License Agreement, dated July 20, 1999, between
Walker Digital Corporation and the Registrant
27.1 Financial Data Schedule
EXHIBIT 10.30
LICENSE AGREEMENT
This Agreement is made and entered into as of July 20, 1999,
(the "EFFECTIVE DATE") by and between Walker Digital Corporation, a
corporation organized and existing under the laws of the State of
Connecticut and having its principal office at 4 High Ridge Park, Stamford,
CT 06905 (hereinafter referred to as "LICENSOR"), and Priceline.com
Incorporated, a corporation organized and existing under the laws of the
State of Delaware and having its principal office at 5 High Ridge Park,
Stamford, CT 06905, (hereinafter referred to as "LICENSEE").
WITNESSETH
WHEREAS, Licensor is the sole owner of the Patent Rights and
Patent Applications (each as defined herein), and has the right to grant
the licenses granted herein with respect to the Licensed Property (each as
defined herein), upon the terms and conditions hereinafter set forth; and
WHEREAS, Licensee desires to obtain a license to the
Licensed Property, upon the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and the
representations, warranties and agreements contained herein, and for other
good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto agree as follows:
7. DEFINITIONS.
For the purposes of this Agreement, the following words and
phrases shall have the following meanings:
7.1 An "AFFILIATE" of a party shall mean a company or other
entity which controls, is controlled by, or is under common control with
such party. A corporation or other entity shall be regarded as in control
of another corporation or entity if it owns or directly or indirectly
controls more than fifty percent (50%) of the voting stock or other voting
power of the other corporation or entity, or if it possesses, directly or
indirectly, the power to direct or cause the direction of the management
and policies of the corporation or other entity or the power to elect or
appoint fifty percent (50%) or more of the members of the governing body of
the corporation or other entity.
7.2 "FIELD OF USE" shall mean the business in which Licensee
is engaged from time to time, including without limitation any business
activity which would infringe
any patent rights held by Licensee.
7.3 "LICENSED PRODUCT" shall mean any product or service or
part thereof in the Field of Use which is covered in whole or in part by a
Valid Claim in the country in which any such product or part thereof is
made, used, offered for sale, sold or imported.
7.4 "LICENSED PROPERTY" shall mean, collectively, Patent
Applications, Patent Rights, and Technology.
7.5 "LICENSEE IMPROVEMENT" shall mean any findings,
discoveries, inventions, additions, improvements, enhancements,
modifications, or changes made by or on behalf of Licensee during the term
of this Agreement that relate to, or are generated from, the Patent Rights,
Patent Applications, or Technology.
7.6 "LICENSOR IMPROVEMENT" shall mean any findings,
discoveries, inventions, additions, improvements, enhancements,
modifications, or changes made by or on behalf of Licensor during the term
of this Agreement that relate to, or are generated from, the Patent Rights,
Patent Applications, or Technology.
7.7 "PATENT APPLICATIONS" shall mean the United States
patent applications listed on Exhibit A attached hereto, together with all
related continuations, continuations-in-part, divisionals and similar
applications, and counterpart foreign patent
or equivalent applications and filings.
7.8 "PATENT RIGHTS" shall mean any and all rights arising
from any and all of the following:
(a) United States and foreign patents and/or patent
applications derived from or arising out of the
Technology or the Patent Applications;
(b) United States and foreign patents issued from the Patent
Applications;
(c) claims of United States and foreign continuation,
continuation-in-part, divisional or other patent
applications, and of the resulting patents, which are
directed to subject matter described in the U.S. and
foreign applications described in (a) or (b) above;
and
(d) any reissues, re-examinations or extensions of the
patents and applications described in (a), (b), (c)
or (d) above.
7.9 "TECHNOLOGY" shall mean (i) any and all inventions,
software code, methods, know-how, plans, processes and products, whether
patentable or not or confidential or not, developed, conceived, discovered
or reduced to practice by or on behalf of Licensor, or its Affiliates, on
or before the Effective Date, including, without limitation, any and all of
the foregoing relating to the Patent Applications and Patent Rights; (ii)
all tangible work in progress and tangible research materials, including,
without limitation, notebooks, software code, test results, technical and
non-technical data and specifications, characteristics and designs, whether
patentable or not or confidential or not, relating to the Patent
Applications and Patent Rights; and (iii) all Licensor Improvements.
7.10 "THIRD PARTY" shall mean any person or entity other
than Licensor or Licensee and their respective Affiliates.
7.11 "VALID CLAIM" means a claim within a Patent Right.
8. GRANT OF LICENSE AND OWNERSHIP.
8.1 Non-Exclusive License Grant. Licensor hereby grants to
Licensee a perpetual, worldwide, royalty-free exclusive license, with the
right to transfer and grant sublicenses, to use, distribute, copy, display,
and create derivative works of the Technology, to practice under the Patent
Rights, and to make, have made, use, have used, develop, have developed,
offer for sale, sell, have sold, market, have marketed, import and have
imported, the Licensed Products, in each case in the Field of Use.
(a) Licensor acknowledges that Licensee shall have the
right to prosecute infringement actions involving the
Licensed Property in the Field of Use as set forth in
Section 4.1.
(b) The Field of Use shall be expanded to include any new
area in which Licensee begins to conduct business,
including by commencing development of new products
or services ("New Fields"). In no event shall
Licensor grant an exclusive license to the Licensed
Property in a field before it becomes a New Field for
a period of greater than three (3) years. In the
event Licensor already has granted an exclusive
license to the Licensed Property in a field before it
becomes a New Field, such exclusive license shall
survive pursuant to its terms, but may not be
renewed, except on a nonexclusive basis, without the
prior written consent of Licensee. Licensee shall
promptly inform Licensor in writing of any new areas
in which it is conducting business. The parties shall
meet promptly thereafter to define the scope of the
applicable New Field.
8.2 Licensor Ownership. Licensee acknowledges and agrees
that, as between it and Licensor, Licensor shall own all right, title and
interest in and to the Licensed Property.
8.3 Licensee Ownership. Licensor acknowledges and agrees
that it has, and will have, no rights of any kind with respect to any
intellectual property or work product of any kind owned or created by
Licensee in connection with the development of Licensed Products or
otherwise, including without limitation all Licensee Improvements, except
as separately agreed in writing by the parties.
8.4 Trademarks. Each party shall retain all right, title
and interest in, and no license is granted hereunder with respect to, any
trademarks, trade names, logos or similar identifying marks used by it in
connection with any Licensed Products, except that Licensor and Licensee
may state the nature of their licensor/licensee relationship to the extent
provided herein.
8.5 Markings. Licensee agrees to provide reasonable,
adequate notice of applicable patent numbers in connection with its
exercise of the Patents Rights as permitted hereunder. All Patent Rights
exercised by Licensee in other countries shall be accompanied by similar
reasonable, adequate notice in such manner as to reasonably conform with
the patent laws and practices of the country of sale. Unless any of such
patent laws and regulations specifically require additional markings or
notice procedures, a notice of patent rights on Licensee's Web site shall
constitute sufficient marking of the Patent Rights.
9. SUPPORT. For a period of five years from the Effective Date, Licensor
shall provide, at no cost to Licensee, reasonable consulting and technical
support services as requested by Licensee with respect to the Licensed
Property. Such consulting and support services shall include, without
limitation, disclosing to Licensee all information known by or otherwise in
the possession of Licensor with respect to any and all aspects of the
Licensed Property; and training Licensee regarding the use of the
Technology.
10. PATENT PROSECUTION.
10.1 Licensor's Rights. During the term of this Agreement,
Licensor shall have the sole initial right to: (i) file such United States
and/or foreign patent or equivalent applications covering patentable
inventions included within the Technology created by or on behalf of
Licensor as Licensor shall, in its sole discretion, deem advisable; (ii)
prosecute and defend all Patent Applications referred to in clause (i); and
(iii) maintain in force all Patent Rights and any patents resulting from
such applications. Licensor shall bear all costs associated with the
foregoing filing, prosecution, defense and maintenance. Without limitation
of the foregoing, Licensor shall prosecute with reasonable diligence and at
its sole expense the Patent Applications.
10.2 Licensee's Rights. If Licensor determines not to file
any such patent application after request by Licensee, or not to prosecute
or defend any such patent application or to maintain any such Patent
Rights, as specified in Section 4.1 above, Licensor shall timely provide
Licensee with written notice of such determination, in which event Licensee
shall have the right to file, prosecute or defend such application or
maintain such Patent Rights entirely at its own expense, unless Licensor
has a reasonable basis for such determination (including, without
limitation, Licensor's preference for keeping the relevant Technology a
trade secret to the extent allowable by such Technology's reasonable
commercial exploitation). Licensor's written notice of such determination
shall state the reasonable basis. If the reasonable basis is Licensor's
preference for keeping the relevant Technology a trade secret, the trade
secret shall be identified in the written notice and such trade secret
shall become a Valid Claim for purposes of this Agreement.
10.3 Notice. Each party shall (i) timely advise the other in
writing of its intentions with respect to the filing, prosecution and
maintenance of patent applications and patents as set forth above in order
to allow the other the opportunity to comment thereon, which comments the
party shall consider in good faith, and (ii) at its own expense, provide
the other with reasonable assistance to facilitate the filing, prosecution
and maintenance of patent applications and patents as set forth above, and
shall execute all documents which the other party reasonably deems
necessary or desirable therefor. Without limitation of the foregoing clause
(ii), Licensor shall, within seven (7) days of request by Licensee, cause
to be delivered to Licensee all prosecution file history and related
documents relating to the patent applications.
11. THIRD-PARTY INFRINGEMENT.
11.1 Notice. Each party shall inform the other promptly in
writing if it becomes aware of any (i) applications for a patent or issued
patent that may conflict with either party's intellectual property rights
hereunder or (ii) acts of infringement or unfair competition by any third
party involving such intellectual property rights, and shall provide the
other with any evidence thereof in its possession or control.
11.2 Licensee's Rights. Licensee shall have the right, but
not the obligation, to prosecute and to settle any and all infringement
actions involving the Licensed Property in the Field of Use, provided that
if the settlement, consent judgment or other voluntary final disposition of
any such action would affect the rights of Licensor, Licensor's consent to
such settlement shall be required, such consent not to be unreasonably
withheld. In furtherance of the foregoing right, Licensor hereby agrees
that Licensor will, at Licensee's request and expense, join as a party
plaintiff in any such infringement action. Licensee shall keep Licensor
reasonably informed of the status of the litigation. The entire cost of any
such infringement action prosecuted by Licensee shall be borne by Licensee,
and Licensee shall keep any damages and costs recovered in connection
therewith.
11.3 Licensor's Rights. If within six (6) months after
having been notified of any alleged infringement, Licensee shall have been
unsuccessful in persuading the alleged infringer to desist and shall not
have brought and shall not be diligently prosecuting an infringement
action, or if Licensee shall notify Licensor at any time prior thereto of
its intention not to bring suit against any such alleged infringer in the
Field of Use, then, and in those events only, Licensor shall have the
right, but not the obligation, to prosecute at its own expense any
infringement action involving the Licensed Property and Licensor may, for
such purposes, join Licensee as a plaintiff as necessary to maintain
standing. No settlement, consent judgment or other voluntary final
disposition of any such action may be entered into without the consent of
Licensee, which consent shall not be unreasonably withheld. Licensor shall
keep any damages and costs recovered in connection with such an
infringement action.
11.4 Cooperation. In any action brought by either party in
accordance with the foregoing, the other party shall, at the request and
expense of the party bringing such suit, cooperate in all reasonable
respects, including, to the extent possible, by having its employees
testify when requested and making available relevant records, papers,
information, samples, specimens, and the like.
12. REPRESENTATIONS AND WARRANTIES; INDEMNIFICATION.
12.1 Licensor Representations: Licensor represents and
warrants to Licensee as follows:
(i) Except to the extent licensed to Licensee
hereby, as of the Effective Date, Licensor owns the entire right,
title and interest in and to all Licensed Property, and Licensor
has all required right, power and authority to grant the licenses
granted hereunder.
(ii) To the best knowledge of Licensor, the Licensed
Property does not and will not infringe any third-party
intellectual property rights when used in accordance with this
Agreement.
(iii) There are no outstanding licenses or agreements
of any kind, as of the Effective Date, between Licensor and any
Third Party relating to the Licensed Property in the Field of Use.
(iv) Licensor has in place, and will require as a
condition of employment of each Licensor employee, agreements
assigning to Licensor all rights to inventions and other
intellectual property which relate to the Licensed Property as are
created or discovered by each such Licensor employee, while
employed by Licensor.
12.2 Mutual Representations. Each party represents and
warrants to the other party that (i) it has the full right, power and
authority to enter into this Agreement and to perform its obligations
hereunder, (ii) the execution of this Agreement and the performance of its
obligations hereunder does not and will not conflict with or result in a
breach (including with the passage of time) of any other agreement to which
it is a party, and (iii) this Agreement has been duly executed and
delivered by such party and constitutes the valid and binding agreement of
such party, enforceable against such party in accordance with its terms
except to the extent that enforceability is limited by public policy or
creditors' rights generally.
12.3 Indemnity. Licensor and Licensee shall indemnify and
hold harmless the other against any loss, damages or expense (including,
without limitation, reasonable attorneys' fees) resulting from any breach
of this agreement or of one or more of the representations and warranties
of such party contained herein.
12.4 Limitation of Liability. EXCEPT AS OTHERWISE EXPRESSLY
SET FORTH IN THIS AGREEMENT, LICENSOR, ITS MEMBERS, DIRECTORS, OFFICERS,
EMPLOYEES, AND AFFILIATES MAKE NO REPRESENTATIONS AND EXTEND NO WARRANTIES
OF ANY KIND, EITHER EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO
WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, VALIDITY
OF PATENT RIGHTS CLAIMS, ISSUED OR PENDING, OR THAT THE SUBJECT MATTER
LICENSED HEREIN CAN BE SUCCESSFULLY COMMERCIALIZED.
12.5 Consequential Damages. IN NO EVENT SHALL A PARTY BE
LIABLE HEREUNDER FOR INCIDENTAL OR CONSEQUENTIAL OR PUNITIVE DAMAGES OF ANY
KIND, INCLUDING ECONOMIC DAMAGE OR INJURY TO PROPERTY AND LOST PROFITS,
REGARDLESS OF WHETHER THE PARTY SHALL BE ADVISED, SHALL HAVE OTHER REASON
TO KNOW, OR IN FACT SHALL KNOW OF THE POSSIBILITY OF SUCH DAMAGES.
13. CONFIDENTIALITY.
13.1 Definition. "Confidential Information" means (a) any
information, in whatever form, designated by the disclosing party (the
"Disclosing Party") in writing as confidential, proprietary or marked with
words of like import when provided to the receiving party (the "Receiving
Party"); and (b) information orally conveyed if the Disclosing Party states
at the time of the oral conveyance or promptly thereafter that such
information is Confidential, and such statement of confidentiality is
specifically confirmed in writing within fifteen (15) days of such oral
conveyance.
13.2 Exclusions. Confidential Information will not include
information which:
(a) at or prior to the time of disclosure by the
Disclosing Party was known to the Receiving Party
through lawful means or through act of a third party
that was not known by the Receiving Party to be
unauthorized;
(b) at or after the time at which the disclosure by the
Disclosing Party becomes generally available to the
public through no act or omission on the Receiving
Party's part;
(c) is developed by the Receiving Party independent of
any Confidential Information it receives from the
Disclosing Party; or
(d) the Receiving Party receives from a third Person free
to make such disclosure without breach of any legal
obligation.
13.3 Legal Obligations. The Receiving Party may disclose
Confidential Information pursuant to any statute, regulation, order,
subpoena or document discovery request, including without limitation in
publicly filed disclosure documents of Licensee under federal or state
securities laws; provided that prior written notice of such disclosure is
furnished to the Disclosing Party as soon as practicable in order to afford
the Disclosing Party an opportunity to seek a protective order (it being
agreed that if the Disclosing Party is unable to obtain or does not seek a
protective order and the Receiving Party is legally compelled to disclose
such information, disclosure of such information may be made without
liability).
13.4 Requirements. The Receiving Party acknowledges the
confidential and proprietary nature of the Disclosing Party's Confidential
Information and agrees that it will not discuss, reveal, or disclose the
Disclosing Party's Confidential Information to any other Person (other than
Affiliates), or use any Confidential Information for any purpose other than
as contemplated hereby, in each case, without the prior written consent of
the Disclosing Party. The Receiving Party agrees to take reasonable
precautions (no less rigorous than the Receiving Party takes with respect
to its own comparable Confidential Information) to prevent unauthorized or
inadvertent disclosure of the Confidential Information of the Disclosing
Party. In the event that a Receiving Party wishes to disclose Confidential
Information to one of its advisors or subcontractors, it may do so only if
that advisor or subcontractor agrees to abide by the terms substantially
the same as those of this Article.
13.5 Return of Information. The Receiving Party will, at the
request of the Disclosing Party, (a) promptly return all Confidential
Information held or used by the Receiving Party in whatever form, or (b) at
the discretion of the Disclosing Party, promptly destroy all such
Confidential Information, including all copies thereof, and those portions
of all documents that incorporate such Confidential Information, provided
that during the Term, the Disclosing Party will not make such a request
with respect to Confidential Information necessary for the Receiving Party
to perform its obligations hereunder.
13.6 Injunctions. In view of the difficulties of placing a
monetary value on the Confidential Information, the Disclosing Party may be
entitled to a preliminary and final injunction without the necessity of
posting any bond or undertaking in connection therewith to prevent any
further breach of this Article or further unauthorized use of its
Confidential Information. This remedy is separate from and in addition to
any other remedy the Disclosing Party may have.
14. TERMINATION.
14.1 Material Breach. In the event of a material breach of
this Agreement (including, without limitation, a breach of any
representation or warranty), the non-breaching party shall have the right
to terminate this Agreement with respect to the applicable Licensed
Property effected by such breach by providing written notice of such breach
to the breaching party, specifying the nature of such breach ("Breach
Notice"). The non-breaching party shall thereupon have the right to
terminate this Agreement immediately upon written notice if the breaching
party fails to cure such breach within sixty (60) days (or fails to take
good faith material action within sixty (60) days, and to continue such
good faith material action, to cure a breach which by its nature cannot be
cured within sixty (60) days) after receipt of the Breach Notice.
Termination of this Agreement by a party under this Section shall be
without prejudice to any remedy that any party may have in addition to
those rights as provided under this Agreement.
14.2 Bankruptcy. In the event that Licensor shall become
insolvent, shall make an assignment for the benefit of creditors, or shall
have a petition in bankruptcy filed for or against it (which, in the case
of an involuntary petition, is not dismissed or stayed within sixty (60)
days after such petition is filed), all rights and licenses granted under
or pursuant to this Agreement by Licensor to Licensee are, and shall
otherwise be deemed to be, for purposes of Section 365(n) of Title 11, US
Code (the "Bankruptcy Code"), licenses of rights to "intellectual property"
as defined under Section 101(60) of the Bankruptcy Code. The parties agree
that Licensee, as a licensee of such rights under this Agreement, shall
retain and may fully exercise all of its rights and elections under the
Bankruptcy Code, subject to the continued performance of its obligations
under this Agreement.
14.3 Survival. Articles 1, 2, 4, 5, 6.3 to 6.7, 7, 8.3, 9
and 10 shall survive termination of this Agreement for any reason.
15. DISPUTE RESOLUTION.
Unless otherwise explicitly set forth in this Agreement, in the event that
the parties are unable to resolve any dispute, controversy or claim arising
out of, or in relation to this Agreement, or the breach, termination or
invalidity thereof (collectively "Issue"), the parties shall first refer
such Issue to the respective Chief Executive Officers of Licensee and
Licensor. In the event that such Issue cannot be resolved by these
individuals after a good faith discussion to resolve the Issue, then either
party may initiate arbitration in the State of Connecticut in accordance
with this subsection under the guidelines of the American Arbitration
Association ("AAA") and the commercial rules then in effect for AAA, except
as otherwise provided for herein.
16. GENERAL.
16.1 Assignment. Neither party may assign this Agreement or
its rights and obligations hereunder without the prior, written consent of
the other party, such consent not to be unreasonably withheld; provided,
however, that either party may assign this Agreement and its rights
hereunder to an Affiliate or an entity which acquires or acquires control
of its entire business or that part of its business to which this Agreement
relates, whether pursuant to a merger, consolidation, stock purchase,
recapitalization, asset sale or otherwise (provided that in any such event,
Licensee or the successor entity or Licensor or the successor entity in
such transaction shall continue to be liable to perform Licensee's or
Licensor's obligations hereunder, as the case may be). This Agreement shall
inure to the benefit of and be binding upon the parties and their
respective heirs, executors, administrators, successors and permitted
assigns.
16.2 Governing Law. This Agreement shall be construed,
governed, interpreted and applied in accordance with the laws of The State
of Connecticut, without giving effect to its conflicts of law principles,
except that questions affecting the construction and effect of any patent
shall be determined by the law of the country in which the patent was
granted.
16.3 Entire Agreement. The parties hereto acknowledge that
this Agreement (including its Exhibits) sets forth the entire Agreement and
understanding of the parties with respect to the subject matter hereof, and
shall not be subject to any change or modification except by the execution
of a written instrument subscribed to by Licensee and Licensor.
16.4 Validity. The invalidity or enforceability of any
provision of this Agreement shall not affect the validity or enforceability
of any other provision of this Agreement, each of which shall remain in
full force and effect. In addition, any such invalid or unenforceable
provision shall be deemed amended or replaced with a provision that is
valid and enforceable which achieves, to the fullest extent possible, the
original objectives and intent of the parties as reflected in the offending
provision.
16.5 Waiver. The failure of either party to assert a right
hereunder or to insist upon compliance with any term or condition of this
Agreement shall not constitute a waiver of that right or excuse a
subsequent failure to perform any such term or condition by the other
party.
16.6 Relationship Between the Parties. Nothing herein shall
be deemed to constitute either party as the agent or representative of the
other party. Each party shall be an independent contractor, not an employee
or partner of the other party. Each party shall be responsible for the
conduct of activities at its own facilities and for any liabilities
resulting therefrom. Neither party shall be responsible for the acts or
omissions of the other party, and neither party will have authority or
represent to have authority to speak for, represent or obligate the other
party in any way without prior written authority from the other party.
16.7 Notices. All notices, requests and other
communications to any Party hereunder will be in writing (including
facsimile transmission or similar writing) and will be given to such Party
at its address or telecopy number set forth below or at such other address
or telecopy number as such Party may hereafter specify for such purposes.
Each such notice, request or other communication will be effective (i) if
given by telecopy, when such telecopy is transmitted to the telecopy number
specified in this Article and confirmation of receipt is obtained or (ii)
if given by any other means, when received at the address specified below:
If to Licensor:
Walker Digital Corporation
4 High Ridge Park
Stamford, CT 06905
Attention: Jay Walker
If to Licensee:
Priceline.com Incorporated
5 High Ridge Park
Stamford, CT 06905
Attention: General Counsel
16.8 Confidentiality of Terms. No party will disclose the
terms or conditions of this Agreement to any Third Party (other than a
party's officers, directors, members, employees, stockholders, attorneys,
financial advisors and other representatives) or issue any press release
relating to the terms and conditions of this Agreement for any purpose,
without the prior written consent of the other party except as required by
law (including without limitation in publicly filed disclosure documents of
Licensee under federal or state securities laws, or upon order or request
of any regulatory agency or commission of competent jurisdiction); provided
that such consent will not be unreasonably withheld and shall not be
required for any such disclosure by Licensee which Licensee determines in
good faith is required by law or reasonably necessary in connection with
any public disclosure document, financing, strategic transaction,
acquisition or disposition involving Licensee. The restriction on
disclosure contained herein shall not apply to any information which is
essentially identical to that contained in a previous disclosure authorized
hereunder.
[Remainder of Page Intentionally Left Blank]
16.9 Counterparts. This Agreement may be executed in any
number of counterparts, each of which shall be deemed an original but all
of which together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have duly executed this
Agreement as of the day and year first written above.
WALKER DIGITAL CORPORATION
/s/ Jay S. Walker
_________________________________
By: Jay S. Walker
Its: President
Date: July 20, 1999
PRICELINE.COM INCORPORATED
/s/ Thomas D'Angelo
_________________________________
By: Thomas D'Angelo
Its: Vice President, Finance
Date: July 20, 1999