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, 2000
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to __________
Commission File Number 0-25581
PRICELINE.COM INCORPORATED
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 06-152849
- ---------------------------------- ------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
800 Connecticut Avenue
Norwalk, Connecticut 06854
- --------------------------------------------------------------------------------
(address of principal executive offices)
(203) 299-8000
- --------------------------------------------------------------------------------
(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 November 10, 2000:
Common Stock, par value $0.008 per share 168,508,660
- ----------------------------------------- ---------------------------
(Class) (Number of Shares)
priceline.com Incorporated
Form 10-Q
For the Quarter Ended September 30, 2000
PART I - UNAUDITED FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets at September 30, 2000 and December 31, 1999.......3
Consolidated Statements of Operations For the Three and Nine Months
Ended September 30, 2000 and 1999...........................................4
Consolidated Statement of Changes in Stockholders' Equity For the Nine
Months Ended September 30, 2000.............................................5
Consolidated Statements of Cash Flows For the Nine Months Ended September
30, 2000 and 1999...........................................................6
Notes to Unaudited Consolidated Financial Statements..........................7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................................13
Item 3. Quantitative and Qualitative Disclosures About Market Risk...........32
PART II - OTHER INFORMATION
Item 1. Legal Proceedings....................................................33
Item 6. Exhibits & Reports on Form 8-K.......................................33
SIGNATURES...................................................................34
2
Part I - UNAUDITED FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
priceline.com Incorporated
CONSOLIDATED BALANCE SHEETS
(In thousands)
September 30, December 31,
2000 1999
------------- ------------
ASSETS (unaudited)
Current assets:
Cash and cash equivalents ..................................... $ 104,501 $ 133,172
Short-term investments ........................................ 26,122 38,771
Accounts receivable, net of allowance for doubtful accounts of
$3,979 and $1,961 ........................................... 24,199 21,289
Related party receivable ...................................... 5,532 508
Prepaid expenses and other current assets ..................... 20,755 17,999
----------- -----------
Total current assets .......................................... 181,109 211,739
Property and equipment, net ................................... 46,257 28,006
Related party receivable ...................................... 15,089 8,838
Warrants to purchase common stock of licensees ................ 3,250 189,000
Other assets .................................................. 39,868 4,303
----------- -----------
Total assets .................................................. $ 285,573 $ 441,886
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .............................................. $ 59,447 $ 24,302
Preferred stock dividends payable ............................. 14,382
Accrued expenses .............................................. 17,324 13,695
Other current liabilities ..................................... 3,739 1,253
----------- -----------
Total current liabilities ..................................... 94,892 39,250
----------- -----------
Mandatorily redeemable convertible preferred stock, $0.01 par
value, authorized 6,000 shares; issued 6,000 and 0 shares,
respectively ................................................ 359,580
----------- -----------
Stockholders' equity:
Common stock, $0.008 par value, authorized 1,000,000 shares;
issued 173,807 and 163,867 shares, respectively ............. 1,390 1,311
Treasury stock, at cost, 6,000 and 0 shares, respectively ..... (359,580)
Additional paid-in capital .................................... 1,595,228 1,581,708
Accumulated other comprehensive loss .......................... (1,162)
Accumulated deficit ........................................... (1,404,775) (1,180,383)
----------- -----------
Total stockholders' equity .................................... (168,899) 402,636
----------- -----------
Total liabilities and stockholders' equity .................... $ 285,573 $ 441,886
=========== ===========
See notes to consolidated financial statements.
3
priceline.com Incorporated
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(In thousands, except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
Revenues ..................... $ 341,334 $ 152,222 $ 1,007,227 $ 313,197
Cost of revenues:
Product costs .............. 286,899 133,628 848,589 277,951
Supplier warrant costs ..... 381 381 1,143 1,143
----------- ----------- ----------- -----------
Total cost of revenues ....... 287,280 134,009 849,732 279,094
Gross profit ................. 54,054 18,213 157,495 34,103
----------- ----------- ----------- -----------
Operating expenses:
Supplier start-up warrant
costs .................... -- 88,389 -- 88,389
Write off of WebHouse
Warrant .................. 189,000 -- 189,000 --
Sales and marketing ........ 35,569 21,413 113,635 56,284
General and administrative . 11,934 6,843 39,860 16,013
Payroll tax expense on
employee stock options ... 349 1,547 8,763 1,547
Systems and business
development .............. 11,420 4,593 23,983 10,246
----------- ----------- ----------- -----------
Total operating expenses ..... 248,272 122,785 375,241 172,479
----------- ----------- ----------- -----------
Operating loss ............... (194,218) (104,572) (217,746) (138,376)
Gain on sale of equity
investments ................ 32 -- 32 --
Interest income, net ......... 2,264 2,356 7,704 4,743
----------- ----------- ----------- -----------
Net loss ..................... (191,922) (102,216) (210,010) (133,633)
Preferred stock dividend ..... (7,191) (14,382)
Accretion on preferred stock . (8,354)
----------- ----------- ----------- -----------
Net loss applicable to common
stockholders ............... $ (199,113) $ (102,216) $ (224,392) $ (141,987)
=========== =========== =========== ===========
Net loss applicable to common
stockholders per basic and
diluted common share ....... $ (1.19) $ (0.71) $ (1.35) $ (1.02)
=========== =========== =========== ===========
Weighted average number of
basic and diluted common
shares outstanding ......... 167,059 144,501 166,389 139,817
=========== =========== =========== ===========
See notes to consolidated financial statements.
4
priceline.com Incorporated
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
AS OF SEPTEMBER 30, 2000
(unaudited)
(In thousands)
Treasury Stock Common Stock Additional Other
-------------- ------------ Paid-in Accumulated Comprehensive
Shares Amount Shares Amount Capital Deficit Loss Total
------ ------ ------ ------ ------- ------- ---- -----
Balance, January 1, 2000 ....... 163,867 $ 1,311 $ 1,581,708 $(1,180,383) $ 402,636
Purchase of treasury shares ... 6,000 $(359,580) (359,580)
Exercise of warrants and options
to purchase common stock ..... 9,940 79 13,520 13,599
Comprehensive loss:
Net loss applicable to
common stockholders ........... (224,392) (224,392)
Unrealized loss
on investments ................ $(1,162) (1,162)
Total comprehensive loss ....... $ (224,392) $(1,162) (225,554)
----- --------- ------ ------- ----------- ----------- ------- -----------
Balance, September 30, 2000 .... 6,000 $(359,581) 73,807 $ 1,390 $ 1,595,228 $(1,404,775) $(1,162) $ (168,899)
===== ========= ====== ======= =========== =========== ======= ===========
See notes to consolidated financial statements.
5
priceline.com Incorporated
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(In thousands)
Nine Months Ended
September 30,
2000 1999
---- ----
OPERATING ACTIVITIES:
Net loss ......................................... $(210,010) $(133,633)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Depreciation and amortization .................... 10,711 3,508
Provision for uncollectible accounts ............. 2,018 2,159
Warrant costs .................................... 1,143 1,143
Supplier start-up costs .......................... 88,389
Write off of WebHouse Warrant .................... 189,000
Changes in assets and liabilities:
Accounts receivable ........................... (4,928) (25,468)
Related party receivables ..................... (11,275) (12,511)
Prepaid expenses and other current assets ..... (3,898) (4,513)
Accounts payable and accrued expenses ......... 38,774 32,998
Other ......................................... 1,486 (2,297)
--------- ---------
Net cash provided by (used in) operating
activities ..................................... 13,021 (50,225)
--------- ---------
INVESTING ACTIVITIES:
Additions to property and equipment .............. (28,962) (17,975)
Purchase of convertible notes and warrants
of licensees ................................... (34,304)
Purchase of equity investments ................... (5,000) (2,000)
Proceeds from sale of equity investments ......... 347
(Purchase )/sale of short term investments ....... 12,649 (77,446)
--------- ---------
Net cash used in investing activities ............ (55,270) (97,421)
--------- ---------
FINANCING ACTIVITIES:
Payment of long-term debt and capital lease
obligations .................................... (21) (1,018)
Issuance of common stock ......................... 13,599 210,541
--------- ---------
Net cash provided by financing activities ........ 13,578 209,523
--------- ---------
Net (decrease) increase in cash and cash
equivalents .................................... (28,671) 61,877
Cash and cash equivalents, beginning of
period ......................................... 133,172 53,593
--------- ---------
Cash and cash equivalents, end of period ......... $ 104,501 $ 115,470
--------- ---------
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for interest ....... $33 $57
========= =========
See notes to consolidated financial statements.
6
priceline.com Incorporated
Notes to Unaudited Consolidated Financial Statements
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and notes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments, consisting of normal recurring
accruals considered necessary for a fair presentation, have been included in the
accompanying unaudited financial statements. Operating results for the three
months and nine months ended September 30, 2000 are not necessarily indicative
of the results that may be expected for the full year ending December 31, 2000.
For a summary of significant accounting policies see the Company's Annual Report
on Form 10-K for the year ended December 31, 1999.
2. NET LOSS PER SHARE
The Company computes basic and diluted earnings per share in accordance
with Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings
per Share". SFAS 128 requires the Company to report both basic earnings per
share, which is based on the weighted average number of common shares
outstanding, and diluted earnings per share, which is based on the weighted
average number of common shares outstanding and all dilutive potential common
shares outstanding. Since the Company incurred losses for all periods presented,
the inclusion of options in the calculation of weighted average common shares is
anti-dilutive and therefore there is no difference between basic and diluted
earnings per share.
3. NEW ACCOUNTING POLICY
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 summarizes certain of the SEC's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
In September 2000, the SEC issued SAB No. 101B to defer for three quarters the
effective date of implementation of SAB No. 101 with earlier application
encouraged. The Company is required to adopt SAB 101 in the fourth quarter 2000.
In July 2000, the Emerging Issues Task Force reached a consensus with
respect to EITF 99-19, "Reporting Revenue Gross as a Principal versus Net as an
Agent" ("EITF 99-19"). The Task Force addressed whether a company should report
revenue based on the gross amount billed to a customer because it has earned
revenue from the sale of the goods or services or the net amount retained (that
is, the amount billed to the customer less the amount paid to a supplier)
because it has earned a commission or fee. The accounting principles in EITF
99-19 are consistent with the requirements of SAB 101. The Company does not
expect the adoption of SAB 101 or EITF 99-19 to have a material effect on its
financial position or results of operations, or presentation of its operating
results.
In July 1999, the FASB issued Statement No. 137, "Accounting for
Derivative Instruments and Hedging Activities-Deferral of Effective Date of FASB
No. 133". The Statement defers for one year the effective date of FASB Statement
No. 133, "Accounting for Derivative Instruments and Hedging Activities". The
rule now will apply to fiscal quarters of fiscal years beginning after June 15,
2000. In June 1998, SFAS No. 133 "Accounting for Derivative Instruments and
Hedging Activities" was issued. The statement will require the recognition of
all derivatives as either assets or liabilities in the balance
7
sheet and the measurement of those instruments at fair value. Derivatives that
are not hedges must be adjusted to fair value through income. If the derivative
is a hedge, depending on the nature of the hedge, changes in the fair value of
derivatives will either be offset against the change in fair value of the hedged
assets, liabilities, or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of the derivative's change in fair value will be immediately
recognized in earnings. The Company does not expect that the adoption of SFAS
No. 133 will have a material effect on its financial position or results of
operations.
4. OTHER ASSETS
Other assets consist of the following as of September 30, 2000:
Equity investments in publicly traded companies $ 5,667
Convertible notes of licensees 29,179
Other 5,022
-------
Total $39,868
=======
The Company has entered into several transactions with internet
businesses. The equity investments in two of these businesses, Lastminute.com
plc. and LendingTree.com, Inc., the stock of each of which is publicly traded,
are recorded at the closing market price of the shares as of the balance sheet
date.
The convertible notes of $11.1 million, $7.5 million, $6.7 million and
$3.8 million, issued by Hutchison-Priceline Limited, priceline.com Auto
Insurance Agency, Inc., MyPrice Pty. Ltd. and Alliance Capital Partners,
respectively, are recorded at cost.
The warrants to purchase shares of priceline.com europe Ltd. are carried
at cost, $3.2 million, which the Company believes approximates the fair value at
September 30, 2000. The underlying shares are not publicly traded. During the
three month period ended September 30, 2000, the Company recorded a non-cash
loss of $189 million to write off the full carrying value of a warrant to
purchase shares of Priceline Webhouse Club, Inc., which ceased operations in
October 2000.
5. COMPREHENSIVE LOSS
Following are components of the Company's comprehensive loss:
Three Months Nine Months
Ended Ended
September 30, September 30,
2000 2000
Net loss applicable to common stockholders $(199,113) $(224,392)
Other comprehensive loss:
Unrealized loss on investments (4,867) (1,162)
--------- ---------
Total comprehensive loss $(203,980) $(225,554)
========= =========
6. PREFERRED STOCK
In February 2000, the Board of Directors authorized an amendment to the
Company's certificate of incorporation to allow the Company to issue a new
series of preferred stock designated as Series A Convertible Redeemable PIK
Preferred Stock. The total number of Series A Preferred shares which the
8
Company is authorized to issue is six million shares, par value $.01 per share.
The Series A Preferred Stock has special voting powers and preferences.
Specifically, the Series A Preferred Stock has a liquidation preference of
$59.93 per share plus an amount equal to any dividends accrued or cumulated but
not paid. The Series A Preferred Stock accrues dividends payable in shares of
the Company's common stock at a rate of 8% per annum commencing April 1, 2000.
Dividends on the Series A Preferred Stock are payable semi-annually on October
1st and April 1st of each year starting October 1, 2000. Subject to certain
limitations, payment of the first six semi-annual dividend payments is assured.
The Series A Preferred Stock may be redeemed at the option of the Company
in whole or in part at any time after April 1, 2003 at $59.93 per share in cash,
plus accrued but unpaid dividends. The Series A Preferred Stock is subject to
mandatory redemption on April 1, 2010. The Series A Preferred Stock is
convertible at the option of the holder into shares of the Company's common
stock on a one-for-one basis at any time prior to redemption, subject to certain
anti-dilution adjustments. Holders of the Series A Preferred Stock vote together
with holders of common stock on all matters and in certain limited circumstances
are entitled to a separate class vote. Holders of Series A Preferred Stock are
entitled to specified cash payments in the event of certain business combination
transactions involving the Company.
On June 30, 2000, the Company exchanged six million shares of the
Company's common stock held by Delta Air Lines, Inc. for six million shares of
the Series A Preferred Stock. The six million shares of common stock received by
the Company from Delta are included in Treasury Stock on the Company's balance
sheet. On October 1, 2000, the Company issued Delta 549,764 shares of Common
Stock as a dividend on the Preferred Stock.
7. COMMITMENTS AND CONTINGENCIES
On January 6, 1999, the Company received notice that a third party patent
applicant and patent attorney, Thomas G. Woolston, purportedly had filed in
December 1998 with the United States Patent and Trademark Office a request to
declare an interference between a patent application filed by Woolston and the
Company's U.S. Patent 5,794,207. The Company is currently awaiting information
from the Patent Office regarding whether it will initiate an interference
proceeding.
On January 19, 1999, Marketel International Inc. (Marketel), a California
corporation, filed a lawsuit against the Company, among others. On February 22,
1999, Marketel filed an amended and supplemental complaint. On March 15, 1999,
Marketel filed a second amended complaint. On May 9, 2000, Marketel filed a
third amended complaint against the Company and Priceline Travel, Inc. The third
amended complaint alleges causes of action for misappropriation of trade
secrets, conversion, false advertising and for correction of inventorship of
U.S. Patent 5,794,207. In its third amended complaint, Marketel alleges, among
other things, that the defendants conspired to misappropriate Marketel's
business model, which allegedly was provided in confidence approximately ten
years ago. The third amended complaint also alleges that four former Marketel
employees are the actual sole inventors or co-inventors of U.S. Patent
5,794,207, which was issued on August 11, 1998 and has been assigned to the
Company. Marketel asks that the patent's inventorship be corrected accordingly.
On February 5, February 10 and March 31, 1999, the Company filed answers
respectively, to the complaint, amended complaint and second amended complaint,
in which the Company denied the material allegations of liability. On May 19,
2000, the Company filed a motion to dismiss the third amended complaint for
failure to state a complaint upon which relief can be granted. The Company
strongly disputed the material legal and factual allegations contained in
Marketel's third amended complaint and believes that the amended complaint is
without merit. In addition, on July 13, 2000, the Company filed a motion for
summary judgment alleging that Marketel has not identified legally protectable
trade secrets and is not entitled to correction of
9
inventorship of U.S. Patent 5,794,207. The Company's motions are scheduled to be
heard on December 5, 2000. Trial is currently scheduled to commence on January
16, 2001. The Company intends to defend vigorously against the action. Pursuant
to the indemnification obligations contained in the Purchase and Intercompany
Services Agreement with Walker Digital, Walker Digital has agreed to indemnify,
defend and hold the Company harmless for damages, liabilities and legal expenses
incurred in connection with the Marketel litigation.
On October 13, 1999, the Company 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
Corporation, infringe the Company's U.S. Patent 5,794,207 by operating the
defendants' "Hotel Price Matcher" service, and that the defendants' conduct
toward the Company violated the Connecticut Unfair Trade Practices Act. On
December 20, 1999, defendants moved the Court to dismiss the complaint for
failure to name a necessary party, Marketel. On March 21, 2000, the presiding
judge stated that he intends to deny defendant's motion to dismiss, and that a
decision will be forthcoming. On December 23, 1999, the Court granted the
Company's motion to supplement the complaint to expressly include defendant's
"Flight Price Matcher" service.
On July 14, 2000, the Company filed a complaint in the United States
District Court for the District of Connecticut under the caption Priceline.com
Incorporated v. Microsoft Corporation and Expedia, Inc., alleging that
defendants infringe the Company's U.S. Patent 6,085,169 by operating the "Hotel
Price Matcher" and "Flight Price Matcher" services. In the lawsuit, the Company
is seeking declaratory relief, permanent injunctive relief and actual and
punitive damages. Walker Digital has agreed to reimburse the Company for a
portion of the legal expenses incurred in connection with the Microsoft
litigations.
On September 6, 2000, Pannell-Christ Incorporated, an Indiana corporation,
filed a lawsuit against the Company in the United States District Court for the
District of Indiana under the caption Pannell-Christ Incorporated v.
priceline.com Incorporated, IP 00-0810 CT/G. The complaint alleges federal and
state common law service mark infringement based on Pannell-Christ's federal
trademark registration for "Name Your Price!" for educational services and
common law trademark rights. The complaint seeks injunctive relief and damages.
On September 29, 2000, the Company filed an Answer and Counterclaim in which the
Company denied the material allegations of liability in the complaint and
counterclaimed for cancellation of Pannell-Christ's federal trademark
registration. The Company strongly dispute the material legal and factual
allegations contained in the complaint and believe the complaint is without
merit.
Subsequent to the Company's announcement on September 27, 2000 that
revenues for the third quarter 2000 would not meet expectations, the Company
became aware of press announcements concerning class action lawsuits against the
Company alleging violations of the securities laws. As of November 13, 2000, the
Company has been served with the following purported class action complaints:
o Mathis Weingarten, et al v priceline.com
Incorporated and Jay S. Walker, 300 CV 1901 SRU,
(District of Connecticut)
o Randall Twardy, et al v priceline.com Incorporated,
Jay Walker, R. Braddock, and D. Schulman
300 CV 1884 JBA, (District of Connecticut)
10
o Natalie Berdakina, et al v priceline.com Incorporated,
Jay Walker, R. Braddock, and D. Schulman
300 CV 1902 RNC, (District of Connecticut)
o Samuel Mayer et al v priceline.com Incorporated,
Jay Walker, R. Braddock, and D. Schulman
300 CV 1923 RNC, (District of Connecticut)
o Anthony Mazzo, et al v priceline.com Incorporated,
Jay Walker, R. Braddock, and D. Schulman
300 CV 1924 PCD, (District of Connecticut)
o Mark Fialkov, et al v priceline.com Incorporated,
Jay Walker, R. Braddock, and D. Schulman
300 CV 1954 CFD, (District of Connecticut)
o Jeremy Licht, et al v priceline.com Incorporated and
Jay Walker 300 CV 2049 DJS, (District of Connecticut)
o Jim M. Ayach & Sarah Sontag, et al v priceline.com Incorporated,
Jay Walker, R. Braddock, and D. Schulman
300 CV 2062 DJS, (District of Connecticut)
o Michael Cerelli, et al v priceline.com Incorporated,
Jay Walker, R. Braddock, and D. Schulman
300 CV 1918 DJS, (District of Connecticut)
o Howard Gunty Profit Sharing Plan, et al v. priceline.com
Incorporated,
R. Braddock, D. Schulman, and Jay S. Walker
300 CV 1917 WWB, (District of Connecticut)
o Thomas Atkin, et al v. priceline.com Incorporated,
R. Braddock, D. Schulman, and Jay S. Walker
300 CV 1994 SRU, (District of Connecticut)
o Hyacinth S. Anish, et al v. priceline.com Incorporated,
R. Braddock, D. Schulman, and Jay S. Walker
300 CV 1048, (District of Connecticut)
o Jerry Krim, et al v. priceline.com Incorporated,
R. Braddock, D. Schulman, and Jay S. Walker
300 CV 2083, (District of Connecticut)
o Scott Lyon, et al v. priceline.com Incorporated,
R. Braddock, D. Schulman, and Jay S. Walker
300 CV 2066 DJS, (District of Connecticut)
o Johnny Kwan, et al v. priceline.com Incorporated
R. Braddock, D. Schulman, and Jay S. Walker
300 CV 2069 DJS, (District of Connecticut)
11
In addition, the Company has been served with a complaint that purports to be a
shareholder derivative action against the Company's Board of Directors and
certain of the Company's current executive officers, as well as the Company (as
a nominal defendant). The complaint alleges breach of fiduciary duty. The action
is captioned Mark Zimmerman, et al v priceline.com Incorporated, Jay Walker, R.
Braddock, D. Schulman, P. Allaire, R. Bahna, P. Blackney, W. Ford, M. Loeb, N.
Nicholas, N. Peretsman, 18473-NC, (Court of Chancery of Delaware, County of New
Castle, State of Delaware). No action has been taken in these cases. The Company
intends to defend vigorously against these actions.
The Company is cooperating with the Connecticut Attorney General's office
concerning complaints by customers received by the Attorney General's office and
intends to continue its cooperation.
From time to time, the Company 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 it. Such claims, even if not meritorious, could result in the
expenditure of significant financial and managerial resources and could
adversely affect the Company's stock price.
8. Subsequent Events
During the fourth quarter of 2000, the Company announced its intention to
implement a number of measures to improve operations and reduce its overall cost
structure. As part of the plans, the Company implemented a reduction in its work
force and realigned its operational management and intends to consolidate its
real estate and certain operations, eliminate operational redundancies and
implement a new compensation program. Additionally, the Company is evaluating
the overall impact of no longer providing certain services to Priceline WebHouse
Club, Inc. and Priceline Perfect Yardsale, Inc., which have ceased their
operations. The costs associated with these measures are not currently
determinable, however, to the extent appropriate, a charge will be recorded in
the fourth quarter 2000.
In November 2000, the Company also announced that Heidi Miller, the
Company's former Senior Executive Vice President and Chief Financial Officer,
had decided to leave the Company. In connection with Ms. Miller's separation,
the Company will record a charge of approximately $3.3 million in the fourth
quarter 2000, primarily as the result of the forgiveness of a loan pursuant to
the terms of Ms. Miller's employment agreement.
During the fourth quarter 2000, the Company amended the terms of warrants
held by Delta Air Lines, Inc. and, as a result, will record a non-cash charge of
approximately $9 million in the fourth quarter 2000. In connection with the
amendment, the Company reduced the number of shares underlying the warrant to
4.675 million shares from 5.5 million shares and reduced the strike price from
$56.63 per share to $4.71875 per share.
12
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
We have pioneered a unique e-commerce pricing system known as a "demand
collection system" that enables consumers to use the Internet to save money on a
wide range of products and services while enabling sellers to generate
incremental revenue. Using a simple and compelling consumer proposition - Name
Your Own Price(SM) - 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 communicate that demand directly to
participating sellers or access participating sellers' private databases to
determine whether we can fulfill the customer's offer. Consumers agree to hold
their offers open for a specified period of time and, once fulfilled, offers
cannot be canceled. We benefit consumers by enabling them to save money, while
at the same time benefiting sellers by providing them with an effective revenue
management tool capable of identifying and capturing incremental revenues. By
requiring consumers to be flexible with respect to brands, sellers and product
features, we enable sellers to generate incremental revenue without disrupting
their existing distribution channels or retail pricing structures.
Our business model and brand are currently, through us or independent
licensees, supporting several products and service offerings, including the
following:
o leisure airline tickets, provided by 10 domestic and 26
international airline participants;
o hotel rooms, in substantially all major United States markets with
more than 25 national hotel chains as participants;
o rental cars, in substantially all major United States markets with
five leading rental car chains as participants;
o new automobiles, in substantially all major United States markets;
o home financing services, in substantially all major United States
markets, which includes home mortgage services, home equity loans
and refinancing services;
o long distance telephone calling, provided by three carriers, in
substantially all United States markets.
o Travel insurance, provided in connection with our airline product
and offered through an agreement with member companies of American
International Group, Inc.
In addition, Name Your Own Price(SM) automobile insurance will be offered
in 2001. We also are currently planning an expansion of our core Name Your Own
Price(SM) business model to other areas of e-commerce, including Business to
Business.
We measure our "bind" rate as the percentage of unique offers that we
ultimately fulfill. Since April 1999, each initial offer and any resubmitted
offers are treated as a single offer - a unique offer - for purposes of
measuring our total offer volume and our offer fulfillment rates. Previously,
each had been counted as a separate offer. Therefore, comparisons with prior
periods may not be meaningful. For the quarter ended September 30, 2000, our
bind rate was 50.5%, 47.8% and 49.2% for all unique airline ticket, hotel room
and rental car offers, respectively. For the quarter ended June 30, 2000, our
bind rate was
13
49.6%, 45.3% and 40.0% for all unique airline ticket, hotel room and rental car
offers, respectively.
When making offers for airline tickets through the priceline.com service,
consumers are permitted to make only one offer within a seven day period unless
they change some feature of their itinerary, such as the date on which, or the
airport from which, they are willing to fly. As a result of our "checkstatus"
feature, introduced in April 1999, consumers whose initial requests are not
satisfied are permitted to resubmit revised offers that reflect at least one
change to their itinerary.
We have announced several transactions pursuant to which third parties
license the priceline.com name and demand collection system to offer a
particular product or service or to offer a number of products or services in a
distinct international region. Pursuant to the licensee transactions, we
generally receive a royalty under the license and may also receive fees for
services and reimbursement of certain expenses. We also hold convertible
securities or warrants entitling us to acquire a significant percentage of such
licensee's equity securities upon the occurrence of certain events. Unless such
securities or warrants are converted or exercised, the results of our licensees
will not be included in our financial results.
In July 2000, we started to make available to our airline customers an
optional travel insurance package for their trip that offers coverage for trip
cancellation, medical expenses, emergency evaluation and loss of baggage,
property and travel documents through an agreement with member companies of
American International Group, Inc. ("AIG"). Under our agreement with AIG, we
will receive a fixed fee from AIG member companies for every optional insurance
package purchased. Subject to the rules in specific states, the travel insurance
program is made available to every eligible customer.
In July 2000, we entered into definitive agreements with W.R. Berkley
Corporation to offer Name Your Own Price(SM) automobile insurance to car owners
in the United States and Canada through our website. Under the terms of the
agreements, we will license our business model and provide our expertise in
technology, marketing and operations to priceline.com Auto Insurance Agency
Inc., a company formed under the laws of Delaware. Priceline.com Auto Insurance
Agency will pay us an annual licensing fee to use our intellectual property.
Under the terms of the agreement, we purchased a convertible note for $7.5
million which will allow us to take an equity position in priceline.com Auto
Insurance Agency under certain conditions.
In September 2000, we entered into a formation agreement with SoftBank
E-Commerce Corp. to introduce our services in Japan. The agreement contemplates
that we will license our business model and intellectual property to
priceline.com Japan, a newly-formed entity, and purchase a convertible security
allowing us to take a significant equity position in priceline.com Japan under
certain conditions. We are in the process of evaluating with SoftBank E-Commerce
the viability of this transaction and, as a result, the actual launch of
services is subject to further negotiation and the execution of additional
agreements. We can provide no assurance that the transaction will be
consummated.
We believe that our success will depend in large part on our ability to
achieve profitability, primarily from our travel business, to continue to
promote the priceline.com brand and to offer other products and services on the
priceline.com website. We intend to continue to invest in marketing and
promotion, technology and personnel within parameters consistent with attempts
to improve operating results. Our goal is to reduce operating losses and improve
gross margins in an effort to achieve profitability. Our limited operating
history makes the prediction of future results of operations difficult, and
accordingly, we cannot assure you that we will achieve or sustain revenue growth
or profitability.
Recent Developments
14
During the fourth quarter 2000, we announced our intention to implement a
number of measures to improve operations and reduce our overall cost structure.
As part of the plans, we implemented a reduction in our work force and realigned
our operational management and intend to consolidate our real estate and certain
operations, eliminate operational redundancies and implement a new compensation
program designed to motivate and retain key employees. This compensation program
will consist primarily of incentive-based compensation, as well as certain cash
and other compensation. While the costs associated with these measures is not
currently determinable, the compensation program will result in an increase in
non-cash and cash compensation expense in the fourth quarter 2000 and certain
ongoing non-cash expenses related to restricted stock awards. To the extent
appropriate, a charge will be recorded in the 4th quarter 2000.
As part of our operational restructuring, we named Jeffery Boyd as our new
Chief Operating Officer and announced that Robert Mylod would be our new Chief
Financial Officer. Heidi Miller, our former Senior Executive Vice President and
CFO, announced her decision to leave the Company in November 2000. In connection
with Ms. Miller's separation, we will record a charge of approximately $3.3
million in the fourth quarter 2000, primarily as the result of the forgiveness
of a loan pursuant to the terms of her employment agreement.
On October 5, 2000, the Priceline WebHouse Club, Inc. and Priceline
Perfect Yardsale, Inc., privately-held licensees of ours, separately announced
that they would be ceasing operations. We received a warrant in WebHouse Club
and recorded non-cash income of $189 million in the fourth quarter 1999. As a
result of WebHouse Club ceasing operations, in the third quarter 2000, we
recorded a non-cash loss of $189 million to write off the full carrying value of
the warrant. For the three and nine month periods ended September 30, 2000, we
received royalties from WebHouse Club in the amount of $423,000 and $1.0
million. For the three and nine months ended September 30, 2000, we were
reimbursed $3.0 million and $8.7 million, respectively, by WebHouse Club and
Perfect Yardsale for costs we incurred in connection with providing information
technology and other services to them. We are in the process of reviewing our
operations to reduce any costs associated with providing services to WebHouse
Club and Perfect Yardsale and evaluating the overall impact of no longer
providing certain services to WebHouse Club and Perfect Yardsale, which have
ceased their operations.
During the fourth quarter 2000, we amended the terms of warrants held by
Delta Air Lines, Inc. and, as a result, will record a non-cash charge of
approximately $9 million in the fourth quarter 2000. In connection with the
amendment, we reduced the number of shares underlying the warrant to 4.675
million shares from 5.5 million shares and reduced the strike price from $56.63
per share to $4.71875 per share.
Results of Operations
Revenues
Quarter Ended % Nine Month Ended %
September 30, Change September 30, Change
------------- ------ ------------- ------
($000) ($000)
2000 1999 2000 1999
---- ---- ---- ----
Revenues............ $341,334 $152,222 124% $1,007,227 $313,197 222%
Revenues for the three and nine months ended September 30, 2000 consisted
primarily of: (1) transaction revenues representing the selling price of airline
tickets, hotel rooms, rental cars and long distance telephone service; and (2)
fee based revenue. Fee based revenue was comprised primarily of: (a)
15
Worldspan reservation booking fees and customer processing fees; and (b) fee
income from marketing programs offered in connection with our product offerings.
Revenues for the three and nine months ended September 30, 1999 consisted
primarily of: (1) transaction revenues representing the selling price of airline
tickets and hotel rooms; (2) fee income from marketing programs offered in
connection with our product offerings; and (3) Worldspan reservation booking
fees and customer processing fees.
Revenues increased during the three and nine months ended September 30,
2000 over the prior year period primarily as a result of the substantial
development of our unique customer base, to which we added 1.3 million and 4.3
million new customers during the three and nine months ended September 30, 2000,
respectively. In addition, we generated approximately 1.4 million and 3.2
million repeat customer offers during the three and nine months ended September
30, 2000, respectively. As of September 30, 2000, we had a base of approximately
8.1 million unique customers, compared to approximately 2.3 million unique
customers at September 30, 1999. A unique customer is defined as someone who has
made a guaranteed offer for at least one of our products.
Revenues for the three months ended September 30, 2000 decreased
approximately 3.1% to $341.3 million from $352.1 million for the three months
ended June 30, 2000, primarily as a result of a shortfall in revenue from
airline ticket sales. We believe that the shortfall in airline ticket sales was
attributable, in part, to a $20 fuel surcharge imposed in early September by
airlines, a high level of flight cancellations that negatively affected supply
and the introduction by certain airlines of their own special sale fares in
September which contributed to lower average offer prices for tickets. The
September fuel surcharge was the second imposed by certain airlines this year
due to increased fuel prices and must be reflected in higher customer offer
prices since we ceased reflecting fuel surcharges as a separate charge in July
2000. In addition, we believe that certain promotional strategies that we
pursued during late August and September negatively impacted average offer and
ticket sale prices and did not result in targeted increases in ticket sales.
Airline ticket sales in September, which based on our historical experience we
had expected to be our strongest sales month of the third quarter, were weaker
than sales in July and August. Our airline ticket sale revenues in October 2000,
which historically has been our strongest sales month of the fourth quarter,
were approximately 20% below our September 2000 ticket sale revenues. We believe
our demand for travel products has also been adversely affected by negative news
concerning our revenue shortfall, WebHouse Club and Perfect Yardsale ceasing
operations and service concerns. As a result, we expect that our revenues for
the three months ended December 31, 2000 will be significantly less than our
revenues for the three months ended September 30, 2000.
We believe our customer base grew during the three and nine months ended
September 30, 2000 as a result of our advertising campaign during the first half
of 2000, and due to the availability of additional product inventory generated
from adding three additional domestic air carriers during the fourth quarter
1999 and two additional major rental cars companies during the second quarter of
2000. The growth in our customer base is also attributable to our continued
expansion of our service into new vertical markets. During the three and nine
months ended September 30, 2000, we generated revenues from our long distance
telephone service, launched during the second quarter. In addition, we received
fee income from our auto and financial products introduced in the first quarter
of 2000. These services were not offered during the same periods of 1999. Travel
products, particularly airline tickets, continue to account for the majority of
our revenue. Seasonal variations in our travel business, where the third and
fourth calendar quarters are typically weaker than the first two quarters, have
historically and are expected to continue to impact revenue from travel
products.
Fee revenues for the three and nine months ended September 30, 2000
increased as a result of volume driven increases in Worldspan reservation
booking fees and customer processing fees in the airline and hotel room and
rental car services. The processing fees for the airline and hotel room services
were introduced during the second quarter of 1999. Although Worldspan
reservation booking fees and customer processing fees increased and adaptive
marketing revenues declined in the three and nine months ended September 30,
2000, fee based revenue (approximately 8% of total revenues) have remained
consistent period to period.
16
Cost of Revenues and Gross Profit
Quarter Ended % Nine Month Ended %
September 30, Change September 30, Change
------------- ------ ------------- ------
($000) ($000)
2000 1999 2000 1999
---- ---- ---- ----
Total Cost of
Revenues.......... $287,280 134,009 114% $849,732 279,094 204%
% of
Revenues.......... 84% 88% 84% 89%
Gross
Profit............ $ 54,054 $18,213 197% $157,495 $34,103 362%
Gross
Margin............. 15.8% 12.0% 15.6% 10.9%
Cost of revenues consists of product costs and supplier warrant costs. For
the three and nine months ended September 30, 2000, product costs consisted of:
(1) the cost of airline tickets from our suppliers, net of the federal air
transportation tax, segment fees and passenger facility charges imposed in
connection with the sale of airline tickets; (2) the cost of hotel rooms from
our suppliers, net of hotel tax; (3) the cost of rental cars from our suppliers,
net of applicable taxes; and (4) the cost of long distance telephone service
provided by our suppliers. During the three and nine months ended September 30,
1999, our product costs were comprised of (1) the cost of airline tickets from
our suppliers, net of the federal air transportation tax, segment fees and
passenger facility charges imposed in connection with the sale of airline
tickets; and (2) the cost of hotel rooms from our suppliers, net of hotel tax.
Our supplier warrant costs for the three and nine month periods in both years
were approximately $381,000 and $1.1 million, respectively, which represent a
non-cash expense related to the issuance of common stock warrants to one of our
airline program participants in January 1999. We will recognize additional
supplier warrant costs in the amount of approximately $381,000 in the next
quarter.
Gross profit consists of revenues less the cost of revenues. For the three
and nine months ended September 30, 2000, gross profit increased over the same
periods in 1999 as a result of increased transactional sales volume, increased
Worldspan reservation booking and customer processing fee revenues, and
increased other fee-based revenues. In addition to increasing transactional
volume, we also have increased the average margin on air tickets and hotel rooms
as compared to the same periods of 1999. Because fee-based revenues do not
involve separate costs, these revenues have had a disproportionately positive
impact on total gross profit. Fee-based revenues represented approximately 48%
and 54% of total gross profit for the three months ended September 30, 2000 and
1999, respectively, and 50% and 76% of total gross profit for the nine months
ended September 30, 2000 and 1999, respectively.
For the three and nine months ended September 30, 2000, gross margin
increased from the same period of 1999 as a result of increased average margin
on air tickets and hotel rooms, increased Worldspan and customer processing
fees, and as a result of the introduction and expansion of additional products
for long distance telephone, financial services and autos during 2000.
Operating Expenses
Pursuant to agreements we have entered into with our licensees and Walker
Digital, during the third quarter 2000, we were reimbursed $4.5 million by our
licensees and Walker Digital for costs we incurred in connection with providing
information technology and other services to our licensees and for
17
reimbursement by Walker Digital of certain legal expenses associated with patent
litigations. Such reimbursement amounts totaled $3.8 million and $7.1 million
for the first and second quarters of 2000, respectively. Despite the cessation
of operations by WebHouse Club and Perfect Yardsale, there can be no assurance
that the gross operating expenses associated with providing such services will
be significantly reduced or eliminated in the fourth quarter 2000 or in the
future.
Sales and Marketing
Quarter Ended % Nine Month Ended %
September 30, Change September 30, Change
------------- ------ ------------- ------
($000) ($000)
2000 1999 2000 1999
---- ---- ---- ----
Advertising............ $14,175 $ 9,504 49% $48,340 $30,280 60%
Other Sales &
Marketing.............. 21,394 11,909 80% 65,295 26,004 151%
------- ------- ------- -------
Total.................. $35,569 $21,413 66% $113,635 $56,284 102%
% of
Revenues............... 10.4% 14.1% 11.3% 18.0%
Sales and marketing consists of advertising expenses and other sales and
marketing expenses. Advertising expenses consist primarily of: (1) television
and radio advertising; (2) agency fees and production costs for television and
radio commercials; and (3) on-line and print advertisements. For the three and
nine months ended September 30, 2000, advertising expenses increased over the
same period in 1999 primarily due to substantial expenses related to the
television advertising campaign launched in January 2000. We intend to continue
to pursue an advertising and branding campaign in order to continue to attract
new users and retain existing users.
Other sales and marketing expenses consist primarily of: (1) credit card
processing fees; (2) fees paid to third-party service providers that operate our
call centers; (3) provisions for customer credit card charge-backs; and (4)
compensation for our sales and marketing personnel. For the three and nine
months ended September 30, 2000, other sales and marketing expenses increased
over the same periods in 1999 due to increased costs to run the customer service
call centers, increased credit card processing fees, and increased payroll and
related expenses resulting from growing our employee base. The increases in
other sales and marketing expenses were driven by substantial increases in
customer offers and revenue.
General and Administrative
Quarter Ended % Nine Month Ended %
September 30, Change September 30, Change
------------- ------ ------------- ------
($000) ($000)
2000 1999 2000 1999
---- ---- ---- ----
General &
Administrative.......... $11,934 $6,843 74% $39,860 $16,013 149%
Payroll Tax
Expense on
Employee Stock
Options................. 349 1,547 -77% 8,763 1,547 466%
------- ------ ------- -------
Total................... $12,283 $8,390 46% $48,623 $17,560 177%
% of Revenues.......... 3.6% 5.5% 4.8% 5.6%
18
General and administrative expenses consist primarily of: (1) compensation
for personnel; (2) fees for outside professionals; (3) telecommunications costs;
and (4) occupancy expenses. General and administrative expenses increased during
the three and nine months ended September 30, 2000 over the same periods in 1999
as a result of increased headcount and resulting payroll and overhead costs
associated with the expansion of our product offerings and increases in our
revenue base. In addition, for the three and nine months ended September 30,
2000, we incurred charges of $349,000 and $8.8 million, respectively, for
payroll taxes relating to options exercised in accordance with our employee
stock option plans. For the three and nine months ended September 30, 1999,
payroll taxes relating to options exercised in accordance with our employee
stock option plans amounted to $1.5 million.
Systems and Business Development
Quarter Ended % Nine Month Ended %
September 30, Change September 30, Change
------------- ------ ------------- ------
($000) ($000)
2000 1999 2000 1999
---- ---- ---- ----
Systems & Business
Development.......... $11,420 $4,593 149% $23,983 $10,246 134%
% of Revenues........ 3.3% 3.0% 2.4% 3.3%
Systems and business development expenses for all periods consist
primarily of: (1) payments to outside contractors, (2) depreciation and
amortization on computer hardware and software, (3) compensation to our
information technology and product development staff, and (4) data
communications and other expenses associated with operating our internet site.
For the three and nine months ended September 30, 2000, systems and business
development expenses increased over the same periods in 1999 due to increased
staffing requirements and resulting consulting, payroll and overhead costs
related to the expansion of our product offerings and technological
infrastructure. In addition, we recognized increased depreciation and
amortization expenses resulting primarily from capital expenditures and
increased internal software development costs incurred in past and current
quarters.
Interest Income, Net
Quarter Ended % Nine Month Ended %
September 30, Change September 30, Change
------------- ------ ------------- ------
($000) ($000)
2000 1999 2000 1999
---- ---- ---- ----
Interest Income, Net..... $2,264 $2,356 -4% $7,704 $4,743 62%
19
For the three months ending September 30, 2000, interest income on cash
and marketable securities decreased slightly from the prior year. For nine
months ended September 30, 2000, interest income on cash and marketable
securities increased primarily due to higher balances resulting from our initial
public offering of common stock in April of 1999 and our follow-on public
offering of common stock in August of 1999.
Liquidity and Capital Resources
As of September 30, 2000, we had approximately $130.6 million in cash,
cash equivalents and short-term investments. We generally invest excess cash,
cash equivalents and short-term investments predominantly in debt instruments
that are highly liquid, of high-quality investment grade, and predominantly have
maturities of less than one year with the intent to make such funds readily
available for operating purposes.
Net cash provided by operating activities was $13.0 million for the nine
months ended September 30, 2000, $7.9 million of which was related to the
release of a credit card reserve. Net cash provided by operating activities
during 2000 was primarily attributable to expanding gross margin on increasing
revenues, which was partially offset by increasing operating expenses. Net cash
used in operating activities was $50.2 million for the nine months ended
September 30, 1999. Net cash used in operating activities during 1999 was
primarily attributable to net losses from operations.
Net cash used in investing activities was $55.3 million and $97.4 million
for the nine months ended September 30, 2000 and 1999, respectively. Net cash
used in investing activities was primarily related to purchases of property and
equipment and, in the first half of 2000, to purchase convertible notes and
warrants in certain licensees and to purchase certain equity investments,
described more fully below.
In February 2000, we made an equity investment of $5.0 million in Last
Minute.com, a U.K. based e-commerce company.
In February 2000, we purchased a $3.6 million convertible secured note in
an affiliate of Alliance Capital Partners, pursuant to our agreement with
Alliance. Subsequently, the amount of the convertible secured note was increased
to $3.8 million.
During the second quarter, we purchased convertible notes in the amounts
of $11.1 million and $6.7 million in Hutchison-Priceline Limited and MyPrice
Pty. Ltd., respectively, pursuant to our agreements to develop our products in
certain Asian and Australian markets. In addition, we purchased a warrant in the
amount of $3.2 million from priceline.com europe Ltd. pursuant to our agreements
to develop our products in Europe. During the third quarter 2000, we purchased a
convertible note in priceline.com Auto Insurance Agency, Inc. in the amount of
$7.5 million.
We have certain commitments for capital expenditures as part of our
ongoing business cycle. None of these commitments are material to our financial
position either individually or in the aggregate. As a result of our rapid
growth, we expect to continue to increase capital expenditures for purchased
computer hardware, internally developed software, other equipment and leasehold
improvements. Additionally, we have commitments to make additional loans to
certain licensees under certain circumstances.
Net cash provided by financing activities was $13.6 million for the nine
months ended September 30, 2000, primarily as a result of cash inflow related to
the exercise of employee stock options. Net cash provided by financing
activities was $209.5 million for the nine months ended September 30, 1999,
primarily as a result of proceeds from our initial public offering and secondary
offering.
20
We believe that our existing cash balances and liquid resources will be
sufficient to fund our operating activities, capital expenditures and other
obligations through at least the next twelve months. However, if during that
period or thereafter, we are not successful in generating sufficient cash flow
from operations or in raising additional capital when required in sufficient
amounts and on terms acceptable to us, we may be required to reduce our planned
capital expenditures and scale back the scope of our business plan, either of
which could have a material adverse effect on our projected financial condition
or results of operation. If additional funds were raised through the issuance of
equity securities, the percentage ownership of our then current stockholders
would be diluted. We cannot assure you that we will generate sufficient cash
flow from operations in the future, that anticipated revenue growth will be
realized or that future borrowings or equity contributions will be available in
amounts sufficient to make anticipated capital expenditures or finance our
business plan.
Additional Factors that May Affect Future Results
The following risk factors and other information included in this Form
10-Q should be carefully considered. The risks and uncertainties described below
are not the only ones we face. Additional risks and uncertainties not presently
known to us or that we currently deem immaterial may also impair our business
operations. If any of the following risks occur, our business, financial
condition, operating results and cash flows could be materially adversely
affected.
Our Limited Operating History Makes Evaluating Our Business Difficult
Priceline.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 Will Continue to Incur Losses
As of September 30, 2000, we had an accumulated deficit of $1.4 billion.
We have not achieved profitability and will continue to incur losses.
A substantial portion of our revenues to date have been derived from
airline, hotel and rental car products. As our business model evolves, we expect
to continue to introduce 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
21
revenues and gross profit margins will need to increase sufficiently to cover
these and other future costs. Otherwise, we may never achieve profitability.
Potential Fluctuations in Our Financial Results Make Financial Forecasting
Difficult
We expect our revenues and operating results to vary significantly from
quarter to quarter. As a result, quarter to quarter comparisons of our revenues
and operating results may not be meaningful. In addition, due to our limited
operating history and a business model that is still relatively new and
unproven, it may be difficult to predict our future revenues or results of
operations accurately. It is likely that in one or more future quarters our
operating results will fall below the expectations of securities analysts and
investors. If this happens, the trading price of our common stock would almost
certainly be materially and adversely affected.
Our business has almost no backlog and almost all of our revenues for a
particular quarter are derived from transactions that are both initiated and
completed during that quarter. Our current and future expense levels are based
largely on our investment plans and estimates of future revenues and are, to a
large extent, fixed. Accordingly, we may be unable to adjust spending in a
timely manner to compensate for any unexpected revenue shortfall, and any
significant shortfall in revenues relative to our planned expenditures could
have an immediate adverse effect on our business and results of operations.
Our limited operating history and rapid growth over the past year and a
half makes it difficult for us to assess the impact of seasonal factors on our
business. Nevertheless, we expect our business to be subject to seasonal
fluctuations, reflecting a combination of seasonality trends for the products
and services offered by us and seasonality patterns affecting Internet use. For
example, with regard to our travel products, demand for leisure travel may
increase over summer vacations and holiday periods, while Internet usage may
decline during the summer months. Our results also may be affected by seasonal
fluctuations in the inventory made available to the priceline.com service by
participating sellers. Airlines, for example, typically enjoy high demand for
tickets through traditional distribution channels for travel during Thanksgiving
and the year-end holiday period. As a result, during those periods, less excess
airline ticket inventory would be available to priceline.com. Our business also
may be subject to cyclical variations for the products and services offered; for
example, leisure travel and home mortgage financing tend to decrease in economic
downturns.
We Are Dependent On the Airline Industry and Certain Airlines
Our near term, and possibly long term, our prospects are significantly
dependent upon our sale of leisure airline tickets. Sales of leisure airline
tickets represented a substantial majority of total revenue for the year ended
December 31, 1999 and the nine months ended September 30, 2000. Leisure travel,
including the sale of leisure airline tickets, is dependent on personal
discretionary spending levels. As a result, sales of leisure airline tickets and
other leisure travel products tend to decline during general economic downturns
and recessions. In addition, unforeseen events, such as political instability,
regional hostilities, increases in fuel prices, imposition of taxes or
surcharges by regulatory authorities, 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.
22
Sales of airline tickets from priceline.com's six largest airline
suppliers accounted for approximately 93% and 84%, respectively, of airline
ticket revenue for the year ended December 31, 1999 and the nine months ended
September 30, 2000, respectively. As a result, currently we are substantially
dependent upon the continued participation of these airlines in the
priceline.com service in order to maintain and continue to grow our total
airline ticket revenues and, as a consequence, our overall revenues. Our ticket
sale revenues for the three months ended September 30, 2000 were 8% below our
ticket sale revenue for the three months ended June 30, 2000. In addition, our
October 2000 ticket sale revenues, which historically has been our strongest
sales month of the fourth quarter, were approximately 20% below our September
2000 ticket sale revenues, which based on our historical experience we had
expected to be our strongest sales month of the third quarter. As a result, we
expect that our revenues for the three months ended December 31, 2000, will be
significantly less than our revenues for the three months ended September 30,
2000.
We currently have 36 participating airlines. However, our airline
participation agreements:
o do not require the airlines to make tickets available for any
particular routes;
o do not require the airlines to provide any specific quantity of
airline tickets;
o do not require the airlines to provide particular prices or levels
of discount;
o do not require the airlines to deal exclusively with us in the
public sale of discounted airline tickets; and
o generally, can be terminated upon relatively short notice.
These agreements also outline the terms and conditions under which ticket
inventory provided by the airlines may be sold.
Our agreement with Delta contains certain restrictions relating to the
terms of participation in our service by other carriers and the circumstances
under which we may transfer or license our intellectual property to other travel
providers. It is possible that, as the priceline.com service grows and becomes a
significant channel of distribution for airline tickets and as other carriers
seek participation in the priceline.com service, these competitively restrictive
provisions of the Delta agreement could raise issues under federal and state
antitrust laws. If that happened, either a federal or state government agency or
private party could initiate litigation seeking to enjoin us and Delta from
enforcing these provisions or seeking to collect treble damages. The outcome of
any such litigation would be uncertain. If, however, such a lawsuit resulted in
an injunction or subjected us to damages, our business and financial condition
could suffer.
Due to our dependence on the airline industry, we could be severely
affected by changes in that industry, and, in many cases, we will have no
control over such changes or their timing. For example, our revenues for the
three months ended September 30, 2000 were 3.1% below our revenues for the three
months ended June 30, 2000. We believe that the decline in revenues was
attributable, in part, and in addition to other factors, to specific events in
the airline industry, including a $20 fuel surcharge imposed in early September
by airlines due to increased fuel prices, a high level of flight cancellations
that negatively affected supply and the introduction by certain airlines of
their own special sale fares in September which contributed to lower average
offer prices for tickets. 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. Moreover, the airlines may attempt to
23
establish their own buyer-driven commerce service or participate or invest in
other similar services being established to compete with us. We also could be
materially adversely affected by the bankruptcy, insolvency or other material
adverse change in the business or financial condition of one or more of our
airline participants.
Our Business Model is Relatively Novel and Unproven
The priceline.com service is based on a relatively novel and unproven
business model. We will be successful only if consumers and sellers continue to
actively use the priceline.com service. Prior to the launch of the priceline.com
service, consumers and sellers had never bought and sold products and services
through a demand collection system over the Internet. Therefore, it is
impossible to predict the degree to which consumers and sellers will continue to
use the priceline.com service over time.
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 place orders online with a credit card. Also, recent
adverse publicity surrounding our recent public announcements may affect
consumers' willingness to use our service. Consequently, it is possible that
consumers and sellers will never utilize the priceline.com service to the degree
necessary for us to achieve profitability.
We Need to Sell New Products and Services
We are unlikely to make significant profits unless we continue to make new
or complementary products and services and a broader range of existing products
and services available through the priceline.com service or through services
provided by our licensees. We will incur substantial expenses and use
significant resources in trying to continue to expand the type and range of the
products and services that we offer. However, we may not be able to attract
sellers, other participants and licensees to provide such products and services
or consumers to purchase such products and services through the priceline.com
service. In addition, if we or our licensees launch new products or services
that are not favorably received by consumers, our reputation and the value of
the priceline.com brand could be damaged.
The great majority of our experience to date is in the travel industry.
The travel industry is characterized by "expiring" inventories. For example, if
not used by a specific date, an airline ticket, hotel room reservation or rental
car reservation has no value. The expiring nature of the inventory creates
incentives for airlines, hotels and rental car companies to sell seats, hotel
room reservations or rental car reservations at reduced rates. Because we have
only limited experience in selling "non-expiring" inventories on the
priceline.com service, such as new cars or financial services, we cannot predict
whether the priceline.com business model can be successfully applied to such
products and services.
New Businesses We Are Evaluating May Not Be Successful
We intend to expand our current Name Your Own Price(SM) business model
into other areas of e-commerce and to other regions, directly and through
licensees. For example, we licensed our name and business model to Alliance
Capital Partners in connection with our home financing services and to other
third parties in connection with other products. We also have entered into,
24
and intend to continue to enter into, similar licensing arrangements with third
parties in connection with international expansion of the priceline.com service.
These new businesses typically incur start-up costs and operating losses
and may not be successful. If these new businesses are not favorably received by
consumers or are unsuccessful, 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. Further, to the extent that these
new businesses are not successful, we may not be able to recover our costs
associated with their development. Priceline WebHouse Club, Inc. and Priceline
Perfect Yardsale, Inc., both privately held licensees of ours, separately
announced in October that they would be ceasing their operations. We are in the
process of evaluating the overall impact that their cessation of operations will
have on our business.
To the extent that we need to service these licensees, our core business
may suffer. Moreover, expansion of our core business model will expose us to
additional risks not currently applicable to our existing operations. The
additional risks associated with the expansion of our core business could have a
material adverse effect on our business generally. In addition, as we expand our
business model to other areas of e-commerce, these new businesses will face
competition from established providers in those areas.
We May Be Unable to Effectively Manage and Sustain Growth
We have rapidly and significantly expanded our operations over the course
of the last year and anticipate that further expansion will be required to
realize our growth strategy. Our rapid growth over the course of the last year
has placed significant demands on our management and other resources which may
continue. To manage and sustain any future growth, we will need to continue,
among other things, to improve existing systems and/or implement new systems
for: (1) transaction processing; (2) operational and financial management; and
(3) training, integrating and managing our employee base. Recent changes to our
operating structure, including the recent hiring of the new Chief Financial
Officer and the addition of a new Chief Operating Officer, while intended to
strengthen our business and foster and harness future growth, may not have the
intended effect. Our failure to effectively manage and sustain any future growth
could have a material adverse effect on our business, results of operations and
financial condition.
If We Lose Our Key Personnel or Cannot Recruit Additional Personnel, Our
Business May Suffer
Competition for personnel with experience in Internet commerce is intense.
We depend on the continued services and performance of our executive officers
and other key personnel. We do not have "key person" life insurance policies. If
we do not succeed in attracting new employees or retaining and motivating
current and future employees or executive officers, our business could suffer
significantly. Our ability to retain key employees could be materially adversely
affected by recent developments concerning the Company and the decline in the
market price of our common stock.
We Rely on Third-Party Systems
We rely on certain third-party computer systems and third-party service
providers, including the computerized central reservation systems of the airline
and hotel industries to satisfy demand for airline tickets and hotel room
reservations. Any interruption in these third-party services systems or
deterioration in their performance could be disruptive to our business. Our
agreements with third-party service providers are terminable upon short notice.
In the event our arrangement with any of such third parties is terminated, we
may not be able to find an alternative
25
source of systems support on a timely basis or on commercially reasonable terms
and, as a result, our business and results of operations could be materially and
adversely affected.
Intense Competition Could Reduce Our Market Share and Harm Our Financial
Performance
We compete with both online and traditional sellers of the products and
services offered on priceline.com. Current and new competitors can launch new
sites at a relatively low cost. In addition, the traditional retail industry for
the products and services we offer is intensely competitive.
We currently or potentially compete with a variety of companies with
respect to each product or service we offer. With respect to travel products,
these competitors include:
o Internet travel agents such as Microsoft's Expedia;
o traditional travel agencies;
o consolidators and wholesalers of airline tickets and other travel
products, including online consolidators such as Cheaptickets.com;
o individual or groups of airlines, hotels, rental car companies,
cruise operators and other travel service providers; and
o operators of travel industry reservation databases such as Worldspan
and Sabre.
Our current or potential competitors with respect to the arrangement and
sale of new automobiles in the online marketplace, include, among others,
Auto-by-Tel, Carsdirect.com, Autoweb.com, Greenlight.com and CarPoint.com. To
some extent, we compete for new car shoppers' attention with retail new car
dealers, many of which offer online shopping capabilities.
With respect to financial service products, our competitors include:
o banks and other financial institutions;
o online and traditional mortgage and insurance brokers, including
Quicken Mortgage, E-Loan and iOwn, Inc.; and
o insurance companies.
Our current or potential competitors with respect to rental cars include,
among others, rental car companies and traditional and online travel agencies
and travel service providers.
With respect to long distance services, our current or potential
competitors include long distance providers, local exchange providers that may
be entering the long distance market and Internet Protocol telephone services.
We potentially face competition from a number of large Internet companies
and services that have expertise in developing online commerce and in
facilitating Internet traffic, including Amazon.com, America Online, Microsoft
and Yahoo!, who could choose to compete with us either directly or indirectly
through affiliations with other e-commerce or off-line companies. Other large
companies with strong brand recognition, technical expertise and experience in
Internet commerce could also seek to compete with us. A number of airlines
intend to invest in
26
and offer discount airfares and travel services through a site or sites to be
established, including Orbitz, and a number of airlines have agreed to
participate in and receive an equity stake from Hotwire, a website which offers
discounted fares on opaque inventory. Similar steps may be under consideration
by certain hotel companies and travel service providers. Competition from these
and other sources could have a material adverse effect on our business, results
of operations and financial condition.
Many of our current and potential competitors, including Internet
directories and search engines and large traditional retailers, have longer
operating histories, larger customer bases, greater brand recognition and
significantly greater financial, marketing, technical and other resources than
we have. Some of these competitors may be able to secure products and services
on more favorable terms than we can. In addition, many of these competitors may
be able to devote significantly greater resources to: (1) marketing and
promotional campaigns, (2) attracting traffic to their Web sites, (3) attracting
and retaining key employees, (4) securing vendors and inventory and (5) Web site
and systems development.
Increased competition could result in reduced operating margins and loss
of market share and could damage our brand. There can be no assurance that we
will be able to compete successfully against current and future competitors or
that competition will not have a material adverse effect on our business,
results of operations and financial condition.
Our Success Depends on Our Ability to Protect Our Intellectual Property
We regard our intellectual property as critical to our success, and we
rely on trademark, copyright and patent law, trade secret protection and
confidentiality and/or license agreements with our employees, customers,
partners and others to protect our proprietary rights. If we are not successful
in protecting our intellectual property, there could be a material adverse
effect on our business.
While we believe that our issued patents and pending patent applications
help to protect our business, there can be no assurance that:
o any patent can be successfully defended against challenges by third
parties;
o pending patent applications will result in the issuance of patents;
o competitors or potential competitors of priceline.com will not
devise new methods of competing with us that are not covered by our
patents or patent applications;
o because of variations in the application of our business model to
each of our products and services, our patents will be effective in
preventing one or more third parties from utilizing a copycat
business model to offer the same product or service in one or more
categories;
o new prior art will not be discovered which may diminish the value of
or invalidate an issued patent; or
o a third party will not have or obtain one or more patents that
prevent us from practicing features of our business or will require
us to pay for a license to use those features.
There has been recent discussion in the press regarding the examination
and issuance of so called "business-method" patents. As a result, the United
States Patent and Trademark Office has
27
indicated that it intends to intensify the review process applicable to such
patent applications. The new procedures are not expected to have a direct effect
on patents already granted. We cannot anticipate what effect, if any, the new
process will have on our pending patent applications.
We pursue the registration of our trademarks and service marks in the U.S.
and internationally. However, effective trademark, service mark, copyright and
trade secret protection may not be available in every country in which our
services are made available online. We have licensed in the past, and expect to
license in the future, certain of our proprietary rights, such as trademarks or
copyrighted material, to third parties. These licensees may take actions that
might diminish the value of our proprietary rights or harm our reputation.
Legal Proceedings
We are a party to the legal proceedings described in Item 1 of Part II
"Legal Proceedings." An adverse outcome in any of the actions described in Item
1 of Part II could have a material adverse effect on our business, results of
operation and financial condition.
The Success of Our Business Will Depend on Continued Growth of Internet Commerce
The market for the purchase of products and services over the Internet is
a new and emerging market. As an Internet commerce business, our future revenues
and profits are substantially dependent upon the widespread acceptance and use
of the Internet and other online services as a medium for commerce by consumers
and sellers. If widespread acceptance and growth of Internet use does not occur,
our business and financial performance will suffer. Rapid growth in the use of
and interest in the Internet and other online services is a recent phenomenon.
This growth may not continue. A sufficiently broad base of consumers may not
adopt, or continue to use, the Internet as a medium of commerce. Demand for and
market acceptance of recently introduced products and services over the Internet
are subject to a high level of uncertainty, and there are few proven products
and services. For us to grow, consumers who historically have purchased through
traditional means of commerce, such as a travel agent for airline tickets or a
branch of a bank for home financings, will need to elect to purchase online
products and services. Sellers of products and services will need to adopt or
expand use of the Internet as a channel of distribution.
The Internet has experienced, and is expected to continue to experience,
significant growth in the number of users and amount of traffic. Our success
will depend upon the development and maintenance of the Internet's
infrastructure to cope with this increased traffic. This will require a reliable
network backbone with the necessary speed, data capacity and security, and the
timely development of complementary products, such as high-speed modems, for
providing reliable Internet access and services.
The Internet has experienced a variety of outages and other delays as a
result of damage to portions of its infrastructure and could face such outages
and delays in the future. Outages and delays are likely to affect the level of
Internet usage generally, as well as the processing of transactions on the
priceline.com Web site. It is unlikely that the level of orders lost in those
circumstances could be made up by increased phone orders. In addition, the
Internet could lose its viability due to delays in the development or adoption
of new standards to handle increased levels of activity or due to increased
government regulation. The adoption of new standards or government regulation
may, however, require us to incur substantial compliance costs.
28
Capacity Constraints and System Failures Could Harm Our Business
If our systems cannot be expanded to cope with increased demand or fail to
perform, we could experience:
o unanticipated disruptions in service;
o slower response times;
o decreased customer service and customer satisfaction; or
o delays in the introduction of new products and services;
any of which could impair our reputation, damage the priceline.com brand and
materially and adversely affect our revenues. Publicity about a service
disruption also could cause a material decline in our stock price.
We use internally developed systems to operate the priceline.com service,
including transaction processing and order management systems that were designed
to be scaleable. However, if the number of users of the priceline.com service
increases substantially, we will need to significantly expand and upgrade our
technology, transaction processing systems and network infrastructure. We do not
know whether we will be able to accurately project the rate or timing of any
such increases, or expand and upgrade our systems and infrastructure to
accommodate such increases in a timely manner.
Our ability to facilitate transactions successfully and provide high
quality customer service also depends on the efficient and uninterrupted
operation of our computer and communications hardware systems. The priceline.com
service has experienced periodic system interruptions, which we believe will
continue to occur from time to time. Our systems and operations also are
vulnerable to damage or interruption from human error, natural disasters, power
loss, telecommunication failures, break-ins, sabotage, computer viruses,
intentional acts of vandalism and similar events. While we currently maintain
redundant servers at our Stamford, Connecticut premises to provide limited
service during system disruptions, we do not have fully redundant systems, a
formal disaster recovery plan or alternative providers of hosting services. In
addition, we do not carry sufficient business interruption insurance to
compensate for losses that could occur. Any system failure that causes an
interruption in service or decreases the responsiveness of the priceline.com
service could impair our reputation, damage our brand name and materially
adversely affect our revenues.
We May Not Be Able to Keep Up with Rapid Technological and Other Changes
The markets in which we compete are characterized by rapidly changing
technology, evolving industry standards, frequent new service and product
announcements, introductions and enhancements and changing consumer demands. We
may not be able to keep up with these rapid changes. In addition, these market
characteristics are heightened by the emerging nature of the Internet and the
apparent need of companies from many industries to offer Internet-based products
and services. As a result, our future success will depend on our ability to
adapt to rapidly changing technologies, to adapt our services to evolving
industry standards and to continually improve the performance, features and
reliability of our service in response to competitive service and product
offerings and the evolving demands of the marketplace. In addition, the
widespread adoption of
29
new Internet, networking or telecommunications technologies or other
technological changes could require us to incur substantial expenditures to
modify or adapt our services or infrastructure.
Online Security Breaches Could Harm Our Business
The secure transmission of confidential information over the Internet is
essential in maintaining consumer and supplier confidence in the priceline.com
service. Substantial or ongoing security breaches on our system or other
Internet-based systems could significantly harm our business. We currently
require buyers to guarantee their offers with their credit card, either online
or through our toll-free telephone service. We rely on licensed encryption and
authentication technology to effect secure transmission of confidential
information, including credit card numbers. It is possible that advances in
computer capabilities, new discoveries or other developments could result in a
compromise or breach of the technology used by us to protect customer
transaction data.
We incur substantial expense to protect against and remedy security
breaches and their consequences. However, we cannot guarantee that our security
measures will prevent security breaches. A party that is able to circumvent our
security systems could steal proprietary information or cause significant
interruptions in our operations. For instance, several major Web sites have
experienced significant interruptions as a result of improper direction of
excess traffic to those sites, and computer viruses have substantially disrupted
e-mail and other functionality in a number of countries, including the United
States. Security breaches also could damage our reputation and expose us to a
risk of loss or litigation and possible liability. Our insurance policies carry
low coverage limits, which may not be adequate to reimburse us for losses caused
by security breaches.
We also face risks associated with security breaches affecting third
parties conducting business over the Internet. Consumers generally are concerned
with security and privacy on the Internet and any publicized security problems
could inhibit the growth of the Internet and, therefore, the priceline.com
service as a means of conducting commercial transactions.
Our Stock Price is Highly Volatile
The market price of our common stock is highly volatile and is likely to
continue to be subject to wide fluctuations in response to factors such as the
following, some of which are beyond our control:
o quarterly variations in our operating results;
o operating results that vary from the expectations of securities
analysts and investors;
o changes in expectations as to our future financial performance,
including financial estimates by securities analysts and investors;
o changes in market valuations of other Internet or online service
companies;
o announcements of technological innovations or new services by us or
our competitors;
30
o announcements by us or our competitors of significant contracts,
acquisitions, strategic partnerships, joint ventures or capital
commitments;
o loss of a major seller participant, such as an airline or hotel
chain;
o changes in the status of our intellectual property rights;
o lack of success in the expansion of our business model horizontally
or geographically;
o adverse publicity surrounding recent announcements concerning the
Company;
o announcements by third parties of significant claims or proceedings
against us or adverse developments in pending proceedings;
o additions or departures of key personnel; and
o stock market price and volume fluctuations.
Sales of a substantial number of shares of our common stock could
adversely affect the market price of our common stock by introducing a large
number of sellers to the market. Given the volatility that exists for our
shares, such sales could cause the market price of our common stock to decline.
In addition, the trading prices of Internet stocks in general, including
ours, have experienced extreme price and volume fluctuations. To the extent that
the public's perception of the prospects of Internet or e-commerce companies is
negative, our stock price could decline further 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. The market value of e-commerce stocks has declined dramatically over
recent months based on profitability and other concerns. The recent declines in
the value of our common stock and market conditions could adversely affect our
ability to raise additional capital.
We are currently the subject of a number of securities class action
litigations. 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. To the extent our stock price declines or is volatile, we may
in the future be the target of additional litigation. Securities litigation
could result in substantial costs and divert management's attention and
resources.
Our Business is Subject to Tax Uncertainties
Potential Federal Air Transportation Tax on Airline Ticket Sales. A
Federal transportation tax is imposed upon the sale of airline tickets. The tax
is based on a percentage of the cost of transportation, which was 9% for periods
prior to October 1, 1998, 8% for the period October 1, 1998 through September
30, 1999 and 7.5% thereafter. We have historically interpreted the tax
regulations as requiring that the tax be computed based on the amount charged by
the airline to us for the airline ticket and participating airlines have
collected and remitted the tax based on this amount. We applied for a ruling
from the Internal Revenue Service confirming this interpretation. In December
1999, the Internal Revenue Service indicated to us that it was unlikely that a
favorable ruling would be issued. We subsequently withdrew our ruling request
because of the uncertainty of the outcome. Because we anticipated the
possibility of an adverse ruling on this issue, we accrued approximately $1.9
million relating to the balance of the tax liability for tickets
31
sold prior to that date. We believe this accrual to be adequate, but there can
be no assurance as to the final outcome because a formal ruling has not been
issued by the Internal Revenue Service.
State Taxes. We file tax returns in such states as required by law based
on principles applicable to traditional businesses. In addition, we do not
collect sales or other similar taxes in respect of transactions conducted
through the priceline.com service (other than the federal air transportation tax
referred to above). However, one or more states could seek to impose additional
income tax obligations or sales tax collection obligations on out-of-state
companies, such as ours, which engage in or facilitate online commerce. A number
of proposals have been made at state and local levels that could impose such
taxes on the sale of products and services through the Internet or the income
derived from such sales. Such proposals, if adopted, could substantially impair
the growth of e-commerce and adversely affect our opportunity to become
profitable.
Legislation limiting the ability of the states to impose taxes on
Internet-based transactions has been enacted by the United States Congress.
However, this legislation, known as the Internet Tax Freedom Act, imposes only a
three-year moratorium, which commenced October 1, 1998 and ends on October 21,
2001, on state and local taxes on (1) electronic commerce where such taxes are
discriminatory and (2) Internet access unless such taxes were generally imposed
and actually enforced prior to October 1, 1998. It is possible that the tax
moratorium could fail to be renewed prior to October 21, 2001. Failure to renew
this legislation would allow various states to impose taxes on Internet-based
commerce. The imposition of such taxes could adversely affect our ability to
become profitable.
Regulatory and Legal Uncertainties Could Harm Our Business
The products and services we offer through the priceline.com service are
regulated by federal and state governments. Our ability to provide such products
and services is and will continue to be affected by such regulations. The
implementation of unfavorable regulations or unfavorable interpretations of
existing regulations by courts or regulatory bodies could require us to incur
significant compliance costs, cause the development of the affected markets to
become impractical and otherwise adversely affect our financial performance.
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
Sections of this Form 10-Q may contain forward-looking statements.
Expressions of future goals and similar expressions including, without
limitation, "may," "will," "should," "could," "expects," "does not currently
expect," "plans," "anticipates," "believes," "estimates," "predicts,"
"potential," or "continue," reflecting something other than historical fact are
intended to identify forward-looking statements. The following factors, among
others, could cause our actual results to differ materially from those described
in the forward-looking statements: inability to successfully expand our business
model both horizontally and geographically; adverse changes in our relationships
with airlines and other product and service providers; systems-related failures;
our ability to protect our intellectual property rights; the effects of
increased competition; losses by us and our licensees; any adverse impact from
negative publicity and negative customer reaction relating to recent
announcements concerning us; legal and regulatory risks and the ability to
attract and retain qualified personnel. These factors and others are described
in more detail above in "Additional Factors That May Affect Future Results."
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Priceline.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
32
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 and effect the value of our
loans to our foreign licensees. In addition, to the extent that changes in
interest rates and currency exchange rates affect general economic conditions,
priceline.com would also be affected by such changes.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Please see Note 7 to the Notes to Unaudited Consolidated Financial
Statements included in the Form10-Q and Part I, Item 3 of priceline.com's Annual
Report on Form 10-K for the year ended December 31, 1999.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Description
- ------ -----------
10.35 Amended and Restated Promissory Note, dated August 21, 2000,
between priceline.com Incorporated and Heidi Miller.
10.36 Amendment to Employment Agreement, dated August 21, 2000, between
priceline.com Incorporated and Heidi Miller.
10.37 Second Amended and Restated Promissory Note, dated August 21,
2000, between priceline.com Incorporated and Jeffery H. Boyd.
10.38 Amendment to Offer Letter, dated August 21, 2000, between
priceline.com Incorporated and Jeffery H. Boyd.
10.39 Second Amended and Restated Promissory Note, dated August 21,
2000, between priceline.com Incorporated and Daniel H. Schulman.
10.40 Amendment to Employment Agreement, dated August 21, 2000, between
priceline.com Incorporated and Daniel H. Schulman.
27.1 Financial Data Schedule
(b) Reports on Form 8-K
On July 26, 2000, we filed a report on Form 8-K announcing our second
quarter 2000 financial results that included unaudited balance sheets at June
30, 2000 and December 31, 1999 and statements of operations for the three and
six months ended June 30, 2000. On November 6, 2000, we furnished a report on
Form 8-K announcing our third quarter 2000 financial results that included
unaudited balance sheets at September 30, 2000 and December 31, 1999 and
statements of operations for the three and nine months
33
ended September 30, 2000 and statements of operations for the three and nine
months ended September 30, 2000.
34
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.
PRICELINE.COM INCORPORATED
(Registrant)
Date: November 14, 2000 By: /s/ Tom D'Angelo
-------------------------------------
Name: Tom D'Angelo
Title: Senior Vice President of
Finance and Controller