-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VxrksZu33MRZLnCrScqdzTmFxnJhK0F3uI5jCUHKnbjjH75wPGQDMScfpczYY4lj AbYzpymmM+Ezu1F1K2y80w== /in/edgar/work/0001005477-00-007886/0001005477-00-007886.txt : 20001115 0001005477-00-007886.hdr.sgml : 20001115 ACCESSION NUMBER: 0001005477-00-007886 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PRICELINE COM INC CENTRAL INDEX KEY: 0001075531 STANDARD INDUSTRIAL CLASSIFICATION: [7373 ] IRS NUMBER: 061528493 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-25581 FILM NUMBER: 766545 BUSINESS ADDRESS: STREET 1: 800 CONNECTICUT AVE CITY: NORWALK STATE: CT ZIP: 06854 BUSINESS PHONE: 2037053000 10-Q 1 0001.txt FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------- FORM 10-Q (Mark One) |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2000 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________ to __________ Commission File Number 0-25581 PRICELINE.COM INCORPORATED - -------------------------------------------------------------------------------- (Exact name of Registrant as specified in its charter) Delaware 06-152849 - ---------------------------------- ------------------------------ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 800 Connecticut Avenue Norwalk, Connecticut 06854 - -------------------------------------------------------------------------------- (address of principal executive offices) (203) 299-8000 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) N/A - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed, since last report) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES |X| NO |_|. Number of shares of Common Stock outstanding at November 10, 2000: Common Stock, par value $0.008 per share 168,508,660 - ----------------------------------------- --------------------------- (Class) (Number of Shares) priceline.com Incorporated Form 10-Q For the Quarter Ended September 30, 2000 PART I - UNAUDITED FINANCIAL INFORMATION Item 1. Consolidated Financial Statements Consolidated Balance Sheets at September 30, 2000 and December 31, 1999.......3 Consolidated Statements of Operations For the Three and Nine Months Ended September 30, 2000 and 1999...........................................4 Consolidated Statement of Changes in Stockholders' Equity For the Nine Months Ended September 30, 2000.............................................5 Consolidated Statements of Cash Flows For the Nine Months Ended September 30, 2000 and 1999...........................................................6 Notes to Unaudited Consolidated Financial Statements..........................7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..................................................13 Item 3. Quantitative and Qualitative Disclosures About Market Risk...........32 PART II - OTHER INFORMATION Item 1. Legal Proceedings....................................................33 Item 6. Exhibits & Reports on Form 8-K.......................................33 SIGNATURES...................................................................34 2 Part I - UNAUDITED FINANCIAL INFORMATION Item 1. Consolidated Financial Statements priceline.com Incorporated CONSOLIDATED BALANCE SHEETS (In thousands)
September 30, December 31, 2000 1999 ------------- ------------ ASSETS (unaudited) Current assets: Cash and cash equivalents ..................................... $ 104,501 $ 133,172 Short-term investments ........................................ 26,122 38,771 Accounts receivable, net of allowance for doubtful accounts of $3,979 and $1,961 ........................................... 24,199 21,289 Related party receivable ...................................... 5,532 508 Prepaid expenses and other current assets ..................... 20,755 17,999 ----------- ----------- Total current assets .......................................... 181,109 211,739 Property and equipment, net ................................... 46,257 28,006 Related party receivable ...................................... 15,089 8,838 Warrants to purchase common stock of licensees ................ 3,250 189,000 Other assets .................................................. 39,868 4,303 ----------- ----------- Total assets .................................................. $ 285,573 $ 441,886 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable .............................................. $ 59,447 $ 24,302 Preferred stock dividends payable ............................. 14,382 Accrued expenses .............................................. 17,324 13,695 Other current liabilities ..................................... 3,739 1,253 ----------- ----------- Total current liabilities ..................................... 94,892 39,250 ----------- ----------- Mandatorily redeemable convertible preferred stock, $0.01 par value, authorized 6,000 shares; issued 6,000 and 0 shares, respectively ................................................ 359,580 ----------- ----------- Stockholders' equity: Common stock, $0.008 par value, authorized 1,000,000 shares; issued 173,807 and 163,867 shares, respectively ............. 1,390 1,311 Treasury stock, at cost, 6,000 and 0 shares, respectively ..... (359,580) Additional paid-in capital .................................... 1,595,228 1,581,708 Accumulated other comprehensive loss .......................... (1,162) Accumulated deficit ........................................... (1,404,775) (1,180,383) ----------- ----------- Total stockholders' equity .................................... (168,899) 402,636 ----------- ----------- Total liabilities and stockholders' equity .................... $ 285,573 $ 441,886 =========== ===========
See notes to consolidated financial statements. 3 priceline.com Incorporated CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) (In thousands, except per share data)
Three Months Ended Nine Months Ended September 30, September 30, ------------- ------------- 2000 1999 2000 1999 ---- ---- ---- ---- Revenues ..................... $ 341,334 $ 152,222 $ 1,007,227 $ 313,197 Cost of revenues: Product costs .............. 286,899 133,628 848,589 277,951 Supplier warrant costs ..... 381 381 1,143 1,143 ----------- ----------- ----------- ----------- Total cost of revenues ....... 287,280 134,009 849,732 279,094 Gross profit ................. 54,054 18,213 157,495 34,103 ----------- ----------- ----------- ----------- Operating expenses: Supplier start-up warrant costs .................... -- 88,389 -- 88,389 Write off of WebHouse Warrant .................. 189,000 -- 189,000 -- Sales and marketing ........ 35,569 21,413 113,635 56,284 General and administrative . 11,934 6,843 39,860 16,013 Payroll tax expense on employee stock options ... 349 1,547 8,763 1,547 Systems and business development .............. 11,420 4,593 23,983 10,246 ----------- ----------- ----------- ----------- Total operating expenses ..... 248,272 122,785 375,241 172,479 ----------- ----------- ----------- ----------- Operating loss ............... (194,218) (104,572) (217,746) (138,376) Gain on sale of equity investments ................ 32 -- 32 -- Interest income, net ......... 2,264 2,356 7,704 4,743 ----------- ----------- ----------- ----------- Net loss ..................... (191,922) (102,216) (210,010) (133,633) Preferred stock dividend ..... (7,191) (14,382) Accretion on preferred stock . (8,354) ----------- ----------- ----------- ----------- Net loss applicable to common stockholders ............... $ (199,113) $ (102,216) $ (224,392) $ (141,987) =========== =========== =========== =========== Net loss applicable to common stockholders per basic and diluted common share ....... $ (1.19) $ (0.71) $ (1.35) $ (1.02) =========== =========== =========== =========== Weighted average number of basic and diluted common shares outstanding ......... 167,059 144,501 166,389 139,817 =========== =========== =========== ===========
See notes to consolidated financial statements. 4 priceline.com Incorporated CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY AS OF SEPTEMBER 30, 2000 (unaudited) (In thousands)
Treasury Stock Common Stock Additional Other -------------- ------------ Paid-in Accumulated Comprehensive Shares Amount Shares Amount Capital Deficit Loss Total ------ ------ ------ ------ ------- ------- ---- ----- Balance, January 1, 2000 ....... 163,867 $ 1,311 $ 1,581,708 $(1,180,383) $ 402,636 Purchase of treasury shares ... 6,000 $(359,580) (359,580) Exercise of warrants and options to purchase common stock ..... 9,940 79 13,520 13,599 Comprehensive loss: Net loss applicable to common stockholders ........... (224,392) (224,392) Unrealized loss on investments ................ $(1,162) (1,162) Total comprehensive loss ....... $ (224,392) $(1,162) (225,554) ----- --------- ------ ------- ----------- ----------- ------- ----------- Balance, September 30, 2000 .... 6,000 $(359,581) 73,807 $ 1,390 $ 1,595,228 $(1,404,775) $(1,162) $ (168,899) ===== ========= ====== ======= =========== =========== ======= ===========
See notes to consolidated financial statements. 5 priceline.com Incorporated CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (In thousands) Nine Months Ended September 30, 2000 1999 ---- ---- OPERATING ACTIVITIES: Net loss ......................................... $(210,010) $(133,633) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization .................... 10,711 3,508 Provision for uncollectible accounts ............. 2,018 2,159 Warrant costs .................................... 1,143 1,143 Supplier start-up costs .......................... 88,389 Write off of WebHouse Warrant .................... 189,000 Changes in assets and liabilities: Accounts receivable ........................... (4,928) (25,468) Related party receivables ..................... (11,275) (12,511) Prepaid expenses and other current assets ..... (3,898) (4,513) Accounts payable and accrued expenses ......... 38,774 32,998 Other ......................................... 1,486 (2,297) --------- --------- Net cash provided by (used in) operating activities ..................................... 13,021 (50,225) --------- --------- INVESTING ACTIVITIES: Additions to property and equipment .............. (28,962) (17,975) Purchase of convertible notes and warrants of licensees ................................... (34,304) Purchase of equity investments ................... (5,000) (2,000) Proceeds from sale of equity investments ......... 347 (Purchase )/sale of short term investments ....... 12,649 (77,446) --------- --------- Net cash used in investing activities ............ (55,270) (97,421) --------- --------- FINANCING ACTIVITIES: Payment of long-term debt and capital lease obligations .................................... (21) (1,018) Issuance of common stock ......................... 13,599 210,541 --------- --------- Net cash provided by financing activities ........ 13,578 209,523 --------- --------- Net (decrease) increase in cash and cash equivalents .................................... (28,671) 61,877 Cash and cash equivalents, beginning of period ......................................... 133,172 53,593 --------- --------- Cash and cash equivalents, end of period ......... $ 104,501 $ 115,470 --------- --------- SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the period for interest ....... $33 $57 ========= ========= See notes to consolidated financial statements. 6 priceline.com Incorporated Notes to Unaudited Consolidated Financial Statements 1. BASIS OF PRESENTATION The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring accruals considered necessary for a fair presentation, have been included in the accompanying unaudited financial statements. Operating results for the three months and nine months ended September 30, 2000 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2000. For a summary of significant accounting policies see the Company's Annual Report on Form 10-K for the year ended December 31, 1999. 2. NET LOSS PER SHARE The Company computes basic and diluted earnings per share in accordance with Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings per Share". SFAS 128 requires the Company to report both basic earnings per share, which is based on the weighted average number of common shares outstanding, and diluted earnings per share, which is based on the weighted average number of common shares outstanding and all dilutive potential common shares outstanding. Since the Company incurred losses for all periods presented, the inclusion of options in the calculation of weighted average common shares is anti-dilutive and therefore there is no difference between basic and diluted earnings per share. 3. NEW ACCOUNTING POLICY In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements." SAB 101 summarizes certain of the SEC's views in applying generally accepted accounting principles to revenue recognition in financial statements. In September 2000, the SEC issued SAB No. 101B to defer for three quarters the effective date of implementation of SAB No. 101 with earlier application encouraged. The Company is required to adopt SAB 101 in the fourth quarter 2000. In July 2000, the Emerging Issues Task Force reached a consensus with respect to EITF 99-19, "Reporting Revenue Gross as a Principal versus Net as an Agent" ("EITF 99-19"). The Task Force addressed whether a company should report revenue based on the gross amount billed to a customer because it has earned revenue from the sale of the goods or services or the net amount retained (that is, the amount billed to the customer less the amount paid to a supplier) because it has earned a commission or fee. The accounting principles in EITF 99-19 are consistent with the requirements of SAB 101. The Company does not expect the adoption of SAB 101 or EITF 99-19 to have a material effect on its financial position or results of operations, or presentation of its operating results. In July 1999, the FASB issued Statement No. 137, "Accounting for Derivative Instruments and Hedging Activities-Deferral of Effective Date of FASB No. 133". The Statement defers for one year the effective date of FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities". The rule now will apply to fiscal quarters of fiscal years beginning after June 15, 2000. In June 1998, SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities" was issued. The statement will require the recognition of all derivatives as either assets or liabilities in the balance 7 sheet and the measurement of those instruments at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of the derivative's change in fair value will be immediately recognized in earnings. The Company does not expect that the adoption of SFAS No. 133 will have a material effect on its financial position or results of operations. 4. OTHER ASSETS Other assets consist of the following as of September 30, 2000: Equity investments in publicly traded companies $ 5,667 Convertible notes of licensees 29,179 Other 5,022 ------- Total $39,868 ======= The Company has entered into several transactions with internet businesses. The equity investments in two of these businesses, Lastminute.com plc. and LendingTree.com, Inc., the stock of each of which is publicly traded, are recorded at the closing market price of the shares as of the balance sheet date. The convertible notes of $11.1 million, $7.5 million, $6.7 million and $3.8 million, issued by Hutchison-Priceline Limited, priceline.com Auto Insurance Agency, Inc., MyPrice Pty. Ltd. and Alliance Capital Partners, respectively, are recorded at cost. The warrants to purchase shares of priceline.com europe Ltd. are carried at cost, $3.2 million, which the Company believes approximates the fair value at September 30, 2000. The underlying shares are not publicly traded. During the three month period ended September 30, 2000, the Company recorded a non-cash loss of $189 million to write off the full carrying value of a warrant to purchase shares of Priceline Webhouse Club, Inc., which ceased operations in October 2000. 5. COMPREHENSIVE LOSS Following are components of the Company's comprehensive loss: Three Months Nine Months Ended Ended September 30, September 30, 2000 2000 Net loss applicable to common stockholders $(199,113) $(224,392) Other comprehensive loss: Unrealized loss on investments (4,867) (1,162) --------- --------- Total comprehensive loss $(203,980) $(225,554) ========= ========= 6. PREFERRED STOCK In February 2000, the Board of Directors authorized an amendment to the Company's certificate of incorporation to allow the Company to issue a new series of preferred stock designated as Series A Convertible Redeemable PIK Preferred Stock. The total number of Series A Preferred shares which the 8 Company is authorized to issue is six million shares, par value $.01 per share. The Series A Preferred Stock has special voting powers and preferences. Specifically, the Series A Preferred Stock has a liquidation preference of $59.93 per share plus an amount equal to any dividends accrued or cumulated but not paid. The Series A Preferred Stock accrues dividends payable in shares of the Company's common stock at a rate of 8% per annum commencing April 1, 2000. Dividends on the Series A Preferred Stock are payable semi-annually on October 1st and April 1st of each year starting October 1, 2000. Subject to certain limitations, payment of the first six semi-annual dividend payments is assured. The Series A Preferred Stock may be redeemed at the option of the Company in whole or in part at any time after April 1, 2003 at $59.93 per share in cash, plus accrued but unpaid dividends. The Series A Preferred Stock is subject to mandatory redemption on April 1, 2010. The Series A Preferred Stock is convertible at the option of the holder into shares of the Company's common stock on a one-for-one basis at any time prior to redemption, subject to certain anti-dilution adjustments. Holders of the Series A Preferred Stock vote together with holders of common stock on all matters and in certain limited circumstances are entitled to a separate class vote. Holders of Series A Preferred Stock are entitled to specified cash payments in the event of certain business combination transactions involving the Company. On June 30, 2000, the Company exchanged six million shares of the Company's common stock held by Delta Air Lines, Inc. for six million shares of the Series A Preferred Stock. The six million shares of common stock received by the Company from Delta are included in Treasury Stock on the Company's balance sheet. On October 1, 2000, the Company issued Delta 549,764 shares of Common Stock as a dividend on the Preferred Stock. 7. COMMITMENTS AND CONTINGENCIES On January 6, 1999, the Company received notice that a third party patent applicant and patent attorney, Thomas G. Woolston, purportedly had filed in December 1998 with the United States Patent and Trademark Office a request to declare an interference between a patent application filed by Woolston and the Company's U.S. Patent 5,794,207. The Company is currently awaiting information from the Patent Office regarding whether it will initiate an interference proceeding. On January 19, 1999, Marketel International Inc. (Marketel), a California corporation, filed a lawsuit against the Company, among others. On February 22, 1999, Marketel filed an amended and supplemental complaint. On March 15, 1999, Marketel filed a second amended complaint. On May 9, 2000, Marketel filed a third amended complaint against the Company and Priceline Travel, Inc. The third amended complaint alleges causes of action for misappropriation of trade secrets, conversion, false advertising and for correction of inventorship of U.S. Patent 5,794,207. In its third amended complaint, Marketel alleges, among other things, that the defendants conspired to misappropriate Marketel's business model, which allegedly was provided in confidence approximately ten years ago. The third amended complaint also alleges that four former Marketel employees are the actual sole inventors or co-inventors of U.S. Patent 5,794,207, which was issued on August 11, 1998 and has been assigned to the Company. Marketel asks that the patent's inventorship be corrected accordingly. On February 5, February 10 and March 31, 1999, the Company filed answers respectively, to the complaint, amended complaint and second amended complaint, in which the Company denied the material allegations of liability. On May 19, 2000, the Company filed a motion to dismiss the third amended complaint for failure to state a complaint upon which relief can be granted. The Company strongly disputed the material legal and factual allegations contained in Marketel's third amended complaint and believes that the amended complaint is without merit. In addition, on July 13, 2000, the Company filed a motion for summary judgment alleging that Marketel has not identified legally protectable trade secrets and is not entitled to correction of 9 inventorship of U.S. Patent 5,794,207. The Company's motions are scheduled to be heard on December 5, 2000. Trial is currently scheduled to commence on January 16, 2001. The Company intends to defend vigorously against the action. Pursuant to the indemnification obligations contained in the Purchase and Intercompany Services Agreement with Walker Digital, Walker Digital has agreed to indemnify, defend and hold the Company harmless for damages, liabilities and legal expenses incurred in connection with the Marketel litigation. On October 13, 1999, the Company filed a complaint in the United States District Court for the District of Connecticut under the caption Priceline.com Incorporated v. Microsoft Corporation and Expedia, Inc., No. 399CV1991 (AWT) alleging that Microsoft Corporation and Expedia, Inc., a subsidiary of Microsoft Corporation, infringe the Company's U.S. Patent 5,794,207 by operating the defendants' "Hotel Price Matcher" service, and that the defendants' conduct toward the Company violated the Connecticut Unfair Trade Practices Act. On December 20, 1999, defendants moved the Court to dismiss the complaint for failure to name a necessary party, Marketel. On March 21, 2000, the presiding judge stated that he intends to deny defendant's motion to dismiss, and that a decision will be forthcoming. On December 23, 1999, the Court granted the Company's motion to supplement the complaint to expressly include defendant's "Flight Price Matcher" service. On July 14, 2000, the Company filed a complaint in the United States District Court for the District of Connecticut under the caption Priceline.com Incorporated v. Microsoft Corporation and Expedia, Inc., alleging that defendants infringe the Company's U.S. Patent 6,085,169 by operating the "Hotel Price Matcher" and "Flight Price Matcher" services. In the lawsuit, the Company is seeking declaratory relief, permanent injunctive relief and actual and punitive damages. Walker Digital has agreed to reimburse the Company for a portion of the legal expenses incurred in connection with the Microsoft litigations. On September 6, 2000, Pannell-Christ Incorporated, an Indiana corporation, filed a lawsuit against the Company in the United States District Court for the District of Indiana under the caption Pannell-Christ Incorporated v. priceline.com Incorporated, IP 00-0810 CT/G. The complaint alleges federal and state common law service mark infringement based on Pannell-Christ's federal trademark registration for "Name Your Price!" for educational services and common law trademark rights. The complaint seeks injunctive relief and damages. On September 29, 2000, the Company filed an Answer and Counterclaim in which the Company denied the material allegations of liability in the complaint and counterclaimed for cancellation of Pannell-Christ's federal trademark registration. The Company strongly dispute the material legal and factual allegations contained in the complaint and believe the complaint is without merit. Subsequent to the Company's announcement on September 27, 2000 that revenues for the third quarter 2000 would not meet expectations, the Company became aware of press announcements concerning class action lawsuits against the Company alleging violations of the securities laws. As of November 13, 2000, the Company has been served with the following purported class action complaints: o Mathis Weingarten, et al v priceline.com Incorporated and Jay S. Walker, 300 CV 1901 SRU, (District of Connecticut) o Randall Twardy, et al v priceline.com Incorporated, Jay Walker, R. Braddock, and D. Schulman 300 CV 1884 JBA, (District of Connecticut) 10 o Natalie Berdakina, et al v priceline.com Incorporated, Jay Walker, R. Braddock, and D. Schulman 300 CV 1902 RNC, (District of Connecticut) o Samuel Mayer et al v priceline.com Incorporated, Jay Walker, R. Braddock, and D. Schulman 300 CV 1923 RNC, (District of Connecticut) o Anthony Mazzo, et al v priceline.com Incorporated, Jay Walker, R. Braddock, and D. Schulman 300 CV 1924 PCD, (District of Connecticut) o Mark Fialkov, et al v priceline.com Incorporated, Jay Walker, R. Braddock, and D. Schulman 300 CV 1954 CFD, (District of Connecticut) o Jeremy Licht, et al v priceline.com Incorporated and Jay Walker 300 CV 2049 DJS, (District of Connecticut) o Jim M. Ayach & Sarah Sontag, et al v priceline.com Incorporated, Jay Walker, R. Braddock, and D. Schulman 300 CV 2062 DJS, (District of Connecticut) o Michael Cerelli, et al v priceline.com Incorporated, Jay Walker, R. Braddock, and D. Schulman 300 CV 1918 DJS, (District of Connecticut) o Howard Gunty Profit Sharing Plan, et al v. priceline.com Incorporated, R. Braddock, D. Schulman, and Jay S. Walker 300 CV 1917 WWB, (District of Connecticut) o Thomas Atkin, et al v. priceline.com Incorporated, R. Braddock, D. Schulman, and Jay S. Walker 300 CV 1994 SRU, (District of Connecticut) o Hyacinth S. Anish, et al v. priceline.com Incorporated, R. Braddock, D. Schulman, and Jay S. Walker 300 CV 1048, (District of Connecticut) o Jerry Krim, et al v. priceline.com Incorporated, R. Braddock, D. Schulman, and Jay S. Walker 300 CV 2083, (District of Connecticut) o Scott Lyon, et al v. priceline.com Incorporated, R. Braddock, D. Schulman, and Jay S. Walker 300 CV 2066 DJS, (District of Connecticut) o Johnny Kwan, et al v. priceline.com Incorporated R. Braddock, D. Schulman, and Jay S. Walker 300 CV 2069 DJS, (District of Connecticut) 11 In addition, the Company has been served with a complaint that purports to be a shareholder derivative action against the Company's Board of Directors and certain of the Company's current executive officers, as well as the Company (as a nominal defendant). The complaint alleges breach of fiduciary duty. The action is captioned Mark Zimmerman, et al v priceline.com Incorporated, Jay Walker, R. Braddock, D. Schulman, P. Allaire, R. Bahna, P. Blackney, W. Ford, M. Loeb, N. Nicholas, N. Peretsman, 18473-NC, (Court of Chancery of Delaware, County of New Castle, State of Delaware). No action has been taken in these cases. The Company intends to defend vigorously against these actions. The Company is cooperating with the Connecticut Attorney General's office concerning complaints by customers received by the Attorney General's office and intends to continue its cooperation. From time to time, the Company has been and expects to continue to be subject to legal proceedings and claims in the ordinary course of business, including claims of alleged infringement of third party intellectual property rights by it. Such claims, even if not meritorious, could result in the expenditure of significant financial and managerial resources and could adversely affect the Company's stock price. 8. Subsequent Events During the fourth quarter of 2000, the Company announced its intention to implement a number of measures to improve operations and reduce its overall cost structure. As part of the plans, the Company implemented a reduction in its work force and realigned its operational management and intends to consolidate its real estate and certain operations, eliminate operational redundancies and implement a new compensation program. Additionally, the Company is evaluating the overall impact of no longer providing certain services to Priceline WebHouse Club, Inc. and Priceline Perfect Yardsale, Inc., which have ceased their operations. The costs associated with these measures are not currently determinable, however, to the extent appropriate, a charge will be recorded in the fourth quarter 2000. In November 2000, the Company also announced that Heidi Miller, the Company's former Senior Executive Vice President and Chief Financial Officer, had decided to leave the Company. In connection with Ms. Miller's separation, the Company will record a charge of approximately $3.3 million in the fourth quarter 2000, primarily as the result of the forgiveness of a loan pursuant to the terms of Ms. Miller's employment agreement. During the fourth quarter 2000, the Company amended the terms of warrants held by Delta Air Lines, Inc. and, as a result, will record a non-cash charge of approximately $9 million in the fourth quarter 2000. In connection with the amendment, the Company reduced the number of shares underlying the warrant to 4.675 million shares from 5.5 million shares and reduced the strike price from $56.63 per share to $4.71875 per share. 12 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Overview We have pioneered a unique e-commerce pricing system known as a "demand collection system" that enables consumers to use the Internet to save money on a wide range of products and services while enabling sellers to generate incremental revenue. Using a simple and compelling consumer proposition - Name Your Own Price(SM) - we collect consumer demand, in the form of individual customer offers guaranteed by a credit card, for a particular product or service at a price set by the customer. We then communicate that demand directly to participating sellers or access participating sellers' private databases to determine whether we can fulfill the customer's offer. Consumers agree to hold their offers open for a specified period of time and, once fulfilled, offers cannot be canceled. We benefit consumers by enabling them to save money, while at the same time benefiting sellers by providing them with an effective revenue management tool capable of identifying and capturing incremental revenues. By requiring consumers to be flexible with respect to brands, sellers and product features, we enable sellers to generate incremental revenue without disrupting their existing distribution channels or retail pricing structures. Our business model and brand are currently, through us or independent licensees, supporting several products and service offerings, including the following: o leisure airline tickets, provided by 10 domestic and 26 international airline participants; o hotel rooms, in substantially all major United States markets with more than 25 national hotel chains as participants; o rental cars, in substantially all major United States markets with five leading rental car chains as participants; o new automobiles, in substantially all major United States markets; o home financing services, in substantially all major United States markets, which includes home mortgage services, home equity loans and refinancing services; o long distance telephone calling, provided by three carriers, in substantially all United States markets. o Travel insurance, provided in connection with our airline product and offered through an agreement with member companies of American International Group, Inc. In addition, Name Your Own Price(SM) automobile insurance will be offered in 2001. We also are currently planning an expansion of our core Name Your Own Price(SM) business model to other areas of e-commerce, including Business to Business. We measure our "bind" rate as the percentage of unique offers that we ultimately fulfill. Since April 1999, each initial offer and any resubmitted offers are treated as a single offer - a unique offer - for purposes of measuring our total offer volume and our offer fulfillment rates. Previously, each had been counted as a separate offer. Therefore, comparisons with prior periods may not be meaningful. For the quarter ended September 30, 2000, our bind rate was 50.5%, 47.8% and 49.2% for all unique airline ticket, hotel room and rental car offers, respectively. For the quarter ended June 30, 2000, our bind rate was 13 49.6%, 45.3% and 40.0% for all unique airline ticket, hotel room and rental car offers, respectively. When making offers for airline tickets through the priceline.com service, consumers are permitted to make only one offer within a seven day period unless they change some feature of their itinerary, such as the date on which, or the airport from which, they are willing to fly. As a result of our "checkstatus" feature, introduced in April 1999, consumers whose initial requests are not satisfied are permitted to resubmit revised offers that reflect at least one change to their itinerary. We have announced several transactions pursuant to which third parties license the priceline.com name and demand collection system to offer a particular product or service or to offer a number of products or services in a distinct international region. Pursuant to the licensee transactions, we generally receive a royalty under the license and may also receive fees for services and reimbursement of certain expenses. We also hold convertible securities or warrants entitling us to acquire a significant percentage of such licensee's equity securities upon the occurrence of certain events. Unless such securities or warrants are converted or exercised, the results of our licensees will not be included in our financial results. In July 2000, we started to make available to our airline customers an optional travel insurance package for their trip that offers coverage for trip cancellation, medical expenses, emergency evaluation and loss of baggage, property and travel documents through an agreement with member companies of American International Group, Inc. ("AIG"). Under our agreement with AIG, we will receive a fixed fee from AIG member companies for every optional insurance package purchased. Subject to the rules in specific states, the travel insurance program is made available to every eligible customer. In July 2000, we entered into definitive agreements with W.R. Berkley Corporation to offer Name Your Own Price(SM) automobile insurance to car owners in the United States and Canada through our website. Under the terms of the agreements, we will license our business model and provide our expertise in technology, marketing and operations to priceline.com Auto Insurance Agency Inc., a company formed under the laws of Delaware. Priceline.com Auto Insurance Agency will pay us an annual licensing fee to use our intellectual property. Under the terms of the agreement, we purchased a convertible note for $7.5 million which will allow us to take an equity position in priceline.com Auto Insurance Agency under certain conditions. In September 2000, we entered into a formation agreement with SoftBank E-Commerce Corp. to introduce our services in Japan. The agreement contemplates that we will license our business model and intellectual property to priceline.com Japan, a newly-formed entity, and purchase a convertible security allowing us to take a significant equity position in priceline.com Japan under certain conditions. We are in the process of evaluating with SoftBank E-Commerce the viability of this transaction and, as a result, the actual launch of services is subject to further negotiation and the execution of additional agreements. We can provide no assurance that the transaction will be consummated. We believe that our success will depend in large part on our ability to achieve profitability, primarily from our travel business, to continue to promote the priceline.com brand and to offer other products and services on the priceline.com website. We intend to continue to invest in marketing and promotion, technology and personnel within parameters consistent with attempts to improve operating results. Our goal is to reduce operating losses and improve gross margins in an effort to achieve profitability. Our limited operating history makes the prediction of future results of operations difficult, and accordingly, we cannot assure you that we will achieve or sustain revenue growth or profitability. Recent Developments 14 During the fourth quarter 2000, we announced our intention to implement a number of measures to improve operations and reduce our overall cost structure. As part of the plans, we implemented a reduction in our work force and realigned our operational management and intend to consolidate our real estate and certain operations, eliminate operational redundancies and implement a new compensation program designed to motivate and retain key employees. This compensation program will consist primarily of incentive-based compensation, as well as certain cash and other compensation. While the costs associated with these measures is not currently determinable, the compensation program will result in an increase in non-cash and cash compensation expense in the fourth quarter 2000 and certain ongoing non-cash expenses related to restricted stock awards. To the extent appropriate, a charge will be recorded in the 4th quarter 2000. As part of our operational restructuring, we named Jeffery Boyd as our new Chief Operating Officer and announced that Robert Mylod would be our new Chief Financial Officer. Heidi Miller, our former Senior Executive Vice President and CFO, announced her decision to leave the Company in November 2000. In connection with Ms. Miller's separation, we will record a charge of approximately $3.3 million in the fourth quarter 2000, primarily as the result of the forgiveness of a loan pursuant to the terms of her employment agreement. On October 5, 2000, the Priceline WebHouse Club, Inc. and Priceline Perfect Yardsale, Inc., privately-held licensees of ours, separately announced that they would be ceasing operations. We received a warrant in WebHouse Club and recorded non-cash income of $189 million in the fourth quarter 1999. As a result of WebHouse Club ceasing operations, in the third quarter 2000, we recorded a non-cash loss of $189 million to write off the full carrying value of the warrant. For the three and nine month periods ended September 30, 2000, we received royalties from WebHouse Club in the amount of $423,000 and $1.0 million. For the three and nine months ended September 30, 2000, we were reimbursed $3.0 million and $8.7 million, respectively, by WebHouse Club and Perfect Yardsale for costs we incurred in connection with providing information technology and other services to them. We are in the process of reviewing our operations to reduce any costs associated with providing services to WebHouse Club and Perfect Yardsale and evaluating the overall impact of no longer providing certain services to WebHouse Club and Perfect Yardsale, which have ceased their operations. During the fourth quarter 2000, we amended the terms of warrants held by Delta Air Lines, Inc. and, as a result, will record a non-cash charge of approximately $9 million in the fourth quarter 2000. In connection with the amendment, we reduced the number of shares underlying the warrant to 4.675 million shares from 5.5 million shares and reduced the strike price from $56.63 per share to $4.71875 per share. Results of Operations Revenues Quarter Ended % Nine Month Ended % September 30, Change September 30, Change ------------- ------ ------------- ------ ($000) ($000) 2000 1999 2000 1999 ---- ---- ---- ---- Revenues............ $341,334 $152,222 124% $1,007,227 $313,197 222% Revenues for the three and nine months ended September 30, 2000 consisted primarily of: (1) transaction revenues representing the selling price of airline tickets, hotel rooms, rental cars and long distance telephone service; and (2) fee based revenue. Fee based revenue was comprised primarily of: (a) 15 Worldspan reservation booking fees and customer processing fees; and (b) fee income from marketing programs offered in connection with our product offerings. Revenues for the three and nine months ended September 30, 1999 consisted primarily of: (1) transaction revenues representing the selling price of airline tickets and hotel rooms; (2) fee income from marketing programs offered in connection with our product offerings; and (3) Worldspan reservation booking fees and customer processing fees. Revenues increased during the three and nine months ended September 30, 2000 over the prior year period primarily as a result of the substantial development of our unique customer base, to which we added 1.3 million and 4.3 million new customers during the three and nine months ended September 30, 2000, respectively. In addition, we generated approximately 1.4 million and 3.2 million repeat customer offers during the three and nine months ended September 30, 2000, respectively. As of September 30, 2000, we had a base of approximately 8.1 million unique customers, compared to approximately 2.3 million unique customers at September 30, 1999. A unique customer is defined as someone who has made a guaranteed offer for at least one of our products. Revenues for the three months ended September 30, 2000 decreased approximately 3.1% to $341.3 million from $352.1 million for the three months ended June 30, 2000, primarily as a result of a shortfall in revenue from airline ticket sales. We believe that the shortfall in airline ticket sales was attributable, in part, to a $20 fuel surcharge imposed in early September by airlines, a high level of flight cancellations that negatively affected supply and the introduction by certain airlines of their own special sale fares in September which contributed to lower average offer prices for tickets. The September fuel surcharge was the second imposed by certain airlines this year due to increased fuel prices and must be reflected in higher customer offer prices since we ceased reflecting fuel surcharges as a separate charge in July 2000. In addition, we believe that certain promotional strategies that we pursued during late August and September negatively impacted average offer and ticket sale prices and did not result in targeted increases in ticket sales. Airline ticket sales in September, which based on our historical experience we had expected to be our strongest sales month of the third quarter, were weaker than sales in July and August. Our airline ticket sale revenues in October 2000, which historically has been our strongest sales month of the fourth quarter, were approximately 20% below our September 2000 ticket sale revenues. We believe our demand for travel products has also been adversely affected by negative news concerning our revenue shortfall, WebHouse Club and Perfect Yardsale ceasing operations and service concerns. As a result, we expect that our revenues for the three months ended December 31, 2000 will be significantly less than our revenues for the three months ended September 30, 2000. We believe our customer base grew during the three and nine months ended September 30, 2000 as a result of our advertising campaign during the first half of 2000, and due to the availability of additional product inventory generated from adding three additional domestic air carriers during the fourth quarter 1999 and two additional major rental cars companies during the second quarter of 2000. The growth in our customer base is also attributable to our continued expansion of our service into new vertical markets. During the three and nine months ended September 30, 2000, we generated revenues from our long distance telephone service, launched during the second quarter. In addition, we received fee income from our auto and financial products introduced in the first quarter of 2000. These services were not offered during the same periods of 1999. Travel products, particularly airline tickets, continue to account for the majority of our revenue. Seasonal variations in our travel business, where the third and fourth calendar quarters are typically weaker than the first two quarters, have historically and are expected to continue to impact revenue from travel products. Fee revenues for the three and nine months ended September 30, 2000 increased as a result of volume driven increases in Worldspan reservation booking fees and customer processing fees in the airline and hotel room and rental car services. The processing fees for the airline and hotel room services were introduced during the second quarter of 1999. Although Worldspan reservation booking fees and customer processing fees increased and adaptive marketing revenues declined in the three and nine months ended September 30, 2000, fee based revenue (approximately 8% of total revenues) have remained consistent period to period. 16 Cost of Revenues and Gross Profit Quarter Ended % Nine Month Ended % September 30, Change September 30, Change ------------- ------ ------------- ------ ($000) ($000) 2000 1999 2000 1999 ---- ---- ---- ---- Total Cost of Revenues.......... $287,280 134,009 114% $849,732 279,094 204% % of Revenues.......... 84% 88% 84% 89% Gross Profit............ $ 54,054 $18,213 197% $157,495 $34,103 362% Gross Margin............. 15.8% 12.0% 15.6% 10.9% Cost of revenues consists of product costs and supplier warrant costs. For the three and nine months ended September 30, 2000, product costs consisted of: (1) the cost of airline tickets from our suppliers, net of the federal air transportation tax, segment fees and passenger facility charges imposed in connection with the sale of airline tickets; (2) the cost of hotel rooms from our suppliers, net of hotel tax; (3) the cost of rental cars from our suppliers, net of applicable taxes; and (4) the cost of long distance telephone service provided by our suppliers. During the three and nine months ended September 30, 1999, our product costs were comprised of (1) the cost of airline tickets from our suppliers, net of the federal air transportation tax, segment fees and passenger facility charges imposed in connection with the sale of airline tickets; and (2) the cost of hotel rooms from our suppliers, net of hotel tax. Our supplier warrant costs for the three and nine month periods in both years were approximately $381,000 and $1.1 million, respectively, which represent a non-cash expense related to the issuance of common stock warrants to one of our airline program participants in January 1999. We will recognize additional supplier warrant costs in the amount of approximately $381,000 in the next quarter. Gross profit consists of revenues less the cost of revenues. For the three and nine months ended September 30, 2000, gross profit increased over the same periods in 1999 as a result of increased transactional sales volume, increased Worldspan reservation booking and customer processing fee revenues, and increased other fee-based revenues. In addition to increasing transactional volume, we also have increased the average margin on air tickets and hotel rooms as compared to the same periods of 1999. Because fee-based revenues do not involve separate costs, these revenues have had a disproportionately positive impact on total gross profit. Fee-based revenues represented approximately 48% and 54% of total gross profit for the three months ended September 30, 2000 and 1999, respectively, and 50% and 76% of total gross profit for the nine months ended September 30, 2000 and 1999, respectively. For the three and nine months ended September 30, 2000, gross margin increased from the same period of 1999 as a result of increased average margin on air tickets and hotel rooms, increased Worldspan and customer processing fees, and as a result of the introduction and expansion of additional products for long distance telephone, financial services and autos during 2000. Operating Expenses Pursuant to agreements we have entered into with our licensees and Walker Digital, during the third quarter 2000, we were reimbursed $4.5 million by our licensees and Walker Digital for costs we incurred in connection with providing information technology and other services to our licensees and for 17 reimbursement by Walker Digital of certain legal expenses associated with patent litigations. Such reimbursement amounts totaled $3.8 million and $7.1 million for the first and second quarters of 2000, respectively. Despite the cessation of operations by WebHouse Club and Perfect Yardsale, there can be no assurance that the gross operating expenses associated with providing such services will be significantly reduced or eliminated in the fourth quarter 2000 or in the future. Sales and Marketing Quarter Ended % Nine Month Ended % September 30, Change September 30, Change ------------- ------ ------------- ------ ($000) ($000) 2000 1999 2000 1999 ---- ---- ---- ---- Advertising............ $14,175 $ 9,504 49% $48,340 $30,280 60% Other Sales & Marketing.............. 21,394 11,909 80% 65,295 26,004 151% ------- ------- ------- ------- Total.................. $35,569 $21,413 66% $113,635 $56,284 102% % of Revenues............... 10.4% 14.1% 11.3% 18.0% Sales and marketing consists of advertising expenses and other sales and marketing expenses. Advertising expenses consist primarily of: (1) television and radio advertising; (2) agency fees and production costs for television and radio commercials; and (3) on-line and print advertisements. For the three and nine months ended September 30, 2000, advertising expenses increased over the same period in 1999 primarily due to substantial expenses related to the television advertising campaign launched in January 2000. We intend to continue to pursue an advertising and branding campaign in order to continue to attract new users and retain existing users. Other sales and marketing expenses consist primarily of: (1) credit card processing fees; (2) fees paid to third-party service providers that operate our call centers; (3) provisions for customer credit card charge-backs; and (4) compensation for our sales and marketing personnel. For the three and nine months ended September 30, 2000, other sales and marketing expenses increased over the same periods in 1999 due to increased costs to run the customer service call centers, increased credit card processing fees, and increased payroll and related expenses resulting from growing our employee base. The increases in other sales and marketing expenses were driven by substantial increases in customer offers and revenue. General and Administrative Quarter Ended % Nine Month Ended % September 30, Change September 30, Change ------------- ------ ------------- ------ ($000) ($000) 2000 1999 2000 1999 ---- ---- ---- ---- General & Administrative.......... $11,934 $6,843 74% $39,860 $16,013 149% Payroll Tax Expense on Employee Stock Options................. 349 1,547 -77% 8,763 1,547 466% ------- ------ ------- ------- Total................... $12,283 $8,390 46% $48,623 $17,560 177% % of Revenues.......... 3.6% 5.5% 4.8% 5.6% 18 General and administrative expenses consist primarily of: (1) compensation for personnel; (2) fees for outside professionals; (3) telecommunications costs; and (4) occupancy expenses. General and administrative expenses increased during the three and nine months ended September 30, 2000 over the same periods in 1999 as a result of increased headcount and resulting payroll and overhead costs associated with the expansion of our product offerings and increases in our revenue base. In addition, for the three and nine months ended September 30, 2000, we incurred charges of $349,000 and $8.8 million, respectively, for payroll taxes relating to options exercised in accordance with our employee stock option plans. For the three and nine months ended September 30, 1999, payroll taxes relating to options exercised in accordance with our employee stock option plans amounted to $1.5 million. Systems and Business Development Quarter Ended % Nine Month Ended % September 30, Change September 30, Change ------------- ------ ------------- ------ ($000) ($000) 2000 1999 2000 1999 ---- ---- ---- ---- Systems & Business Development.......... $11,420 $4,593 149% $23,983 $10,246 134% % of Revenues........ 3.3% 3.0% 2.4% 3.3% Systems and business development expenses for all periods consist primarily of: (1) payments to outside contractors, (2) depreciation and amortization on computer hardware and software, (3) compensation to our information technology and product development staff, and (4) data communications and other expenses associated with operating our internet site. For the three and nine months ended September 30, 2000, systems and business development expenses increased over the same periods in 1999 due to increased staffing requirements and resulting consulting, payroll and overhead costs related to the expansion of our product offerings and technological infrastructure. In addition, we recognized increased depreciation and amortization expenses resulting primarily from capital expenditures and increased internal software development costs incurred in past and current quarters. Interest Income, Net Quarter Ended % Nine Month Ended % September 30, Change September 30, Change ------------- ------ ------------- ------ ($000) ($000) 2000 1999 2000 1999 ---- ---- ---- ---- Interest Income, Net..... $2,264 $2,356 -4% $7,704 $4,743 62% 19 For the three months ending September 30, 2000, interest income on cash and marketable securities decreased slightly from the prior year. For nine months ended September 30, 2000, interest income on cash and marketable securities increased primarily due to higher balances resulting from our initial public offering of common stock in April of 1999 and our follow-on public offering of common stock in August of 1999. Liquidity and Capital Resources As of September 30, 2000, we had approximately $130.6 million in cash, cash equivalents and short-term investments. We generally invest excess cash, cash equivalents and short-term investments predominantly in debt instruments that are highly liquid, of high-quality investment grade, and predominantly have maturities of less than one year with the intent to make such funds readily available for operating purposes. Net cash provided by operating activities was $13.0 million for the nine months ended September 30, 2000, $7.9 million of which was related to the release of a credit card reserve. Net cash provided by operating activities during 2000 was primarily attributable to expanding gross margin on increasing revenues, which was partially offset by increasing operating expenses. Net cash used in operating activities was $50.2 million for the nine months ended September 30, 1999. Net cash used in operating activities during 1999 was primarily attributable to net losses from operations. Net cash used in investing activities was $55.3 million and $97.4 million for the nine months ended September 30, 2000 and 1999, respectively. Net cash used in investing activities was primarily related to purchases of property and equipment and, in the first half of 2000, to purchase convertible notes and warrants in certain licensees and to purchase certain equity investments, described more fully below. In February 2000, we made an equity investment of $5.0 million in Last Minute.com, a U.K. based e-commerce company. In February 2000, we purchased a $3.6 million convertible secured note in an affiliate of Alliance Capital Partners, pursuant to our agreement with Alliance. Subsequently, the amount of the convertible secured note was increased to $3.8 million. During the second quarter, we purchased convertible notes in the amounts of $11.1 million and $6.7 million in Hutchison-Priceline Limited and MyPrice Pty. Ltd., respectively, pursuant to our agreements to develop our products in certain Asian and Australian markets. In addition, we purchased a warrant in the amount of $3.2 million from priceline.com europe Ltd. pursuant to our agreements to develop our products in Europe. During the third quarter 2000, we purchased a convertible note in priceline.com Auto Insurance Agency, Inc. in the amount of $7.5 million. We have certain commitments for capital expenditures as part of our ongoing business cycle. None of these commitments are material to our financial position either individually or in the aggregate. As a result of our rapid growth, we expect to continue to increase capital expenditures for purchased computer hardware, internally developed software, other equipment and leasehold improvements. Additionally, we have commitments to make additional loans to certain licensees under certain circumstances. Net cash provided by financing activities was $13.6 million for the nine months ended September 30, 2000, primarily as a result of cash inflow related to the exercise of employee stock options. Net cash provided by financing activities was $209.5 million for the nine months ended September 30, 1999, primarily as a result of proceeds from our initial public offering and secondary offering. 20 We believe that our existing cash balances and liquid resources will be sufficient to fund our operating activities, capital expenditures and other obligations through at least the next twelve months. However, if during that period or thereafter, we are not successful in generating sufficient cash flow from operations or in raising additional capital when required in sufficient amounts and on terms acceptable to us, we may be required to reduce our planned capital expenditures and scale back the scope of our business plan, either of which could have a material adverse effect on our projected financial condition or results of operation. If additional funds were raised through the issuance of equity securities, the percentage ownership of our then current stockholders would be diluted. We cannot assure you that we will generate sufficient cash flow from operations in the future, that anticipated revenue growth will be realized or that future borrowings or equity contributions will be available in amounts sufficient to make anticipated capital expenditures or finance our business plan. Additional Factors that May Affect Future Results The following risk factors and other information included in this Form 10-Q should be carefully considered. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations. If any of the following risks occur, our business, financial condition, operating results and cash flows could be materially adversely affected. Our Limited Operating History Makes Evaluating Our Business Difficult Priceline.com was formed in July 1997 and began operations on April 6, 1998. As a result, we have only a limited operating history on which you can base an evaluation of our business and prospects. Our prospects must be considered in the light of the risks, uncertainties, expenses and difficulties frequently encountered by companies in their early stages of development, particularly companies in new and rapidly evolving markets, such as online commerce, using new and unproven business models. To address these risks and uncertainties, we must, among other things: o attract leading sellers and consumers to the priceline.com service; o maintain and enhance our brand, and expand our product and service offerings; o attract, integrate, retain and motivate qualified personnel; and o adapt to meet changes in our markets and competitive developments. We may not be successful in accomplishing these objectives. We Are Not Profitable and Will Continue to Incur Losses As of September 30, 2000, we had an accumulated deficit of $1.4 billion. We have not achieved profitability and will continue to incur losses. A substantial portion of our revenues to date have been derived from airline, hotel and rental car products. As our business model evolves, we expect to continue to introduce new products and services. With respect to both current and future product and service offerings, we expect to increase significantly our operating expenses in order to increase our customer base, enhance our brand image and support our growing infrastructure. For us to make a profit, our 21 revenues and gross profit margins will need to increase sufficiently to cover these and other future costs. Otherwise, we may never achieve profitability. Potential Fluctuations in Our Financial Results Make Financial Forecasting Difficult We expect our revenues and operating results to vary significantly from quarter to quarter. As a result, quarter to quarter comparisons of our revenues and operating results may not be meaningful. In addition, due to our limited operating history and a business model that is still relatively new and unproven, it may be difficult to predict our future revenues or results of operations accurately. It is likely that in one or more future quarters our operating results will fall below the expectations of securities analysts and investors. If this happens, the trading price of our common stock would almost certainly be materially and adversely affected. Our business has almost no backlog and almost all of our revenues for a particular quarter are derived from transactions that are both initiated and completed during that quarter. Our current and future expense levels are based largely on our investment plans and estimates of future revenues and are, to a large extent, fixed. Accordingly, we may be unable to adjust spending in a timely manner to compensate for any unexpected revenue shortfall, and any significant shortfall in revenues relative to our planned expenditures could have an immediate adverse effect on our business and results of operations. Our limited operating history and rapid growth over the past year and a half makes it difficult for us to assess the impact of seasonal factors on our business. Nevertheless, we expect our business to be subject to seasonal fluctuations, reflecting a combination of seasonality trends for the products and services offered by us and seasonality patterns affecting Internet use. For example, with regard to our travel products, demand for leisure travel may increase over summer vacations and holiday periods, while Internet usage may decline during the summer months. Our results also may be affected by seasonal fluctuations in the inventory made available to the priceline.com service by participating sellers. Airlines, for example, typically enjoy high demand for tickets through traditional distribution channels for travel during Thanksgiving and the year-end holiday period. As a result, during those periods, less excess airline ticket inventory would be available to priceline.com. Our business also may be subject to cyclical variations for the products and services offered; for example, leisure travel and home mortgage financing tend to decrease in economic downturns. We Are Dependent On the Airline Industry and Certain Airlines Our near term, and possibly long term, our prospects are significantly dependent upon our sale of leisure airline tickets. Sales of leisure airline tickets represented a substantial majority of total revenue for the year ended December 31, 1999 and the nine months ended September 30, 2000. Leisure travel, including the sale of leisure airline tickets, is dependent on personal discretionary spending levels. As a result, sales of leisure airline tickets and other leisure travel products tend to decline during general economic downturns and recessions. In addition, unforeseen events, such as political instability, regional hostilities, increases in fuel prices, imposition of taxes or surcharges by regulatory authorities, travel-related accidents and unusual weather patterns also may adversely affect the leisure travel industry. As a result, our business also is likely to be affected by those events. Significantly reducing our dependence on the airline and travel industries is likely to take a long time and there can be no guarantee that we will succeed in reducing that dependence. 22 Sales of airline tickets from priceline.com's six largest airline suppliers accounted for approximately 93% and 84%, respectively, of airline ticket revenue for the year ended December 31, 1999 and the nine months ended September 30, 2000, respectively. As a result, currently we are substantially dependent upon the continued participation of these airlines in the priceline.com service in order to maintain and continue to grow our total airline ticket revenues and, as a consequence, our overall revenues. Our ticket sale revenues for the three months ended September 30, 2000 were 8% below our ticket sale revenue for the three months ended June 30, 2000. In addition, our October 2000 ticket sale revenues, which historically has been our strongest sales month of the fourth quarter, were approximately 20% below our September 2000 ticket sale revenues, which based on our historical experience we had expected to be our strongest sales month of the third quarter. As a result, we expect that our revenues for the three months ended December 31, 2000, will be significantly less than our revenues for the three months ended September 30, 2000. We currently have 36 participating airlines. However, our airline participation agreements: o do not require the airlines to make tickets available for any particular routes; o do not require the airlines to provide any specific quantity of airline tickets; o do not require the airlines to provide particular prices or levels of discount; o do not require the airlines to deal exclusively with us in the public sale of discounted airline tickets; and o generally, can be terminated upon relatively short notice. These agreements also outline the terms and conditions under which ticket inventory provided by the airlines may be sold. Our agreement with Delta contains certain restrictions relating to the terms of participation in our service by other carriers and the circumstances under which we may transfer or license our intellectual property to other travel providers. It is possible that, as the priceline.com service grows and becomes a significant channel of distribution for airline tickets and as other carriers seek participation in the priceline.com service, these competitively restrictive provisions of the Delta agreement could raise issues under federal and state antitrust laws. If that happened, either a federal or state government agency or private party could initiate litigation seeking to enjoin us and Delta from enforcing these provisions or seeking to collect treble damages. The outcome of any such litigation would be uncertain. If, however, such a lawsuit resulted in an injunction or subjected us to damages, our business and financial condition could suffer. Due to our dependence on the airline industry, we could be severely affected by changes in that industry, and, in many cases, we will have no control over such changes or their timing. For example, our revenues for the three months ended September 30, 2000 were 3.1% below our revenues for the three months ended June 30, 2000. We believe that the decline in revenues was attributable, in part, and in addition to other factors, to specific events in the airline industry, including a $20 fuel surcharge imposed in early September by airlines due to increased fuel prices, a high level of flight cancellations that negatively affected supply and the introduction by certain airlines of their own special sale fares in September which contributed to lower average offer prices for tickets. In addition, given the concentration of the airline industry, particularly in the domestic market, major airlines that are not participating in the priceline.com service could exert pressure on other airlines not to supply us with tickets. Moreover, the airlines may attempt to 23 establish their own buyer-driven commerce service or participate or invest in other similar services being established to compete with us. We also could be materially adversely affected by the bankruptcy, insolvency or other material adverse change in the business or financial condition of one or more of our airline participants. Our Business Model is Relatively Novel and Unproven The priceline.com service is based on a relatively novel and unproven business model. We will be successful only if consumers and sellers continue to actively use the priceline.com service. Prior to the launch of the priceline.com service, consumers and sellers had never bought and sold products and services through a demand collection system over the Internet. Therefore, it is impossible to predict the degree to which consumers and sellers will continue to use the priceline.com service over time. Many of the factors influencing consumers' and sellers' willingness to use the priceline.com service are outside our control. For example, a labor dispute that disrupts airline service or an airline accident could make consumers unwilling to use a service like priceline.com that does not permit the customer to designate the airline on which the customer purchases a ticket. In addition, a breach of security on the Internet, even if we were not involved, could make consumers unwilling to place orders online with a credit card. Also, recent adverse publicity surrounding our recent public announcements may affect consumers' willingness to use our service. Consequently, it is possible that consumers and sellers will never utilize the priceline.com service to the degree necessary for us to achieve profitability. We Need to Sell New Products and Services We are unlikely to make significant profits unless we continue to make new or complementary products and services and a broader range of existing products and services available through the priceline.com service or through services provided by our licensees. We will incur substantial expenses and use significant resources in trying to continue to expand the type and range of the products and services that we offer. However, we may not be able to attract sellers, other participants and licensees to provide such products and services or consumers to purchase such products and services through the priceline.com service. In addition, if we or our licensees launch new products or services that are not favorably received by consumers, our reputation and the value of the priceline.com brand could be damaged. The great majority of our experience to date is in the travel industry. The travel industry is characterized by "expiring" inventories. For example, if not used by a specific date, an airline ticket, hotel room reservation or rental car reservation has no value. The expiring nature of the inventory creates incentives for airlines, hotels and rental car companies to sell seats, hotel room reservations or rental car reservations at reduced rates. Because we have only limited experience in selling "non-expiring" inventories on the priceline.com service, such as new cars or financial services, we cannot predict whether the priceline.com business model can be successfully applied to such products and services. New Businesses We Are Evaluating May Not Be Successful We intend to expand our current Name Your Own Price(SM) business model into other areas of e-commerce and to other regions, directly and through licensees. For example, we licensed our name and business model to Alliance Capital Partners in connection with our home financing services and to other third parties in connection with other products. We also have entered into, 24 and intend to continue to enter into, similar licensing arrangements with third parties in connection with international expansion of the priceline.com service. These new businesses typically incur start-up costs and operating losses and may not be successful. If these new businesses are not favorably received by consumers or are unsuccessful, the association of our brand name and business model with these new entities may adversely affect our business and reputation and may dilute the value of our brand name. Further, to the extent that these new businesses are not successful, we may not be able to recover our costs associated with their development. Priceline WebHouse Club, Inc. and Priceline Perfect Yardsale, Inc., both privately held licensees of ours, separately announced in October that they would be ceasing their operations. We are in the process of evaluating the overall impact that their cessation of operations will have on our business. To the extent that we need to service these licensees, our core business may suffer. Moreover, expansion of our core business model will expose us to additional risks not currently applicable to our existing operations. The additional risks associated with the expansion of our core business could have a material adverse effect on our business generally. In addition, as we expand our business model to other areas of e-commerce, these new businesses will face competition from established providers in those areas. We May Be Unable to Effectively Manage and Sustain Growth We have rapidly and significantly expanded our operations over the course of the last year and anticipate that further expansion will be required to realize our growth strategy. Our rapid growth over the course of the last year has placed significant demands on our management and other resources which may continue. To manage and sustain any future growth, we will need to continue, among other things, to improve existing systems and/or implement new systems for: (1) transaction processing; (2) operational and financial management; and (3) training, integrating and managing our employee base. Recent changes to our operating structure, including the recent hiring of the new Chief Financial Officer and the addition of a new Chief Operating Officer, while intended to strengthen our business and foster and harness future growth, may not have the intended effect. Our failure to effectively manage and sustain any future growth could have a material adverse effect on our business, results of operations and financial condition. If We Lose Our Key Personnel or Cannot Recruit Additional Personnel, Our Business May Suffer Competition for personnel with experience in Internet commerce is intense. We depend on the continued services and performance of our executive officers and other key personnel. We do not have "key person" life insurance policies. If we do not succeed in attracting new employees or retaining and motivating current and future employees or executive officers, our business could suffer significantly. Our ability to retain key employees could be materially adversely affected by recent developments concerning the Company and the decline in the market price of our common stock. We Rely on Third-Party Systems We rely on certain third-party computer systems and third-party service providers, including the computerized central reservation systems of the airline and hotel industries to satisfy demand for airline tickets and hotel room reservations. Any interruption in these third-party services systems or deterioration in their performance could be disruptive to our business. Our agreements with third-party service providers are terminable upon short notice. In the event our arrangement with any of such third parties is terminated, we may not be able to find an alternative 25 source of systems support on a timely basis or on commercially reasonable terms and, as a result, our business and results of operations could be materially and adversely affected. Intense Competition Could Reduce Our Market Share and Harm Our Financial Performance We compete with both online and traditional sellers of the products and services offered on priceline.com. Current and new competitors can launch new sites at a relatively low cost. In addition, the traditional retail industry for the products and services we offer is intensely competitive. We currently or potentially compete with a variety of companies with respect to each product or service we offer. With respect to travel products, these competitors include: o Internet travel agents such as Microsoft's Expedia; o traditional travel agencies; o consolidators and wholesalers of airline tickets and other travel products, including online consolidators such as Cheaptickets.com; o individual or groups of airlines, hotels, rental car companies, cruise operators and other travel service providers; and o operators of travel industry reservation databases such as Worldspan and Sabre. Our current or potential competitors with respect to the arrangement and sale of new automobiles in the online marketplace, include, among others, Auto-by-Tel, Carsdirect.com, Autoweb.com, Greenlight.com and CarPoint.com. To some extent, we compete for new car shoppers' attention with retail new car dealers, many of which offer online shopping capabilities. With respect to financial service products, our competitors include: o banks and other financial institutions; o online and traditional mortgage and insurance brokers, including Quicken Mortgage, E-Loan and iOwn, Inc.; and o insurance companies. Our current or potential competitors with respect to rental cars include, among others, rental car companies and traditional and online travel agencies and travel service providers. With respect to long distance services, our current or potential competitors include long distance providers, local exchange providers that may be entering the long distance market and Internet Protocol telephone services. We potentially face competition from a number of large Internet companies and services that have expertise in developing online commerce and in facilitating Internet traffic, including Amazon.com, America Online, Microsoft and Yahoo!, who could choose to compete with us either directly or indirectly through affiliations with other e-commerce or off-line companies. Other large companies with strong brand recognition, technical expertise and experience in Internet commerce could also seek to compete with us. A number of airlines intend to invest in 26 and offer discount airfares and travel services through a site or sites to be established, including Orbitz, and a number of airlines have agreed to participate in and receive an equity stake from Hotwire, a website which offers discounted fares on opaque inventory. Similar steps may be under consideration by certain hotel companies and travel service providers. Competition from these and other sources could have a material adverse effect on our business, results of operations and financial condition. Many of our current and potential competitors, including Internet directories and search engines and large traditional retailers, have longer operating histories, larger customer bases, greater brand recognition and significantly greater financial, marketing, technical and other resources than we have. Some of these competitors may be able to secure products and services on more favorable terms than we can. In addition, many of these competitors may be able to devote significantly greater resources to: (1) marketing and promotional campaigns, (2) attracting traffic to their Web sites, (3) attracting and retaining key employees, (4) securing vendors and inventory and (5) Web site and systems development. Increased competition could result in reduced operating margins and loss of market share and could damage our brand. There can be no assurance that we will be able to compete successfully against current and future competitors or that competition will not have a material adverse effect on our business, results of operations and financial condition. Our Success Depends on Our Ability to Protect Our Intellectual Property We regard our intellectual property as critical to our success, and we rely on trademark, copyright and patent law, trade secret protection and confidentiality and/or license agreements with our employees, customers, partners and others to protect our proprietary rights. If we are not successful in protecting our intellectual property, there could be a material adverse effect on our business. While we believe that our issued patents and pending patent applications help to protect our business, there can be no assurance that: o any patent can be successfully defended against challenges by third parties; o pending patent applications will result in the issuance of patents; o competitors or potential competitors of priceline.com will not devise new methods of competing with us that are not covered by our patents or patent applications; o because of variations in the application of our business model to each of our products and services, our patents will be effective in preventing one or more third parties from utilizing a copycat business model to offer the same product or service in one or more categories; o new prior art will not be discovered which may diminish the value of or invalidate an issued patent; or o a third party will not have or obtain one or more patents that prevent us from practicing features of our business or will require us to pay for a license to use those features. There has been recent discussion in the press regarding the examination and issuance of so called "business-method" patents. As a result, the United States Patent and Trademark Office has 27 indicated that it intends to intensify the review process applicable to such patent applications. The new procedures are not expected to have a direct effect on patents already granted. We cannot anticipate what effect, if any, the new process will have on our pending patent applications. We pursue the registration of our trademarks and service marks in the U.S. and internationally. However, effective trademark, service mark, copyright and trade secret protection may not be available in every country in which our services are made available online. We have licensed in the past, and expect to license in the future, certain of our proprietary rights, such as trademarks or copyrighted material, to third parties. These licensees may take actions that might diminish the value of our proprietary rights or harm our reputation. Legal Proceedings We are a party to the legal proceedings described in Item 1 of Part II "Legal Proceedings." An adverse outcome in any of the actions described in Item 1 of Part II could have a material adverse effect on our business, results of operation and financial condition. The Success of Our Business Will Depend on Continued Growth of Internet Commerce The market for the purchase of products and services over the Internet is a new and emerging market. As an Internet commerce business, our future revenues and profits are substantially dependent upon the widespread acceptance and use of the Internet and other online services as a medium for commerce by consumers and sellers. If widespread acceptance and growth of Internet use does not occur, our business and financial performance will suffer. Rapid growth in the use of and interest in the Internet and other online services is a recent phenomenon. This growth may not continue. A sufficiently broad base of consumers may not adopt, or continue to use, the Internet as a medium of commerce. Demand for and market acceptance of recently introduced products and services over the Internet are subject to a high level of uncertainty, and there are few proven products and services. For us to grow, consumers who historically have purchased through traditional means of commerce, such as a travel agent for airline tickets or a branch of a bank for home financings, will need to elect to purchase online products and services. Sellers of products and services will need to adopt or expand use of the Internet as a channel of distribution. The Internet has experienced, and is expected to continue to experience, significant growth in the number of users and amount of traffic. Our success will depend upon the development and maintenance of the Internet's infrastructure to cope with this increased traffic. This will require a reliable network backbone with the necessary speed, data capacity and security, and the timely development of complementary products, such as high-speed modems, for providing reliable Internet access and services. The Internet has experienced a variety of outages and other delays as a result of damage to portions of its infrastructure and could face such outages and delays in the future. Outages and delays are likely to affect the level of Internet usage generally, as well as the processing of transactions on the priceline.com Web site. It is unlikely that the level of orders lost in those circumstances could be made up by increased phone orders. In addition, the Internet could lose its viability due to delays in the development or adoption of new standards to handle increased levels of activity or due to increased government regulation. The adoption of new standards or government regulation may, however, require us to incur substantial compliance costs. 28 Capacity Constraints and System Failures Could Harm Our Business If our systems cannot be expanded to cope with increased demand or fail to perform, we could experience: o unanticipated disruptions in service; o slower response times; o decreased customer service and customer satisfaction; or o delays in the introduction of new products and services; any of which could impair our reputation, damage the priceline.com brand and materially and adversely affect our revenues. Publicity about a service disruption also could cause a material decline in our stock price. We use internally developed systems to operate the priceline.com service, including transaction processing and order management systems that were designed to be scaleable. However, if the number of users of the priceline.com service increases substantially, we will need to significantly expand and upgrade our technology, transaction processing systems and network infrastructure. We do not know whether we will be able to accurately project the rate or timing of any such increases, or expand and upgrade our systems and infrastructure to accommodate such increases in a timely manner. Our ability to facilitate transactions successfully and provide high quality customer service also depends on the efficient and uninterrupted operation of our computer and communications hardware systems. The priceline.com service has experienced periodic system interruptions, which we believe will continue to occur from time to time. Our systems and operations also are vulnerable to damage or interruption from human error, natural disasters, power loss, telecommunication failures, break-ins, sabotage, computer viruses, intentional acts of vandalism and similar events. While we currently maintain redundant servers at our Stamford, Connecticut premises to provide limited service during system disruptions, we do not have fully redundant systems, a formal disaster recovery plan or alternative providers of hosting services. In addition, we do not carry sufficient business interruption insurance to compensate for losses that could occur. Any system failure that causes an interruption in service or decreases the responsiveness of the priceline.com service could impair our reputation, damage our brand name and materially adversely affect our revenues. We May Not Be Able to Keep Up with Rapid Technological and Other Changes The markets in which we compete are characterized by rapidly changing technology, evolving industry standards, frequent new service and product announcements, introductions and enhancements and changing consumer demands. We may not be able to keep up with these rapid changes. In addition, these market characteristics are heightened by the emerging nature of the Internet and the apparent need of companies from many industries to offer Internet-based products and services. As a result, our future success will depend on our ability to adapt to rapidly changing technologies, to adapt our services to evolving industry standards and to continually improve the performance, features and reliability of our service in response to competitive service and product offerings and the evolving demands of the marketplace. In addition, the widespread adoption of 29 new Internet, networking or telecommunications technologies or other technological changes could require us to incur substantial expenditures to modify or adapt our services or infrastructure. Online Security Breaches Could Harm Our Business The secure transmission of confidential information over the Internet is essential in maintaining consumer and supplier confidence in the priceline.com service. Substantial or ongoing security breaches on our system or other Internet-based systems could significantly harm our business. We currently require buyers to guarantee their offers with their credit card, either online or through our toll-free telephone service. We rely on licensed encryption and authentication technology to effect secure transmission of confidential information, including credit card numbers. It is possible that advances in computer capabilities, new discoveries or other developments could result in a compromise or breach of the technology used by us to protect customer transaction data. We incur substantial expense to protect against and remedy security breaches and their consequences. However, we cannot guarantee that our security measures will prevent security breaches. A party that is able to circumvent our security systems could steal proprietary information or cause significant interruptions in our operations. For instance, several major Web sites have experienced significant interruptions as a result of improper direction of excess traffic to those sites, and computer viruses have substantially disrupted e-mail and other functionality in a number of countries, including the United States. Security breaches also could damage our reputation and expose us to a risk of loss or litigation and possible liability. Our insurance policies carry low coverage limits, which may not be adequate to reimburse us for losses caused by security breaches. We also face risks associated with security breaches affecting third parties conducting business over the Internet. Consumers generally are concerned with security and privacy on the Internet and any publicized security problems could inhibit the growth of the Internet and, therefore, the priceline.com service as a means of conducting commercial transactions. Our Stock Price is Highly Volatile The market price of our common stock is highly volatile and is likely to continue to be subject to wide fluctuations in response to factors such as the following, some of which are beyond our control: o quarterly variations in our operating results; o operating results that vary from the expectations of securities analysts and investors; o changes in expectations as to our future financial performance, including financial estimates by securities analysts and investors; o changes in market valuations of other Internet or online service companies; o announcements of technological innovations or new services by us or our competitors; 30 o announcements by us or our competitors of significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments; o loss of a major seller participant, such as an airline or hotel chain; o changes in the status of our intellectual property rights; o lack of success in the expansion of our business model horizontally or geographically; o adverse publicity surrounding recent announcements concerning the Company; o announcements by third parties of significant claims or proceedings against us or adverse developments in pending proceedings; o additions or departures of key personnel; and o stock market price and volume fluctuations. Sales of a substantial number of shares of our common stock could adversely affect the market price of our common stock by introducing a large number of sellers to the market. Given the volatility that exists for our shares, such sales could cause the market price of our common stock to decline. In addition, the trading prices of Internet stocks in general, including ours, have experienced extreme price and volume fluctuations. To the extent that the public's perception of the prospects of Internet or e-commerce companies is negative, our stock price could decline further regardless of our results. Other broad market and industry factors may decrease the market price of our common stock, regardless of our operating performance. Market fluctuations, as well as general political and economic conditions, such as a recession or interest rate or currency rate fluctuations, also may decrease the market price of our common stock. The market value of e-commerce stocks has declined dramatically over recent months based on profitability and other concerns. The recent declines in the value of our common stock and market conditions could adversely affect our ability to raise additional capital. We are currently the subject of a number of securities class action litigations. In the past, securities class action litigation often has been brought against a company following periods of volatility in the market price of their securities. To the extent our stock price declines or is volatile, we may in the future be the target of additional litigation. Securities litigation could result in substantial costs and divert management's attention and resources. Our Business is Subject to Tax Uncertainties Potential Federal Air Transportation Tax on Airline Ticket Sales. A Federal transportation tax is imposed upon the sale of airline tickets. The tax is based on a percentage of the cost of transportation, which was 9% for periods prior to October 1, 1998, 8% for the period October 1, 1998 through September 30, 1999 and 7.5% thereafter. We have historically interpreted the tax regulations as requiring that the tax be computed based on the amount charged by the airline to us for the airline ticket and participating airlines have collected and remitted the tax based on this amount. We applied for a ruling from the Internal Revenue Service confirming this interpretation. In December 1999, the Internal Revenue Service indicated to us that it was unlikely that a favorable ruling would be issued. We subsequently withdrew our ruling request because of the uncertainty of the outcome. Because we anticipated the possibility of an adverse ruling on this issue, we accrued approximately $1.9 million relating to the balance of the tax liability for tickets 31 sold prior to that date. We believe this accrual to be adequate, but there can be no assurance as to the final outcome because a formal ruling has not been issued by the Internal Revenue Service. State Taxes. We file tax returns in such states as required by law based on principles applicable to traditional businesses. In addition, we do not collect sales or other similar taxes in respect of transactions conducted through the priceline.com service (other than the federal air transportation tax referred to above). However, one or more states could seek to impose additional income tax obligations or sales tax collection obligations on out-of-state companies, such as ours, which engage in or facilitate online commerce. A number of proposals have been made at state and local levels that could impose such taxes on the sale of products and services through the Internet or the income derived from such sales. Such proposals, if adopted, could substantially impair the growth of e-commerce and adversely affect our opportunity to become profitable. Legislation limiting the ability of the states to impose taxes on Internet-based transactions has been enacted by the United States Congress. However, this legislation, known as the Internet Tax Freedom Act, imposes only a three-year moratorium, which commenced October 1, 1998 and ends on October 21, 2001, on state and local taxes on (1) electronic commerce where such taxes are discriminatory and (2) Internet access unless such taxes were generally imposed and actually enforced prior to October 1, 1998. It is possible that the tax moratorium could fail to be renewed prior to October 21, 2001. Failure to renew this legislation would allow various states to impose taxes on Internet-based commerce. The imposition of such taxes could adversely affect our ability to become profitable. Regulatory and Legal Uncertainties Could Harm Our Business The products and services we offer through the priceline.com service are regulated by federal and state governments. Our ability to provide such products and services is and will continue to be affected by such regulations. The implementation of unfavorable regulations or unfavorable interpretations of existing regulations by courts or regulatory bodies could require us to incur significant compliance costs, cause the development of the affected markets to become impractical and otherwise adversely affect our financial performance. SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS Sections of this Form 10-Q may contain forward-looking statements. Expressions of future goals and similar expressions including, without limitation, "may," "will," "should," "could," "expects," "does not currently expect," "plans," "anticipates," "believes," "estimates," "predicts," "potential," or "continue," reflecting something other than historical fact are intended to identify forward-looking statements. The following factors, among others, could cause our actual results to differ materially from those described in the forward-looking statements: inability to successfully expand our business model both horizontally and geographically; adverse changes in our relationships with airlines and other product and service providers; systems-related failures; our ability to protect our intellectual property rights; the effects of increased competition; losses by us and our licensees; any adverse impact from negative publicity and negative customer reaction relating to recent announcements concerning us; legal and regulatory risks and the ability to attract and retain qualified personnel. These factors and others are described in more detail above in "Additional Factors That May Affect Future Results." Item 3. Quantitative and Qualitative Disclosures About Market Risk Priceline.com currently has no floating rate indebtedness, holds no derivative instruments, and does not earn significant foreign-sourced income. Accordingly, changes in interest rates or currency 32 exchange rates do not generally have a direct effect on priceline.com's financial position. However, changes in currency exchange rates may affect the cost of international airline tickets and international hotel reservations offered through the priceline.com service, and so indirectly affect consumer demand for such products and priceline.com's revenue and effect the value of our loans to our foreign licensees. In addition, to the extent that changes in interest rates and currency exchange rates affect general economic conditions, priceline.com would also be affected by such changes. PART II - OTHER INFORMATION Item 1. Legal Proceedings Please see Note 7 to the Notes to Unaudited Consolidated Financial Statements included in the Form10-Q and Part I, Item 3 of priceline.com's Annual Report on Form 10-K for the year ended December 31, 1999. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit Number Description - ------ ----------- 10.35 Amended and Restated Promissory Note, dated August 21, 2000, between priceline.com Incorporated and Heidi Miller. 10.36 Amendment to Employment Agreement, dated August 21, 2000, between priceline.com Incorporated and Heidi Miller. 10.37 Second Amended and Restated Promissory Note, dated August 21, 2000, between priceline.com Incorporated and Jeffery H. Boyd. 10.38 Amendment to Offer Letter, dated August 21, 2000, between priceline.com Incorporated and Jeffery H. Boyd. 10.39 Second Amended and Restated Promissory Note, dated August 21, 2000, between priceline.com Incorporated and Daniel H. Schulman. 10.40 Amendment to Employment Agreement, dated August 21, 2000, between priceline.com Incorporated and Daniel H. Schulman. 27.1 Financial Data Schedule (b) Reports on Form 8-K On July 26, 2000, we filed a report on Form 8-K announcing our second quarter 2000 financial results that included unaudited balance sheets at June 30, 2000 and December 31, 1999 and statements of operations for the three and six months ended June 30, 2000. On November 6, 2000, we furnished a report on Form 8-K announcing our third quarter 2000 financial results that included unaudited balance sheets at September 30, 2000 and December 31, 1999 and statements of operations for the three and nine months 33 ended September 30, 2000 and statements of operations for the three and nine months ended September 30, 2000. 34 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PRICELINE.COM INCORPORATED (Registrant) Date: November 14, 2000 By: /s/ Tom D'Angelo ------------------------------------- Name: Tom D'Angelo Title: Senior Vice President of Finance and Controller EX-10.35 2 0002.txt AMENDMENT TO PROMISSORY NOTE Exhibit 10.35 AMENDMENT TO PROMISSORY NOTE The undersigned, Heidi G. Miller, hereby agrees that the Promissory Note dated March 7, 2000, issued by me to priceline.com Incorporated is hereby amended by replacing the second paragraph thereof reading in full as follows: "The Borrower shall pay to the Company a mandatory prepayment of accrued interest hereunder and principal upon the exercise, in whole or in part at any time prior to the Maturity Date, of the stock options granted pursuant to the Employment Agreement, dated February 18, 2000, by and between the Company and Borrower, or granted to the Borrower thereafter under the Company's 1999 Omnibus Plan (including any amendments thereto), or any options granted in exchange, replacement or substitution therefor, in an amount equal to twenty-five percent (25%) of Borrower's pretax profits from such exercise, to the extent that the sum of such pretax profits, and of all prior pretax profits from such exercises, exceeds six million, six hundred thousand dollars ($6,600,000.00) (the "Profits Threshold"). Within ten (10) Business Days (as hereinafter defined) following each date that the Borrower shall receive pretax profits from any exercise of the options referred above in excess of the Profits Threshold, Borrower shall deliver a mandatory prepayment in reduction of the accrued interest and outstanding principal balance of this Note in an amount equal to 25% of the excess attributed to such exercise. Each prepayment, as provided herein, shall be applied first against accrued but unpaid interest under this Note and then in reduction of the outstanding principal amount hereof until the indebtedness of this Note is paid in full. "Business Day" shall mean any day on which NASDAQ is not authorized or required to close and trading of securities is permitted." IN WITNESS WEHREOF, I have signed this Amendment to Promissory Note on August 21, 2000. ------------------------ Heidi G. Miller EX-10.36 3 0003.txt AMENDMENT TO EMPLOYMENT AGREEMENT Exhibit 10.36 Amendment to Employment Agreement The employment agreement, dated as of February 18, 2000, by and between priceline.com Incorporated and Ms. Heidi G. Miller, shall be amended by replacing paragraph 4(c)(i) in its entirety with the following: "(i) Options in Common Stock of the Company. On the Commencement Date, Executive was granted stock options (the "Original Stock Options") under a stand-alone plan having terms substantially similar to the terms of the priceline.com Incorporated 1999 Omnibus Plan (the "Plan") to purchase two million five hundred thousand (2,500,000) shares of the Company's common stock (the "Common Stock"). On August 9, 2000, Executive was granted certain stock options (the "Refresher Options" and, together with the Original Stock Options, the "Option") pursuant to the terms of a Stock Option Award (the "Stock Option Award"), dated August 9, 2000, by and between the Company and Executive. The grant of the Original Options and the Refresher Options are each referred to herein as a "Separate Option Grant." The Original Options shall terminate on the tenth (10) anniversary of the date of grant or, if earlier, following a termination of Executive's employment with the Company as provided below. The per share exercise price with respect to one million (1,000,000) shares of the Common Stock subject to the Original Options is the Fair Market Value of the Common Stock on the date of grant of the Original Options which is equal to the closing market price of the Common Stock on the NASDAQ Stock Market on the last trading day prior to the date of grant (such portion of the Original Options, the "FMV Options"). The exercise price with respect to the remaining one million five hundred thousand (1,500,000) shares of the Common Stock subject to the Original Options is $90.00 per share (such portion of the Original Options, the "Premium Options"). The Original Options will vest and become exercisable as to one sixth (1/6) of the Original Options upon the Commencement Date, as to one sixth (1/6) of the Original Options on December 31, 2000, as to one-third (1/3) of the Original Options on December 31, 2001 and as to the final one-third (1/3) of the Original Options on December 31, 2002, provided that Executive is employed by the Company on such vesting dates, subject to accelerated vesting and excercisability as provided below. The Refresher Options shall have the terms set forth in the Stock Option Award. On each vesting date, forty percent (40%) of the portion of the Original Options vesting on each such vesting date shall be FMV Options and sixty percent (60%) of the portion of the Original Options vesting on each such vesting date shall be Premium Options. Vesting and exercisability shall be accelerated as follows: (i) upon a Termination without Cause or a Termination for Good Reason, each Separate Option Grant will immediately vest and become exercisable (to the extent not then vested) as follows: sixty-five percent (65%) of the shares, if the termination takes place prior to the first anniversary of the Commencement Date; eighty-two and one-half percent (82.5%) of the shares, if the termination takes place on or after the first anniversary of the Commencement Date and prior to the second anniversary of the Commencement Date; and one hundred percent (100%) of the shares, if the termination takes place thereafter; or (ii) upon death or Termination for a Disability, each Separate Option Grant will immediately vest as to fifty percent (50%) of Executive's then unvested shares; and (iii) in the event of a Change in Control, each Separate Option Grant will vest and become exercisable (to the extent not then vested): sixty-five percent (65%) of the shares, if the Change in Control takes place prior to the first anniversary of the Commencement Date; eighty-two and one-half percent (82.5%) of the shares, if the Change in Control takes place on or after the first anniversary of the Commencement Date and prior to the second anniversary of the Commencement Date; and one hundred percent (100%) of the shares, if the Change in Control takes place thereafter; provided that the remaining unvested shares shall vest and become exercisable (to the extent not otherwise vested and exercisable prior thereto by the other terms hereof) six (6) months after the Change in Control, if the Executive is then employed by the Company or, if earlier, upon a Termination without Cause, Termination for Good Reason, death, Termination for Disability or the Option not being continued or assumed upon the Change in Control. Upon a termination, each Option shall continue to be exercisable as follows: (i) in the event of a termination due to Termination without Cause, Termination for Good Reason, death or Termination for Disability, the Option shall continue to be exercisable for eighteen (18) months following the date of such termination and (ii) in the vent of a Termination for Cause or by the Executive without Good Reason, all unvested options shall be forfeited and vested options shall remain exercisable for ninety (90) days following the date of such termination." IN WITNESS WHEREOF, the parties hereto have duly executed this amendment as of August 21, 2000. PRICELINE.COM INCORPORATED ---------------------------- By: Rick Braddock Title: Chairman HEIDI G. MILLER ---------------------------- EX-10.37 4 0004.txt SECOND AMENDMENT TO PROMISSORY NOTE Exhibit 10.37 SECOND AMENDMENT TO PROMISSORY NOTE The undersigned, Jeffery H. Boyd, hereby agrees that the Promissory Note dated February 10, 2000, as amended on March 28, 2000, issued by me to priceline.com Incorporated is hereby amended by replacing the second paragraph thereof reading in full as follows: "The Borrower shall pay to the Company a mandatory prepayment of accrued interest hereunder and principal upon the exercise, at any time on or prior to February 10, 2005, of one or more Company stock options granted pursuant to the offer of employment dated December 30, 1999, by and between the Company and Borrower, or granted to the Borrower thereafter under the Company's 1999 Omnibus Plan (including any amendments thereto), or any options granted in exchange, replacement or substitution therefor, in an amount equal to twenty-five percent (25%) of Borrower's pretax profits in excess of two million dollars ($2,000,000.00) (the "Profits Threshold"). Within ten (10) Business Days (as hereinafter defined) following each date that the Borrower shall exercise options referred to above in excess of the Profits Threshold, Borrower shall deliver a mandatory prepayment in reduction of the accrued interest and outstanding principal balance of this Note in an amount required by the first sentence of this paragraph. Each prepayment, as provided herein, shall be applied first against accrued but unpaid interest under this Note and then in reduction of the outstanding principal amount hereof until the indebtedness of this Note is paid in full. "Business Day" shall mean any day on which NASDAQ is not authorized or required to close and trading of securities is permitted." IN WITNESS WEHREOF, I have signed this Second Amendment to Promissory Note on August 21, 2000. ------------------------ Jeffery H. Boyd EX-10.38 5 0005.txt AMENDMENT TO OFFER LETTER Exhibit 10.38 Amendment to Offer Letter The offer of employment, dated December 30, 1999, by and between priceline.com Incorporated and Jeffery H. Boyd, shall be amended by adding a new sentence at the end of the fourth paragraph thereof reading in full as follows: "The term Options, except as used in this fourth paragraph, shall include any and all options to purchase shares of the Company's common stock granted to you under the Company's 1999 Omnibus Plan (including any amendments thereto), whether granted on the date hereof or thereafter." PRICELINE.COM INCORPORATED ---------------------------- By: Rick Braddock Title: Chairman JEFFERY H. BOYD ---------------------------- Dated: August 21, 2000 EX-10.39 6 0006.txt SECOND AMENDMENT TO PROMISSORY NOTE Exhibit 10.39 SECOND AMENDMENT TO PROMISSORY NOTE The undersigned, Daniel H. Schulman, hereby agrees that the Promissory Note dated July 2, 1999, as amended on March 28, 2000, issued by me to priceline.com Incorporated is hereby amended by replacing the second paragraph thereof reading in full as follows: "The Borrower shall pay to the Company a mandatory prepayment of accrued interest hereunder and principal upon the exercise, at any time on or prior to June 14, 2004, of one or more Company stock options granted pursuant to the Employment Agreement, dated June 14, 1999, by and between the Company and the Borrower, or granted to the Borrower thereafter under the Company's 1999 Omnibus Plan (including any amendments thereto), or any options granted in exchange, replacement or substitution therefor, in an amount equal to twenty-five percent (25%) of Borrower's pretax profits in excess of ten million dollars ($10,000,000.00) (the "Profits Threshold"). Within ten (10) Business Days (as hereinafter defined) following each date that the Borrower shall exercise options referred to above in excess of the Profits Threshold, Borrower shall deliver a mandatory prepayment in reduction of the accrued interest and outstanding principal balance of this Note in an amount required by the first sentence of this paragraph. Each prepayment, as provided herein, shall be applied first against accrued but unpaid interest under this Note and then in reduction of the outstanding principal amount hereof until the indebtedness of this Note is paid in full. "Business Day" shall mean any day on which NASDAQ is not authorized or required to close and trading of securities is permitted." IN WITNESS WEHREOF, I have signed this Second Amendment to Promissory Note on August 21, 2000. ------------------------ Daniel H. Schulman EX-10.40 7 0007.txt AMENDMENT TO EMPLOYMENT AGREEMENT Exhibit 10.40 Amendment to Employment Agreement The employment agreement, dated as of June 14, 1999, by and between priceline.com Incorporated and Daniel H. Schulman, shall be amended by replacing paragraph 4(c)(i) in its entirety with the following: "(c) Equity. (i) Options. On June 14, 1999, Executive was granted stock options (the "Original Stock Options") under the priceline.com Incorporated 1999 Omnibus Plan to purchase three million (3,000,000) shares of the Company's common stock (the "Common Stock"). Subsequent thereto, Executive was granted additional stock options (the "Additional Options" and, together with the Original Stock Options, the "Option") pursuant to the terms of Stock Option Awards (the "Stock Option Awards"), dated February 24, 2000, May 11, 2000 and August 9, 2000, by and between the Company and Executive. Each separate grant of options on June 14, February 24, May 11 and August 9 is referred to herein as a "Separate Option Grant." The Original Options shall terminate on the tenth (10) anniversary of the date of grant or, if earlier, eighteen (18) months after a termination of Executive's employment with the Company. The exercise price with respect to each share of Common Stock subject to the Original Options is $76.875. The Original Options will become exercisable as to one sixth (1/6) of the Original Options upon the Commencement Date, as to one sixth (1/6) of the Original Options on December 31, 1999, as to one-third (1/3) of the Original Options on December 31, 2000 and as to the final one-third (1/3) of the Original Options on December 31, 2001, provided that Executive is employed by the Company on such vesting date. The Additional Options shall have the terms set forth in the Stock Option Awards. Vesting and exercisability shall be accelerated as follows: (i) upon a Termination without Cause or a Termination for Good Reason, each Separate Option Grant will immediately vest and become exercisable (to the extent not then vested) as follows: 66.66% of the shares, if the termination takes place prior to the first anniversary of the Commencement Date; 83.33% of the shares, if the termination takes place on or after the first anniversary of the Commencement Date and prior to the second anniversary of the Commencement Date; and 100% of the shares, if the termination takes place thereafter; or (ii) upon death or Termination for a Disability, each Separate Option Grant will immediately vest as to 50% of Executive's then unvested shares; and (iii) in the event of a Change in Control, each Separate Option Grant will vest and become exercisable (to the extent not then vested): 66.66% of shares, if the Change in Control takes place prior to the first anniversary of the Commencement Date; 83.33% of the shares, if the Change in Control takes place on or after the first anniversary of the Commencement Date and prior to the second anniversary of the Commencement Date; and 100% of the shares, if the Change in Control takes place thereafter; provided that the remaining unvested shares shall vest and become exercisable (to the extent not otherwise vested and exercisable prior thereto by the other terms hereof) six (6) months after the Change in Control, if the Executive is then employed by the Company or, if earlier, upon a Termination without Cause, Termination for Good Reason, death, Termination for Disability or the Option not being continued or assumed upon the Change in Control." IN WITNESS WHEREOF, the parties hereto have duly executed this amendment as of August 21, 2000. PRICELINE.COM INCORPORATED ---------------------------- By: Rick Braddock Title: Chairman DANIEL H. SCHULMAN ---------------------------- EX-27.1 8 0008.txt FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF PRICELINE.COM INCORPORATED FOR THE PERIOD ENDED SEPTEMBER 30, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-2000 JAN-01-2000 SEP-30-2000 104,501 26,122 28,178 (3,979) 0 181,109 64,377 (18,120) 285,573 94,892 0 359,580 0 1,390 (170,289) 285,573 1,007,227 1,007,227 849,732 849,732 375,241 0 0 (210,010) 0 0 0 0 0 (210,010) (1.35) (1.35)
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