SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
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 May 10, 2001:
Common Stock, par value $0.008 per share 201,545,109
- ---------------------------------------- ------------------
(Class) (Number of Shares)
priceline.com Incorporated
Form 10-Q
For the Quarter Ended March 31, 2001
PART I - UNAUDITED FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets at March 31, 2001 and December 31, 2000.....................3
Consolidated Statements of Operations For the Three Months
Ended March 31, 2001 and 2000.......................................................4
Consolidated Statement of Changes in Stockholders' Equity For the Three Months
Ended March 31, 2001................................................................5
Consolidated Statements of Cash Flows For the Three Months Ended March 31, 2001
and 2000...........................................................................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.....................30
PART II - OTHER INFORMATION
Item 1. Legal Proceedings..............................................................30
Item 2. Changes in Securities and Use of Proceeds......................................30
Item 6. Exhibits & Reports on Form 8-K.................................................30
SIGNATURES.............................................................................31
2
PART I - UNAUDITED FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
priceline.com Incorporated
CONSOLIDATED BALANCE SHEETS
(In thousands)
March 31, December 31,
2001 2000
---- ----
ASSETS (unaudited)
Current assets:
Cash and cash equivalents ......................................................... $ 98,698 $ 77,024
Restricted cash ................................................................... 17,514 13,568
Short-term investments ............................................................ 26,394 10,952
Accounts receivable, net of allowance for doubtful accounts of $1,555 and $2,372 .. 20,706 13,889
Prepaid expenses and other current assets ......................................... 15,187 15,790
----------- -----------
Total current assets ............................................................ 178,499 131,223
Property and equipment, net ............................................................ 35,861 37,083
Related party receivable ............................................................... 3,183 3,503
Warrants to purchase common stock of licensees ......................................... 3,250 3,250
Other assets ........................................................................... 19,769 20,019
----------- -----------
Total assets .................................................................... $ 240,562 $ 195,078
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................................................. $ 51,377 $ 40,691
Accrued expenses .................................................................. 26,630 33,172
Other current liabilities ......................................................... 4,978 5,434
----------- -----------
Total current liabilities ....................................................... 82,985 79,297
----------- -----------
Accrued expenses ....................................................................... 4,747 5,108
----------- -----------
Total liabilities ............................................................... 87,732 84,405
----------- -----------
MANDATORILY REDEEMABLE CONVERTIBLE SERIES A PREFERRED STOCK ............................ -- 359,580
MANDATORILY REDEEMABLE SERIES B PREFERRED STOCK ........................................ 80,000 --
Stockholders' equity:
Common stock, $0.008 par value, authorized 1,000,000,000 shares; issued 206,293,440
and 181,798,204 shares, respectively .............................................. 1,650 1,454
Treasury stock, 5,450,236 shares .................................................... (326,633) (326,633)
Additional paid-in capital .......................................................... 1,948,533 1,618,956
Deferred compensation ............................................................... (8,471) (13,053)
Accumulated other comprehensive loss ................................................ -- (1,156)
Accumulated deficit ................................................................. (1,542,249) (1,528,475)
----------- -----------
Total stockholders' equity ...................................................... 72,830 (248,907)
----------- -----------
Total liabilities and stockholders' equity ............................................. $ 240,562 $ 195,078
=========== ===========
See notes to consolidated financial statements.
3
priceline.com Incorporated
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(In thousands, except per share data)
Three Months Ended March 31,
----------------------------
2001 2000
---- ----
Travel revenues ............................... $ 267,020 $ 311,607
Other revenues ................................ 2,684 2,191
--------- ---------
Total revenues .............................. 269,704 313,798
Cost of travel revenues ....................... 225,496 264,670
Cost of other revenues ........................ 1,093 101
Supplier warrant costs ........................ -- 381
--------- ---------
Total costs of revenues ................... 226,589 265,152
--------- ---------
Gross profit .................................. 43,115 48,646
--------- ---------
Operating expenses:
Sales and marketing ......................... 30,623 40,449
General and administrative .................. 9,404 12,704
Payroll tax expense on employee stock
options ................................... 23 5,907
Stock based compensation .................... 5,157 --
Systems and business development ............ 11,112 5,868
Restructuring charge ........................ 1,400 --
--------- ---------
Total operating expenses .................. 57,719 64,928
--------- ---------
Operating loss ................................ (14,604) (16,282)
Other income (expense):
Loss on sale of equity investment ........... (946) --
Interest income ............................. 1,776 2,715
--------- ---------
Total other income ........................ 830 2,715
--------- ---------
Net loss ...................................... (13,774) (13,567)
Net loss applicable to common
stockholders ................................ $ (13,774) $ (13,567)
========= =========
Net loss applicable to common
stockholders per basic and diluted
common share ................................ $ (0.07) $ (0.08)
========= =========
Weighted average number of basic and diluted
common shares outstanding ................... 188,589 166,467
========= =========
See notes to consolidated financial statements.
4
priceline.com Incorporated
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
AS OF MARCH 31, 2001
(unaudited)
(In thousands)
Accumulated
Common Stock Additional Other Treasury Stock
-------------- Paid-in Accumulated Comprehensive ----------------- Deferred
Shares Amount Capital Deficit Income Shares Amount Compensation Total
------ ------ ------- ------- ------ ------ ------ ------------ -----
Balance, January 1, 2001 181,798 $1,454 $1,618,956 $(1,528,475) $(1,156) (5,450) $(326,633) $(13,053) $(248,907)
Net loss applicable to
common stockholders -- -- -- (13,774) -- -- -- -- (13,774)
Sale of equity investments -- -- -- -- 1,156 -- -- -- 1,156
Exchange of preferred
stock -- -- 279,530 -- -- -- -- -- 279,530
Issuance of common
stock under deferred
compensation plans 120 1 265 -- -- -- -- (266) --
Amortization of deferred
compensation -- -- -- -- -- -- -- 4,848 4,848
Sale of common stock 23,809 191 49,331 -- -- -- -- -- 49,522
Exercise of stock options 566 4 451 -- -- -- -- -- 455
------- ------ ---------- ----------- ------- ------ --------- -------- ---------
Balance, March 31, 2001 206,293 $1,650 $1,948,533 $(1,542,249) $ -- (5,450) $(326,633) $ (8,471) $ 72,830
======= ====== ========== =========== ======= ====== ========= ======== =========
See notes to consolidated financial statements.
priceline.com Incorporated
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(In thousands)
Three Months Ended
March 31,
2001 2000
---- ----
OPERATING ACTIVITIES:
Net loss ........................................................... $(13,774) $ (13,567)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization .................................. 4,099 2,672
Provision for uncollectible accounts ........................... 1,875 1,114
Warrant costs .................................................. -- 381
Net loss on sale of equity investments ......................... 946 --
Acceleration of stock options .................................. 61 --
Amortization of deferred compensation .......................... 4,848 --
Changes in assets and liabilities:
Accounts receivable ............................................ (8,372) (36,742)
Prepaid expenses and other current assets ...................... 603 1,836
Accounts payable and accrued expenses .......................... 3,327 35,180
Other .......................................................... 130 3,644
-------- ---------
Net cash used in operating activities .............................. (6,257) (5,482)
-------- ---------
INVESTING ACTIVITIES:
Additions to property and equipment ............................ (2,816) (11,796)
Purchase of investments ........................................ -- (15,401)
Proceeds from sales/maturities of investments .................. 770 --
Funding of restricted cash and bank certificate of deposits .... (3,946) 1,462
(Purchase of) proceeds from sale of marketable securities ..... (16,003) 15,146
-------- ---------
Net cash used in investing activities .............................. (21,995) (10,589)
-------- ---------
FINANCING ACTIVITIES:
Payment of capital lease obligations ........................... -- (6)
Proceeds from sale of common stock/purchase of warrants, net ... 49,471 --
Proceeds from exercise of stock options ........................ 455 10,222
-------- ---------
Net cash provided by financing activities .......................... 49,926 10,216
-------- ---------
Net increase (decrease) in cash and cash equivalents ............... 21,674 (5,855)
Cash and cash equivalents, beginning of period ..................... 77,024 124,383
-------- ---------
Cash and cash equivalents, end of period ........................... $ 98,698 $ 118,528
======== =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for interest ....................... $ 0 $ 1
======== =========
See notes to consolidated financial statements.
priceline.com Incorporated
Notes to Unaudited Consolidated Financial Statements
1. BASIS OF PRESENTATION
The Company is responsible for the unaudited financial statements included
in this document. The financial statements have been prepared in accordance with
generally accepted accounting principles ("GAAP") and include all normal and
recurring adjustments that management of the Company considers necessary for a
fair presentation of its financial position and operating results. The Company
prepared the condensed financial statements following the requirements of the
Securities and Exchange Commission for interim reporting. As permitted under
those rules, the Company condensed or omitted certain footnotes or other
financial information that are normally required by GAAP for annual financial
statements. As these are condensed financials, one should also read the
financial statements in the Company's December 31, 2000, Form 10-K.
Revenues, expenses, assets and liabilities can vary during each quarter of
the year. Therefore, the results and trends in these interim financial
statements may not be the same as those for the full year.
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
The Company adopted Statement of Financial Accounting Standards No. 133
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133")
on January 1, 2001. SFAS No. 133, as amended, establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. Under SFAS
No. 133, all derivatives are required to be recorded as either assets or
liabilities and the instruments are required to be measured at fair value. Gains
or losses resulting from changes in the values of those derivatives are to be
recognized immediately or deferred depending on the use of the derivative and
whether or not it qualifies as a hedge. The adoption in the first quarter 2001
of SFAS No. 133 did not have a significant impact on the consolidated balance
sheet, statement of operations, or cash flows.
Pending Accounting Pronouncements -- In September 2000, FASB issued SFAS
No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" which replaces SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities"
("SFAS No. 125"). It revises the standards for accounting for securitizations
and other transfers of financial assets and collateral and requires certain
disclosures, but it carries over most of the provisions of SFAS No. 125 without
reconsideration. The remaining provisions of SFAS No. 140 are effective for
transactions occurring after March 15, 2001. Management believes that the
adoption of the remaining provisions will not have a material effect on the
Company's financial condition or results of operations.
4. RESTRUCTURING AND SPECIAL CHARGES
In the first quarter of 2001, the Company recorded a restructuring charge
of approximately $1.4 million. This restructuring related primarily to the
Company's reduction of its workforce in February 2001. The charge relates
primarily to severance payments and the Company believes that the entire amount
of the charge will be disbursed during 2001.
During the year ended December 31, 2000, the Company recorded
restructuring charges of approximately
8
$32.0 million and a special charge of approximately $34.8 million. The following
are the changes in the related liability (included in accounts payable and
long-term accrued expenses) during the first quarter of 2001 (in thousands):
Restructuring Special Total
------------- ------- -----
Accrued at December 31, 2000 $ 13,470 $ 11,093 $ 24,563
Disbursed in 2001 (4,861) (6,190) (11,051)
2001 restructuring charge 1,400 -- 1,400
-------- -------- --------
Accrued at March 31, 2001 $ 10,009 $ 4,903 $ 14,912
======== ======== ========
At March 31, 2001:
Current Portion $ 5,464 $ 4,701 $ 10,165
Long-term portion 4,545 202 4,747
5. OTHER ASSETS AND WARRANTS TO PURCHASE COMMON STOCK OF LICENEES
Other assets consists of the following as of March 31, 2001 (in thousands):
Convertible loans and other advances - priceline Asia $11,110
Convertible loans and other advances - Alliance Partner Capital/My Price 6,456
Other 2,203
-------
Total $19,769
=======
"Convertible loans and other advances-priceline Asia" represents a
convertible note and receivables for reimbursable expenses from a licensee.
"Convertible loans and other advances-Alliance Partner Capital/MyPrice"
represents convertible notes, receivables for reimburseable expenses incurred by
the Company and billed to Alliance and the estimated net realizable value of the
amounts due to the Company from its Australian licensee.
At March 31, 2001, 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. The Company purchased these warrants for cash in 2000. The
underlying shares are not publicly traded.
6. COMPREHENSIVE LOSS
Following are components of the Company's comprehensive loss (in thousands):
Three Months Ended Three Months Ended
March 31, 2001 March 31, 2000
Net loss applicable to common stockholders $(13,774) $(13,567)
Other comprehensive income:
Unrealized gain on investments -- 5,969
-------- --------
Total comprehensive loss $(13,774) $ (7,598)
======== ========
7. STOCKHOLDERS' EQUITY
During the first quarter 2001, the Company sold approximately 23.8 million
shares of its Common Stock to Hutchison Whampoa Limited and Cheung Kong
(Holdings) Limited in a private placement. The net proceeds were
9
approximately $49.5 million. Hutchison Whampoa Limited also received a seat on
the Company's Board of Directors. At the same time, Hutchison purchased $9.5
million worth of Hutchison-Priceline Limited convertible notes. In connection
with the sale, Hutchison received the right, for a period of six months, to
negotiate with the Company for the establishment of a potential business in
Japan. In June 2000, the Company entered into definitive agreements with
subsidiaries of Hutchison Whampoa Limited to introduce the Company's services to
several Asian markets. Under the terms of the agreements, the Company licenses
its business model and provides expertise in technology, marketing and
operations.
During the first quarter 2001, the Company issued approximately 120,000
shares of restricted stock to employees. The accrual for the shares issued was
recorded at the market value on the date of grant ($2.2187) and will be expensed
over the vesting period.
8. DELTA AIR LINES
During the first quarter 2001, Delta Air Lines, Inc. ("Delta") and the
Company agreed to restructure Delta's investment in the Company. Delta exchanged
6,000,000 shares of Series A Convertible Redeemable PIK Preferred Stock for
80,000 shares of a newly created Series B Redeemable Preferred Stock ("Series B
Preferred Stock") and a warrant to purchase approximately 27 million shares of
the Company's Common Stock at an exercise price of $2.96875 per share.
The Series B Preferred Stock bears a dividend that is payable through the
issuance of approximately 3.0 million shares of the Company's Common Stock each
year, subject to adjustment, as defined. The Series B Preferred Stock has a
liquidation preference of $1,000 per share, is subject to mandatory redemption
on February 6, 2007 or is subject to redemption at the option of Delta or the
Company prior to February 6, 2007 in the event the Company consummates any of
certain business combination transactions. In the event that any of the business
combination transactions occurs before November 16, 2002, Delta would be
entitled to a premium payment of $625 per share.
The warrant provides that at any time the closing sales price of the
Company's Common Stock has exceeded $8.90625 (subject to adjustment) for 20
consecutive trading days, the warrant will automatically be exercised.
9. 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 our
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 priceline.com, 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 priceline.com 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
priceline.com. 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 priceline.com 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
10
upon which relief can be granted. The Company strongly disputed the material
legal and factual allegations contained in Marketel's third amended complaint
and believe that the amended complaint is without merit. In addition, on July
13, 2000, 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 inventorship of U.S. Patent 5,794,207.
On December 5, 2000, the United States District Court for the Northern
District of California granted priceline.com's motion for summary judgment with
respect to Marketel's theft of trade secret and patent inventorship claims, and
ruled that there were triable issues of fact as to Marketel's false advertising
claims, although Judge Legge volunteered that it was unlikely that Marketel
could establish damages and suggested that these claims should be voluntarily
dismissed. The false advertising claims were subsequently dismissed by
stipulation, and on February 1, 2001, Judge Legge clarified his inventorship
ruling in favor of priceline.com and entered final judgment in favor of
priceline.com. On March 13, 2001, Marketel filed a Notice of Appeal to the
United States Court of Appeals for the Federal Circuit. The Company intends to
continue defending 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 priceline.com harmless for damages, liabilities and legal expenses
incurred in connection with the Marketel litigation. However, Walker Digital
currently is experiencing financial difficulties and is not honoring its
indemnification obligation. We are paying for the defense of this action and
recognizing the expense, subject to a reservation of all rights to recover these
amounts from Walker Digital.
On January 8, 2001, the Company settled two lawsuits brought by
priceline.com against Microsoft Corporation and Expedia, Inc. in U.S. District
Court for the District of Connecticut.
Subsequent to the Company's announcement on September 27, 2000 that
revenues for the third quarter 2000 would not meet expectations, the Company was
served with the following putative class action complaints:
o Weingarten v. priceline.com Incorporated
and Jay S. Walker
300 CV 1901 (District of Connecticut).
o Twardy v. priceline.com Inc.,
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
300 CV 1884 (District of Connecticut).
o Berdakina v. priceline.com Inc.,
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
300 CV 1902 (District of Connecticut).
o Mazzo v. priceline.com Inc.,
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
300 CV 1924 (District of Connecticut).
o Fialkov v. priceline.com Inc.,
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
300 CV 1954 (District of Connecticut).
o Licht v. priceline.com Incorporated and
Jay S. Walker 300 CV 2049 (District of Connecticut).
o Ayach v. priceline.com Inc.,
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
300 CV 2062 (District of Connecticut).
11
o Zia v. priceline.com Inc.,
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
300 CV 1968 (District of Connecticut).
o Mazzo v. priceline.com Inc.,
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
300 CV 1980 (District of Connecticut).
o Bazag v. priceline.com Inc.,
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
300 CV 2122 (District of Connecticut).
o Breier v. priceline.com Inc.,
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
300 CV 2146 (District of Connecticut).
o Farzam et al. v. priceline.com Inc.,
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
300 CV 2176 (District of Connecticut).
o Caswell v. priceline.com Inc.,
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
300 CV 2169 (District of Connecticut).
o Howard Gunty Profit Sharing Plan v. priceline.com Inc.
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
300 CV 1917 (District of Connecticut).
o Cerelli v. priceline.com Inc.,
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
300 CV 1918 (District of Connecticut)
o Mayer v. priceline.com Inc.,
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
300 CV 1923 (District of Connecticut)
o Anish v. priceline.com Inc.,
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
300 CV 1948 (District of Connecticut)
o Atkin v. priceline.com Inc.,
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
300 CV 1994 (District of Connecticut).
o Lyon v. priceline.com Inc.,
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
300 CV 2066 (District of Connecticut).
o Kwan v. priceline.com Inc.,
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
300 CV 2069 (District of Connecticut).
o Krim v. priceline.com Inc.,
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
300 CV 2083 (District of Connecticut).
o Karas v. priceline.com Inc.,
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
300 CV 2232 (District of Connecticut).
o Michols v. priceline.com Inc.,
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
300 CV 2280 (District of Connecticut).
All of these cases have been transferred to Judge Dominick J. Squatrito,
and two groups have filed motions requesting to be appointed as lead plaintiffs
and lead counsel. By agreement of counsel, once the lead plaintiffs and lead
counsel have been appointed, such lead plaintiffs and counsel shall have
forty-five days to file an amended and consolidated complaint, and the Company
will thereafter have forty-five days to respond to the amended and consolidated
complaint. The Company intends to defend vigorously against these actions.
12
In addition, the Company has been served with complaints that purport to
be a shareholder derivative action against the Company's Board of Directors and
certain of its current executive officers, as well as priceline.com (as a
nominal defendant). The complaint alleges breach of fiduciary duty. The actions
are captioned Mark Zimmerman v. Jay Walker, R. Braddock, D. Schulman, P.
Allaire, R. Bahna, P. Blackney, W. Ford, M. Loeb, N. Nicholas, N. Peretsman, and
priceline.com Incorporated 18473-NC (Court of Chancery of Delaware, County of
New Castle, State of Delaware). On February 6, 2001, all defendants moved to
dismiss the complaint for failure to make a demand upon the Board of Directors
and failure to state a cause of action upon which relief can be granted. The
parties have stipulated that an amended complaint will be filed after which
defendants may renew their motion to dismiss or answer the complaint. The
Company intends to defend vigorously against this action.
On March 16, March 26, and April 27, 2001, respectively, three putative
class action complaints were filed in the U.S. District Court for the Southern
District of New York naming priceline.com, Inc., Richard S. Braddock, Jay
Walker, Paul Francis, Morgan Stanley Dean Witter & Co., Merrill Lynch, Pierce,
Fenner & Smith, Inc., BancBoston Robertson Stephens, Inc. and Salomon Smith
Barney, Inc. as defendants (01 Civ. 2262, 01 Civ. 2576 and 01 Civ. 3590). The
complaints allege, among other things, that priceline.com and the individual
defendants named in the complaints violated the federal securities laws by
issuing and selling priceline.com common stock in priceline.com's March 1999
initial public offering without disclosing to investors that some of the
underwriters in the offering, including the lead underwriters, had allegedly
solicited and received excessive and undisclosed commissions from certain
investors. The Company intends to defend vigorously against these actions.
The Company has been informed that a sub-committee of the board of
directors of Myprice pty. Ltd. has been formed to evaluate whether a lawsuit
should be instituted against priceline.com in connection with its investment in
Myprice. If necessary, the Company will defend against any such suit vigorously.
The Company is cooperating with the Connecticut Attorney General's office
concerning complaints by customers received by the Attorney General's office and
intend to continue our 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 effect priceline.com's results of operations and business.
10. SUBSEQUENT EVENTS
In May 2001, the Company's Board of Directors announced that Chairman
Richard S. Braddock had been reappointed as Chief Executive Officer, effective
immediately. Mr. Braddock replaced Daniel H. Schulman, the Company's prior
President and Chief Executive Officer. In connection with Mr. Schulman's
separation, the Company will record a charge in the second quarter 2001 of $5.8
million. The components of the charge are as follows (in thousands):
Non Cash:
Acceleration of loan forgiveness ......................... $3,168
Acceleration of restricted stock vesting ................. 1,252
------
Total non cash charges 4,420
Cash:
Severance, taxes and benefits ............................ 1,154
Legal and other expenses ................................. 200
------
Total cash charges 1,354
------
Total $5,774
======
13
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with our financial
statements, including the notes to those statements, included elsewhere in this
Form 10-Q, and the Section entitled "Special Note Regarding Forward Looking
Statements" in this Form 10-Q. As discussed in more detail in the Section
entitled "Special Note Regarding Forward Looking Statements," this discussion
contains forward-looking statements which involve risks and uncertainties. Our
actual results may differ materially from the results discussed in the
forward-looking statements. Factors that might cause those differences include,
but are not limited to, those discussed in "Factors That May Affect Future
Results."
Overview
We have pioneered a unique e-commerce pricing system known as a "demand
collection system" that enables consumers to use the Internet to save money on a
wide range of products and services while enabling sellers to generate
incremental revenue. Using a simple and compelling consumer proposition - Name
Your Own PriceSM - we collect consumer demand, in the form of individual
customer offers, for a particular product or service at a price set by the
customer. We then communicate that demand directly to participating sellers or
access a proprietary database of inventory available to us for purchase and,
based upon the customer's offer price, elect whether or not to accept that
customer's offer. Consumers agree to hold their offers open for a specified
period of time and, once fulfilled, offers generally 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 24
international airline participants, and travel insurance;
o hotel rooms, in substantially all major United States markets
with more than 50 national hotel chains as participants;
o rental cars, in substantially all major United States airport
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; and
o long distance telephone calling, provided by three carriers,
in substantially all United States markets.
In certain instances, we have licensed the priceline.com name and demand
collection system to third parties to offer a particular product or service
(home financing) or to offer a number of products or services in a distinct
international region (Europe and Asia). Pursuant to these 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.
On February 8, 2001, we announced that Delta Air Lines, Inc. had agreed to
restructure its investment in priceline.com. Under the terms of the agreement,
Delta exchanged 6 million shares of Series A Convertible Redeemable PIK
Preferred Stock of priceline.com for 80,000 shares of Series B Redeemable
Preferred Stock of priceline.com and received warrants to purchase approximately
27 million shares of our common stock at an exercise price of $2.97 per share.
The Series B Preferred Stock has an aggregate liquidation preference of $80.0
million and
14
will pay dividends of approximately 3.0 million shares of priceline.com common
stock per year. The Series B Preferred Stock is mandatorily redeemable on
February 6, 2007 and can be redeemed, at either priceline.com's or Delta's
option, upon a change of control of priceline.com. The warrants to purchase
shares of priceline.com common stock issued to Delta are fully vested and can be
exercised at Delta's election at any time prior to the redemption of the Series
B Preferred Stock. To pay the exercise price of the warrants, Delta will
surrender shares of preferred stock valued at the liquidation preference per
share. In connection with the restructuring, Delta received certain registration
rights. See "Recent Developments" below.
On February 15, 2001, we announced that Hutchison Whampoa Limited and
Cheung Kong (Holdings) Limited purchased approximately 23.8 million shares of
our common stock at $2.10 per share. In connection with the sale, Hutchison and
Cheung Kong received certain registration rights and Hutchison received a seat
on our Board of Directors. At the same time, Hutchison purchased $9.5 million
worth of Hutchison-Priceline Limited convertible notes. In connection with the
sale, Hutchison received the right, for a period of six months, to negotiate
with us for the establishment of a potential business in Japan. Hutchison and
Cheung Kong also announced at the same time that they purchased an aggregate of
11.3 million shares of our common stock from Jay S. Walker, priceline.com's
founder and former Vice Chairman, for an aggregate purchase price of
approximately $24 million.
On February 15, 2001, we also announced that we had implemented an
additional reduction in our work-force in an attempt to reduce costs. As a
result, we reduced our work-force by 25 full-time employees and had
approximately 359 full-time employees as of March 28, 2001. As a result of this
reduction in our work-force, we recorded a restructuring charge of $1.4 million
in the first quarter 2001.
We believe that our success will depend in large part on our ability to
achieve profitability, primarily from our travel business, and to continue to
promote the priceline.com brand. 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
On May 4, 2001, Delta Air Lines, Inc. notified us that they were
exercising warrants to purchase 4.0 million shares of priceline.com common
stock. The warrants were issued to Delta in February 2001 in connection with
Delta's exchange of priceline.com Series A Preferred Stock for Series B
Preferred Stock. As required by the terms of the warrants, Delta exercised the
warrants by surrendering 11,875 shares of Series B Preferred Stock. As a result,
on May 4, 2001, after giving effect to the exercise of the warrants, there were
68,125 shares of Series B Preferred Stock outstanding having an aggregate
liquidation preference of approximately $68.1 million. As a result of this
exercise, the Series B Preferred Stock will pay dividends of approximately 2.45
million shares of priceline.com common stock per year.
On May 7, 2001, our Board of Directors announced that Chairman Richard S.
Braddock had been reappointed as Chief Executive Officer, effective immediately.
Mr. Braddock replaced Daniel H. Schulman, our prior President and Chief
Executive Officer. We also announced that Chief Operating Officer Jeffery H.
Boyd was named President of the Company. Mr. Braddock will continue to serve as
the Chairman of our Board of Directors. Mr. Braddock previously acted as our
Chief Executive Officer from July 1998 to May 2000.
In connection with Mr. Schulman's separation, we will record a charge of
approximately $5.8 million in the second quarter 2001, primarily as the result
of the acceleration of the forgiveness of loans to Mr. Schulman and the
acceleration of the vesting of restricted stock, each of which were required by
the terms of Mr. Schulman's employment agreement.
15
Results of Operations
Three Months Ended March 31, 2001 compared to Three Months Ended March 31, 2000
Revenues
Three Months Ended %
March 31, Change
--------- ------
($000)
2001 2000
---- ----
Travel Revenues ........................ $267,020 $311,607 (14.3)%
Other Revenues ......................... 2,684 2,191 22.5%
-------- -------- -----
Total Revenues ......................... $269,704 $313,798 (14.1)%
Revenues for the three months ended March 31, 2001 and 2000 consisted
primarily of: (1) travel revenues and (2) other revenues.
Travel Revenues
Travel revenues for the three months ended March 31, 2001 consisted
primarily of: (1) transaction revenues representing the selling price of airline
tickets, hotel rooms and rental cars; and (2) ancillary fees we earned in
connection with the sale of our travel products, including Worldspan reservation
booking fees and customer processing fees. Travel revenues for the three months
ended March 31, 2000 consisted primarily of: (1) transaction revenues
representing the selling price of airline tickets, hotel rooms and rental cars;
and (2) ancillary fees we earned in connection with the sale of our travel
products, including Worldspan reservation booking fees, customer processing fees
and fee income from marketing programs offered in connection with the sale of
airline tickets, hotel rooms and rental cars.
During the three months ended March 31, 2001, we sold approximately 1.1
million, 433,000 and 607,000 airline tickets, hotel room nights and rental car
days, respectively. During the three months ended March 31, 2000, we sold
approximately 1.3 million, 410,000 and 230,000 airline tickets, hotel room
nights and rental car days, respectively.
Our "bind" rate is 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. Our "bind rate" for all unique airline ticket, hotel room and rental
car offers were as follows:
Unique Offers For
-----------------
Airline Hotel Rental
Tickets Rooms Cars
------- ----- ----
Three Months Ended March 31, 2001 50.9% 53.5% 46.2%
Three Months Ended March 31, 2000 44.0% 47.0% 41.6%
We added approximately 891,000 new customers during the three months ended
March 31, 2001 compared to 1.5 million new customers during the three months
ended March 31, 2000. In addition, we generated approximately 1.2 million repeat
customer offers during the three months ended March 31, 2001 compared to 833,000
repeat customer offers during the three months ended March 31, 2000. A unique
customer is defined as someone who has made a guaranteed offer for at least one
of our products. We believe that the quarter over quarter
16
decline in the number of new customer offers was primarily the result of a
decrease in the momentum of our business in the second half of 2000 as the
result of, among other things, the closing of WebHouse Club, Inc., one of our
licensees, negative news stories related primarily to customer service issues
and the decline in our stock price, all of which continued to have negative
impact on our business in the first quarter 2001.
Travel revenues for the three months ended March 31, 2001 decreased
approximately 14.3% to $267.0 million from approximately $311.6 million for the
three months ended March 31, 2000, primarily as a result of the decrease in the
momentum of our business in the second half of 2000 due to the factors described
above and an attempt to increase travel margins over 2000 levels. Ancillary fee
revenues we earned in connection with the sale of our travel products for the
three months ended March 31, 2001 increased from the same period a year ago
primarily as a result of an increase in our customer processing fees in the
airline and hotel room and rental car services.
Seasonal variations in our travel business, where the third and fourth
quarters are typically weaker than the first two quarters, have historically and
are expected to continue to impact our travel revenues. Travel products,
particularly airline tickets, continue to account for the majority of our
revenue.
Other Revenues
Other revenues during the three months ended March 31, 2001 consisted
primarily of: (1) transaction revenues and fees from our long distance phone
service and (2) commissions and fees from our home financing and automobile
services, and license fees from our international licensees. Other revenues
during the three months ended March 31, 2000 consisted primarily of commissions
and fees from our home financing and automobile services and WebHouse Club
licensee.
Other revenues for the three months ended March 31, 2001 increased
approximately 22.5% to $2.7 million from $2.2 million for the three months ended
March 31, 2000, primarily as a result of the introduction of long distance
services during the second quarter 2000 and an increase in fee income received
from our financial and auto service products, which were introduced in the first
quarter of 2000.
Cost of Revenues and Gross Profit
Three Months Ended %
March 31, Change
--------- ------
($000)
2001 2000
---- ----
Cost of Travel Revenues ........... $ 225,496 $ 265,051 (14.9)%
% of Travel Revenues ........... 84.4% 85.1%
Cost of Other Revenues ............ $ 1,093 $ 101 982.2%
% of Other Revenues ............ 40.7% 4.6%
Total Cost of Revenues ............ $ 226,589 $ 265,152 (14.5)%
% of Revenues .................. 84.0% 84.5%
Cost of Revenues
Cost of Travel Revenues. Cost of travel revenues consist of product costs
and supplier warrant costs. For the three months ended March 31, 2001 and 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; and (3) the cost of rental
cars from our suppliers, net of applicable taxes.
17
Cost of Other Revenues. For the three months ended March 31, 2001, cost of
other revenues consisted of the cost of long distance telephone service.
Gross Profit
Three Months Ended %
March 31, Change
--------- ------
($000)
2001 2000
---- ----
Travel Gross Profit ................. $ 41,524 $ 46,556 (10.8)%
Travel Gross Margin ............. 15.6% 14.9%
Other Gross Profit .................. $ 1,591 $ 2,090 (23.9)%
Other Gross Margin ............... 59.3% 95.4%
Total Gross Profit .................. $ 43,115 $ 48,646 (11.4)%
Total Gross Margin ............... 16.0% 15.6%
Travel Gross Profit. Travel gross profit consists of travel revenues less
the cost of travel revenues. For the three months ended March 31, 2001, travel
gross profit decreased over the same period in 2000 as a result of the decline
in transaction volume as the result of the decline in the momentum of our
business described above. We have increased the average margin on air tickets
and hotel rooms as compared to the same period in 2000. The fee portion of the
travel transactions are an integral component in pricing acceptance decisions we
make.
For the three months ended March 31, 2001, consistent with our intentions,
travel gross margin increased from the same period of 2000 as a result of
increased average margin on air tickets and hotel rooms and increased Worldspan
and customer processing fees. We intend to continue to improve travel gross
margin slightly in 2001, which may adversely affect our ability to promote
top-line revenue growth.
Other Gross Profit. Other gross profit consists of other revenues less the
cost of other revenues.
Operating Expenses
Sales and Marketing
Three Months Ended %
March 31, Change
--------- ------
($000)
2001 2000
---- ----
Advertising ............................... $16,189 $20,339 (20.4)%
Other Sales & Marketing ................... 14,434 20,110 (28.2)%
------- -------
Total ..................................... $30,623 $40,449 (24.3)%
% of Revenues ............................. 11.4% 12.9%
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
months ended March 31, 2001, advertising expenses decreased over the same period
in 2000 primarily due to an overall decline in the cost of
18
advertising and an effort to reduce our advertising spending. We intend to
continue to pursue an advertising and branding campaign at lower spending
levels. We intend to decrease significantly our advertising expense in the
remainder of 2001 from levels in corresponding periods of 2000 and place greater
reliance on tactical radio and direct marketing programs and campaigns targeting
our large customer base. There can be no assurance that we will be successful in
achieving revenue growth targets as advertising spending is reduced.
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 months ended
March 31, 2001, other sales and marketing expenses decreased over the same
period in 2000 due to decreases in customer offers and revenue as well as
reductions in the average credit card and customer service transaction costs.
General and Administrative
Three Months Ended %
March 31, Change
--------- ------
($000)
2001 2000
---- ----
General & Administrative ..................... $ 9,404 $12,704 (26.0)%
Payroll Tax Expense on Employee
Stock Options ............................ 23 5,907 (99.6)%
Stock Based Compensation ..................... 5,157 --
------- -------
Total ........................................ $14,584 $18,611 (49.3)%
% of Revenues ................................ 5.4% 5.9%
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 decreased during
the three months ended March 31, 2001 over the same period in 2000 as a result
of decreased headcount and resulting payroll and overhead costs associated with
the shift in focus to our core travel products and the indefinite postponement
of other product initiatives. In addition, for the three months ended March 31,
2001, we incurred charges of approximately $23,000 for payroll taxes relating to
options exercised under our employee stock option plans. For the three months
ended March 31, 2000, payroll taxes relating to options exercised in accordance
with our employee stock option plans amounted to $5.9 million. Additionally, in
2001, the Company incurred approximately $5.2 million of amortization of
deferred compensation related primarily to the grant of restricted stock in the
fourth quarter 2000.
19
Systems and Business Development
Three Months Ended %
March 31, Change
--------- ------
($000)
2001 2000
---- ----
Systems & Business Development ....... $ 11,112 $ 5,868 89.4%
% of Revenues ........................ 4.1% 1.9%
Systems and business development expenses 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 months ended March
31, 2001, systems and business development expenses increased over the same
periods in 2000 due primarily to increases in depreciation and amortization,
costs associated with improving the redundancy of our data center, and a
decrease in the amounts reimbursed by licensees.
Restructuring Charge
In the first quarter 2001, we recorded a restructuring charge of
approximately $1.4 million. The restructuring related primarily to the reduction
of our work force in February 2001. The charge relates primarily to severance
payments and we believe the entire amount of the charge will be disbursed during
2001.
Interest Income, Net
Three Months Ended %
March 31, Change
--------- ------
($000)
2001 2000
---- ----
Interest Income, Net .............. $1,776 $2,715 (34.6)%
For the three months ending March 31, 2001, interest income on cash and
marketable securities decreased primarily due to lower cash balances available
for investment.
Liquidity and Capital Resources
As of March 31, 2001, we had approximately $142.6 million in cash, cash
equivalents, restricted cash and short-term investments. Approximately $17.5
million is restricted cash collateralizing certain letters of credit issued in
favor of certain suppliers and landlords. 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 used in operating activities was $6.3 million for the three
months ended March 31, 2001. Net cash used by operating activities during the
first quarter of 2001 was primarily attributable to net loss from operations and
an increase in accounts receivables. Net cash used in operating activities was
$5.5 million for the three months ended March 31, 2000. Net cash used in
operating activities during the first quarter of 2000 was primarily attributable
to net losses from operations and an increase in accounts receivables.
Net cash used in investing activities was $22.0 million and $10.6 million
for the three months ended March 31, 2001 and 2000, respectively. Net cash used
in investing activities for the first quarter 2001 was primarily related to the
purchase of short-term marketable securities. In the first quarter 2000, we
purchased property and equipment and made certain minority equity investments.
20
In December 1999, we made an investment of $2.0 million in Lending Tree.
In the first quarter 2001, we incurred a $946,000 loss on the sale of all of our
holdings in Lending Tree.
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. Capital expenditures for 2001
are expected to be approximately $15.0 million to $20.0 million and will be
primarily focused on computer equipment, software and internally developed
software.
Net cash provided by financing activities was $49.9 million for the three
months ended March 31, 2001, primarily as a result of the sale of 23.8 million
shares of common stock at a price of $2.10 per share to Hutchison-Whampoa
Limited and Cheung Kong (Holdings) Limited in February 2001. Net cash provided
by financing activities was $10.2 million for the three months ended March 31,
2000, primarily as a result of the exercise of stock options by employees.
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. 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.
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 continue to attract leading sellers and consumers to the
priceline.com service;
o maintain and enhance our brand;
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.
21
We Are Not Profitable and May Continue to Incur Losses
As of March 31, 2001, we had an accumulated deficit of $1.5 billion. We
have not achieved profitability and may continue to incur losses. A substantial
portion of our revenues to date have been derived from travel products. Over
time, we may introduce new products and services. With respect to current
product and service offerings, we may not have decreased our operating expenses
in connection with our recent restructuring sufficiently to attain
profitability. With respect to possible future product and service offerings, we
may have to increase our operating expenses. For us to make a profit, our
revenues and gross profit margins will need to increase sufficiently to cover
these and other possible future costs. Otherwise, we may never achieve
profitability.
Potential Fluctuations in Our Financial Results Make Financial Forecasting
Difficult
Our revenues and operating results have varied significantly from quarter
to quarter and our revenues and operating results may continue 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,
especially when compared to "brick and mortar" companies, still relatively new
and unproven, it may be difficult to predict our future revenues or results of
operations accurately. Our operating results have recently fallen below the
expectations of securities analysts and investors and may, in one or more future
quarters, fall below such expectations again. 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. Despite our recent restructurings, we may be unable to
further 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 makes it difficult for us to assess the
impact of seasonal factors on our business. Nevertheless, we believe that our
business is 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. We
believe that our results are affected by seasonal fluctuations in the inventory
made available to the priceline.com service by participating sellers, especially
airlines. 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 us. 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. These
factors could have an adverse effect on our business and results of operations.
We Are Dependent On the Airline Industry and Certain Airlines
Our financial 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 three months ended March 31, 2001.
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. Further, work stoppages or labor unrest at any of the major
airlines could materially and adversely affect the airline industry and, as a
consequence, our business.
Sales of airline tickets from our seven largest airline suppliers
accounted for approximately 90.8% and 92.4%, respectively, of airline ticket
revenue for the three months ended March 31, 2000 and 2001, respectively. As a
result, currently we are substantially dependent upon the continued
participation of these airlines in the
22
priceline.com service in order to maintain and continue to grow our total
airline ticket revenues and, as a consequence, our overall revenues. We expect
that our travel revenues for the six months ended June 30, 2001, will be
significantly less than our travel revenues for the six months ended June 30,
2000.
We currently have 34 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 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, we believe that the
decline in our revenues in the third quarter 2000 when compared to the
immediately preceding quarter was attributable, in part, to specific events in
the airline industry, including a $20 fuel surcharge imposed 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 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, or our competitors, could exert pressure on other
airlines not to supply us with tickets. Moreover, the airlines may attempt to
establish their own buyer-driven commerce service or participate or invest in
other similar services, like Hotwire, a Web site that offers discounted fares on
opaque inventory, that compete directly with us. We also could be materially
adversely affected by the bankruptcy, consolidation, 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
23
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 and the slowdown in our business momentum in the
second half of 2000 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 May Not Be Able to Introduce New Products and Services
Should we decide to introduce additional products, we may incur
substantial expenses and use significant resources. 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.
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 priceline.com and the decline in the
market price of our common stock and by limitations on our ability to pay cash
compensation that is equivalent to cash paid by traditional businesses and
limitations imposed by our employee benefit plans to issue additional equity
incentives.
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. In particular, our travel business is substantially dependent upon
the computerized reservation system of Worldspan, an operator of a database for
the travel industry. Any interruption in these third-party services systems,
including Worldspan's, or deterioration in their performance could have a
material adverse effect on our business. Our agreements with third-party service
providers are terminable upon short notice and often do not provide recourse for
service interruptions. In the event our arrangement with any of such third
parties is terminated, we may not be able to find an alternative source of
systems support on a timely basis or on commercially reasonable terms and, as a
result, our business and results of operations could be materially and adversely
affected.
Intense Competition Could Reduce Our Market Share and Harm Our Financial
Performance
We compete with both online and traditional sellers of the products and
services offered on priceline.com. Current and new competitors can launch new
sites at a relatively low cost. In addition, the traditional retail industry for
the products and services we offer is intensely competitive.
We currently or potentially compete with a variety of companies with
respect to each product or service we offer. With respect to travel products,
these competitors include:
24
o Internet travel services such as Expedia, Travelocity.com and
Hotwire, a Web site that offers discounted fares on opaque
inventory;
o traditional travel agencies;
o consolidators and wholesalers of airline tickets and other
travel products, including consolidators such as
Cheaptickets.com and Hotel Reservation Network;
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.
A number of airlines have invested in and offer discount airfares and
travel services through the Orbitz internet travel service, and a number of
airlines, including a number that participate in our system, participate in and
have received an equity stake from Hotwire. 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.
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 and Microsoft's CarPoint. 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 banks and brokers, including Quicken
Mortgage and E-Loan; and
o insurance companies.
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 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. 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
25
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 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 of
this Form 10-Q - "Legal Proceedings." The defense of the actions described in
Item 1 may increase our expenses and an adverse outcome in any of such actions
could have a material adverse effect on our business and results of operations.
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 relatively new and emerging market. As an Internet commerce business, our
future revenues and profits are substantially dependent upon the
26
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 significant growth in the number of users and
amount of traffic over the recent past. 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 and could have a
material adverse effect upon our business and results of operations.
Capacity Constraints and System Failures Could Harm Our Business
If our systems cannot be expanded to cope with increased demand, fails to
perform, or we experience unanticipated problems in connection with the current
move of our network operations center from Stamford, Connecticut to Norwalk,
Connecticut, 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
27
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 business and results of operations.
We May Not Be Able to Keep Up with Rapid Technological and Other Changes
The markets in which we compete are characterized by rapidly changing
technology, evolving industry standards, frequent new service and product
announcements, introductions and enhancements and changing consumer demands. We
may not be able to keep up with these rapid changes. In addition, these market
characteristics are heightened by the emerging nature of the Internet and the
apparent need of companies from many industries to offer Internet-based products
and services. As a result, our future success will depend on our ability to
adapt to rapidly changing technologies, to adapt our services to evolving
industry standards and to continually improve the performance, features and
reliability of our service in response to competitive service and product
offerings and the evolving demands of the marketplace. In addition, the
widespread adoption of new Internet, networking or telecommunications
technologies or other technological changes could require us to incur
substantial expenditures to modify or adapt our services or infrastructure.
Online Security Breaches Could Harm Our Business
The secure transmission of confidential information over the Internet is
essential in maintaining consumer and supplier confidence in the priceline.com
service. Substantial or ongoing security breaches - whether instigated
internally or externally -- 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.
New Businesses We May Enter or Our Existing Licensees May Not Be
Successful
We have entered into, and may enter into in the future, licensing or other
arrangements with third parties in connection with expansion of the
priceline.com service. 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 the development of our business model
abroad. 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
28
businesses are not successful, we may not be able to recover or be reimbursed
for our ongoing costs associated with their development, which could have a
material adverse effect on our business and results of operations.
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 our capital structure;
o changes in market valuations of other Internet or online
service companies;
o announcements of technological innovations or new services by
us or our competitors;
o announcements by us or our competitors of significant
contracts, acquisitions, strategic partnerships, joint
ventures or capital commitments;
o loss of a major seller participant, such as an airline or
hotel chain;
o changes in the status of our intellectual property rights;
o lack of success in the expansion of our business model
horizontally or geographically;
o adverse publicity surrounding recent announcements concerning
priceline.com;
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
29
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 and other
litigation could result in substantial costs and divert management's attention
and resources.
Uncertainty Regarding 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). 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. See
"Government Regulation."
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
Sections of this Form 10-Q contain forward-looking statements. These
forward-looking statements are not guarantees of future performance and are
subject to certain risks, uncertainties and assumptions that are difficult to
predict; therefore, actual results may differ materially from those expressed,
implied or forecasted in any such 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," "targets, " 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: adverse
changes in our relationships with airlines and other product and service
providers; adverse changes in general market conditions for leisure and other
travel products; 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 the section
entitled "Factors That May Affect Future Results." Unless required by law, we
undertake no obligation to update publicly any forward-looking
30
statements, whether as a result of new information, future events or otherwise.
However, readers should carefully review the reports and documents we file from
time to time with the Securities and Exchange Commission, particularly the
Quarterly Reports on Form 10-Q and any Current Reports on Form 8-K.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Priceline.com currently has no floating rate indebtedness, holds no
derivative instruments other than through investments in licensees and does not
earn significant foreign-sourced income. Accordingly, changes in interest rates
or currency exchange rates do not generally have a direct effect on
priceline.com's financial position. However, changes in currency exchange rates
may affect the cost of international airline tickets and international hotel
reservations offered through the priceline.com service, and so indirectly affect
consumer demand for such products and priceline.com's revenue. In addition, to
the extent that changes in interest rates and currency exchange rates affect
general economic conditions, priceline.com would also be affected by such
changes.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Please see Note 9 to the Notes to Unaudited Consolidated Financial
Statements included in this Form 10-Q and Part I, Item 3 of priceline.com's
Annual Report on Form 10-K for the year ended December 31, 2000.
Item 2. Changes in Securities and Use of Proceeds
On February 6, 2001, Delta Air Lines, Inc. exchanged six million shares of
Series A Convertible Redeemable PIK Preferred Stock of priceline.com for 80,000
shares of Series B Redeemable Preferred Stock of priceline.com and received
warrants to purchase approximately 27 million shares of our common stock at an
exercise price of $2.97 per share. In connection with the exchange and the
subsequent issuance of Series B preferred stock and warrants, we relied on
Section 3(a)(9) of the Securities Act of 1933, as amended.
On February 15, 2001, Hutchison Whampoa Limited and Cheung Kong (Holdings)
Limited purchased approximately 23.8 million shares of priceline.com common
stock at $2.10 per share. In connection with the sale, Hutchison and Cheung Kong
received certain registration rights and Hutchison received a seat on our Board
of Directors. In connection with the sale of the shares of common stock, we
relied on Section 4(2) of the Securities Act of 1933, as amended.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Description
- ------ -----------
10.66 Employment letter, dated February 9, 2001, by and between
priceline.com and Peter J. Millones.
(b) Reports on Form 8-K
On February 8, 2001, we filed a report on Form 8-K in connection with the
restructuring of Delta Air Lines, Inc.'s investment in priceline.com. On
February 16, 2001, we filed a report on Form 8-K announcing our fourth quarter
2000 and year-ended 2000 earnings and the investment by Hutchison-Whampoa and
Cheung Kong (Holdings) Limited in priceline.com.
31
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: May 15, 2001 By: /s/ Robert Mylod
-------------------------------------
Name: Robert Mylod
Title: Chief Financial Officer
32