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 June 30, 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 August 10, 2001:
Common Stock, par value $0.008 per share 220,312,862
- -------------------------------------------------- ---------------------------
(Class) (Number of Shares)
<Page>
priceline.com Incorporated
Form 10-Q
For the Quarter Ended June 30, 2001
PART I - UNAUDITED FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
<Table>
Consolidated Balance Sheets at June 30, 2001 and December 31, 2000 ............. 3
Consolidated Statements of Operations For the Three and Six Months
Ended June 30, 2001 and 2000 ............................................ 4
Consolidated Statement of Changes in Stockholders' Equity For the Six Months
Ended June 30, 2001 ..................................................... 5
Consolidated Statements of Cash Flows For the Six Months Ended June 30, 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 4. Submission of Matters to a Vote of Security Holders..................... 30
Item 6. Exhibits and Reports on Form 8-K ....................................... 30
SIGNATURES ..................................................................... 32
</Table>
2
<Page>
PART I - UNAUDITED FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
priceline.com Incorporated
CONSOLIDATED BALANCE SHEETS
(In thousands)
<Table>
<Caption>
JUNE 30, DECEMBER 31,
2001 2000
---------- ------------
ASSETS (unaudited)
Current assets:
Cash and cash equivalents ........................................................ $ 124,284 $ 77,024
Restricted cash .................................................................. 11,015 13,568
Short-term investments ........................................................... 30,433 10,952
Accounts receivable, net of allowance for doubtful accounts of $2,108 and $2,372 . 25,839 13,889
Note receivable .................................................................. 8,500 --
Prepaid expenses and other current assets ........................................ 10,908 15,790
----------- -----------
Total current assets .......................................................... 210,979 131,223
Property and equipment, net ........................................................... 34,870 37,083
Related party receivable .............................................................. 41 3,503
Warrants to purchase common stock of licensee ......................................... 3,250 3,250
Other assets .......................................................................... 19,521 20,019
----------- -----------
Total assets .................................................................. $ 268,661 $ 195,078
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................................. $ 69,531 $ 40,691
Accrued expenses ................................................................. 32,210 33,172
Other current liabilities ........................................................ 5,161 5,434
----------- -----------
Total current liabilities ..................................................... 106,902 79,297
----------- -----------
Accrued expenses ...................................................................... 3,789 5,108
----------- -----------
Total liabilities ............................................................. 110,691 84,405
----------- -----------
MANDATORILY REDEEMABLE CONVERTIBLE SERIES A PREFERRED STOCK ........................... -- 359,580
MANDATORILY REDEEMABLE SERIES B PREFERRED STOCK ....................................... 55,032 --
Stockholders' equity (deficiency):
Common stock, $0.008 par value, authorized 1,000,000,000 shares; issued 214,946,458
and 181,798,204 shares, respectively ......................................... 1,720 1,454
Treasury stock, 5,450,236 shares .................................................. (326,633) (326,633)
Additional paid-in capital ........................................................ 1,971,588 1,618,956
Deferred compensation ............................................................. (4,304) (13,053)
Accumulated other comprehensive loss .............................................. -- (1,156)
Accumulated deficit ............................................................... (1,539,433) (1,528,475)
----------- -----------
Total stockholders' equity (deficiency).......................................... 102,938 (248,907)
----------- -----------
Total liabilities and stockholders' equity............................................. $ 268,661 $ 195,078
=========== ===========
</Table>
See notes to consolidated financial statements.
3
<Page>
priceline.com Incorporated
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<Table>
<Caption>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2001 2000 2001 2000
-------- --------- --------- ---------
Travel revenues .............................. $362,492 $ 346,822 $ 629,512 $ 658,429
Other revenues 2,264 5,273 4,948 7,464
-------- --------- --------- ---------
Total revenues ........................... 364,756 352,095 634,460 665,893
Cost of travel revenues ...................... 303,979 296,386 529,475 561,056
Cost of other revenues ....................... 671 533 1,764 634
Supplier warrant costs ....................... -- 381 -- 762
-------- --------- --------- ---------
Total costs of revenues .............. 304,650 297,300 531,239 562,452
Gross profit ................................. 60,106 54,795 103,221 103,441
-------- --------- --------- ---------
Operating expenses:
Sales and marketing....................... 32,818 37,617 63,441 78,066
General and administrative ............... 7,477 15,222 16,881 27,926
Payroll tax expense on employee stock
options .............................. 367 2,507 390 8,414
Stock based compensation ................. 3,140 -- 8,297 --
Systems and business development ......... 9,892 6,695 21,004 12,563
Restructuring charge ..................... -- -- 1,400 --
Severance charge ......................... 5,412 -- 5,412 --
-------- --------- --------- ---------
Total operating expenses ............. 59,106 62,041 116,825 126,969
Operating income (loss) ...................... 1,000 (7,246) (13,604) (23,528)
Other income:
Loss on sale of equity investment ........ -- -- (946) --
Interest income .......................... 1,816 2,725 3,592 5,440
-------- --------- --------- ---------
Total other income
1,816 2,725 2,646 5,440
Net income (loss) ............................ 2,816 (4,521) (10,958) (18,088)
Preferred stock dividend ..................... -- (7,191) -- (7,191)
-------- --------- --------- ---------
Net income (loss) applicable to common
stockholders ............................. $ 2,816 $ (11,712) $ (10,958) $ (25,279)
======== ========= ========= =========
Net income (loss) applicable to common
stockholders per basic common share ...... $ 0.01 $ (0.07) $ (0.06) $ (0.15)
======== ========= ========= =========
Weighted average number of basic common
shares outstanding ........................... 196,581 165,399 188,890 166,051
======== ========= ========= =========
Net income (loss) applicable to common
stockholders per diluted common share .... $ 0.01 $ (0.07) $ (0.06) $ (0.15)
======== ========= ========= =========
Weighted average number of diluted common
shares outstanding ........................... 220,021 165,399 188,890 166,051
======== ========= ========= =========
</Table>
See notes to consolidated financial statements.
4
<Page>
priceline.com Incorporated
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
AS OF JUNE 30, 2001
(UNAUDITED)
(IN THOUSANDS)
<Table>
<Caption>
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER
------------------ PAID-IN ACCUMULATED COMPREHENSIVE
SHARES AMOUNT CAPITAL DEFICIT INCOME
------- ------- ----------- ----------- -------------
Balance, January 1, 2001 ............ 181,798 $ 1,454 $ 1,618,956 $(1,528,475) $(1,156)
Net loss applicable to common
stockholders ........................ -- -- -- (10,958) --
Sale of equity investments .......... -- -- -- -- 1,156
Exchange of preferred stock ......... -- -- 279,530 -- --
Issuance of common stock under
deferred compensation plans ......... 170 1 525 -- --
Cancellation of common stock under
deferred compensation
plans ............................... (500) (4) (762) -- --
Amortization of deferred compensation -- -- -- -- --
Share withholding ................... (782) (6) (4,431) -- --
Sale of common stock ................ 23,809 191 49,318 -- --
Exercise of stock options and
Warrants ............................ 10,451 84 28,452 -- --
Balance, June 30, 2001 .............. 214,946 $ 1,720 $ 1,971,588 $(1,539,433) $ --
======== ======= =========== =========== =======
<Caption>
TREASURY STOCK
------------------- DEFERRED
SHARES AMOUNT COMPENSATION TOTAL
------ --------- ------------ ---------
Balance, January 1, 2001 ......... (5,450) $(326,633) $(13,053) $(248,907)
Net loss applicable to common
stockholders ..................... -- -- -- (10,958)
Sale of equity investments ....... -- -- -- 1,156
Exchange of preferred stock ...... -- -- -- 279,530
Issuance of common stock under
deferred compensation plans ...... -- -- (526) --
Cancellation of common stock under
deferred compensation
plans ............................ -- -- 766 --
Amortization of deferred
compensation ..................... -- -- 8,509 8,509
Shares reacquired for withholding
taxes........................... -- -- -- (4,437)
Sale of common stock ............. -- -- -- 49,509
Exercise of stock options and
warrants ......................... -- -- -- 28,536
------ --------- -------- ---------
Balance, June 30, 2001 ........... (5,450) $(326,633) $ (4,304) $ 102,938
====== ========= ======== =========
</Table>
See notes to consolidated financial statements.
5
<Page>
priceline.com Incorporated
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<Table>
<Caption>
SIX MONTHS ENDED
JUNE 30,
2001 2000
--------- ---------
OPERATING ACTIVITIES:
Net loss ........................................................... $ (10,958) $ (18,088)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization ................................ 8,146 6,249
Provision for uncollectible accounts ......................... 6,542 1,800
Warrant costs ................................................ -- 762
Net loss on sale of equity investments ....................... 946 --
Acceleration of stock options ................................ 61 --
Non-cash severance ........................................... 3,076 --
Amortization of deferred compensation ........................ 8,509 --
Changes in assets and liabilities:
Accounts receivable .......................................... (18,126) (29,718)
Prepaid expenses and other current assets .................... (368) (9,945)
Accounts payable and accrued expenses ........................ 26,286 51,293
Issuance of short-term note receivable ....................... (3,250) --
Other ........................................................ 366 1,652
--------- ---------
Net cash provided by operating activities .......................... 21,230 4,005
--------- ---------
INVESTING ACTIVITIES:
Additions to property and equipment .......................... (5,800) (19,843)
Purchase of convertible notes and warrants of licensees ...... -- (24,706)
Proceeds from sales of investments ........................... 770 (4,502)
Funding of restricted cash and bank certificate of deposits .. 2,553 230
Purchase of marketable securities ............................ (20,042) (5,000)
--------- ---------
Net cash used in investing activities .............................. (22,519) (53,821)
--------- ---------
FINANCING ACTIVITIES:
Payment of capital lease obligations ......................... -- (14)
Shares reacquired for withholding taxes....................... (4,431) --
Proceeds from sale of common stock/purchase of warrants, net . 49,459 --
Proceeds from exercise of stock options ...................... 3,521 12,322
--------- ---------
Net cash provided by financing activities .......................... 48,549 12,308
--------- ---------
Net increase (decrease) in cash and cash equivalents ............... 47,260 (37,508)
Cash and cash equivalents, beginning of period ..................... 77,024 124,383
--------- ---------
Cash and cash equivalents, end of period ........................... $ 124,284 $ 86,875
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for interest ..................... $ 0 $ 1
========= =========
</Table>
See notes to consolidated financial statements.
6
<Page>
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.
Certain amounts in prior years' financial statements have been
reclassified to conform to the current year presentation.
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.
3. RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141 ("SFAS 141"), "Business
Combinations." SFAS 141 requires the purchase method of accounting for business
combinations initiated after June 30, 2001 and eliminates the
pooling-of-interests method. The Company does not believe that the adoption of
SFAS 141 will have a significant impact on its financial statements.
In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets," which is effective
January 1, 2002. SFAS 142 requires, among other things, the discontinuance of
goodwill amortization. In addition, the standard includes provisions for the
reclassification of certain existing recognized intangibles as goodwill,
reassessment of the useful lives of existing recognized intangibles,
reclassification of certain intangibles out of previously reported goodwill and
the identification of reporting units for purposes of assessing potential future
impairments of goodwill. SFAS 142 also requires the Company to complete a
transitional goodwill impairment test six months from the date of adoption. The
Company is currently assessing but has not yet determined the impact of SFAS 142
on its financial position and results of operations.
4. RESTRUCTURING, SPECIAL AND SEVERANCE CHARGES
In the first quarter of 2001, the Company recorded a restructuring charge
of approximately $1.4 million. This restructuring charge 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 $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 half of 2001 (in thousands):
7
<Page>
<Table>
<Caption>
RESTRUCTURING SPECIAL SEVERANCE TOTAL
------------- -------- --------- -------
Accrued at December 31, 2000 ..... $ 13,470 $ 11,093 -- $24,563
2001 restructuring charge ........ 1,400 -- -- 1,400
2001 severance charge ............ -- -- 5,412 5,412
Disbursed during 2001 ............ (6,315) (6,762) -- (13,077)
Acceleration of vesting
and loan forgiveness (non-cash) .. -- -- (4,325) (4,325)
Accrued at June 30, 2001 ......... $ 8,555 $ 4,331 $ 1,087 $13,973
-------- -------- -------- -------
At June 30, 2001:
Current Portion ............... $ 4,766 $ 4,331 $ 1,087 $10,184
Long-term portion ............. 3,789 -- -- 3,789
</Table>
On May 7, 2001, the Company's Board of Directors announced that Richard S.
Braddock had been reappointed as Chief Executive Officer. Mr. Braddock replaced
Daniel H. Schulman, the Company's prior President and Chief Executive Officer.
In connection with Mr. Schulman's separation from the Company, the Company
recorded a severance charge of $5.4 million in the second quarter 2001,
primarily as the result of the forgiveness of outstanding loans to Mr. Schulman
and the payment of severance, all of which was required by the terms of Mr.
Schulman's employment agreement. The Company also accelerated, pursuant to the
terms of Mr. Schulman's employment agreement, the vesting of 2,000,000 shares of
restricted common stock and 1,000,000 shares underlying stock options granted to
Mr. Schulman.
5. OTHER ASSETS AND WARRANTS TO PURCHASE COMMON STOCK OF LICENSEE
Other assets consists of the following as of June 30, 2001 (in thousands):
<Table>
Convertible loans and other advances - priceline Asia $11,110
Convertible loans and other advances - Alliance Partner Capital/My Price 6,456
Other 1,955
-------
Total $19,521
=======
</Table>
"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 June 30, 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.
On June 28, 2001 and August 10, 2001, priceline.com europe Ltd issued to
the Company an $8.5 million promissory note and a $1.5 million promissory note,
respectively, in exchange for an aggregate of $10.0 million.
6. 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
8
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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 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 the related compensation
expense will be amortized over the vesting period.
During the second quarter 2001, the Company issued 50,000 shares of
restricted stock to employees. The accrual for the shares issued was recorded at
the market value on the date of grant ($5.19) and the related compensation
expense will be amortized over the vesting period.
During the second quarter 2001, the Company repurchased shares of common
stock, at fair market value upon employee option exercise or share vesting, to
meet such employees' minimum tax statutory withholding.
7. 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.
Pursuant to the terms of the certificate of designations relating to the
Series B Preferred Stock, 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.
During the second quarter 2001, as the result of the exercise of
approximately 8.4 million warrants, the liquidation preference of the Series B
preferred stock was reduced from $80 million to approximately $55 million.
On July 27, 2001, Delta exercised warrants to purchase 10 million shares
of the Company's common stock. As a result, the liquidation preference of the
Company's outstanding Series B Redeemable Preferred Stock has been reduced to
approximately $25 million. In accordance with the terms of the Series B
Preferred Stock, the Company delivered 986,491 shares of the Company's common
stock to Delta on August 6, 2001 as a dividend payment and, as a result, the
Company will record a non-cash dividend of $8.6 million in the third quarter of
2001. As a result of Delta's warrant exercises, the Company's future semi-annual
dividend has been reduced to 454,323 shares of common stock.
8. 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
9
<Page>
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 alleged 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 alleged, 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 alleged
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
had been assigned to priceline.com. Marketel asked 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 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 had 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.
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).
10
<Page>
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).
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).
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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.
In addition, the Company has been served with a complaint that purports to
be a shareholder derivative action against the Company's Board of Directors and
certain of its current executive officers, as well as priceline.com (as a
nominal defendant). The complaint alleges breach of fiduciary duty. The action
is captioned Mark Zimmerman v. Richard Braddock, J. Walker, 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.
Pursuant to a stipulation by the parties, an amended complaint was filed on June
21, 2001. Defendants may renew their motion to dismiss or answer the complaint
by August 20, 2001. The Company intends to defend vigorously against this
action.
On March 16, March 26, April 27, and June 5, 2001, respectively, four
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, 01 Civ. 3590 and
01 Civ. 4956). SHIVES ET AL. V. BANK OF AMERICA SECURITIES LLC ET AL., 01 Civ.
4956, also names other defendants and states claims unrelated to the Company.
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.
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.
9. SUBSEQUENT EVENTS
On June 5, 2001, Cheung Kong (Holdings) Limited and Hutchison Whampoa
Limited announced that they had entered into an agreement to increase their
stake in the Company by purchasing an aggregate of 25,028,023 shares of the
Company's common stock from the Company's founder Jay S. Walker and his trust.
The purchase closed on July 6, 2001. As a result of their purchase, Cheung Kong
and Hutchison owned approximately 28% of the Company's outstanding common stock
as of August 10, 2001. In connection with the transaction, Cheung Kong and
Hutchison received a total of two additional seats on the Company's Board of
Directors, bringing their total representation on the Company's Board of
Directors to three members.
On August 11, 2001, pursuant to the terms of a registration rights
agreement and stockholders agreement between certain affiliates of Cheung Kong
and Hutchison (the "Hutchison Entities") and the Company, the Hutchison Entities
requested that the Company file and maintain the effectiveness of a shelf
registration statement with respect to all of the shares of the Company's Common
stock held by the Hutchison Entities. In connection with the notice to the
Company, Cheung Kong and Hutchison noted that the request to file the shelf
registration was consistent with their standard corporate policy and required of
all their investments in order to maintain maximum flexibility. In addition,
Cheung Kong and Hutchison noted that they had no present intention to sell their
interest in the Company and fully supported the Company and its long-term plan.
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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 two 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.
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On May 7, 2001, our Board of Directors announced that Richard S. Braddock
had been reappointed as Chief Executive Officer. Mr. Braddock replaced Daniel H.
Schulman, our prior President and Chief Executive Officer. At that time, we also
announced that Chief Operating Officer Jeffery H. Boyd was named President of
priceline.com and that Mr. Schulman had resigned from our Board of Directors. In
connection with Mr. Schulman's separation from the company, we recorded a
severance charge of $5.4 million in the second quarter 2001, primarily as the
result of the forgiveness of outstanding loans to Mr. Schulman and the payment
of severance, all of which was required by the terms of Mr. Schulman's
employment agreement. We also accelerated, pursuant to the terms of Mr.
Schulman's employment agreement, the vesting of 2,000,000 shares of restricted
common stock and 1,000,000 shares underlying stock options granted to Mr.
Schulman.
For the three-months ended June 30, 2001, we had net income of $2.8
million, marking our first profitable quarter. We believe that our success will
depend in large part on our ability to sustain 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 sustain profitability. Our limited operating history makes the
prediction of future results of operations difficult, and accordingly, we cannot
assure you that we will sustain revenue growth or profitability.
RECENT DEVELOPMENTS
On June 5, 2001, Cheung Kong (Holdings) Limited and Hutchison Whampoa
Limited announced that they had entered into an agreement to increase their
stake in priceline.com by purchasing an aggregate of 25,028,023 shares of
priceline.com common stock from priceline.com's founder Jay S. Walker and his
trust. The purchase closed on July 6, 2001. As a result of their purchase,
Cheung Kong and Hutchison own approximately 28% of priceline.com's outstanding
common stock as of August 10, 2001. In connection with the transaction, Cheung
Kong and Hutchison received a total of two additional seats on our Board of
Directors, bringing their total representation on our Board of Directors to
three members.
On August 11, 2001, pursuant to the terms of a registration rights
agreement and stockholders agreement between certain affiliates of Cheung Kong
and Hutchison (the "Hutchison Entities") and us, the Hutchison Entities
requested that we file and maintain the effectiveness of a shelf registration
statement with respect to all of the shares of our Common Stock held by the
Hutchison Entities. In connection with the notice, Cheung Kong and Hutchison
noted that the request to file the shelf registration was consistent with their
standard corporate policy and required of all their investments in order to
maintain maximum flexibility. In addition, Cheung Kong and Hutchison noted that
they had no present intention to sell their interest in us and fully supported
priceline.com and its long-term plan.
On July 27, 2001, Delta Air Lines, Inc. exercised warrants to purchase 10
million shares of the Company's common stock. As a result, the liquidation
preference of the Company's outstanding Series B Redeemable Preferred Stock has
been reduced to approximately $25 million. In accordance with the terms of the
Series B Preferred Stock, the Company delivered 986,491 shares of the Company's
common stock to Delta on August 6, 2001 as a dividend payment and, as a result,
the Company will record a non-cash dividend of $8.6 million in the third quarter
of 2001. As a result of Delta's warrant exercises, the Company's future
semi-annual dividend has been reduced to 454,323 shares of common stock.
On June 28, 2001 and August 10, 2001, priceline.com europe Ltd. issued and
sold to us an $8.5 million promissory note and a $1.5 million promissory note,
respectively, in exchange for an aggregate of $10.0 million. In addition, we
have entered into a non-binding agreement in principle with General Atlantic
Partners (Bermuda), L.P. pursuant to which we would, subject to the satisfaction
of certain conditions, including negotiation and execution of definitive
agreements, lend an additional $20.0 million to priceline.com europe (the
"Loan"), $10.0 million of which would be used by priceline.com europe to repay
the outstanding promissory notes. The Loan would accrue interest at a rate of
13.5% per annum, would mature on November 30, 2001 and would be subordinated to
priceline.com europe's other liabilities. Priceline.com europe would use the
proceeds from the Loan for general corporate purposes and to fund operations
while it seeks permanent financing. The agreement in principle also contemplates
that upon the occurrence of certain events, we would have, among other things,
the right to receive, in exchange for the promissory note evidencing the Loan, a
substantial equity stake in priceline Europe Holdings, N.V., which would
effectively give us control of priceline.com europe. Please see "Factors that
May Affect Future Results -- There are Risks Associated with our Investment in
Priceline.com europe Ltd."
RESULTS OF OPERATIONS
Three and six months ended June 30, 2001 compared to three and six months ended
June 30, 2000
REVENUES
<Table>
<Caption>
THREE MONTHS ENDED % SIX MONTH ENDED %
JUNE 30, CHANGE JUNE 30, CHANGE
------------------------- ------ ------------------------- ------
($000) ($000)
2001 2000 2001 2000
-------- -------- -------- --------
TRAVEL REVENUES .................. $362,492 $346,822 4.5% $629,512 $658,429 (4.4)%
OTHER REVENUES ................... 2,264 5,273 (57.1)% 4,948 7,464 (33.7)%
-------- -------- -------- --------
TOTAL REVENUES ................... $364,756 $352,095 3.6% $634,460 $665,893 (4.7)%
</Table>
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TRAVEL REVENUES
Travel revenues for the three and six months ended June 30, 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. In addition to the above, travel
revenues for the three and six months ended June 30, 2000 include fee income
from marketing programs offered in connection with the sale of airline tickets,
hotel rooms and rental cars.
During the three and six months ended June 30, 2001, we sold approximately
1.4 million, 680,600 and 922,500 and 2.5 million, 1.1 million and 1.5 million
airline tickets, hotel room nights and rental car days, respectively. During the
three and six months ended June 30, 2000, we sold approximately 1.3 million,
432,500 and 430,000 and 2.5 million, 842,000 and 660,000 airline tickets, hotel
room nights and rental car days, respectively. We believe that the approximately
11.4% increase in the number of airline tickets sold in the second quarter of
2001 over the second quarter 2000 came despite stiff competition from aggressive
discounting by airlines of retail prices and from travel companies offering
specially-discounted Internet fares and opaque fares. We expect this discounting
to continue to occur throughout the third quarter of 2001 and we can give no
assurance that any such discounting will not adversely effect the number of
airline tickets we sell in the third quarter of 2001.
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:
<Table>
<Caption>
UNIQUE OFFERS FOR
------------------------------------
AIRLINE HOTEL RENTAL
TICKETS ROOMS CARS
------- ----- ------
THREE MONTHS ENDED JUNE 30, 2001 57.2% 60.2% 49.8%
THREE MONTHS ENDED JUNE 30, 2000 49.6% 45.3% 40.0%
SIX MONTHS ENDED JUNE 30, 2001 54.4% 57.5% 48.3%
SIX MONTHS ENDED JUNE 30, 2000 46.7% 46.1% 40.5%
</Table>
We believe that our overall bind rate for the three and six months ended
June 30, 2001 increased compared to the same period a year ago primarily due to
our access to better airline inventory as a result of a deterioration in the
retail environment for the sale of airline tickets during 2001.
Travel revenues for the three months ended June 30, 2001 increased
approximately 4.5% to $362.5 million from approximately $346.8 million for the
three months ended June 30, 2000. Travel revenues for the six months ended June
30, 2001 decreased approximately 4.4% to $629.5 million from $658.4 million for
the six months ended June 30, 2000. We added approximately 1,025,000 and 1.9
million new unique customers (a unique customer is defined as someone who has
made a guaranteed offer for at least one of our products) during the three and
six months ended June 30, 2001 compared to approximately 1.5 million and 3.0
million new unique customers during the three and six months ended June 30,
2000. In addition, we generated approximately 1.6 million and 2.8 million repeat
customer offers during the three and six months ended June 30, 2001 compared to
approximately 964,000 and 1.8 million repeat customer offers during the three
and six months ended June 30, 2000. We believe that the declines in travel
revenues for the six month period ended June 30, 2001 compared to the same
period in the previous year and the decline in the number of new unique customer
offers in the three and six month periods ended June 30, 2001 compared to the
same periods a year ago were primarily the result of the lingering effect of a
decrease in the momentum of our business in the second half of 2000.
The average revenue per total booked travel offer decreased approximately
5.2% to $252 in the second quarter 2001 from $266 in the first quarter 2001
primarily as a result of a change in our product mix. Specifically, revenues
from our hotel and rental car businesses grew as a percentage of total travel
revenue in the second quarter 2001 compared to the first quarter 2001. However,
the average price of an airline ticket booked on priceline.com
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remained essentially flat compared to the first quarter 2001 and decreased
approximately 12% from the second quarter 2000 primarily as a result of a
deterioration in the retail environment for the sale of airline tickets in the
second quarter 2001.
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 and six months ended June 30, 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 and six months ended June 30, 2000 consisted primarily
of commissions and fees from our home financing and automobile services and
WebHouse Club licensee.
Other revenues for the three and six months ended June 30, 2001 decreased
approximately 57.1% and 33.7%, respectively, from the same periods a year ago,
primarily as a result of the decrease in fees from our licensees and long
distance phone service.
COST OF REVENUES AND GROSS PROFIT
<Table>
<Caption>
THREE MONTHS ENDED % SIX MONTHS ENDED %
JUNE 30, CHANGE JUNE 30, CHANGE
--------------------------- ------ ------------------------- --------
($000) ($000)
2001 2000 2001 2000
---------- ---------- ---------- --------
TOTAL COST OF TRAVEL REVENUES ............. $ 303,979 $ 296,767 2.4% $ 529,475 $561,818 (5.8)%
% OF TRAVEL REVENUES ................. 83.9% 85.6% 84.1% 85.3%
COST OF OTHER REVENUES .................... $ 671 $ 533 25.9% $ 1,764 $ 634 178.2%
% OF OTHER REVENUES .................. 29.6% 10.1% 35.7% 8.5%
---------- ---------- ---------- --------
TOTAL COST OF REVENUES .................... $ 304,650 $ 297,300 2.5% $ 531,239 $562,452 (5.5)%
% OF REVENUES ........................ 83.5% 84.4% 83.7% 84.5%
</Table>
COST OF REVENUES
COST OF TRAVEL REVENUES. Cost of travel revenues consist of product costs
and, in 2000, supplier warrant costs. For the three and six months ended June
30, 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.
COST OF OTHER REVENUES. For the three and six months ended June 30, 2001
and the three and six months ended June 30, 2000, cost of other revenues
consisted primarily of the cost of long distance telephone service.
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GROSS PROFIT
<Table>
<Caption>
THREE MONTHS ENDED % SIX MONTHS ENDED %
JUNE 30, CHANGE JUNE 30, CHANGE
-------------------------- ------ -------------------------- ------
($000) ($000)
2001 2000 2001 2000
--------- --------- ---------- --------
TRAVEL GROSS PROFIT ................... $ 58,513 $ 50,055 16.9% $ 100,037 $ 96,611 3.5%
TRAVEL GROSS MARGIN .............. 16.1% 14.4% 15.9% 14.7%
OTHER GROSS PROFIT .................... $ 1,593 $ 4,740 (66.4)% $ 3,184 $ 6,830 (53.4)%
OTHER GROSS MARGIN ............... 70.4% 90.0% 64.3% 91.5%
TOTAL GROSS PROFIT .................... $ 60,106 $ 54,795 9.7% $ 103,221 $103,441 (0.2)%
TOTAL GROSS MARGIN ............... 16.5% 15.6% 16.3% 15.5%
</Table>
TRAVEL GROSS PROFIT. Travel gross profit consists of travel revenues less
the cost of travel revenues. For the three and six months ended June 30, 2001,
travel gross profit and related travel gross margin increased over the same
periods in 2000 primarily as a result of increased transactional sales volume
and an increase in the average margins on air tickets, hotel rooms and rental
cars. The fee portion of the travel transactions are an integral component in
pricing acceptance decisions we make. We intend to continue to improve travel
gross margin slightly in 2001, which may adversely affect our ability to promote
top-line revenue growth.
OPERATING EXPENSES
SALES AND MARKETING
<Table>
<Caption>
THREE MONTHS ENDED % SIX MONTHS ENDED %
JUNE 30, CHANGE JUNE 30, CHANGE
----------------------- ------ ---------------------- --------
($000) ($000)
2001 2000 2001 2000
------- ------- ------- -------
ADVERTISING ............................. $13,701 $13,826 (0.9)% $29,890 $34,165 (13.5)%
OTHER SALES & MARKETING ................. 19,117 23,791 (19.6)% 33,551 43,901 (23.6)%
------- ------- ------- -------
TOTAL ................................... $32,818 $37,617 (12.8)% $63,441 $78,066 (18.7)%
% OF REVENUES ........................... 9.0% 10.7% 10.0% 11.7%
</Table>
Sales and marketing consists of advertising expenses and other sales and
marketing expenses. Advertising expenses consist primarily of: (1) television
and radio advertising; (2) agency fees and production costs for television and
radio commercials; and (3) on-line and print advertisements. For the three and
six months ended June 30, 2001, advertising expenses decreased over the same
periods in 2000 primarily due to an overall decline in the cost of advertising
and an effort to reduce our advertising spending. We intend to continue to
pursue an advertising and
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branding campaign at lower spending levels than we achieved in 2000. 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 and six months
ended June 30, 2001, other sales and marketing expenses decreased over the same
period in 2000 due to reductions in the average credit card and customer service
transaction costs.
GENERAL AND ADMINISTRATIVE
<Table>
<Caption>
THREE MONTHS ENDED % SIX MONTHS ENDED %
JUNE 30, CHANGE JUNE 30, CHANGE
----------------------- ------- ---------------------- --------
($000) ($000)
2001 2000 2001 2000
------- ------- ------- -------
GENERAL AND ADMINISTRATIVE .............. $ 7,477 $15,222 (50.9)% $16,881 $27,926 (39.6)%
PAYROLL TAX EXPENSE ON
EMPLOYEE STOCK OPTIONS ............... 367 2,507 (85.4)% 390 8,414 (95.4)%
STOCK BASED COMPENSATION ................ 3,140 -- -- 8,297 -- --
------- ------- ----- ------- ------- -----
TOTAL ................................... $10,984 $17,729 (38.0)% $25,568 $36,340 (29.6)%
% OF REVENUES ........................... 3.0% 5.0% 4.0% 5.5%
</Table>
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 and six months ended June 30, 2001 over the same periods 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, all of which was part of
our turn-around plan implemented in the fourth quarter of 2000.
SYSTEMS AND BUSINESS DEVELOPMENT
<Table>
<Caption>
THREE MONTHS ENDED % SIX MONTHS ENDED %
JUNE 30, CHANGE JUNE 30, CHANGE
----------------------- ------ ------------------------ -------
($000) ($000)
2001 2000 2001 2000
-------- -------- --------- -------
SYSTEMS & BUSINESS DEVELOPMENT .............. $ 9,892 $ 6,695 47.8% $ 21,004 $12,563 67.2%
% OF REVENUES ............................... 2.7% 1.9% 3.3% 1.9%
</Table>
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<Page>
Systems and business development expenses consist primarily of: (1)
depreciation and amortization on computer hardware and software, (2) payments to
outside contractors, (3) compensation to our information technology and product
development staff, and (4) data communications and other expenses associated
with operating our Internet site. For the three and six months ended June 30,
2001, systems and business development expenses increased over the same periods
in 2000 due primarily to increases in costs associated with a decrease in the
amounts reimbursed by licensees and expanding the redundancy capabilities of our
data centers.
INTEREST INCOME, NET
<Table>
<Caption>
THREE MONTHS ENDED % SIX MONTHS ENDED %
JUNE 30, CHANGE JUNE 30, CHANGE
--------------------- -------- --------------------- -------
($000) ($000)
2001 2000 2001 2000
------ ------ ------ ------
INTEREST INCOME, NET ..................... $1,816 $2,725 (33.4)% $3,592 $5,440 (34.0)%
</Table>
For the three and six months ending June 30, 2001, interest income on cash
and marketable securities decreased over the same periods in 2000 primarily due
to lower interest rates.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2001, we had approximately $165.7 million in cash, cash
equivalents, restricted cash and short-term investments. Approximately $11.0
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 provided by operating activities was $21.2 million for the six
months ended June 30, 2001. Net cash provided by operating activities during
2001 was primarily attributable to changes in working capital and operations.
Net cash provided by operating activities was $4.0 million for the six months
ended June 30, 2000. Net cash provided by operating activities during 2000 was
primarily attributable to expanding gross margin on increasing revenues, which
was partially offset by increasing operating expenses.
Net cash used in investing activities was $22.5 million and $53.8 million
for the six months ended June 30, 2001 and 2000, respectively. Net cash used in
investing activities for 2001 was primarily related to the purchase of
short-term marketable securities and additions to property and equipment. Net
cash used in investing activities for the six months ended June 30, 2000, was
primarily related to purchases of property and equipment, to purchase
convertible notes and warrants in certain licensees and to purchase certain
equity investments.
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 the
third and fourth quarters of 2001 are expected to be approximately $3.0 million
to $5.0 million per quarter and will be primarily focused on computer equipment,
software and internally developed software.
Net cash provided by financing activities was $48.5 million for the six
months ended June 30, 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 $12.3 million for the six months ended June 30,
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
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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.
WE MAY CONTINUE TO INCUR LOSSES
As of June 30, 2001, we had an accumulated deficit of $1.5 billion. While
we had $2.8 million of net income in the three month period ending June 30,
2001, we may incur losses and may not be profitable in future quarters. 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 on an on-going basis
sufficiently to sustain profitability. With respect to possible future product
and service offerings, we may have to increase our operating expenses. For us to
make a profit in future quarters, our revenues and gross profit margins will
need to increase sufficiently to cover these and other possible future costs.
Otherwise, we may not be able to sustain 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
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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, including any shortfall resulting from unexpected fare sales
by the airlines 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 and six months ended June
30, 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 91.9% and 90.5%, respectively, of airline ticket
revenue for the six months ended June 30, 2001 and 2000, respectively. As a
result, currently we are substantially dependent upon the continued
participation of these airlines in the priceline.com service in order to
maintain and continue to grow our total airline ticket revenues and, as a
consequence, our overall revenues.
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.
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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 that
quarter.
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.
THERE ARE RISKS ASSOCIATED WITH OUR INVESTMENT IN PRICELINE.COM EUROPE
LTD.
There can be no assurances that the conditions to the loan contemplated by
the non-binding agreement in principle we entered into with General Atlantic
Partners (Bermuda), L.P. pursuant to which we would lend $20.0 million to
priceline.com Europe Ltd. (the "Loan") will be satisfied or that the
transactions contemplated by the agreement in principle will be consummated or
consummated on the terms described in the Form 10-Q. If priceline.com europe is
unable to secure additional financing in the near future to repay principal and
interest on outstanding promissory notes to us in the aggregate amount of $10.0
million or, if the Loan is made and priceline.com europe is unable to obtain
additional financing during the term of the Loan, it will not be able to repay
the principal and interest on the outstanding promissory notes or the Loan,
respectively. In such an event, we may not be able to recover or be reimbursed
for our ongoing costs associated with priceline.com europe's development and may
choose to exercise our right to obtain a substantial equity interest in
priceline.com Holdings, which would effectively give us control of priceline.com
europe. Priceline.com europe currently has operating losses. To the extent that
we exercised our rights to obtain a substantial equity stake in priceline.com
Europe Holdings, it is likely that we would have to consolidate priceline.com
europe's financial results with ours and recognize its operating losses. In such
an event, it is likely that we would have to restructure priceline.com europe's
operations. While we currently believe that our investment in priceline.com
europe would not be impaired if we restructured priceline.com europe's
operations, we can give no assurance that over the long term our investment
would not be impaired and that any such consolidation and restructuring would
not have a material adverse effect on our business, results of operations and
financial conditions. Please see "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Recent Developments."
OUR BUSINESS MODEL IS RELATIVELY NOVEL AND UNPROVEN
The priceline.com service is based on a relatively novel and unproven
business model. We will be successful only if consumers and sellers continue to
actively use the priceline.com service. Prior to the launch of the priceline.com
service, consumers and sellers had never bought and sold products and services
through a demand collection system over the Internet. Therefore, it is
impossible to predict the degree to which consumers and sellers will continue to
use the priceline.com service over time.
Many of the factors influencing consumers' and sellers' willingness to use
the priceline.com service are outside our control. For example, a labor dispute
that disrupts airline service or an airline accident could make consumers
unwilling to use a service like priceline.com that does not permit the customer
to designate the airline on which the customer purchases a ticket. In addition,
a breach of security on the Internet, even if we were not involved, could make
consumers unwilling to place orders online with a credit card. Also, recent
adverse publicity surrounding our recent public announcements and the slowdown
in our business momentum in the second half of 2000 may affect consumers'
willingness to use our service and have a lingering effect on our business.
Consequently, it is possible that consumers and sellers will never utilize the
priceline.com service to the degree necessary for us to sustain 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.
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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.
TWO LARGE STOCKHOLDERS BENEFICIALLY OWN APPROXIMATELY 28% OF OUR STOCK.
Hutchison Whampoa Limited and its 49.94% shareholder, Cheung Kong
(Holdings) Limited, beneficially owned approximately 28% of our outstanding
common stock as of August 10, 2001. Together, Cheung Kong (Holdings) Limited and
Hutchison Whampoa Limited have the right to appoint three of the eleven members
of our Board of Directors. As a result of its ownership and positions, Cheung
Kong (Holdings) Limited and Hutchison Whampoa Limited collectively are able to
significantly influence all matters requiring stockholder approval, including
the election of directors and approval of significant corporate transactions.
Such concentration of ownership may also have the effect of delaying or
preventing a change in control of our company. In addition, both Cheung Kong
(Holdings) Limited and Hutchison Whampoa Limited have registration rights with
respect to their shares held in priceline.com. On August 11, 2001, Cheung Kong
(Holdings) Limited and Hutchinson Whampoa Limited requested that the Company
file and maintain the effectiveness of a shelf registration statement with
respect to all of the shares of the Company's common stock held by them. There
can be no assurance that Cheung Kong (Holdings) Limited, Hutchison Whampoa
Limited, or both, will not dispose of all or substantially all of the Company's
common stock held by them at any time after the effectiveness of the shelf
registration statement. Sales of significant amounts of shares held by Cheung
Kong (Holdings) Limited or Hutchison Whampoa Limited, or the prospect of these
sales, could adversely affect the market price of our common stock.
WE RELY ON THIRD-PARTY SYSTEMS
We rely on certain third-party computer systems and third-party service
providers, including the computerized central reservation systems of the airline
and hotel industries to satisfy demand for airline tickets and hotel room
reservations. 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 prevent us
from booking airline, hotel and rental car reservations and 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:
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o Internet travel services such as Expedia, Travelocity.com,
Orbitz 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
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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 - "Commitments and Contingencies." 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
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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 or fails
to perform, we could experience:
o unanticipated disruptions in service;
o slower response times;
o decreased customer service and customer satisfaction; or
o delays in the introduction of new products and services;
any of which could impair our reputation, damage the priceline.com
brand and materially and adversely affect our revenues. Publicity about a
service disruption also could cause a material decline in our stock price.
Like many online businesses, we have experienced system failures
from time to time. For example, in May 2001, our primary website was interrupted
for a period of 12 hours. In addition to placing increased burdens on our
engineering staff, these outages create a flood of user questions and complaints
that need to be addressed by our customer support personnel. Any unscheduled
interruption in our service could result in an immediate loss of revenues that
can be substantial and may cause some users to switch to our competitors. If we
experience frequent or persistent system failures, our reputation and brand
could be permanently harmed. We have been taking steps to increase the
reliability and redundancy of our system. These steps are expensive, may reduce
our margins and may not be successful in reducing the frequency or duration of
unscheduled downtime.
Substantially all of our computer hardware for operating our
services currently is located at the facilities of Exodus Communications, Inc.
in New Jersey. These systems and operations are vulnerable to damage or
interruption from human error, floods, fires, power loss, telecommunication
failures and similar events. They are also subject to break-ins, sabotage,
intentional acts of vandalism and similar misconduct. We do not maintain fully
redundant systems or hosting services, and we do not carry business interruption
insurance sufficient to compensate us for losses that may occur. Despite any
precautions we may take, the occurrence of a natural disaster
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or other unanticipated problems at the Exodus facility could result in lengthy
interruptions in our services. In addition, the failure by Exodus to provide our
required data communications capacity could result in interruptions in our
service. 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 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.
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
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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, including priceline.com europe Ltd. These new businesses typically incur
start-up costs and operating losses and may not be successful. If these new
businesses are not favorably received by consumers or are unsuccessful, the
association of our brand name and business model with these new entities may
adversely affect our business and reputation and may dilute the value of our
brand name. Further, to the extent that these new businesses are not successful,
we may not be able to recover 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;
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o additions or departures of key personnel; and
o stock market price and volume fluctuations.
Sales of a substantial number of shares of our common stock could
adversely affect the market price of our common stock by introducing a large
number of sellers to the market. Given the volatility that exists for our
shares, such sales could cause the market price of our common stock to decline.
In addition, the trading prices of Internet stocks in general, including
ours, have experienced extreme price and volume fluctuations. To the extent that
the public's perception of the prospects of Internet or e-commerce companies is
negative, our stock price could decline further regardless of our results. Other
broad market and industry factors may decrease the market price of our common
stock, regardless of our operating performance. Market fluctuations, as well as
general political and economic conditions, such as a recession or interest rate
or currency rate fluctuations, also may decrease the market price of our common
stock. The market value of e-commerce stocks has declined dramatically over
recent months based on profitability and other concerns. The recent declines in
the value of our common stock and market conditions could adversely affect our
ability to raise additional capital.
We are currently the subject of a number of securities class action
litigations. In the past, securities class action litigation often has been
brought against a company following periods of volatility in the market price of
their securities. To the extent our stock price declines or is volatile, we may
in the future be the target of additional litigation. Securities 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
sustain profitability.
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.
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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 and/or security breaches; the effects
of increased competition; our ability to protect our intellectual property
rights; 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 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 8 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We held our Annual Meeting of Stockholders on May 21, 2001. Following are
descriptions of the matters voted on and the results of such meeting:
Number of Stockholders
Matter Voted On For Withheld
- --------------- --- --------
1. Election of Directors
Richard S. Braddock 172,355,008 1,242,621
Paul A. Allaire 173,116,374 481,256
Ralph M. Bahna 173,140,243 457,386
Paul J. Blackney 173,144,830 452,799
William B. Ford 173,117,419 480,210
Marshall Loeb 173,099,629 498,000
N.J. Nicholas, Jr 173,140,555 457,074
Nancy B. Perctsman 173,136,321 461,308
Ian F. Wade 173,135,362 462,267
In addition, the terms of office as directors of Dominic Kai Ming Lai and
Edmond Tak Cheun Ip continued after the Annual Meeting of Stockholders.
Broker
For Against Abstaining Non-votes
--- ------- ---------- ---------
2. Approval of
Ammendments to
priceline.com 1999
Omnibus Plan 167,461,280 4,881,208 241,673 3,468
3. Ratification of
appointment of
Deloitte & Touche
LLP as independent
auditors for fiscal
year ending
December 31, 2001 173,327,670 170,892 99,067 --
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
10.66 Amendment to Employment Agreement, dated June 15, 2001,
by and between priceline.com and Robert Mylod.
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(b) REPORTS ON FORM 8-K
On April 2, 2001, we furnished a report on Form 8-K in connection with the
reaffirmation of first and second quarter 2001 guidance at the Goldman Sachs
Internet Conference. On May 2, 2001, we furnished a report on Form 8-K in
connection with our first quarter earnings release. On May 8, 2001, we filed a
report on Form 8-K in connection with Richard Braddock's reappointment as Chief
Executive Officer replacing Daniel Schulman and Jeffery Boyd being named
President of the Company. On June 6, 2001, we filed a report on Form 8-K in
connection with the purchase of shares of priceline.com common stock from Jay
Walker by Cheung Kong (Holdings) Limited and Hutchison Whampoa Limited.
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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: August 14, 2001 By: /s/ Robert Mylod
-------------------------
Name: Robert Mylod
Title: Chief Financial Officer
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