-----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, MY5aAtHmkX6abjg4UvhipI4J0mvMROBDJHKUxQK+ELvf5osouSAr1ydt4BBv5C8E meXPtt83ua/b2Zt4yrvctw== 0001047469-03-027688.txt : 20030814 0001047469-03-027688.hdr.sgml : 20030814 20030814142216 ACCESSION NUMBER: 0001047469-03-027688 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20030630 FILED AS OF DATE: 20030814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PRICELINE COM INC CENTRAL INDEX KEY: 0001075531 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 061528493 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-25581 FILM NUMBER: 03846210 BUSINESS ADDRESS: STREET 1: 800 CONNECTICUT AVE CITY: NORWALK STATE: CT ZIP: 06854 BUSINESS PHONE: 2037053000 10-Q 1 a2116831z10-q.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 June 30, 2003 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________ to __________ Commission File Number 0-25581 PRICELINE.COM INCORPORATED - -------------------------------------------------------------------------------- (Exact name of Registrant as specified in its charter) Delaware 06-1528493 - -------------------------------------- -------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 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 / /. Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act. YES /X/. NO / /. Number of shares of Common Stock outstanding at August 1, 2003: Common Stock, par value $0.008 per share 38,024,469 - ------------------------------------------ ------------------------------ (Class) (Number of Shares) priceline.com Incorporated Form 10-Q For the Quarter Ended June 30, 2003 PART I - FINANCIAL INFORMATION Item 1. Consolidated Condensed Financial Statements Consolidated Balance Sheets at June 30, 2003 (unaudited) and December 31, 2002....................................3 Consolidated Statements of Operations For the Three and Six Months Ended June 30, 2003 and 2002 (unaudited)...................................................................4 Consolidated Statement of Changes in Stockholders' Equity For the Six Months Ended June 30, 2003 (unaudited)............................................................................5 Consolidated Statements of Cash Flows For the Six Months Ended June 30, 2003 and 2002 (unaudited).................6 Notes to Unaudited Consolidated Financial Statements..............................................................7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....................16 Item 3. Quantitative and Qualitative Disclosures About Market Risk...............................................39 Item 4. Controls and Procedures..................................................................................39 PART II - OTHER INFORMATION Item 1. Legal Proceedings........................................................................................39 Item 4. Submission of Matters to a Vote of Security Holders......................................................40 Item 6. Exhibits and Reports on Form 8-K.........................................................................41 SIGNATURES.......................................................................................................42
2 PART I - FINANCIAL INFORMATION ITEM 1. CONSOLIDATED CONDENSED FINANCIAL STATEMENTS PRICELINE.COM INCORPORATED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30, DECEMBER 31, 2003 2002 ------------- ------------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents ..................................................... $ 69,292 $ 67,182 Restricted cash ............................................................... 16,869 18,248 Short-term investments ........................................................ 62,992 64,154 Accounts receivable, net of allowance for doubtful accounts of $1,256 and 1,262, respectively ................... 23,565 13,636 Prepaid expenses and other current assets ................................. 8,158 6,348 ------------- ------------- Total current assets ...................................................... 180,876 169,568 Property and equipment, net ........................................................ 16,106 21,413 Goodwill ........................................................................... 10,517 10,517 Other assets, primarily related parties ............................................ 21,507 9,664 ------------- ------------- Total assets ............................................................... $ 229,006 $ 211,162 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable ............................................................. $ 46,863 $ 35,375 Accrued expenses ............................................................. 23,296 27,889 Other current liabilities .................................................... 2,134 2,063 ------------- ------------- Total current liabilities ................................................. 72,293 65,327 Long-term accrued expenses ........................................................ 276 715 ------------- ------------- Total liabilities ......................................................... 72,569 66,042 ------------- ------------- Commitments and Contingencies (See Notes) Series B Mandatorily Redeemable Preferred Stock, $0.01 par value; 80,000 authorized shares; $1,000 liquidation value per share; 80,000 shares issued; 13,470 and 13,470 shares outstanding, respectively 13,470 13,470 Stockholders' equity: Common stock, $0.008 par value, authorized 1,000,000,000 shares, issued 39,731,504 and 39,258,196 shares, respectively ............................. 303 1,884 Treasury stock, 1,806,326 shares and 1,806,326 shares, respectively .......... (338,410) (338,410) Additional paid-in capital ................................................... 2,048,785 2,033,944 Deferred compensation ........................................................ (1,619) - Accumulated deficit .......................................................... (1,566,208) (1,565,869) Accumulated other comprehensive income: Cumulative currency translation adjustment ................................. 116 101 ------------- ------------- Total stockholders' equity ................................................. 142,967 131,650 ------------- ------------- Total liabilities and stockholders' equity ........................................ $ 229,006 $ 211,162 ------------- -------------
See Notes to Unaudited Consolidated Financial Statements. 3 PRICELINE.COM INCORPORATED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30 JUNE 30 --------------------------- ---------------------------- 2003 2002 2003 2002 ------------ ------------ ------------ ------------ Merchant revenues ............................... $ 236,943 $ 302,670 $ 435,551 $ 562,337 Agency revenues ................................. 1,476 211 2,481 429 Other revenues .................................. 1,147 1,575 2,021 3,575 ------------ ------------ ------------ ------------ Total revenues .............................. 239,566 304,456 440,053 566,341 Cost of merchant revenues ....................... 199,072 255,972 366,572 475,483 Cost of agency revenues ......................... - - - - Cost of other revenues .......................... - 336 - 717 ------------ ------------ ------------ ------------ Total costs of revenues ................. 199,072 256,308 366,572 476,200 ------------ ------------ ------------ ------------ Gross profit .................................... 40,494 48,148 73,481 90,141 ------------ ------------ ------------ ------------ Operating expenses: Advertising ................................. 10,774 12,777 21,872 23,004 Sales and marketing ......................... 9,000 11,813 17,064 22,377 General and administrative, including option payroll taxes of $102 and $16 for the three months ended June 30, 2003 and 2002, respectively, and $102 and $120 for the six months ended June 30, 2003 and 2002, respectively ............................... 6,106 7,559 12,674 14,046 Stock based compensation .................... 70 250 70 500 Systems and business development ............ 5,578 6,275 10,508 12,603 Depreciation and amortization ............... 2,787 4,490 6,699 8,948 Special charge (reversal) ................... - (200) - (200) Restructuring charge (reversal) ............. - - - (824) Severance charge (reversal) ................. - (55) - (55) Warrant costs ............................... - - 6,638 - ------------ ------------ ------------ ------------ Total operating expenses .................... 34,315 42,909 75,525 80,399 ------------ ------------ ------------ ------------ Operating income (loss) ......................... 6,179 5,239 (2,044) 9,742 Other income: Interest income ............................. 405 788 897 1,570 Equity in income of investees, net .......... 1,105 245 1,105 737 Other ....................................... - 37 - 1 ------------ ------------ ------------ ------------ Total other income .......................... 1,510 1,070 2,002 2,308 ------------ ------------ ------------ ------------ Net income (loss) ............................... 7,689 6,309 (42) 12,050 Preferred stock dividend ........................ - - (297) (1,854) ------------ ------------ ------------ ------------ Net income (loss) applicable to common stockholders ................................. 7,689 6,309 (339) 10,196 ============ ============ ============ ============ Net income (loss) applicable to common stockholders per basic common share .......... $ 0.20 $ 0.16 $ (0.01) $ 0.27 ============ ============ ============ ============ Weighted average number of basic common shares outstanding .................... 37,635 38,280 37,556 38,099 ============ ============ ============ ============ Net income (loss) applicable to common stockholders per diluted common share ....... $ 0.20 $ 0.16 $ (0.01) $ 0.26 ============ ============ ============ ============ Weighted average number of diluted common shares outstanding ........................... 39,284 39,917 37,556 39,924 ============ ============ ============ ============
See Notes to Unaudited Consolidated Financial Statements. 4 PRICELINE.COM INCORPORATED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE SIX MONTHS ENDED JUNE 30, 2003 (UNAUDITED) (IN THOUSANDS)
ACCUMULATED OTHER COMMON STOCK ADDITIONAL ACCUMULATED COMPREHENSIVE SHARES AMOUNT PAID-IN CAPITAL DEFICIT INCOME -------------------------------------------------------------------------- Balance, January 1, 2003 .............. 39,258 $ 1,884 $ 2,033,944 $ (1,565,869) $ 101 Net loss applicable to common stockholders .......................... - - - (339) - Currency translation adjustment ....... - - - - 15 Total comprehensive loss .............. - - - - - Reclassification of common stock par value due to reverse stock split ...... - (1,585) 1,585 - - Issuance of warrants to purchase common stock ................................. - - 6,638 - - Issuance of common stock under deferred compensation plans .................... 83 1 1,688 - - Amortization of deferred compensation . - - - - - Issuance of preferred stock dividend .. 40 0 297 - - Exercise of options and other ......... 350 3 4,633 - - -------------------------------------------------------------------------- Balance, June 30, 2003 ................ 39,731 $ 303 $ 2,048,785 $ (1,566,208) $ 116 ========================================================================== TREASURY STOCK DEFERRED SHARES AMOUNT COMPENSATION TOTAL ------------------------------------------------------- Balance, January 1, 2003 .............. (1,806) $ (338,410) $ - $ 131,650 Net loss applicable to common stockholders .......................... - - - (339) Currency translation adjustment ....... - - - 15 ------------- Total comprehensive loss .............. - - - (324) Reclassification of common stock par value due to reverse stock split ...... - - - - Issuance of warrants to purchase common stock ................................. - - - 6,638 Issuance of common stock under deferred compensation plans .................... - - (1,689) - Amortization of deferred compensation . - - 70 70 Issuance of preferred stock dividend .. - - - 297 Exercise of options and other ......... - - - 4,636 ------------------------------------------------------- Balance, June 30, 2003 ................ (1,806) $ (338,410) $ (1,619) $ 142,967 =======================================================
See Notes to Unaudited Consolidated Financial Statements. PRICELINE.COM INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)
SIX MONTHS ENDED JUNE 30, 2003 2002 ---------- ---------- OPERATING ACTIVITIES: Net (loss) income ............................................................ $ (42) $ 12,050 Adjustments to reconcile net (loss)/income to net cash provided by operating activities: Depreciation and amortization .......................................... 6,699 8,949 Provision for uncollectible accounts, net .............................. 1,680 479 Warrant costs .......................................................... 6,638 - Equity in income of investees, net ..................................... (1,105) (737) Compensation expense arising from deferred stock awards ................ 70 - Changes in assets and liabilities: Accounts receivable .................................................... (11,609) (6,791) Prepaid expenses and other current assets .............................. (1,810) (2,114) Accounts payable and accrued expenses .................................. 6,527 4,043 Other .................................................................. 919 927 ---------- ---------- Net cash provided by operating activities .................................... 7,967 16,806 ---------- ---------- INVESTING ACTIVITIES: Additions to property and equipment .................................... (1,588) (4,307) Proceeds from sales of fixed assets .................................... - 33 Release of/(investment in) short-term investments/marketable securities, net .................................................................... 1,162 (13,189) Return/(funding) of restricted cash and bank certificate of deposit .... 1,379 (4,177) Equity investment and other acquisitions ............................... (11,686) - ---------- ---------- Net cash used in investing activities ........................................ (10,733) (21,640) ---------- ---------- FINANCING ACTIVITIES: Proceeds from exercise of stock options and warrants ................... 4,677 3,031 ---------- ---------- Net cash provided by financing activities .................................... 4,677 3,031 ---------- ---------- Effect of exchange rate changes on cash and cash equivalents ................. 199 - Net increase (decrease) in cash and cash equivalents ......................... 2,110 (1,803) Cash and cash equivalents, beginning of period ............................... 67,182 99,943 ---------- ---------- Cash and cash equivalents, end of period ..................................... $ 69,292 $ 98,140 ========== ==========
See Notes to Unaudited Consolidated Financial Statements. 6 PRICELINE.COM INCORPORATED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION Priceline.com Incorporated ("priceline.com" or the "Company") is responsible for the consolidated financial statements included in this document. The financial statements have been prepared in accordance with generally accepted accounting principles in the United States ("GAAP") and include all normal and recurring adjustments that management of the Company considers necessary for a fair presentation of its financial position and operating results. The Company prepared the consolidated financial statements following the requirements of the Securities and Exchange Commission for interim reporting. As permitted under those rules, the Company condensed or omitted certain footnotes or other financial information that are normally required by GAAP for annual financial statements. These statements should be read in combination with the consolidated financial statements in the Company's Annual Report on Form 10-K for the year ended December 31, 2002. During the first quarter of 2003, the Company enhanced its financial reporting format. In the past, the Company reported revenue segmented between travel and other revenue, a format that was driven by the Company's pursuit of businesses outside of the travel industry. With the repositioning of the Company's long distance and new car products in the fourth quarter of 2002, the Company's ongoing plan to keep its strategic focus on the online travel sector and its recent commitment to compliment its core Name Your Own Price(R) products by developing agency-based retail travel products, the decision was made to provide revenue and gross profit reporting in three categories: Merchant (encompassing substantially all of its Name Your Own Price(R) travel services), Agency (encompassing substantially all of its priced-disclosed retail services) and Other (encompassing all remaining revenue, the largest component of which is advertising revenue). The Company believes that this presentation is more useful to the reader. Historical results have been presented to conform to the current period presentation. In addition, certain other amounts in prior periods' financial statements have been reclassified to conform to the current period presentation. On June 9, 2003, the Company's shareholders approved a one-for-six reverse stock split of the Company's outstanding common stock. The reverse stock split was effected at 12:01 a.m. on June 16, 2003 and, as a result, the Company's issued and outstanding common stock was reduced from approximately 227.6 million to approximately 37.9 million shares. The par value of the common stock was not affected by the reverse stock split and remains at $0.008 per share. Consequently, on the Company's balance sheet, the aggregate par value of the issued common stock was reduced by reclassifying the par value amount of the eliminated shares of common stock to Additional Paid-in Capital. All per share amounts and outstanding shares, including all common stock equivalents (stock options and warrants), have been retroactively restated in the Consolidated Condensed Financial Statements and in the Notes to the Unaudited Consolidated Financial Statements for all periods presented to reflect the reverse stock split. Revenues, expenses, assets and liabilities can vary during each quarter of the year. Therefore, the results and trends in these interim financial statements may not be the same as those for the full year. 2. STOCK BASED EMPLOYEE COMPENSATION The following table summarizes relevant information as to reported results under the Company's APB Opinion No. 25 method of accounting for stock options with supplemental information as if the fair value recognition provisions of SFAS No. 123, "Accounting for Stock Based Compensation," had been applied (in thousands, except per share amounts):
FOR THE THREE MONTHS FOR THE SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, ---------------------------------------------------- 2003 2002 2003 2002 ---------------------------------------------------- Net income (loss) applicable to common stockholders, as reported $ 7,689 $ 6,309 $ (339) $ 10,196 Add: Stock-based compensation, as reported 70 250 70 500
7 Deduct: Total stock-based compensation determined under fair value based method for all stock based compensation (7,218) (28,506) (14,272) (57,013) ------------ ------------- ------------- ----------- Adjusted net income (loss), fair value method for all stock based compensation $ 541 $ (21,947) $ (14,541) $ (46,317) ------------ ------------- ------------- ----------- Basic and diluted income (loss) per share as reported $ 0.20 $ 0.16 $ (0.01) $ 0.26 Basic and diluted income (loss) per share SFAS 123 adjusted $ 0.01 $ (0.55) $ (0.39) $ (1.16)
The fair value of stock options granted was determined on the date of grant using the Black-Scholes option-pricing model, assuming no expected dividends and the following weighted average assumptions:
2003 2002 2003 2002 ------------ ------------ ------------- ---------- Risk-free interest rate 2.2% 2.8% 2.2% 2.8% Expected lives 3 years 3 years 3 years 3 years Volatility 97% 99% 97% 99%
3. NET INCOME (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. For the three and six months ended June 30, 2003, for the purpose of calculating earnings per share - basic, the weighted average number of common shares outstanding was 37,634,646 and 37,556,053, respectively. For the three months ended June 30, 2003, for the purpose of calculating earnings per share - diluted, the weighted average number of common shares outstanding was 39,283,553, which includes 1,648,907 shares representing the dilutive effect of common stock equivalents. Total anti-dilutive stock options and warrants excluded from earning per share for the three months ended June 30, 2003 were 5,288,103. Since the company incurred a loss applicable to common stockholders for the six month period ended June 30, 2003, the inclusion of options and warrants in the calculation of weighted average common shares is anti-dilutive and therefore, there is no difference between basic and diluted earnings per share for that period. Total anti-dilutive stock options and warrants excluded from the calculation of net loss per share for the six months ended June 30, 2003 were 6,903,378. For the three and six months ended June 30, 2002, for the purpose of calculating earnings per share - basic, the weighted average number of common shares outstanding was 38,279,764 and 38,099,468, respectively, and for the purpose of calculating earnings per share - diluted, the weighted average number of common shares outstanding was 39,917,062 and 39,923,894, respectively, which includes 1,637,298 shares and 1,824,426 shares, respectively, representing the dilutive effect of common stock equivalents. Total anti-dilutive stock options and warrants excluded from the calculation of earning per share for the three and six months ended June 30, 2002 were 7,427,110 and 7,239,982, respectively. 4. RECENT ACCOUNTING PRONOUNCEMENTS In May 2002, the Financial Standards Board ("FASB") issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections". Among other things, under the provision of FSAS No. 145, gains and losses from the early extinguishment of debt are no longer classified as an extraordinary item, net of income taxes, but are included in the determination of pretax earnings. The adoption of this standard, effective January 1, 2003, had no effect on the Company's financial statements. In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS 146"). This statement addresses significant issues regarding the recognition, measurement, and reporting of costs that are associated with exit and disposal activities, including restructuring activities that are 8 currently accounted for pursuant to the guidance that the Emerging Issues Task Force ("EITF") set forth in EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The principal difference between SFAS 146 and EITF 94-3 is that SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred versus EITF 94-3 where a liability was recognized on the date an entity committed to an exit plan. SFAS 146 is effective for exit and disposal activities that are initiated after December 31, 2002. The Company adopted the new standard on January 1, 2003, with no effect on the Company's financial statements. In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." This interpretation expands the disclosures to be made by a guarantor in its financial statements about its obligations under certain guarantees and requires the guarantor to recognize a liability for the fair value of an obligation assumed under a guarantee. The recognition requirements of FIN 45 are to be applied prospectively to guarantees issued or modified after December 31, 2002. The adoption of FIN 45 did not impact the Company's disclosure, results of operations, financial position or liquidity. In January 2003, the FASB issued FASB Interpretation No. 46 "Consolidation of Variable Interest Entities" which clarifies the application of Accounting Research Bulletin No. 51, CONSOLIDATED FINANCIAL STATEMENTS, to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. This interpretation applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. The Company does not have any equity investments in variable interest entities. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" ("SFAS 150"). SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Company does not expect the adoption of SFAS 150 to have a material impact on its results of operatons or financial condition. 5. SPECIAL AND RESTRUCTURING CHARGES During the second quarter of 2002, the Company decreased the liability for the special charge by approximately $200,000. The reduction resulted from the favorable resolution of certain matters. The adjustment was reflected in the "Special charge (reversal)" line on the Company's Consolidated Statements of Operations. During the first quarter 2002, the Company decreased the liability for the restructuring charge by approximately $824,000. The reduction resulted from the subleasing of office space under more favorable terms than originally anticipated. The adjustment was reflected in the "Restructuring charge (reversal)" line on the Company's Consolidated Statements of Operations. At December 31, 2002, the Company had a restructuring charge liability of $5.1 million related to restructuring provisions made in 2002 and 2000. 9 During 2003, the liability for the restructuring charge decreased by approximately $2.6 million. The reductions resulted primarily from cash payments made during the year.
(IN THOUSANDS) -------------- RESTRUCTURING ------------- Accrued at December 31, 2002...... $ 5,073 Currency translation adjustment... 12 Disbursed during 2003............. (2,571) ------------- Accrued at June 30, 2003.......... $ 2,514 ============= At June 30, 2003: Current portion.............. $ 2,238 Long-term portion............ $ 276
At June 30, 2003, the restructuring liability consisted of estimated remaining severance, real estate costs and other professional fees related to the Company's 2002 restructuring plan and estimated remaining real estate costs related to the Company's 2000 restructuring plan. 6. OTHER ASSETS Other assets at June 30, 2003 and December 31, 2002 consist of the following (in thousands):
JUNE 30, 2003 DECEMBER 31, 2002 ------------- ----------------- Investment in Travelweb LLC......................... $ 8,425 $ - Investment in pricelinemortgage..................... 7,703 6,356 Other............................................... 5,379 3,308 ------------- ----------------- Total $ 21,507 $ 9,664 ============= =================
In March 2003, Lowestfare.com, a wholly-owned subsidiary of the Company, invested approximately $8.7 million (including fees relating to the transaction) in Travelweb LLC. Lowestfare.com's investment represents approximately 14% of the outstanding equity of Travelweb LLC. The investment is accounted for under the equity method of accounting. The Company recognizes its pro rata share of Travelweb LLC's results of operations, which were not material to the Company's results of operations for the three months ended June 30, 2003. In connection with the investment, Lowestfare.com and the Company entered into a distribution agreement with Travelweb LLC. Under the terms of the distribution agreement, Travelweb LLC will become the exclusive provider of published-price, net rate hotel inventory in the U.S. and Canada that will be available on both Lowestfare.com and on priceline.com. Lowestfare.com also has a seat on Travelweb LLC's Board of Directors. Investment in pricelinemortgage represents the Company's 49% equity investment in pricelinemortgage. In September 2001, the Company converted a debt instrument into a 49% equity interest in pricelinemortgage and, accordingly, has recognized its pro rata share of pricelinemortgage's operating results, not to exceed an amount that the Company believes represents the investments' estimated fair value. The Company recognized approximately $1.3 million of income from its investment in pricelinemortgage for the three and six months ended June 30, 2003. The Company earned advertising fees from pricelinemortgage of approximately $197,000 and approximately $195,000 for the three months ended June 30, 2003 and 2002, respectively, and approximately $401,000 and approximately $672,000 for the six months ended June 30, 2003 and 2002, respectively. The excess of the carrying value of the Company's equity investments in Travelweb LLC and pricelinemortgage over its equity in the underlying net assets of the investees is approximately $7.8 million. 10 7. TREASURY STOCK On July 31, 2002, the Company's Board of Directors authorized the repurchase of up to $40 million of common stock from time to time in the open market or in privately negotiated transactions. As part of the stock repurchase program, the Company purchased 897,953 shares of its common stock for its treasury during the period ended December 31, 2002 at an aggregate cost of approximately $11.8 million. All shares were purchased at prevailing market prices. The Company may continue or, from time to time, suspend repurchases of shares under its stock repurchase program, depending on prevailing market conditions, alternate uses of capital and other factors. Whether and when to initiate and/or complete any purchase of common stock and the amount of common stock purchased will be determined in the Company's complete discretion. As of June 30, 2003, there were approximately 1.8 million shares of the Company's common stock held in treasury. 8. DELTA AIR LINES During the first quarter of 2001, Delta Air Lines, Inc. ("Delta") received 80,000 shares of a newly created Series B Preferred Stock and warrants (the "Warrants") to purchase approximately 4.5 million shares of the Company's common stock at an exercise price of $17.81 per share. The exercise price of the Warrants is paid by surrendering .0178125 shares of Series B Preferred Stock for each share of the Company's common stock purchased. Pursuant to the terms of the certificate of designations relating to the Series B Preferred Stock, the Series B Preferred Stock bears a dividend that is payable through the issuance of approximately 500,000 shares of the Company's common stock each year, subject to adjustment as provided for in the certificate of designations (and as described below as the result of exercise of the Warrants). The Series B Preferred Stock has a liquidation preference of $1,000 per share and is subject to mandatory redemption on February 6, 2007. In the event the Company consummates any of certain business combination transactions, the Series B Preferred Stock may be redeemed at the option of the Company or Delta at the liquidation preference per outstanding share plus all dividends accrued but not paid on the shares. In such an event, Delta would be entitled to receive an amount equal to the sum of the dividend payments that would have accrued or cumulated on the shares to be redeemed through the remaining scheduled dividend payment dates. During 2001, Delta exercised Warrants to purchase approximately 3.1 million shares of the Company's common stock and on January 29, 2002, Delta exercised Warrants to purchase 666,667 shares of the Company's common stock. As a result, there are 13,470 shares of Series B Preferred Stock outstanding with an aggregate liquidation preference of approximately $13.5 million and the Company's future semi-annual dividend requirement is 40,240 shares of common stock. In accordance with the terms of the Series B Preferred Stock, the Company delivered to Delta 40,240, 40,240 and 75,718 shares of the Company's common stock as dividend payments on February 6, 2003, August 6, 2002 and February 6, 2002, respectively. As a result, the Company recorded a non-cash dividend of approximately $297,000, approximately $490,000 and approximately $1.85 million in the first quarter of 2003, third quarter of 2002 and the first quarter of 2002, respectively. The Warrants provide that at any time the closing sales price of the Company's common stock has exceeded $53.4375 (subject to adjustment) for 20 consecutive trading days, the Warrants will automatically be exercised. As of June 30, 2003, there were 756,200 Warrants outstanding. 11 9. MARRIOTT WARRANTS In March 2003, in connection with the renewal of a marketing agreement with Marriott International, Inc., ("Marriott") the Company issued Marriott 833,333 warrants to purchase shares of the Company's common stock at an exercise price of $9.84 per share. The warrants, which are not transferable, are fully vested, non-forfeitable, and will be exercisable no earlier than three years from the date of issuance (subject to certain limited exceptions in the event of a reorganization, recapitalization, merger or consolidation involving priceline.com). In connection with the issuance of the warrants, the Company recorded a charge of approximately $6.6 million in the first quarter of 2003. 10. 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. Subsequent to the Company's announcement on September 27, 2000 that revenues for the third quarter 2000 would not meet expectations, it was served with the following putative class action complaints: - Weingarten v. priceline.com Incorporated and Jay S. Walker 3:00 CV 1901 (District of Connecticut). - Twardy v. priceline.com Inc., Richard S. Braddock, Daniel H. Schulman and Jay S. Walker 3:00 CV 1884 (District of Connecticut). - Berdakina v. priceline.com Inc., Richard S. Braddock, Daniel H. Schulman and Jay S. Walker 3:00 CV 1902 (District of Connecticut). - Mazzo v. priceline.com Inc., Richard S. Braddock, Daniel H. Schulman and Jay S. Walker 3:00 CV 1924 (District of Connecticut). - Fialkov v. priceline.com Inc., Richard S. Braddock, Daniel H. Schulman and Jay S. Walker 3:00 CV 1954 (District of Connecticut). - Licht v. priceline.com Incorporated and Jay S. Walker 3:00 CV 2049 (District of Connecticut). - Ayach v. priceline.com Inc., Richard S. Braddock, Daniel H. Schulman and Jay S. Walker 3:00 CV 2062 (District of Connecticut). - Zia v. priceline.com Inc., Richard S. Braddock, Daniel H. Schulman and Jay S. Walker 3:00 CV 1968 (District of Connecticut). - Mazzo v. priceline.com Inc., Richard S. Braddock, Daniel H. Schulman and Jay S. Walker 3:00 CV 1980 (District of Connecticut). - Bazag v. priceline.com Inc., Richard S. Braddock, Daniel H. Schulman and Jay S. Walker 3:00 CV 2122 (District of Connecticut). - Breier v. priceline.com Inc., Richard S. Braddock, Daniel H. Schulman and Jay S. Walker 3:00 CV 2146 (District of Connecticut). - Farzam et al. v. priceline.com Inc., Richard S. Braddock, Daniel H. Schulman and Jay S. Walker 3:00 CV 2176 (District of Connecticut). - Caswell v. priceline.com Inc., 12 Richard S. Braddock, Daniel H. Schulman and Jay S. Walker 3:00 CV 2169 (District of Connecticut). - Howard Gunty Profit Sharing Plan v. priceline.com Inc. Richard S. Braddock, Daniel H. Schulman and Jay S. Walker 3:00 CV 1917 (District of Connecticut). - Cerelli v. priceline.com Inc., Richard S. Braddock, Daniel H. Schulman and Jay S. Walker 3:00 CV 1918 (District of Connecticut) - Mayer v. priceline.com Inc., Richard S. Braddock, Daniel H. Schulman and Jay S. Walker 3:00 CV 1923 (District of Connecticut) - Anish v. priceline.com Inc., Richard S. Braddock, Daniel H. Schulman and Jay S. Walker 3:00 CV 1948 (District of Connecticut) - Atkin v. priceline.com Inc., Richard S. Braddock, Daniel H. Schulman and Jay S. Walker 3:00 CV 1994 (District of Connecticut). - Lyon v. priceline.com Inc., Richard S. Braddock, Daniel H. Schulman and Jay S. Walker 3:00 CV 2066 (District of Connecticut). - Kwan v. priceline.com Inc., Richard S. Braddock, Daniel H. Schulman and Jay S. Walker 3:00 CV 2069 (District of Connecticut). - Krim v. priceline.com Inc., Richard S. Braddock, Daniel H. Schulman and Jay S. Walker 3:00 CV 2083 (District of Connecticut). - Karas v. priceline.com Inc., Richard S. Braddock, Daniel H. Schulman and Jay S. Walker 3:00 CV 2232 (District of Connecticut). - Michols v. priceline.com Inc., Richard S. Braddock, Daniel H. Schulman and Jay S. Walker 3:00 CV 2280 (District of Connecticut). All of these cases have been assigned to Judge Dominick J. Squatrito. On September 12, 2001, Judge Squatrito ordered that these cases be consolidated under the Master File No. 3:00cv1884 (DJS), and he designated lead plaintiffs and lead plaintiffs' counsel. On October 29, 2001, plaintiffs served a Consolidated Amended Complaint. On February 5, 2002, Amerindo Investment Advisors, Inc., who is one of the lead plaintiffs in the consolidated action, made a motion for leave to withdraw as lead plaintiff. The court has yet to rule on that motion. On February 28, 2002, the Company filed a motion to dismiss the Consolidated Amended Complaint. That motion has been fully briefed. The Court has yet to rule on that motion. On July 26 and August 1, 2002, the Court issued scheduling orders concerning pretrial proceedings. The Company intends to defend vigorously against this action. In addition, on November 1, 2000 the Company was served with a complaint that purported to be a shareholder derivative action against its Board of Directors and certain of its current and former executive officers, as well as the Company (as a nominal defendant). The complaint alleged breach of fiduciary duty and waste of corporate assets. The action is captioned Mark Zimmerman v. Richard Braddock, J. Walker, D. Schulman, P. Allaire, R. Bahna, P. Blackney, W. Ford, M. Loeb, N. Nicholas, N. Peretsman, and priceline.com Incorporated 18473-NC (Court of Chancery of Delaware, County of New Castle, State of Delaware). On February 6, 2001, all defendants moved to dismiss the complaint for failure to make a demand upon the Board of Directors and failure to state a cause of action upon which relief can be granted. Pursuant to a stipulation by the parties, an amended complaint was filed on June 21, 2001. Defendants renewed their motion to dismiss on August 20, 2001, and plaintiff served his opposition to that motion on October 26, 2001. Defendants filed their reply brief on January 7, 2002. On December 20, 2002, the Court granted Defendants' motion without prejudice. On April 25, 2003, a second amended complaint, adding H. Miller as a defendant, was filed. The Company intends to defend vigorously against this action. 13 On March 16, March 26, April 27, and June 5, 2001, respectively, four putative class action complaints were filed in the U.S. District Court for the Southern District of New York naming priceline.com, Inc., Richard S. Braddock, Jay Walker, Paul Francis, Morgan Stanley Dean Witter & Co., Merrill Lynch, Pierce, Fenner & Smith, Inc., BancBoston Robertson Stephens, Inc. and Salomon Smith Barney, Inc. as defendants (01 Civ. 2261, 01 Civ. 2576, 01 Civ. 3590 and 01 Civ. 4956). Shives ET AL. v. Bank of America Securities LLC ET AL., 01 Civ. 4956, also names other defendants and states claims unrelated to the Company. The complaints allege, among other things, that priceline.com and the individual defendants violated the federal securities laws by issuing and selling priceline.com common stock in priceline.com's March 1999 initial public offering without disclosing to investors that some of the underwriters in the offering, including the lead underwriters, had allegedly solicited and received excessive and undisclosed commissions from certain investors. By Orders of Judge Mukasey and Judge Scheindlin dated August 8, 2001, these cases were consolidated for pre-trial purposes with hundreds of other cases, which contain allegations concerning the allocation of shares in the initial public offerings of companies other than priceline.com, Inc. By Order of Judge Scheindlin dated August 14, 2001, the following cases were consolidated for all purposes: 01 Civ. 2261; 01 Civ. 2576; and 01 Civ. 3590. On April 19, 2002, plaintiffs filed a Consolidated Amended Class Action Complaint in these cases. This Consolidated Amended Class Action Complaint makes similar allegations to those described above but with respect to both the Company's March 1999 initial public offering and the Company's August 1999 second public offering of common stock. The named defendants are priceline.com, Inc., Richard S. Braddock, Jay S. Walker, Paul E. Francis, Nancy B. Peretsman, Timothy G. Brier, Morgan Stanley Dean Witter & Co., Goldman Sachs & Co., Merrill Lynch, Pierce, Fenner & Smith, Inc., Robertson Stephens, Inc. (as successor-in-interest to BancBoston), Credit Suisse First Boston Corp. (as successor-in-interest to Donaldson Lufkin & Jenrette Securities Corp.), Allen & Co., Inc. and Salomon Smith Barney, Inc. Priceline, Richard Braddock, Jay Walker, Paul Francis, Nancy Peretsman, and Timothy Brier, together with other issuer defendants in the consolidated litigation, filed a joint motion to dismiss on July 15, 2002. On November 18, 2002, the cases against the individual defendants were dismissed without prejudice and without costs. In addition, counsel for plaintiffs and the individual defendants executed Reservation of Rights and Tolling Agreements, which toll the statutes of limitations on plaintiffs' claims against those individuals. On February 19, 2003, Judge Scheindlin issued an Opinion and Order granting in part and denying in part the issuer's motion. None of the claims against the Company were dismissed. On June 26, 2003, counsel for the plaintiff class announced that they and counsel for the issuers had agreed to the form of a Memorandum of Understanding to settle claims against the issuers. The terms of that Memorandum provide that class members will be guaranteed $1 billion dollars in recoveries by the insurers of the issuers and that settling issuer defendants will assign to the class members certain claims that they may have against the underwriters. Issuers also agree to limit their abilities to bring certain claims against the underwriters. If recoveries in excess of $1 billion dollars are obtained by the class from any non-settling defendants, the settling defendants' monetary obligations to the class plaintiffs will be satisfied; any amount recovered from the underwriters that is less than $1 billion will be paid by the insurers on behalf of the issuers. The Memorandum, which is subject to the approval of each issuer, was approved by a special committee of the priceline.com Board of Directors on Thursday, July 3, 2003. Any proposed settlement is subject to the parties entering into a formal written agreement and final approval by the Court. 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 results of operations and business. 14 Uncertainty regarding payment of hotel occupancy taxes - The Company is currently conducting a review and interpretation of the tax laws in various states and other jurisdictions relating to the payment of state and local hotel occupancy taxes. Currently, hotels collect and remit hotel occupancy taxes to the various tax authorities based on the amounts collected by the hotels. Consistent with this practice, the Company recovers the taxes on the underlying cost of the hotel room night from customers and remits the taxes to the hotel operators for payment to the appropriate tax authorities. Several jurisdictions have indicated that they may take the position that hotel occupancy tax is applicable to the differential between the price paid by a customer for the Company's service and the cost to the Company of the underlying room. Historically, the Company has not collected taxes on this differential. Some state and local jurisdictions could assert that the Company is subject to hotel occupancy taxes on this differential and could seek to collect such taxes, either retroactively or prospectively or both. Such actions could have a material adverse effect on the Company's business and results of operations. To the extent that any tax authority succeeds in asserting that such a tax collection responsibility exists, it is likely that, with respect to future transactions, the Company would collect any such additional tax obligation from its customers, which would have the effect of increasing the cost of hotel room nights to the Company's customers and, consequently, could reduce its hotel sales. The Company will continue to assess the risks of the potential financial impact of additional tax exposure, and to the extent appropriate, it will reserve for those contingencies. 11. TAXES For the six months ended June 30, 2003 and 2002, the Company has recorded no provision for income taxes due to current losses and the availability of previously fully reserved net operating losses which have been utilized to offset the income tax provision. 12. SUBSEQUENT EVENTS On July 29, 2003, the Company announced the pricing of $100 million of Convertible Senior Notes due August 1, 2010 in a private placement. The Company granted the initial purchasers of the notes a thirty-day option to purchase up to $25 million of additional notes. The sale of the notes closed on August 1, 2003. The Company intends to use the net proceeds of the anticipated offering for general corporate purposes, strategic purposes and working capital requirements. Interest on the notes will accrue at an annual rate of 1%. The notes will be convertible, subject to certain conditions, into priceline.com's common stock, par value $0.008 per share, at the option of the holder, at a conversion price of approximately $40.00 per share, subject to adjustment upon the occurrence of specified events. Each $1,000 principal amount of notes will initially be convertible into 25 shares of the Company's common stock. In addition, the notes will be redeemable at the Company's option beginning in 2008, and the holders may require the Company to repurchase the notes on August 1, 2008 or in certain other circumstances. The Company has agreed, pursuant to a registration rights agreement, to file a shelf registration statement with respect to the notes and the common stock issuable upon conversion of the notes. Certain of the Company's warrant holders and stockholders have "piggy-back" registration rights that would enable them to sell the Company's common stock under such a shelf registration statement. The Company is in the process of negotiating a restructuring of its relationship with Hutchison-Priceline Limited, a subsidiary of Hutchison Whampoa Limited, or Hutchison, whereby, among other things, the amount of shares Hutchison-Priceline is authorized to issue would be increased, and the par value of Hutchison-Priceline common shares would be decreased. Pursuant to the proposed restructuring agreement, the Company and Hutchison would convert its outstanding convertible notes into shares of Hutchison-Priceline Limited, and Hutchison would purchase shares and be granted the right to purchase additional shares until March 31, 2004. After the restructuring, the Company and Hutchison would own approximately 15% and 85%, respectively, of the outstanding equity securities of Hutchison-Priceline Limited. Under the new agreements, the Company would continue to license its business model and provide its expertise in technology and operations to Hutchison-Priceline Limited. Hutchison and Cheung Kong (Holdings) Limited, a company affiliated with Hutchison, own approximately 34% of the Company's outstanding common stock and hold three seats on the Company's board of directors. The Company holds one seat on Hutchison-Priceline's board of directors. 15 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH OUR FINANCIAL STATEMENTS, INCLUDING THE NOTES TO THOSE STATEMENTS, INCLUDED ELSEWHERE IN THIS FORM 10-Q, AND THE SECTION ENTITLED "SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS" IN THIS FORM 10-Q. AS DISCUSSED IN MORE DETAIL IN THE SECTION ENTITLED "SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS," THIS DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE THOSE DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "FACTORS THAT MAY AFFECT FUTURE RESULTS." OVERVIEW We have pioneered a unique e-commerce pricing system known as a "demand collection system" that enables consumers to use the Internet to save money on products and services while enabling sellers to generate incremental revenue. Using a simple and compelling consumer proposition - NAME YOUR OWN PRICE(R) - we collect consumer demand, in the form of individual customer offers, for a particular product or service at a price set by the customer. We then access databases or, in some instances, communicate that demand to participating sellers to determine whether we can fulfill the customer's offer. For most of these transactions, we establish the price we will accept, have total discretion in supplier selection, purchase and take title to the particular product and are the merchant of record. Consumers agree to hold their offers open for a specified period of time and, once fulfilled, offers generally cannot be canceled. We benefit consumers by enabling them to save money, while at the same time benefiting sellers by providing them with an effective revenue management tool capable of identifying and capturing incremental revenues. By requiring consumers to be flexible with respect to brands, sellers and product features, we enable sellers to generate incremental revenue without disrupting their existing distribution channels or retail pricing structures. Our business model and brand are currently, through us or independent licensees, supporting several products and service offerings, including the following: - leisure airline tickets, provided by 9 domestic and 26 international airline participants, and travel insurance; - hotel rooms, in substantially all major United States markets with more than 50 national hotel chains, and in a limited number of markets outside the United States; - rental cars, in substantially all major United States airport markets with five leading rental car chains as participants; - home financing services, in substantially all major United States markets, which includes home mortgage services, home equity loans and refinancing services; - fixed-price cruises and cruise packages, through a third party that accesses major cruise lines; and - vacation packages, in many United States and certain international markets. In certain instances, we have licensed the priceline.com name and demand collection system to third parties to offer a particular product or service (HOME FINANCING) or to offer a number of products or services in a distinct international region (ASIA). Pursuant to these licensee transactions, we generally receive a royalty under the license and may also receive fees for services and reimbursement of certain expenses. We also hold a significant percentage of equity in such entities. In the weeks following the commencement of the military conflict with Iraq on March 19, 2003 and the outbreak of Severe Acute Respiratory Syndrome, or SARS, in Asia and elsewhere in the second quarter, we experienced a substantial decline in demand for our travel products and an increase in customer service costs and ticket refunds and cancellations. While demand for our travel products gradually recovered, we believe that our first 16 and second quarter 2003 financial results were adversely affected by the war in Iraq and the outbreak of SARS. Our overall financial prospects are significantly dependent upon our sale of leisure airline tickets and, as a result, the health of our business is directly related to the health of the airline industry. The domestic airline industry has experienced significant revenue declines since the beginning of 2001 and most domestic airlines, and many of our major suppliers, are experiencing significant losses which worsened as a result of the war in Iraq and the outbreak of SARS. If the major airlines are unable to stem these losses, additional bankruptcy filings by major airlines are possible. See "FACTORS THAT MAY AFFECT FUTURE RESULTS - THE BANKRUPTCY, DISCONTINUANCE OR CONSOLIDATION OF OUR SUPPLIERS COULD HARM OUR BUSINESS." Since the terrorist attacks of September 11, 2001, and, more recently, following the outbreak of war with Iraq and the outbreak of SARS, the major airlines have grounded portions of their fleets, significantly reducing the number of available airline seats, and have deeply discounted retail airline tickets to stimulate demand. These actions have had a detrimental effect on our business. Deep retail discounting by the airlines affects our demand and our "bind rate" (the percentage of unique offers that we ultimately fulfill) by hurting our value proposition and making users less willing to accept the trade-offs associated with our opaque leisure airline tickets. In addition, decreased airline capacity hurts our business by reducing the levels of inventory available to us and increasing our cost of inventory. Customer offer prices have not kept pace with the increase in our cost of inventory and are, therefore, lower in proportion to our average cost of supply, negatively affecting our bind rate. We believe that over time, our lower bind rate may also negatively impact demand for our airline tickets. Lingering effects of September 11, 2001, hostilities in the Middle East, and the outbreak of SARS, continued aggressive discounting by the airlines, competition from other on-line distribution channels and low-cost carriers, and uncertainty regarding our domestic economy, we believe have, and may continue to, negatively impact our airline ticket demand throughout 2003. As a result, near term forecasting is very difficult and we are not currently forecasting a recovery in the airline industry or a marked improvement during 2003 in our airline ticketing business. We intend to continue to develop our non-air business, in particular our hotel business, for which demand and bind remains relatively strong, continue to evaluate and implement ways to improve offer quality and our bind rate, diversify our revenue among non-opaque products (such as retail travel products offered through our wholly-owned subsidiary, Lowestfare.com) and broaden our customer appeal through marketing efforts relating to both priceline.com and Lowestfare.com. However, further terrorist attacks, hostilities in the Middle East, the insolvency of a major domestic airline now in bankruptcy, the bankruptcy of an additional carrier or the withdrawal from our system of a major airline or hotel supplier could adversely affect our business and results of operations. A number of travel suppliers, particularly airlines, have indicated publicly that, as part of an effort to reduce distribution costs, they intend to reduce their dependence over time on what they view to be "expensive" distribution channels such as global distribution systems (GDSs). A number of travel suppliers have reached agreements with travel distributors that require rebates of all or part of the fees received from the GDS. Additionally, travel suppliers are encouraging distributors, such as us, to develop technology enabling direct connections therefore bypassing the GDS. Development of direct connection technology would require the use of information technology resources and could cause us to incur additional operating expenses and delay other projects. We have been and believe that we will continue to be under pressure from travel suppliers to rebate all or part of the travel booking fees we receive from Worldspan, L.P., our GDS. To the extent that we are required to rebate travel booking fees we currently receive from our GDS to travel suppliers, and are unable to recover such amounts by charging customers, it could have a material adverse effect on our business, results of operations and financial condition. In addition, on July 1, 2003, a corporation newly formed by Citigroup Venture Capital Equity Partners L.P. and Teachers' Merchant Bank, purchased Worldspan, L.P. from its airline owners. It is unclear what effect, if any, a change in control of Worldspan, L.P. will have on our relationship with Worldspan, L.P. or our business, results of operations or financial condition. On June 6, 2003, we entered into an amendment of our agreement with Worldspan, L.P. for the provision of global distribution, or GDS, services. The amendment contains new obligations for priceline.com and, in certain cases, our affiliates, to generate various percentages of our U.S. and Canadian airline, hotel and rental car bookings 17 through the Worldspan GDS. In addition, the amendment changes the inducements that priceline is paid for each airline, hotel and rental car booking that we generate through the Worldspan GDS. The agreement is effective as of April 1, 2003 and continues until December 31, 2007. On June 16, 2003, we effected a 1-for-6 reverse stock split of all outstanding shares of our common stock, par value $0.008 per share. As a result of the reverse stock split, each priceline.com stockholder received 1 share of priceline.com common stock in exchange for every 6 shares. The par value of our common stock did not change as a result of the reverse stock split. As of June 30, 2003, there were 37,925,178 shares of priceline.com common stock outstanding. We believe that our success will depend in large part on our ability to maintain profitability, primarily from our travel business, to continue to promote the priceline.com brand and, over time, to offer other travel products and services on our 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 improve gross margins in an effort to achieve and maintain profitability. Our limited operating history and the uncertain environment described above makes the prediction of future results of operations difficult, and accordingly, we cannot assure you that we will achieve revenue growth or achieve and sustain profitability. FINANCIAL PRESENTATION During the first quarter of 2003, we enhanced our financial reporting format. In the past, we reported revenue segmented between travel and other revenue, a format that was driven by our pursuit of businesses outside of the travel industry. With the repositioning of our long distance and new car products in the fourth quarter of 2002, our ongoing plan to keep our strategic focus on the online travel sector and our recent commitment to compliment our core Name Your Own Price(R) products by developing agency-based retail travel products, the decision was made to provide revenue and gross profit reporting in three categories: Merchant (encompassing substantially all of our Name Your Own Price(R) travel services), Agency (encompassing substantially all of our priced-disclosed retail services) and Other (encompassing all remaining revenue, the largest component of which is advertising revenue). On June 9, 2003, our shareholders approved a one-for-six reverse stock split of our outstanding common stock. The reverse stock split was effected at 12:01 a.m. on June 16, 2003, and, as a result, our issued and outstanding common stock was reduced from approximately 227.6 million to approximately 37.9 million shares. The par value of the common stock was not affected by the reverse stock split and remains at $0.008 per share. Consequently, on our balance sheet, the aggregate par value of the issued common stock was reduced by reclassifying the par value amount of the eliminated shares of common stock to Additional Paid-in Capital for all periods presented. All per share amounts and outstanding shares, including all common stock equivalents (stock options), have been retroactively restated in the Consolidated Condensed Financial Statements and in the Notes to the Unaudited Consolidated Financial Statements for all periods presented to reflect the reverse stock split. RECENT ACCOUNTING PRONOUNCEMENTS A description of recent accounting pronouncements is contained in Note 4 to the Notes to Unaudited Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for the quarter ended June 30, 2003. RECENT DEVELOPMENTS On July 29, 2003, we announced the pricing of $100 million of Convertible Senior Notes due August 1, 2010 in a private placement. We granted the initial purchasers of the notes a thirty-day option to purchase up to $25 million of additional notes. The sale of the notes closed on August 1, 2003. We intend to use the net proceeds of the anticipated offering for general corporate purposes, strategic purposes and working capital requirements. Interest on the notes will accrue at an annual rate of one percent. The notes will be convertible, subject to certain conditions, into priceline.com's common stock, par value $0.008 per share, at the option of the holder, at a conversion price of approximately $40.00 per share, subject to adjustment upon the occurrence of specified events. 18 Each $1,000 principal amount of notes will initially be convertible into 25 shares of our common stock. In addition, the notes will be redeemable at our option beginning in 2008, and the holders may require us to repurchase the notes on August 1, 2008 or in certain other circumstances. We have agreed, pursuant to a registration rights agreement, to file a shelf registration statement with respect to the notes and the common stock issuable upon conversion of the notes. Certain of our warrant holders and stockholders have "piggy-back" registration rights that would enable them to sell our common stock under such a shelf registration statement. See "FACTORS THAT MAY AFFECT FUTURE RESULTS - TWO LARGE STOCKHOLDERS BENEFICIALLY OWN APPROXIMATELY 34% OF OUR STOCK." We are in the process of negotiating a restructuring of our relationship with Hutchison-Priceline Limited, a subsidiary of Hutchison Whampoa Limited, or Hutchison, whereby, among other things, the amount of shares Hutchison-Priceline is authorized to issue would be increased, and the par value of Hutchison-Priceline common shares would be decreased. Pursuant to the proposed restructuring agreement, priceline.com and Hutchison would convert its outstanding convertible notes into shares of Hutchison-Priceline Limited, and Hutchison would purchase shares and be granted the right to purchase additional shares until March 31, 2004. After the restructuring, priceline.com and Hutchison would own approximately 15% and 85%, respectively, of the outstanding equity securities of Hutchison-Priceline Limited. Under the new agreements, we would continue to license our business model to Hutchison-Priceline Limited. Hutchison and Cheung Kong (Holdings) Limited, a company affiliated with Hutchison, own approximately 34% of our outstanding common stock and hold three seats on our board of directors. We hold one seat on Hutchison-Priceline's board of directors. RESULTS OF OPERATIONS THREE AND SIX MONTHS ENDED JUNE 30, 2003 COMPARED TO THE THREE AND SIX MONTHS ENDED JUNE 30, 2002 REVENUES
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------- -------- ($000) % ($000) % 2003 2002 CHANGE 2003 2002 CHANGE ---------- ---------- ---------- ---------- ---------- ---------- MERCHANT REVENUES ....... $ 236,943 $ 302,670 (21.7%) $ 435,551 $ 562,337 (22.5%) AGENCY REVENUES ......... 1,476 211 599.5% 2,481 429 478.3% OTHER REVENUES .......... 1,147 1,575 (27.2%) 2,021 3,575 (43.5%) ---------- ---------- ---------- ---------- TOTAL REVENUES .......... $ 239,566 $ 304,456 (21.3%) $ 440,053 $ 566,341 (22.3%)
MERCHANT REVENUES Merchant revenues are derived from transactions where we are the merchant of record and determine the price to be paid by the customer. Merchant revenues for the three and six months ended June 30, 2003 and 2002 consisted primarily of: (1) transaction revenues representing the selling price of Name Your Own Price(R) airline tickets, hotel rooms and rental cars; (2) ancillary fees, including Worldspan, L.P. reservation booking fees for merchant transactions only; and (3) customer processing fees charged in connection with the sale of Name Your Own Price(R) airline tickets, hotel rooms and rental cars. During the three months ended June 30, 2003, we sold approximately 446,000, 1.5 million and 828,000 airline tickets, hotel room nights and rental car days, respectively. During the six months ended June 30, 2003, we sold approximately 885,000, 2.7 million and 1.5 million airline tickets, hotel room nights and rental car days, respectively. During the three months ended June 30, 2002, we sold approximately 921,000, 1.1 million and 794,000 airline tickets, hotel room nights and rental car days, respectively. During the six months ended June 30, 2002, we sold approximately 1.8 million, 2.0 million and 1.5 million airline tickets, hotel room nights and rental car days, respectively. We believe that the decrease in the number of airline tickets sold in the three and six months ended June 30, 2003, compared to the three and six months ended June 30, 2002 continued to be due primarily to the weak retail environment for airline tickets and reduced airline inventory available to us. In particular, we believe that 19 lower retail pricing causes customers who might normally be willing to make the tradeoff associated with our products in exchange for savings off of higher retail rates, to purchase travel products at the lower retail rates or from low-cost carriers without having to make any trade-offs. In addition, many airlines grounded portions of their fleets in the aftermath of the terrorist attacks of September 11, 2001, and upon the outbreak of war in Iraq and the outbreak of SARS, thus decreasing capacity on existing flights, which we believe reduced airline inventory available to us. The year-over-year decrease in the number of airline tickets sold, however, was partially offset by the increase in hotel room nights sold in the first and second quarters of 2003. During the three months ended June 30, 2003, we sold approximately 1.5 million hotel room nights, an approximate 270,000 room nights over the three months ended March 31, 2003. Hotel unit sales during the three months ended June 30, 2003 increased approximately 38% compared to the same period in 2002. We attribute the growth of our hotel product to the success of our marketing campaign and the competitive room inventory and pricing we receive from our hotel partners. In the past, we have "subsidized" certain offers to purchase airline tickets by adding a variable amount to some customers' offers to increase the likelihood that such customers' offers would be successful. These "subsidies" had the effect of, among other things, increasing our revenues and bind rate at the expense of lower gross margins. At the end of 2002, we made the strategic decision to reduce sales of airline tickets at a loss. To this end, we reduced subsidies we have historically applied to certain airline ticket offers. While this had the effect of reducing our revenue in the first and second quarters of 2003, it resulted in an increase in our gross margin and positively contributed to our gross profit. Our "bind" rate is the percentage of unique offers that we ultimately fulfill. Our "bind rate" for all unique airline ticket, hotel room and rental car offers were as follows:
UNIQUE OFFERS FOR ----------------- AIRLINE HOTEL RENTAL TICKETS ROOMS CARS ------- ------ ------- THREE MONTHS ENDED JUNE 30, 2003 23.8% 62.2% 50.0% THREE MONTHS ENDED JUNE 30, 2002 40.4% 61.4% 44.3% SIX MONTHS ENDED JUNE 30, 2003 25.4% 63.8% 50.2% SIX MONTHS ENDED JUNE 30, 2002 41.0% 63.6% 45.1%
We believe that our merchant revenues and bind rate have been negatively impacted by the weak retail environment for airline tickets and reduced airline inventory available to us. In particular, we believe that lower retail pricing causes customers who might normally be willing to make the tradeoff associated with our products in exchange for savings off of higher retail rates, to purchase travel products at the lower retail rates or from low-cost carriers without having to make any trade-offs. In addition, many airlines grounded portions of their fleets in the aftermath of the terrorist attacks of September 11, 2001, and upon the outbreak of war in Iraq, thus decreasing capacity on existing flights, which we believe reduced airline inventory available to us. Finally, at the end of 2002, we reduced the subsidies applied to certain Name Your Own Price(R) ticket sales, which also negatively affected our revenues. These trends, which negatively impacted our revenues and bind rate in the first and second quarters of 2003, are expected to continue throughout 2003. We added approximately 902,000 and approximately 1.7 million new customers during the three and six months ended June 30, 2003, compared to approximately 964,000 and approximately 1.8 million new customers during three and six months ended June 30, 2002. In addition, we generated approximately 1.8 million and approximately 3.3 million repeat customer offers during the three and six months ended June 30, 2003, and approximately the same amount for the same periods last year. 20 Merchant revenues for the three and six months ended June 30, 2003 decreased approximately 22% compared to the three and six months ended June 30, 2002, primarily as a result of the weak retail environment for airline tickets and reduced airline inventory available to us. In particular, we believe that lower retail pricing causes customers who might normally be willing to make the tradeoff associated with our products in exchange for savings off of higher retail rates, to purchase travel products at the lower retail rates or from low-cost carriers without having to make any trade-offs. In addition, many airlines grounded portions of their fleets in the aftermath of the terrorist attacks of September 11, 2001, and upon the outbreak of war in Iraq, thus decreasing capacity on existing flights, which we believe reduced airline inventory available to us. Finally, at the end of 2002, we reduced the subsidies applied to certain Name Your Own Price(R) ticket sales, which also negatively affected our revenues. Offsetting the approximately 52% year-over-year reduction in airline tickets sold in the second quarter of 2003 was an approximately 38% increase in hotel room nights sold, which was principally driven by our recent emphasis on our hotel business, and specifically by an advertising campaign focused on our hotel product. Ancillary fee revenues for the three months ended June 30, 2003 decreased from the same periods a year ago as a result of a decrease in Worldspan, L.P. reservation booking fees and customer processing fees in the airline services due to lower volume. Merchant revenues continue to account for the majority of our revenue. Seasonal variations in our travel business have historically and are expected to continue to impact our quarter to quarter travel revenues. AGENCY REVENUES Agency revenues are derived from travel related transactions where we are not the merchant of record. Agency revenues for the three and six months ended June 30, 2003 and 2002 consisted primarily of (1) travel commissions and processing fees, principally earned through Lowestfare.com, related to the sale of travel products including the sale of price disclosed airline tickets, cruises and other travel services; and (2) ancillary fees, including GDS reservation booking fees related to price-disclosed transactions. Agency revenues for the three and six months ended June 30, 2003 increased approximately 600% and 478%, respectively, from the same periods a year ago, primarily as a result of our increased focus on the retail airline ticket business and the resulting increase in travel commissions earned. OTHER REVENUES Other revenues during the three and six months ended June 30, 2003 and 2002 consisted primarily of: (1) marketing revenues; (2) fees from our home financing and automobile services; (3) fees and, in 2002, transaction revenue from our long distance phone service, which we repositioned in 2002; and (4) in 2002, license fees from Hutchison-Priceline Limited. Other revenues for the three months ended June 30, 2003 decreased approximately 27% to approximately $1.1 million from approximately $1.6 million for the three months ended June 30, 2002, primarily as a result of the decrease in fees earned from our home financing service, and due to our repositioning of our long distance phone service. There were no transaction revenues generated from our long distance phone service in 2003. 21 COST OF REVENUES AND GROSS PROFIT
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------- -------- ($000) % ($000) % 2003 2002 CHANGE 2003 2002 CHANGE ---------- ---------- ---------- ---------- ---------- ---------- COST OF MERCHANT REVENUES........... $ 199,072 $ 255,972 (22.2%) $ 366,572 $ 475,483 (22.9%) % OF MERCHANT REVENUES ......... 84.0% 84.6% 84.2% 84.6% COST OF AGENCY REVENUES ............ - - - - - - % OF AGENCY REVENUES ........... 0.0% 0.0% 0.0% 0.0% COST OF OTHER REVENUES ............. - 336 (100.0%) - 717 (100.0%) % OF OTHER REVENUES ............ 0.0% 21.3% 0.0% 20.1% ---------- ---------- ---------- ---------- TOTAL COST OF REVENUES.............. $ 199,072 $ 256,308 $ 366,572 $ 476,200 % OF REVENUES .................. 83.1% 84.2% 83.3% 84.1%
COST OF REVENUES COST OF MERCHANT REVENUES For the three and six months ended June 30, 2003 and 2002, cost of merchant revenues consisted primarily 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 occupancy tax; and (3) the cost of rental cars from our suppliers, net of applicable taxes. Cost of merchant revenues for the three and six months ended June 30, 2003, decreased approximately 22% and 23%, respectively, primarily due to a decrease in sales of airline tickets, as discussed above. COST OF AGENCY REVENUES Agency revenues are recorded at their net amount, which are amounts received less amounts paid to suppliers, if any. COST OF OTHER REVENUES For the three and six months ended June 30, 2002, cost of other revenues consisted of the cost of long distance telephone service provided by our suppliers. For the three and six months ended June 30, 2003, there were no such costs due to the repositioning of our long distance telephone service in the fourth quarter of 2002. 22 GROSS PROFIT Total gross profit, as a percentage of revenue, increased for the three months ended June 30, 2003 as compared to the three months ended June 30, 2002, primarily as a result of growth in agency retail sales and improvement in merchant margins.
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------- -------- ($000) % ($000) % 2003 2002 CHANGE 2003 2002 CHANGE ---------- ---------- ---------- ---------- ---------- ---------- MERCHANT GROSS PROFIT ........... $ 37,871 $ 46,698 (18.9%) $ 68,979 $ 86,854 (20.6%) MERCHANT GROSS MARGIN ........ 16.0% 15.4% 15.8% 15.4% AGENCY GROSS PROFIT ............. $ 1,476 $ 211 599.5% $ 2,481 $ 429 478.3% AGENCY GROSS MARGIN .......... 100.0% 100.0% 100.0% 100.0% OTHER GROSS PROFIT .............. $ 1,147 $ 1,239 (7.4%) $ 2,021 $ 2,858 (29.3%) OTHER GROSS MARGIN ........... 100.0% 78.7% 100.0% 79.9% TOTAL GROSS PROFIT .............. $ 40,494 $ 48,148 (15.9%) $ 73,481 $ 90,141 (18.5%) TOTAL GROSS MARGIN ........... 16.9% 15.8% 16.7% 15.9%
MERCHANT GROSS PROFIT Merchant gross profit consists of merchant revenues less the cost of merchant revenues. For the three and six months ended June 30, 2003, merchant gross profit decreased from the same periods in 2002, primarily due to the weak retail environment for airline tickets and reduced airline inventory available to us. In particular, we believe that lower retail pricing causes customers who might normally be willing to make the tradeoff associated with our products in exchange for savings off of higher retail rates, to purchase travel products at the lower retail rates or from low cost carriers without having to make any tradeoffs. In addition, many airlines grounded portions of their fleets in the aftermath of the terrorist attacks of September 11, 2001, and upon the outbreak of war in Iraq, thus decreasing capacity on existing flights, which we believe reduced airline inventory available to us. We are, however, able to manage the level of gross margins by controlling the price at which we will cause offers to be fulfilled. At the end of 2002, we strategically reduced subsidies applied to certain Name Your Own Price(R) ticket sales. While this resulted in a reduction in revenue, the subsidy reduction positively affected our gross profit and increased our gross margin. In addition, our overall gross margin increased year-over-year as the result of higher margins on the sale of our Name Your Own Price(R) products and a shift in mix from air to non-air product. AGENCY GROSS PROFIT Agency gross profit consists of agency revenues which is recorded net of agency costs. For the three and six months ended June 30, 2003, agency gross profit increased over the same period in 2002 due to an increase in agency revenues. OTHER GROSS PROFIT For the three and six months ended June 30, 2003, other gross profit decreased over the same period in 2002 as a result of the decrease in fees earned in connection with our long distance phone service and a decrease in fees earned from our home financing service. There were no license fees received from Hutchison-Priceline Limited for the three and six months ended June 30, 2003. 23 OPERATING EXPENSES ADVERTISING
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------- -------- ($000) % ($000) % 2003 2002 CHANGE 2003 2002 CHANGE ---------- ---------- ---------- ---------- ---------- ---------- ADVERTISING................ $ 10,774 $ 12,777 (15.7%) $ 21,872 $ 23,004 (4.9%) % OF REVENUES ............. 4.5% 4.2% 5.0% 4.1%
Advertising expenses consist primarily of: (1) television and radio advertising; (2) online and email advertisements; and (3) agency fees, creative talent and production costs for television and radio commercials. For the three and six months ended June 30, 2003, advertising expenses decreased over the same periods in 2002 primarily due to the decrease in radio production and advertising fees, which was partially offset by a increase in television production and advertising fees. We intend to continue to promote the priceline.com brand aggressively throughout the remainder of 2003, and will focus the majority of our advertising resources on our hotel product. SALES AND MARKETING
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------- -------- ($000) % ($000) % 2003 2002 CHANGE 2003 2002 CHANGE ---------- ---------- ---------- ---------- ---------- ---------- SALES AND MARKETING ....... $ 9,000 $ 11,813 (23.8%) $ 17,064 $ 22,377 (23.7%) % OF REVENUES ............. 3.8% 3.9% 3.9% 4.0%
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 credit card charge-backs; and (4) compensation for our sales and marketing personnel. For the three and six months ended June 30, 2003, sales and marketing expenses decreased over the same periods in 2002 due to a decrease in credit card processing fees and a reduction in call center expenses, which are primarily variable in nature, and a reduction in product promotion expenses. 24 GENERAL AND ADMINISTRATIVE
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------- -------- ($000) % ($000) % 2003 2002 CHANGE 2003 2002 CHANGE ---------- ---------- ---------- ---------- ---------- ---------- GENERAL AND ADMINISTRATIVE .............. $ 6,106 $ 7,559 (19.2%) $ 12,674 $ 14,046 (9.8%) STOCK BASED COMPENSATION ................ 70 250 (72.0%) 70 500 (86.0%) ---------- ---------- ---------- ---------- TOTAL ................................... $ 6,176 $ 7,809 $ 12,744 $ 14,546 % OF REVENUES ........................... 2.6% 2.6% 2.9% 2.6%
General and administrative expenses consist primarily of: (1) compensation to our personnel; (2) occupancy expenses; (3) telecommunications costs; and (4) fees for outside professionals. General and administrative expenses decreased during the three and six months ended June 30, 2003 compared with the same periods in 2002 as a result of the decrease in professional fees, a decrease in personnel costs as a result of our fourth quarter 2002 restructuring, and the decrease in stock based compensation, partially offset by higher premiums on our Directors and Officers liability insurance policy. SYSTEMS AND BUSINESS DEVELOPMENT
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------- -------- ($000) % ($000) % 2003 2002 CHANGE 2003 2002 CHANGE ---------- ---------- ---------- ---------- ---------- ---------- SYSTEMS AND BUSINESS DEVELOPMENT ............................. $ 5,578 $ 6,275 (11.1%) $ 10,508 $ 12,603 (16.6%) % OF REVENUES ........................... 2.3% 2.1% 2.4% 2.2%
Systems and business development expenses consist primarily of: (1) compensation to our information technology and product development staff; (2) data communications and other expenses associated with operating our Internet site; and (3) payments to outside contractors. For the three and six months ended June 30, 2003, systems and business development expenses decreased over the same periods in 2002, primarily as a result of a decrease in compensation to our information technology staff as a result of the fourth quarter 2002 restructuring and a decrease in consultant expenses. DEPRECIATION AND AMORTIZATION
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------- -------- ($000) % ($000) % 2003 2002 CHANGE 2003 2002 CHANGE ---------- ---------- ---------- ---------- ---------- ---------- DEPRECIATION AND AMORTIZATION ............................ $ 2,787 $ 4,490 (37.9%) $ 6,699 $ 8,948 (25.1%) % OF REVENUES ........................... 1.2% 1.5% 1.5% 1.6%
Depreciation and amortization expenses consist of: (1) amortization of internally developed and purchased 25 software, (2) depreciation of computer equipment, (3) depreciation of our leasehold improvements, office equipment and furniture and fixtures, and (4) amortization of our intangible assets. For the three and six months ended June 30, 2003, depreciation and amortization expense decreased over the same periods in 2002, primarily as a result of a smaller depreciable asset base and a reduction in capital expenditures in 2003. SPECIAL AND RESTRUCTURING CHARGES During the second quarter of 2002, we decreased the liability for the special charge by approximately $200,000. The reduction resulted from the favorable resolution of certain matters. The adjustment was reflected in the "Special charge (reversal)" line on our Consolidated Statements of Operations. During the first quarter 2002, we decreased the liability for the restructuring charge by approximately $824,000. The reduction resulted from the subleasing of office space under more favorable terms than originally anticipated. The adjustment was reflected in the "Restructuring charge (reversal)" line on our Consolidated Statements of Operations. WARRANT CHARGE
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------- -------- ($000) % ($000) % 2003 2002 CHANGE 2003 2002 CHANGE ---------- ---------- ---------- ---------- ---------- ---------- WARRANT CHARGE .......................... - - - $ 6,638 - - % OF REVENUES ........................... 0.0% 0.0% 1.5% 0.0%
The warrant charge for the six months ended June 30, 2003, related to the issuance of warrants to purchase priceline.com common stock to Marriott International, Inc. INTEREST INCOME
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------- -------- ($000) % ($000) % 2003 2002 CHANGE 2003 2002 CHANGE ---------- ---------- ---------- ---------- ---------- ---------- INTEREST INCOME ......................... $ 405 $ 788 (48.6%) $ 897 $ 1,570 (42.9%)
For the three and six months ended June 30, 2003, interest income on cash and marketable securities decreased over the same period in 2002 due to a lower invested cash balance and lower interest rates. 26 EQUITY IN INCOME OF INVESTEES, NET
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------- -------- ($000) % ($000) % 2003 2002 CHANGE 2003 2002 CHANGE ---------- ---------- ---------- ---------- ---------- ---------- EQUITY IN INCOME OF INVESTEES, NET .......................... $ 1,105 $ 245 351.0% $ 1,105 $ 737 49.9%
Equity in income of investees, net for the three and six months ended June 30, 2002 of $1.1 million represented our pro rata share of the net income of pricelinemortgage and our pro rata share of the net loss of Travelweb, LLC. During the second quarter 2003, the estimated fair value of pricelinemortgage exceeded its carrying value. TAXES For the three and six months ended June 30, 2003 and June 30, 2002, we have recorded no provision for income taxes due to current losses and the availability of fully reserved net operating losses which have been utilized to offset the income tax provision, respectively. LIQUIDITY AND CAPITAL RESOURCES As of June 30, 2003, we had approximately $149.2 million in cash, cash equivalents, short-term investments and restricted cash. Approximately $16.9 million is restricted cash collateralizing certain letters of credit issued in favor of certain suppliers and landlords. Also included in restricted cash are amounts held by our credit card processor company. We generally invest excess cash to make such funds readily available for operating purposes. Cash equivalents and short-term investments are primarily comprised of highly liquid, high quality, investment grade debt instruments, having maturities of less than one year. See "RECENT DEVELOPMENTS" for a discussion of priceline.com's pricing of $100 million of Convertible Senior Notes. Because we collect cash up front from our customers and then pay our suppliers over a ten to fifteen day period, we tend to experience significant swings in supplier payables depending on the absolute level of our cost of revenue during the last few weeks of every quarter. This can cause volatility in working capital levels and impact cash balances more or less than our operating income would indicate. Net cash provided by operating activities for the six months ended June 30, 2003, was approximately $8.0 million, resulting from a net loss of approximately $42,000 together with approximately $6.0 million of negative changes in certain assets and liabilities offset by non-cash items not affecting June 30 cash flows of approximately $14.0 million. The changes in working capital for the six months ended June 30, 2003, were primarily related to an approximately $11.6 million increase in accounts receivable, and an approximately $6.5 million increase in accounts payable and accrued expenses. The increase in accounts receivable and accounts payable and accrued expenses was primarily due to the increase in hotel revenues. Non-cash items were primarily associated with the Marriott warrant charge and the depreciation and amortization of property and equipment. Net cash provided by operating activities for the six months ended June 30, 2002 was approximately $16.8 million, resulting from our net income of approximately $12.1 million, non-cash items of approximately $8.7 million and offset by negative changes in certain assets and liabilities of approximately $3.9 million. Net cash used in investing activities was approximately $10.7 million and approximately $21.6 million for the six months ended June 30, 2003 and 2002, respectively. During the six months ended June 30, 2003, Lowestfare.com, our wholly-owned subsidiary, invested approximately $11.7 million in an equity investment and other acquisitions. In both years, net cash used in investing activities was partially related to purchases of property and equipment. Also affecting net cash used in investing activities in the six months ended June 30, 2002 was the purchase of short-term investments and marketable securities in the amount of approximately $13.2 million. 27 Capital expenditures for additions to property and equipment is expected to aggregate approximately $5 to $7 million in the last six months of 2003. On July 31, 2002, our board of directors authorized the repurchase of up to $40 million of common stock from time to time in the open market or in privately negotiated transactions. We may purchase additional shares of our common stock in the future. Net cash provided by financing activities was approximately $4.7 million and approximately $3.0 million for the six months ended June 30, 2003 and 2002, respectively, which resulted entirely from proceeds from the exercise of employee stock options. 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 operations. If additional funds were raised through the issuance of equity securities, the percentage ownership of our then current stockholders would be diluted. There are no assurances that we will generate sufficient cash flow from operations in the future, that 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. SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS Sections of this Form 10-Q including, in particular, our Management's Discussion and Analysis of Financial Condition and Results of Operations above, contain forward-looking statements. These forward-looking statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict; therefore, actual results may differ materially from those expressed, implied or forecasted in any such forward-looking statements. Expressions of future goals and expectations or similar expressions including, without limitation, "may," "will," "should," "could," "expects," "does not currently expect," "plans," "anticipates," "intends," "believes," "estimates," "predicts," "potential," "targets," or "continue," reflecting something other than historical fact are intended to identify forward-looking statements. The factors described below in the section entitled "Factors That May Affect Future Results" could cause our actual results to differ materially from those described in the forward-looking statements. Unless required by law, we undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. However, readers should carefully review the reports and documents we file from time to time with the Securities and Exchange Commission, particularly the Quarterly Reports on Form 10-Q and any Current Reports on Form 8-K. FACTORS THAT MAY AFFECT FUTURE RESULTS THE FOLLOWING RISK FACTORS AND OTHER INFORMATION INCLUDED IN THIS QUARTERLY REPORT ON 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. WE MAY CONTINUE TO INCUR LOSSES As of June 30, 2003, we had an accumulated deficit of approximately $1.6 billion, and for the six months ended June 30, 2003, a net loss of approximately $42,000. In particular, a depressed retail environment for the sale of airline tickets and a general decline in leisure travel since the events of September 11, 2001, have had a negative impact on our business and results of operations. We may not have decreased our operating expenses sufficiently to achieve profitability in this difficult operating environment. If our revenues do not grow as expected, we may continue to incur losses and may not achieve or sustain profitability in future years. 28 OUR BUSINESS WAS NEGATIVELY IMPACTED BY THE WAR IN IRAQ AND THE OUTBREAK OF SEVERE ACUTE RESPIRATORY SYNDROME AND COULD BE FURTHER DAMAGED BY FUTURE TERRORIST ATTACKS, TRAVEL-RELATED HEALTH CONCERNS OR THE FEAR OF FUTURE TERRORIST ATTACKS OR TRAVEL-RELATED HEALTH CONCERNS In the weeks following the commencement of the military conflict with Iraq on March 19, 2003 and the outbreak of Severe Acute Respiratory Syndrome, or SARS, in Asia and elsewhere in the second quarter, we experienced a substantial decline in demand for our travel products and an increase in customer service costs and ticket refunds and cancellations. We believe that our first quarter and second quarter 2003 financial results were adversely affected by the war in Iraq and the outbreak of SARS. Further military conflict or new outbreaks of SARS or another travel-related health concern could have a material adverse effect on our business, results of operations and financial condition. In addition, terrorist attacks, the fear of future terrorist attacks, hostilities involving the United States in other areas of the world or the fear of future outbreaks like SARS are likely to contribute to a general reluctance by the public to travel and, as a result, may have a material adverse effect on our business, results of operations and financial condition. OUR "BIND RATE" MAY BE ADVERSELY AFFECTED BY A NUMBER OF FACTORS OUTSIDE OF OUR CONTROL Since the terrorist attacks of September 11, 2001, and, more recently, following the outbreak of war with Iraq, the major airlines have grounded portions of their fleets, significantly reducing the number of available airline seats, and have deeply discounted retail airline tickets to stimulate demand. These actions have had a detrimental effect on our business. Deep retail discounting by the airlines affects our demand and our "bind rate" (the percentage of unique offers that we ultimately fulfill) by hurting our value proposition and making users less willing to accept the trade-offs associated with our opaque leisure airline tickets. In addition, decreased airline capacity hurts our business by reducing the levels of inventory available to us and increasing our cost of inventory. Customer offer prices have not kept pace with the increase in our cost of inventory and are, therefore, lower in proportion to our average cost of supply, negatively affecting our bind rate. Additionally, our bind rate has been negatively impacted by the weak retail environment for airline tickets. In particular, we believe that lower retail pricing causes customers who might normally be willing to make the tradeoff associated with our products in exchange for savings off of higher retail rates, to purchase travel products at the lower retail rates or from low-cost carriers without having to make any trade-offs. Further, at the end of 2002, we reduced the subsidies applied to certain Name Your Own Price(R) ticket sales, which also negatively affected our revenues. These trends, which negatively impacted our revenues and bind rate in 2002 and the first half of 2003, are expected to continue throughout 2003. As a result, general near term forecasting is very difficult, and more specifically, we are not currently forecasting a recovery in the airline industry or an improvement during 2003 in our airline ticketing business. Also, we believe that over time, our lower bind rate may also negatively impact demand for our airline tickets. Further, we believe that lingering effects of September 11, 2001, the war in Iraq, the outbreak of SARS, continued aggressive discounting by the airlines, competition from other on-line distribution channels and low-cost carriers, uncertainty regarding our domestic economy and additional or protracted hostilities in the Middle East or elsewhere, have negatively impacted, and may continue to negatively impact, our airline ticket demand throughout 2003. WE ARE DEPENDENT ON THE AIRLINE INDUSTRY AND CERTAIN AIRLINES Our financial prospects are significantly dependent upon our sale of leisure airline tickets. Leisure airline tickets represented 28% of booked offers, and an even greater percentage of our revenue, for the six months ended June 30, 2003. 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 terrorist attacks, political instability, regional hostilities, increases in fuel prices, imposition of taxes or surcharges by regulatory authorities, travel-related accidents, travel-related health concerns and unusual weather patterns also may adversely affect the leisure travel industry. As a result, our business also is likely to be affected by those events. Further, work stoppages or labor unrest at any of the major airlines could materially and adversely affect the airline industry and, as a consequence, have a material adverse effect on our business, results of operations and financial condition. 29 During the six months ended June 30, 2003, sales of airline tickets from our five largest and two largest airline suppliers accounted for approximately 92.9% and 48.9% of airline ticket revenue, respectively. As a result, currently we are substantially dependent upon the continued participation of these airlines in the priceline.com service in order to maintain and continue to grow our total airline ticket revenues and, as a consequence, our overall revenues. We currently have 35 participating airlines. However, our arrangements with the airlines that participate in our system: - do not require the airlines to make tickets available for any particular routes; - do not require the airlines to provide any specific quantity of airline tickets; - do not require the airlines to provide particular prices or levels of discount; - do not require the airlines to deal exclusively with us in the public sale of discounted airline tickets; - often limit the manner in which we can sell inventory and, in the case of our agreement with Delta Air Lines, substantially limits which airlines can participate in our system; and - generally, can be terminated upon little or no notice. As a general matter, during the course of our business, we are in continuous dialogue with our major airline suppliers about the nature and extent of their participation in the priceline.com system. The significant reduction on the part of any of our other major suppliers of their participation in the priceline.com system for a sustained period of time or their complete withdrawal could have a material adverse effect on our business, results of operations and financial condition. Due to our dependence on the airline industry, we could be severely affected by changes in that industry, and, in many cases, we will have no control over such changes or their timing. For example, we believe that our business has been adversely affected by the general reduction in airline capacity since September 11, 2001. Further, since the September 11, 2001 terrorist attacks, several major U.S. airlines are struggling financially and have either filed for reorganization under the United States Bankruptcy Code or discussed publicly the risks of bankruptcy. To the extent other major U.S. airlines that participate in our system declare bankruptcy, they may be unable or unwilling to honor tickets sold for their flights. Our policy in such event would be to direct customers seeking a refund or exchange to the airline, and not to provide a remedy ourselves. Because we are the merchant-of-record on sales of airline tickets to our customers, however, we could experience a significant increase in demands for refunds or credit card charge-backs from customers which would materially and adversely affect our business. In addition, because our customers do not choose the airlines on which they are to fly, the bankruptcy of a major U.S. airline or the possibility of a major U.S. airline declaring bankruptcy could discourage customers from booking airline tickets through us. In addition, given the concentration of the airline industry, particularly in the domestic market, major airlines that are not participating in the priceline.com service, or our competitors, could exert pressure on other airlines not to supply us with tickets. Moreover, the airlines may attempt to establish their own buyer-driven commerce service or participate or invest in other similar services, like Hotwire, a website that offers discounted fares on opaque inventory, or Orbitz LLC, an airline-owned website that competes directly with us. THE BANKRUPTCY, DISCONTINUANCE OR CONSOLIDATION OF OUR SUPPLIERS COULD HARM OUR BUSINESS We are heavily dependent on our suppliers. One of our largest airline suppliers, United Airlines, is currently operating under the protection of federal bankruptcy laws, and certain other major suppliers, have disclosed publicly the possibility of seeking the protection of the federal bankruptcy laws. If any of our suppliers currently in bankruptcy liquidates or does not emerge from bankruptcy and we are unable to replace such supplier as a participant in priceline.com, our business would be adversely affected. In addition, in the event that another of our major suppliers 30 voluntarily or involuntarily declares bankruptcy and is subsequently unable to successfully emerge from bankruptcy, and we are unable to replace such supplier, our business would be adversely affected. Further, as discussed in "WE ARE DEPENDENT ON THE AIRLINE INDUSTRY AND CERTAIN AIRLINES", because our customers do not choose the airline, hotel or rental car company on which they are booked, the bankruptcy of a major supplier or even the possibility of a major supplier declaring bankruptcy, could discourage consumers from booking their travel products through us. As of July 28, 2003, two of the five rental car brands that supply our rental car business are operating under the protection of the bankruptcy laws. If any or all of such companies discontinue their business, and we are unable to find other suppliers, it would have a material adverse effect on our business, results of operations and financial condition. If one of our major suppliers merges or consolidates with, or is acquired by, another company that either does not participate in the priceline.com system or that participates on substantially lower levels, the surviving company may elect not to participate in our system or to participate at lower levels than the previous supplier. In such event, if we are unable to divert sales to other suppliers, our business results of operations and financial condition may be adversely affected. UNCERTAINTY REGARDING PAYMENT OF HOTEL OCCUPANCY TAXES We are currently conducting a review and interpretation of the tax laws in various states and other jurisdictions relating to the payment of state and local hotel occupancy taxes. Currently, hotels collect and remit hotel occupancy taxes to the various tax authorities based on the amounts collected by the hotels. Consistent with this practice, we recover the taxes on the underlying cost of the hotel room night from customers and remit the taxes to the hotel operators for payment to the appropriate tax authorities. Several jurisdictions have indicated that they may take the position that hotel occupancy tax is applicable to the differential between the price paid by a customer for our service and the cost to us of the underlying room. Historically, we have not collected taxes on this differential. Some state and local jurisdictions could assert that we are subject to hotel occupancy taxes on this differential and could seek to collect such taxes, either retroactively or prospectively or both. Such actions could have a material adverse effect on our business and results of operations. To the extent that any tax authority succeeds in asserting that such a tax collection responsibility exists, it is likely that, with respect to future transactions, we would collect any such additional tax obligation from our customers, which would have the effect of increasing the cost of hotel room nights to our customers and, consequently, could reduce our hotel sales. We will continue to assess the risks of the potential financial impact of additional tax exposure, and to the extent appropriate, we will reserve for those contingencies. WE MAY BE UNABLE TO REPURCHASE OUR OUTSTANDING NOTES AS REQUIRED BY THEIR TERMS On August 1, 2008, holders of our 1% convertible senior notes may require us to repurchase the notes. In addition, if a change in control, as defined in the indenture relating to the notes, occurs, each holder of the notes may require us to repurchase all or a portion of that holder's notes. It is possible that we may not have sufficient funds or may be unable to arrange for additional financing to pay the principal amount or repurchase price due. Under the terms of the indenture for the notes, we may elect, subject to certain conditions, to pay all or a portion of the repurchase price with shares of common stock. Any future borrowing arrangements or agreements relating to debt to which we become a party may contain restrictions on, or prohibitions against, our repayments or repurchases of the notes. If the maturity date or change in control occurs at a time when our other arrangements prohibit us from repaying or repurchasing the notes, we could try to obtain the consent of the lenders under those arrangements, or we could attempt to refinance the borrowings that contain the restrictions. If we do not obtain the necessary consents or refinance these borrowings, we would be unable to repay or repurchase the notes. In that case, our failure to repurchase any tendered notes or repay the notes upon maturity would constitute an event of default under the indenture. 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. Recently, we have seen the continuation of a trend in the online travel industry toward vertical integration. For example, in February 2003, InterActive Corp., formerly USA Interactive, Inc., which owns a controlling stake in Hotels.com L.P., acquired all of Expedia, Inc. InterActive Corp. also recently acquired all of Hotels.com L.P. shares it did not already own. In addition, Hilton Hotels Corporation, Hyatt Corporation, Marriott International, Inc., Intercontinental Hotels Group, Starwood Hotels and Pegasus Solutions, Inc. recently formed Travelweb LLC, a full-service automated distributor of hotel rooms that will compete with us in the online hotel space. If this trend continues, we may not be able to effectively compete with industry conglomerates that have access to greater and more diversified resources than we do. 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: - Internet travel services such as Expedia, Travelocity.com L.P., Orbitz, Hotels.com and Hotwire, a website that offers discounted fares on opaque inventory; - traditional travel agencies; 31 - consolidators and wholesalers of airline tickets and other travel products, including online consolidators such as Hotels.com and Cheaptickets.com; - individual or groups of airlines, hotels, rental car companies, cruise operators and other travel service providers (all of which may provide services by telephone or through their branded website); and - operators of travel industry reservation databases such as Worldspan, L.P. and Sabre. A number of airlines, including a number that participate in our system, have invested in and offer discount airfares and travel services through the Orbitz Internet travel service, and a number of airlines, including a number that participate in our system, participate in and have received an equity stake from Hotwire. The June 2001 launch of Orbitz has had a strong impact on the online travel industry. Specifically, because Orbitz is airline-owned, it is in a position to forego certain revenue streams upon which other online travel suppliers, including us, may be dependent, such as commissions and global distribution system fees. Orbitz's prices, which, unlike ours, are disclosed to the consumer, have typically been lower than other online travel providers offering disclosed price fares. Hotwire, which was launched in October 2000, provides airline tickets, hotel rooms and rental car reservations at disclosed prices, although supplier identity and flight times remain opaque. Since its launch, Hotwire has been successful in establishing itself in the online travel marketplace through aggressive advertising which has had the effect of decreasing our market share. If we are unable to effectively compete with Hotwire, our business, results of operation and financial condition will be adversely affected. With respect to financial service products, our competitors include banks and other financial institutions and online and traditional mortgage and insurance brokers, including mortgage.com, Quicken Mortgage, E-Loan, LendingTree and iOwn, Inc. In 2003, InterActive Corp. acquired Lending Tree. 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 and Yahoo!, who could choose to compete with us either directly or indirectly through affiliations with other e-commerce or off-line companies. Other large companies with strong brand recognition, technical expertise and experience in Internet commerce could also seek to compete with us. Competition from these and other sources could have a material adverse effect on our business, results of operations and financial condition. Many of our current and potential competitors, including Internet directories, 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 priceline.com. 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: - marketing and promotional campaigns; - attracting traffic to their websites; - attracting and retaining key employees; - securing vendors and inventory; and - website and systems development. Increased competition could result in reduced operating margins, loss of market share and damage to 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. 32 OUR GROWTH CANNOT BE ASSURED. EVEN IF WE DO EXPERIENCE GROWTH, WE CANNOT ASSURE YOU THAT WE WILL GROW PROFITABLY Our business strategy is dependent on the growth of our business. For us to achieve significant growth, consumers and travel suppliers must accept our website as a valuable commercial tool. Consumers who have historically purchased travel products using traditional commercial channels, such as local travel agents and calling suppliers directly, must instead purchase these products on our website. Similarly, travel suppliers will also need to accept or expand their use of our website and view our website as an efficient and profitable channel of distribution for their travel products. Our ability to enhance awareness of the priceline.com brands and offer products and services that will attract and retain a significant number of new consumers and travel suppliers is not certain, and therefore, our growth may be limited. WE MAY LOSE OR BE SUBJECT TO REDUCTION OF GLOBAL DISTRIBUTION SYSTEM FEES We rely on fees paid to us by Worldspan, L.P. for travel bookings made through Worldspan, L.P.'s global distribution system, or GDS, for a substantial portion of our gross profit and net income. A number of travel suppliers, particularly airlines, have indicated publicly that, as part of an effort to reduce distribution costs, they intend to reduce their dependence over time on what they view to be "expensive" distribution channels such as GDSs. A number of travel suppliers have reached agreements with travel distributors that require rebates of all or part of the fees received from the GDS. Additionally, travel suppliers are encouraging distributors, such as us, to develop technology enabling direct connections, therefore bypassing the GDS. Development of direct connection technology would require the use of information technology resources and could cause us to incur additional operating expenses and delay other projects. We have been and believe that we will continue to be under pressure from travel suppliers to rebate all or part of the travel booking fees we receive from Worldspan, L.P. To the extent that we are required to rebate travel booking fees we currently receive to travel suppliers, and are unable to recover such amounts by charging customers, it could have a material adverse effect on our business, results of operations and financial condition. On July 1, 2003, Worldspan was acquired by a corporation newly formed by Citigroup Venture Capital Equity Partners L.P. and Teachers' Merchant Bank. It is unclear what effect, if any, this change in control of Worldspan, L.P. will have on our relationship with Worldspan, L.P. or our business, results of operations or financial condition. UNCERTAINTY REGARDING STATE AND LOCAL TAXES We file tax returns in such states as required by law based on principles applicable to traditional businesses. In addition, we pay sales and other taxes to suppliers on our purchases of travel services sold through the priceline.com service. In certain cases, where appropriate, we remit taxes directly to the tax authorities. We believe that this practice is consistent with the tax laws of all jurisdictions. However, one or more states could seek to impose additional income tax obligations, sales tax collection obligations or other tax obligations on 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 these sales. Current economic conditions in the United States are triggering active consideration on ways to generate additional tax revenues by both the federal and state and local governments. We cannot predict what changes in tax law or interpretations of such laws may be adopted or assure that such changes or interpretations would not materially impact our business. Federal legislation imposing limitations on the ability of states to tax Internet-based sales was enacted in 1998. The Internet Tax Freedom Act exempts specific types of sales transactions conducted over the Internet from multiple or discriminatory state and local taxation through November 1, 2003. If this legislation is not renewed, state and local goverments could impose taxes on Internet-based sales. These taxes could decrease the demand for our products and services or increase our costs of operations, which would have a meterial adverse effect on our business, financial condition and results of operations. OUR BUSINESS IS EXPOSED TO RISKS ASSOCIATED WITH CREDIT CARD FRAUD AND CHARGE-BACKS To date, our results have been negatively impacted by purchases made using fraudulent credit cards. Because we act as the merchant-of-record, we are held liable for fraudulent credit card transactions on our website as well as other payment disputes with our customers. Accordingly, we calculate and record an allowance for the resulting credit card charge-backs. During the second half of 2001, we launched a company-wide credit card charge-back reduction project aimed at preventing the fraudulent use of credit cards. To date, this project has been successful in reducing fraud; however, if we are unable to continue to reduce the fraudulent use of credit cards on our website, our business, results of operations and financial condition could be materially adversely affected. 33 FLUCTUATIONS IN OUR FINANCIAL RESULTS MAKE QUARTERLY COMPARISONS AND FINANCIAL FORECASTING DIFFICULT Our revenues and operating results have varied significantly from quarter to quarter because our business experiences seasonal fluctuations, which reflect seasonal trends for the travel products offered by our website. Traditional leisure travel bookings are higher in the first two calendar quarters of the year in anticipation of spring and summer vacations and holiday periods, but online travel reservations may decline with reduced Internet usage during the summer months. In the last two quarters of the calendar year, demand for travel products generally declines and the number of bookings flattens. Our results may also be affected by seasonal fluctuations in the inventory made available to us by airlines, hotels and rental car suppliers. Our revenues and operating results may continue to vary significantly from quarter to quarter because of these factors. 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, a relatively new and unproven business model and an uncertain environment in the travel industry, it may be difficult to predict our future revenues or results of operations. Because of these fluctuations and uncertainties, our operating results may fail to meet the expectations of securities analysts and investors. If this happens, the trading price of our common stock would almost certainly be materially adversely affected. IF WE LOSE OUR KEY PERSONNEL OR CANNOT RECRUIT ADDITIONAL PERSONNEL, OUR BUSINESS MAY SUFFER We depend on the continued services and performance of our executive officers and other key personnel. These individuals have acquired specialized knowledge and skills with respect to priceline.com and our operations. We do not have "key person" life insurance policies. Our ability to retain key employees could be materially adversely affected by the decline in the market price of our common stock, limitations on our ability to pay cash compensation that is equivalent to cash paid by traditional businesses and limitations imposed by our employee benefit plans on our ability to issue additional equity incentives. 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. WE RELY ON THE VALUE OF THE PRICELINE.COM BRAND, AND THE COSTS OF MAINTAINING AND ENHANCING OUR BRAND AWARENESS ARE INCREASING We believe that maintaining and expanding the priceline.com brand (including Lowestfare.com and Rentalcars.com) are important aspects of our efforts to attract and expand our user and advertiser base. We also believe that the importance of brand recognition will increase due to the relatively low cost for competitors to launch new sites. Promotion of the priceline.com brand will depend largely on our success in satisfying our customers. In addition, we have spent considerable money and resources to date on the establishment and maintenance of the priceline.com brands, and we will continue to spend money on, and devote resources to advertising, marketing and other brand-building efforts to preserve and enhance consumer awareness of the priceline.com brands. We may not be able to successfully maintain or enhance consumer awareness of the priceline.com brands, and, even if we are successful in our branding efforts, such efforts may not be cost-effective. If we are unable to maintain or enhance customer awareness of the priceline.com brands in a cost-effective manner, our business, results of operations and financial condition would be adversely affected. ONLINE SECURITY BREACHES COULD HARM OUR BUSINESS The secure transmission of confidential information over the Internet is essential in maintaining consumer and supplier confidence in the priceline.com service. Substantial or ongoing security breaches - whether instigated internally or externally - on our system or other Internet-based systems could significantly harm our business. We currently require buyers to guarantee their offers with their credit card, either online or through our toll-free telephone service. We rely on licensed encryption and authentication technology to effect secure transmission of confidential information, including credit card numbers. It is possible that advances in computer capabilities, new discoveries or other developments could result in a compromise or breach of the technology used by us to protect customer transaction data. 34 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 websites 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. TWO LARGE STOCKHOLDERS BENEFICIALLY OWN APPROXIMATELY 34% OF OUR STOCK Hutchison Whampoa Limited and its 49.97% shareholder, Cheung Kong (Holdings) Limited, collectively beneficially owned approximately 34% of our outstanding common stock as of June 30, 2003, based on public filings with the SEC. Together, Cheung Kong (Holdings) Limited and Hutchison Whampoa Limited have appointed three of the eleven members of our Board of Directors. As a result of their ownership and positions, Cheung Kong (Holdings) Limited and Hutchison Whampoa Limited collectively are able to significantly influence all matters requiring stockholders approval, including the election of directors and approval of significant corporate transactions. Such concentration of ownership may also have the effect of delaying or preventing a change in control of our company. In addition, both Cheung Kong (Holdings) Limited and Hutchison Whampoa Limited have registration rights with respect to their shares of priceline.com. On September 19, 2001, Cheung Kong (Holdings) Limited and Hutchison Whampoa Limited withdrew a request they had made for us to file a shelf registration statement to sell shares and obtained rights to purchase up to a 37.5% stake (on a fully diluted basis) in priceline.com, subject to certain limitations. There can be no assurance that Cheung Kong (Holdings) Limited, Hutchison Whampoa Limited, or both, will not make another request for registration and dispose of all or substantially all of our common stock held by them at any time after the effectiveness of a shelf registration statement. Sales of significant amounts of shares held by Cheung Kong (Holdings) Limited or Hutchison Whampoa Limited, or the prospect of these sales, could adversely affect the market price of our common stock. See Note 12 to the Notes to Unaudited Consolidated Financial Statements. 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, hotel and rental car industries to satisfy demand for airline tickets and hotel room reservations. In particular, our travel business is substantially dependent upon the computerized reservation system of Worldspan, L.P., an operator of a database for the travel industry. Any interruption in these third-party services systems, including Worldspan, L.P.'s system, or deterioration in their performance could prevent us from booking airline, hotel and rental car reservations and have a material adverse effect on our business. Our agreements with third-party service providers are terminable upon short notice and often do not provide recourse for service interruptions. In the event our arrangement with any of such third parties is terminated, we may not be able to find an alternative source of systems support on a timely basis or on commercially reasonable terms and, as a result, it could have a material adverse effect on our business, results of operations and financial condition. Substantially all of our computer hardware for operating our services is currently located at Cable & Wireless plc. in Jersey City, New Jersey. If Cable & Wireless is unable, for any reason, to support our primary web hosting facility, we would need to activate our secondary site at AT&T which would be a substantial burden to us and have a material adverse effect on our business, results of operations and financial condition. Some of our communications infrastructure is provided by WorldCom, Inc., which currently does business under the MCI brand name and has filed for bankruptcy protection. If WorldCom, Inc. is unable, for any reason, to 35 support the communications infrastructure that it provides us, instabilities in our systems could increase until such time as we were able to replace its services. While we do maintain redundant systems and hosting services, it is possible that we could experience an interruption in our business, and we do not carry business interruption insurance sufficient to compensate us for losses that may occur. CAPACITY CONSTRAINTS AND SYSTEM FAILURES COULD HARM OUR BUSINESS A substantial amount of our computer hardware for operating our services is currently located at the facilities of Cable & Wireless plc in New Jersey. These systems and operations are vulnerable to damage or interruption from human error, floods, fires, power loss, telecommunication failures and similar events. They are also subject to break-ins, sabotage, intentional acts of vandalism and similar misconduct. Despite any precautions we may take, the occurrence of a natural disaster or other unanticipated problems at the Cable & Wireless facility could result in lengthy interruptions in our services. In addition, the failure by Cable & Wireless to provide our required data communications capacity could result in interruptions in our service. Any system failure that causes an interruption in service or decreases the responsiveness of the priceline.com service could impair our reputation, damage our brand name and have a material adverse effect on our business, results of operations and financial condition. If our systems cannot be expanded to cope with increased demand or fails to perform, we could experience: - unanticipated disruptions in service; - slower response times; - decreased customer service and customer satisfaction; or - delays in the introduction of new products and services, any of which could impair our reputation, damage the priceline.com brand and materially and adversely affect our revenues. Publicity about a service disruption also could cause a material decline in our stock price. Like many online businesses, we have experienced system failures from time to time. For example, in May 2001, our primary website was interrupted for a period of 12 hours. In addition to placing increased burdens on our engineering staff, these outages create a significant amount of user questions and complaints that need to be addressed by our customer support personnel. Any unscheduled interruption in our service could result in an immediate loss of revenues that can be substantial and may cause some users to switch to our competitors. If we experience frequent or persistent system failures, our reputation and brand could be permanently harmed. We have been taking steps to increase the reliability and redundancy of our system. These steps are expensive, may reduce our margins and may not be successful in reducing the frequency or duration of unscheduled downtime. 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 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, it could have a material adverse effect on our business, results of operations and financial condition. 36 While we believe that our issued patents and pending patent applications help to protect our business, there can be no assurance that: - any patent can be successfully defended against challenges by third parties; - pending patent applications will result in the issuance of patents; - 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; - 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; - new prior art will not be discovered which may diminish the value of or invalidate an issued patent; or - a third party will not have or obtain one or more patents that prevent us from practicing features of our business or require us to pay for a license to use those features. There has been recent discussion in the press regarding the examination and issuance of so called "business-method" patents. As a result, the United States Patent and Trademark Office has indicated that it intends to intensify the review process applicable to such patent applications. The new procedures are not expected to have a direct effect on patents already granted. We cannot anticipate what effect, if any, the new review 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 Note 10 to our unaudited consolidated financial statements in our Quarterly Report on Form 10-Q for the three months ended June 30, 2003. The defense of the actions described in Note 10 may increase our expenses and an adverse outcome in any of these actions could have a material adverse effect on our business, results of operations and financial condition. WE MAY NOT BE ABLE TO KEEP UP WITH RAPID TECHNOLOGICAL AND OTHER CHANGES The markets in which we compete are characterized by rapidly changing technology, evolving industry standards, frequent new service and product announcements, introductions and enhancements and changing consumer demands. We may not be able to keep up with these rapid changes. In addition, these market characteristics are heightened by the emerging nature of the Internet and the apparent need of companies from many industries to offer Internet-based products and services. As a result, our future success will depend on our ability to adapt to rapidly changing technologies, to adapt our services to evolving industry standards and to continually improve the performance, features and reliability of our service in response to competitive service and product offerings and the evolving demands of the marketplace. In addition, the widespread adoption of new Internet, networking or telecommunications technologies or other technological changes could require us to incur substantial expenditures to modify or adapt our services or infrastructure. 37 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: - quarterly variations in our operating results; - operating results that vary from the expectations of securities analysts and investors; - changes in expectations as to our future financial performance, including financial estimates by securities analysts and investors; - changes in our capital structure; - changes in market valuations of other Internet or online service companies; - announcements of technological innovations or new services by us or our competitors; - announcements by us or our competitors of significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments; - loss of a major supplier participant, such as an airline or hotel chain; - changes in the status of our intellectual property rights; - lack of success in the expansion of our business model geographically; - announcements by third parties of significant claims or proceedings against us or adverse developments in pending proceedings; - additions or departures of key personnel; and - 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 significantly. In addition, fluctuations in our stock price and our price-to-earnings multiple may have made our stock attractive to momentum, hedge or day-trading investors who often shift funds into and out of stocks rapidly, exacerbating price fluctuations in either direction, particularly when viewed on a quarterly basis. The trading prices of Internet company 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 recently based on profitability and other concerns. Negative market conditions could adversely affect our ability to raise additional capital. We are defendants in 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 its securities. To the extent our stock price declines or is volatile, we may in the future be the target of additional litigation. This additional litigation could result in substantial costs and divert management's attention and resources. 38 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 have a material adverse effect on our business, results of operations and financial condition. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Priceline.com currently has no floating rate indebtedness, holds no derivative instruments (other than through investments in licensees described in this Quarterly Report on Form 10-Q) and does not earn significant foreign-sourced income. Accordingly, changes in interest rates or currency exchange rates do not generally have a material 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 may indirectly affect consumer demand for such products and priceline.com's revenue. Additionally, fixed rate investments are subject to interest rate volatility. In the event of such weakness, such additional US Dollars would have reduced purchasing power. 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. If the US Dollar weakens versus the British Pound Sterling, we may have to invest additional US Dollars in priceline.com europe Ltd. to fund its ongoing operations. ITEM 4. CONTROLS AND PROCEDURES Prior to filing this report, we carried out an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, our principal executive officer and principal financial officer concluded that as of June 30, 2003, our disclosure controls and procedures were effective in timely alerting them to material information required to be included in our periodic SEC reports. It should be noted that the design of any system of controls is based in part upon certain assumptions, and there can be no assurance that any design will succeed in achieving its stated goals. In addition, we reviewed our internal controls, and there have been no significant changes in our internal controls or in other factors that could significantly affect those controls to the date of their last evaluation. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS A description of material legal proceedings to which we are a party is contained in Note 10 to the Notes to Unaudited Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for the quarter ended June 30, 2003. 39 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS We held our Annual Meeting of Stockholders on June 9, 2003. Listed below are descriptions of the maters voted on and the results of such meeting. The numbers of shares voted are on a "pre-split" basis and, as a result, do not give effect to priceline.com's one-for-six reverse stock split which was effected on June 16, 2003 after our annual meeting of stockholders.
Number of Stockholders Matter Voted On For Withheld --------------- --- -------- 1. ELECTION OF DIRECTORS Richard S. Braddock 180,264,022 11,683,038 Jeffery H. Boyd 182,018,744 9,428,316 Ralph M. Bahna 189,732,670 2,214,390 Howard W. Barker, Jr 189,006,078 2,940,982 Jeffrey E. Epstein 191,216,326 730,734 Patricia L. Francy 188,899,177 3,047,883 Edmond Tak Chuen Ip 181,681,403 10,265,657 Dominic Kai Ming Lai 191,147,116 799,944 Marshall Loeb 187,403,868 4,543,192 Nancy B. Peretsman 181,870,349 10,076,711 Ian F. Wade 191,147,669 799,391
Paul A. Allaire did not stand for re-election as a director.
Broker For Against Abstaining Non-votes --- ------- ---------- --------- 2. Approval to amend priceline.com's certificate of incorporation to effect a reverse stock split at a ratio of one-for-six 177,207,300 14,616,378 123,382 - 3. Approval to amend priceline.com's certificate of incorporation to effect a reverse stock split at a ratio of one-for-seven 167,943,475 20,112,387 3,891,198 - 4. Approval to amend priceline.com's certificate of incorporation to effect a reverse stock split at a ratio of one-for-eight 167,926,300 20,135,983 3,884,777 - 5. Approval to amend priceline.com's certificate of incorporation to effect a reverse stock split at a ratio of one-for-nine 167,902,487 20,151,578 3,892,995 - 6. Ratification of appointment of Deloitte & Touche LLP as independent auditors for fiscal year ending December 31, 2003 185,024,962 3,550,280 3,371,818 -
40 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS
EXHIBIT NUMBER DESCRIPTION - -------------- ----------- 3.3 Certificate of Amendment to Amended and Restated Certificate of Incorporation of priceline.com Incorporated 10.76(+) Second Amendment to the Worldspan Subscriber Entity Agreement, by and between priceline.com Incorporated and Worldspan, L.P. 31.1 Certification of the Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of Chief Executive Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
+ Portions of this document have been omitted pursuant to a confidential treatment request. (b) REPORTS ON FORM 8-K On April 24, 2003, we filed a report on Form 8-K in connection with the election of Patricia L. Francy and Jeffrey E. Epstein to our Board of Directors. On May 2, 2003, we furnished a report on Form 8-K in connection with our first quarter 2003 earnings announcement. On May 21, 2003, we furnished a report on Form 8-K in connection with the presentation of materials at the Goldman Sachs Internet New Media Conference in Las Vegas, Nevada. On June 5, 2003, we filed a report on Form 8-K in connection with the notification from Paul A. Allaire that he intended to resign from priceline.com's Board of Directors, and that he would not stand for re-election to priceline.com's Board of Directors at priceline.com's annual meeting of stockholders on Monday, June 9, 2003. On June 10, 2003, we furnished a report on Form 8-K in connection with our Annual Meeting of Stockholders, and the presentation of the materials at the annual meeting. On June 16, 2003, we filed a report on Form 8-K in connection with the 1-for-6 reverse stock split of all outstanding shares of our common stock, par value $0.008 per share. 41 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PRICELINE.COM INCORPORATED (Registrant) Date: August 14, 2003 By: /s/ Robert J. Mylod, Jr. ------------------------------------------ Name: Robert J. Mylod, Jr. Title: Chief Financial Officer (On behalf of the Registrant and as principal financial officer) 42 EX-3.3 3 a2116831zex-3_3.txt EXHIBIT 3.3 EXHIBIT 3.3 CERTIFICATE OF AMENDMENT TO AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF PRICELINE.COM INCORPORATED Priceline.com Incorporated, a corporation organized and existing under the laws of the State of Delaware (the "CORPORATION"), hereby certifies that: FIRST: The name of the Corporation is priceline.com Incorporated. SECOND: In accordance with Section 242 of the General Corporation Law of the State of Delaware, the Board of Directors of the Corporation duly adopted a resolution setting forth the proposed amendment to Article Fourth of the Amended and Restated Certificate of Incorporation of the Corporation, declaring the advisability of such amendment and directing that such amendment be considered at the next annual meeting of the stockholders of the Corporation. THIRD: Article Fourth of the Amended and Restated Certificate of Incorporation is hereby amended by adding at the end thereof the following paragraph: "As of Monday, June 16, 2003 (the "EFFECTIVE DATE"), each six shares of common stock, par value $0.008 per share, issued and outstanding immediately prior to the Effective Date (the "OLD COMMON STOCK"), will be automatically reclassified as and combined into one share of common stock, par value $0.008 per share. Any stock certificate that, immediately prior to the Effective Date, represented shares of the Old Common Stock will, from and after the Effective Date, automatically and without the necessity of surrendering the same for exchange, represent the number of whole shares of common stock, par value $0.008 per share, as equals the quotient obtained by dividing the number of shares of Old Common Stock represented by such certificate immediately prior to the Effective Date by six. No fractional shares shall be issued, and in lieu thereof, stockholders who would otherwise be entitled to receive fractional shares will be entitled, upon surrender to Mellon Investor Services, LLC, the exchange agent, of such certificates representing such fractional shares, to receive cash in an amount equal to the product obtained by multiplying the closing price of the Old Common Stock as reported on The Nasdaq National Market on the last trading day prior to the Effective Date by the number of shares of Old Common Stock held by such stockholder that would otherwise have been exchanged for fractional shares." FOURTH: This Certificate of Amendment to the Amended and Restated Certificate of Incorporation of the Corporation was duly adopted by the stockholders in accordance with Section 242 of the General Corporation Law of the State of Delaware. FIFTH: This Certificate of Amendment to the Amended and Restated Certificate of Incorporation shall be effective as of 12:01A.M. (Eastern Time) on June 16, 2003 in accordance with the provisions of Section 103(d) of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, this Certificate of Amendment to the Amended and Restated Certificate of Incorporation has been signed by Jeffery H. Boyd, its authorized officer, on this 13th day of June 2003. priceline.com Incorporated /s/ Jeffery H. Boyd Name: Jeffery H. Boyd Title: President and Chief Executive Officer EX-10.76 4 a2116831zex-10_76.txt EXHIBIT 10.76 EXHIBIT 10.76 SECOND AMENDMENT TO THE WORLDSPAN SUBSCRIBER ENTITY AGREEMENT THIS SECOND AMENDMENT (this "Amendment"), dated as of April 1, 2003 (the "Second Amendment Effective Date"), to the Subscriber Entity Agreement (as defined below) is by and between Worldspan, L.P. ("Worldspan"), a Delaware limited partnership with principal place of business located at 300 Galleria Parkway, N.W., Atlanta, Georgia 30339, for itself and its subsidiaries, and priceline.com Incorporated ("Priceline"), a Delaware corporation with principal place of business located at 800 Connecticut Avenue, Norwalk, Connecticut 06854, for itself, its Affiliates, and the Priceline Group. WHEREAS, Worldspan and Priceline entered into the Worldspan Subscriber Entity Agreement dated the 1st of October, 2001 (the "Subscriber Entity Agreement") with an effective date of October 1, 2001. WHEREAS, Worldspan and Priceline entered into an Amendment dated the 1st of October, 2001 (the "First Amendment") to the Subscriber Entity Agreement. WHEREAS, Worldspan and Priceline now desire to supersede and replace the First Amendment and to further amend the Subscriber Entity Agreement as described in this Amendment. NOW, THEREFORE, Worldspan and Priceline (each, a "Party" and collectively, the "Parties") agree as follows: 1. FIRST AMENDMENT SUPERSEDED. Effective as of the Second Amendment Effective Date, this Amendment replaces and supersedes the First Amendment, and the provisions of this Amendment, rather than the First Amendment, shall be applicable with respect to events and periods of time occurring on or after the Second Amendment Effective Date. 2. TERM. The first sentence of Article I of the Subscriber Entity Agreement is hereby deleted in its entirety and replaced with the following: "The term of this Agreement (the "Term") commences on April 1, 2003 and shall continue until [**] or such earlier date upon which this Agreement may be terminated in accordance with the provisions of this Agreement, as amended." 3. DEFINITIONS. Each term defined in the Subscriber Entity Agreement shall have the same meaning in this Amendment, except to the extent otherwise provided herein or inconsistent with the provisions hereof. In addition to the terms set forth below, various terms are defined in the context in which they are used in this Amendment and shall have the respective meanings there specified. For purposes of this Amendment, each of the following terms shall have the applicable meaning specified below: (a) "Affiliates" shall mean [**]. (b) "Airline Booking" shall mean an airline passenger Booking generated by the Priceline Group. (c) "Booking" shall mean a Segment properly generated by the Priceline Group through the Worldspan GDS for which Worldspan charges and collects a fee, except to the extent otherwise specified in Paragraph 41 of this Amendment. For purposes of the Subscriber Entity Agreement, the term "Booking" shall have the same meaning as specified in the preceding sentence. [**] = Confidential Treatment requested for redacted portion; redacted portion has been filed separately with the commission. (d) "Booking Evaluation Period" shall mean each of the time periods specified below:
BOOKING EVALUATION PERIOD TIME PERIOD ------------------------------------------------------------------------------------------ 1 [**] ------------------------------------------------------------------------------------------ 2 [**] ------------------------------------------------------------------------------------------ 3 [**] ------------------------------------------------------------------------------------------ 4 [**] ------------------------------------------------------------------------------------------ 5 [**] ==========================================================================================
(e) "Direct Connection" shall mean a computer system that provides information about the schedules, fares, rates, and availability of the products and services of, and allows the making of reservations and the issuance of tickets for, the products and services of a particular travel supplier, whether operated by the travel supplier, its designee, or any other company that operates such a system, including, without limitation, Sabre, Galileo, Amadeus, ITA, Abacus, Infini, Axxess, Orbitz, Travelocity, or any affiliate of any of the foregoing. (f) "ePricing" or "Power Shopper" shall mean a fares-and-pricing productivity tool that provides Priceline the ability to retrieve low-fare itinerary alternatives and confirm flights with a single command. (g) "Opaque" shall mean an Internet-based commerce system or process for buying travel-related products or services (including, without limitation, airline tickets, hotel rooms, rental cars and vacation packages) that requires, as a condition of purchase, a non-refundable payment, guaranteed by a credit card, debit card or other payment process of the purchaser, prior to the determination of a material term of the transaction, such as the time of the service, the identity of the vendor of the product or service, or the specific manner of performing the service. (h) "Opaque Airline Booking" shall mean an Airline Booking generated by the Priceline Group through an Opaque system or process. (i) "Opaque Airline Segments" shall mean airline passenger Segments generated by the Priceline Group through an Opaque system or process. (j) "Opaque Booking" shall mean a Booking generated by the Priceline Group through an Opaque system or process. (k) "Opaque Hotel Booking" shall mean a hotel room Booking generated by the Priceline Group through an Opaque system or process. (l) "Opaque Hotel Segments" shall mean hotel room Segments generated by the Priceline Group through an Opaque system or process. (m) "Opaque Rental Car Booking" shall mean a rental car Booking generated by the Priceline Group through an Opaque system or process. (n) "Opaque Rental Car Segments" shall mean rental car Segments generated by the Priceline Group through an Opaque system or process. (o) "Other GDS" shall mean a global distribution system operated by an entity other than Worldspan. (p) "Priceline Group" shall mean Priceline, any entities controlled by Priceline as of the Second Amendment Effective Date, and any corporate form and entity or asset that (i) becomes controlled by Priceline after the Second Amendment Effective Date and (ii) did not have a relationship with any Other GDS or Direct Connection over the entire four (4) month period prior to the time it [**] = Confidential Treatment requested for redacted portion; redacted portion has been filed separately with the commission. Page 2 becomes controlled by Priceline. For purposes of this definition, an entity is "controlled by" Priceline if Priceline is the "beneficial owner" (as defined in Rule 13d(3) of the Securities and Exchange Act of 1934), directly or indirectly, through one or more intermediaries, of more than 50% of the voting power of such entity. Priceline shall act for and on behalf of the Priceline Group and all entities within the Priceline Group for all purposes relating to the Subscriber Entity Agreement, including any approval, acceptance, consent, notice, or other action required or permitted by the Subscriber Entity Agreement, and shall be responsible for the performance of all obligations of the Priceline Group hereunder and for causing each entity within the Priceline Group to comply with all applicable provisions of the Subscriber Entity Agreement. Notwithstanding anything herein to the contrary, (x) Lowestfare.com Incorporated shall not be deemed to be part of the Priceline Group until after the Lowestfare Basic Conversion Completion Date (as defined herein), but no later than December 31, 2003, and (y) neither Hutchison-Priceline Limited nor priceline.com europe Ltd. shall be deemed to be part of the Priceline Group; PROVIDED, HOWEVER, that any Segments generated by Hutchison-Priceline Limited or priceline.com europe Ltd. through the www.priceline.com website, the www.lowestfare.com website, or any successor to either of those websites, shall be deemed to be Segments generated by the Priceline Group and not Segments generated by the EU Affiliates. (q) "Retail" shall mean a system or process for buying travel-related products or services (including, without limitation, airline tickets, hotel rooms, rental cars and vacation packages) that is not Opaque. (r) "Retail Airline Booking" shall mean an Airline Booking generated by the Priceline Group through a Retail system or process. (s) "Retail Airline Segments" shall mean airline passenger Segments generated by the Priceline Group through a Retail system or process. (t) "Retail Booking" shall mean a Booking generated by the Priceline Group through a Retail system or process. (u) "Retail Hotel Segments" shall mean hotel room Segments generated by the Priceline Group through a Retail system or process. However, notwithstanding anything in this Amendment to the contrary, reservations for hotel rooms generated through Travelweb by means of a Retail system or process, irrespective of the entity or URL from which such reservations are generated, shall not be considered "Segments" or "Retail Hotel Segments" for purposes of this Amendment and shall be excluded from all terms of the Subscriber Entity Agreement, including this Amendment. (v) "Retail Rental Car Booking" shall mean a rental car Booking generated by the Priceline Group through a Retail system or process. (w) "Retail Rental Car Segments" shall mean rental car Segments generated by the Priceline Group through a Retail system or process. (x) "Segments" shall mean (i) reservations for airline passenger flights, less cancellations prior to the date of departure, and (ii) reservations for other travel-related products and services, such as hotel rooms, rental cars, tours, and cruises, that are not canceled. For example, except to the extent affected by cancellations, a reservation for one passenger on a direct flight constitutes one Segment, a reservation for one passenger on a round-trip consisting of two direct flights constitutes two Segments, a reservation for one passenger on a two-segment connecting flight constitutes two Segments, a reservation for two passengers on a direct flight constitutes two Segments, even if the reservations for both passengers are within the same passenger name record ("PNR"), and a reservation for a hotel room or rental car for a continuous period of multiple days (e.g., one hotel client for five continuous nights or one car client for five continuous days) constitutes one Segment. [**] = Confidential Treatment requested for redacted portion; redacted portion has been filed separately with the commission. Page 3 (y) "Worldspan System" shall mean the computerized systems, including hardware, software, data and connectivity, used by Worldspan to operate the Worldspan GDS or to otherwise provide services for the Priceline Group. (z) "Yield" shall mean, for any type of Booking and any period of time, the amount determined by dividing (i) the total amount of booking fees paid to Worldspan by travel suppliers in connection with Bookings of that type generated by the Priceline Group during that period of time, by (ii) the number of Bookings of that type generated by the Priceline Group during that period of time. 4. DETERMINATION OF SEGMENTS. The number of Segments booked by the Priceline Group shall be determined as follows: (a) The determination of the number of Segments booked by the Priceline Group through the Worldspan GDS shall be made solely by Worldspan from its books and records. (b) The determination of the number of Segments booked by the Priceline Group through an Other GDS shall be made by Worldspan using industry-standard MIDT data or other industry-standard data of comparable reliability. (c) The determination of the number of Segments booked by the Priceline Group through a Direct Connection or any other means shall be made by Priceline and reported in a manner generally accepted by the travel industry. Promptly following the end of each calendar month during the Term, each Party shall make available to the other Party the documentation or records reasonably requested by the other Party to document and verify the number of Segments booked with respect to that month. If either Party has any questions regarding the information provided by the other Party, the first Party will promptly notify the other Party thereof and the Parties will work together in good faith to resolve the questions and agree upon the number of Segments booked with respect to that month. All determinations of the number of Segments booked shall be subject to the audit rights specified in the following Paragraph. 5. AUDIT OF SEGMENT BOOKING DETERMINATIONS. Either Party may, upon reasonable prior written notice to the other Party and no more than four (4) times per Booking Evaluation Period, request a meeting for the purpose of documenting and verifying the number of Segments booked by the Priceline Group. Each Party shall be solely responsible for its costs incurred with respect to such meetings. Each Party shall make available to the other Party the documentation or records reasonably requested by the other Party to document and verify the number of Segments booked by the Priceline Group. In the event of any material disagreement on the number of Segments booked, either Party shall have the right to engage an independent third party (the "Auditor") acceptable to both Parties to audit the books and records used in determining the number of Segments booked. In the event that the Auditor discovers a discrepancy of 10% or more in either Party's reporting of the number of Segments booked, then that Party alone shall bear the cost of such Auditor, and if the Auditor fails to discover such a discrepancy of 10% or more, then the Party engaging the Auditor alone shall bear the cost of such Auditor. Any remaining material disagreement as to the number of Segments booked by the Priceline Group shall be resolved through the dispute resolution mechanism applicable to the Subscriber Entity Agreement. 6. BOOKING OBLIGATIONS. The Priceline Group shall have the following booking obligations: (a) The Priceline Group shall, for each Booking Evaluation Period, generate through the Worldspan GDS a minimum of [**] of the total Opaque Airline Segments and Opaque Rental Car Segments booked by the Priceline Group (through the Worldspan GDS, any Other GDS, any Direct Connection, and any other means) in the United States of America and Canada ("USA/Canada"). [**] = Confidential Treatment requested for redacted portion; redacted portion has been filed separately with the commission. Page 4 (b) The Priceline Group shall, for each Booking Evaluation Period, generate through the Worldspan GDS a minimum of [**] of the total Retail Airline Segments and Retail Rental Car Segments booked by the Priceline Group (through the Worldspan GDS, any Other GDS, any Direct Connection, and any other means) in USA/Canada. (c) The Priceline Group shall: (1) For each Booking Evaluation Period, generate through the Worldspan GDS a minimum of [**] of the total Opaque Hotel Segments booked by the Priceline Group (through Worldspan, any Other GDS, any Direct Connection, and any other means) in USA/Canada; and (2) [**]. (d) The Priceline Group shall not be required to generate any Retail Hotel Segments through the Worldspan GDS. (e) The Priceline Group shall convert the www.lowestfare.com website (including any successor thereto) so that: (1) Commencing no later than [**] and until a minimum of 365 days after the date the Parties mutually confirm that such conversion with respect to Basic [**] Segments is complete (the "Lowestfare Basic Conversion Completion Date"), the www.lowestfare.com website shall not generate through [**] any [**] Segments other than Other [**] Segments ("Basic [**] Segments"); and (2) Commencing no later than [**] and until a minimum of 365 days after the Lowestfare Basic Conversion Completion Date, the www.lowestfare.com website shall not generate through [**] any of the following types of [**] Segments ("Other [**] Segments"): (1) [**]; (2) [**]; and (3) [**]. Failure by the Priceline Group to comply with this Section 6(e) shall not be deemed a breach of this Agreement. 7. INDUCEMENT REDUCTION UPON FAILURE TO MEET BOOKING OBLIGATION. Notwithstanding the provisions regarding [**] Booking Inducements and [**] Booking Inducements set forth in Paragraphs 11 and 12 below, respectively, if the Priceline Group fails to comply with any of its obligations under Paragraph 6 above for any Booking Evaluation Period, then: (a) The [**] Booking Inducements for [**] Bookings in [**] shall be reduced to [**] per [**] Booking generated during the Booking Evaluation Period for which the Priceline Group failed to comply with such obligation; (b) The [**] Booking Inducements for [**] Bookings in [**] shall be reduced to [**] per [**] Booking generated during the Booking Evaluation Period for which the Priceline Group failed to comply with such obligation; and (c) The [**] Booking Inducement for [**] Bookings in [**] shall not be modified. [**] = Confidential Treatment requested for redacted portion; redacted portion has been filed separately with the commission. Page 5 No later than thirty (30) days following the end of any Booking Evaluation Period in which the Priceline Group fails to comply with any of its obligations under Paragraph 6 above, Worldspan shall conduct a reconciliation of the inducement payments made to Priceline for the portion of that Booking Evaluation Period prior to the last calendar quarter thereof, the inducement payments owed to Priceline for the final calendar quarter of the Booking Evaluation Period, and the amount by which the total of the inducement payments already made to Priceline for that Booking Evaluation Period is greater or less than the total of the inducement payments actually owed to Priceline for that Booking Evaluation Period, after taking into account the inducement reductions described in this Paragraph. No later than fifteen (15) days after the completion of such reconciliation, Worldspan shall notify Priceline of the payment due to or from Priceline. The applicable Party shall make such payment no later than thirty (30) days following the giving of such notice to Priceline. In addition, the Party to whom the payment is owed shall be entitled to set off the amount of such payment against any other amounts owed to the applicable Party. 8. OTHER CONSEQUENCES OF FAILURE TO MEET BOOKING OBLIGATION. If the Priceline Group fails to comply with any of its obligations under Paragraph 6 above (other than subparagraph (e) thereof) in Booking Evaluation Period 1,2,3 or 4 then Worldspan may give the Priceline Group written notice that such an event has occurred and that Worldspan is terminating the Subscriber Entity Agreement, effective thirty (30) days from Priceline's receipt of such notice. Upon a termination pursuant to this Paragraph following Booking Evaluation Period 1, 2, 3, or 4 or upon a breach of a booking obligation under Paragraph 6 above (other than subparagraph (e) thereof) in Booking Evaluation Period 5, the Priceline Group shall be liable to Worldspan for liquidated damages calculated according to the formula set forth below: Liquidated Damages = The lesser of (i) the number of Expected Bookings, multiplied by [**], or (ii) the amount, if any, that the number of actual Bookings generated by the Priceline Group through the Worldspan GDS from the Second Amendment Effective Date until the effective termination date is less than ninety million (90,000,000), multiplied by [**]. For purposes of this Amendment, "Expected Bookings" shall mean (x) the average number of Bookings made by the Priceline Group through the Worldspan GDS per month in (A) the twelve (12) months preceding the end of the applicable Booking Evaluation Period, or (B) if Worldspan has delivered a Compliance Notice to Priceline during the applicable Booking Evaluation Period, the twelve (12) months preceding the first day of the calendar month to which the Compliance Notice applies, multiplied by (y) thirty-six (36) months. A "Compliance Notice" shall mean a notice deliverable by Worldspan to Priceline in the event that over any full calendar month of a Booking Evaluation Period, the percentage of Segments generated by the Priceline Group in the USA/Canada as calculated in accordance with Paragraph 6 (other than subparagraph 6(e) thereof), if continued at the same rate during the remainder of the Booking Evaluation Period, will result in the Priceline Group failing to comply with an obligation under Paragraph 6 above (other than subparagraph (e) thereof) in that Booking Evaluation Period. The Parties acknowledge that the foregoing provision has been negotiated at arms length between Worldspan and Priceline and represents a reasonable measure of liquidated damages in the event of the Priceline Group's default of the specified obligations. 9. AFFILIATE BOOKING OBJECTIVE. For each Booking Evaluation Period, Priceline shall use good-faith efforts to cause the Affiliates, as a whole, to generate through the Worldspan GDS a minimum of [**] of their aggregate Segments globally. This obligation is subject to Worldspan's geographic and vendor-specific connectivity capabilities. Priceline shall give Worldspan the opportunity to develop new technological capabilities in order to serve the Affiliates' international needs. Worldspan agrees that the failure of Priceline to meet its obligations under this Paragraph shall not (i) constitute a breach of the Subscriber Entity Agreement, (ii) constitute the default of any obligation of the Subscriber Entity Agreement, or [**] = Confidential Treatment requested for redacted portion; redacted portion has been filed separately with the commission. Page 6 (iii) give rise to any cause of action or claim against, or liability on the part of, Priceline for any losses or damages of any kind. The Parties acknowledge that the foregoing provision has been negotiated at arms length between Worldspan and Priceline and represents a reasonable compromise in the event of Priceline's failure to complete the specified obligation. 10. AFFILIATE INTERNATIONAL NON-AIRLINE BOOKING OBJECTIVE. For each Booking Evaluation Period, Priceline shall use good-faith efforts to cause the Affiliates, as a whole, to generate through the Worldspan GDS [**] of their non-airline Segments originating in countries other than USA/Canada. This obligation is subject to Worldspan's geographic and vendor-specific connectivity capabilities. Priceline shall give Worldspan the opportunity to develop new technological capabilities in order to serve the Affiliates' international needs. Worldspan agrees that the failure of Priceline to meet its obligations under this Paragraph shall not (i) constitute a breach of the Subscriber Entity Agreement, (ii) constitute the default of any obligation of the Subscriber Entity Agreement, or (iii) give rise to any cause of action or claim against, or liability on the part of, Priceline for any losses or damages of any kind. The Parties acknowledge that the foregoing provision has been negotiated at arms length between Worldspan and Priceline and represents a reasonable compromise in the event of Priceline's failure to complete the specified obligation. 11. OPAQUE BOOKING INDUCEMENTS. Worldspan shall pay the following [**] Booking Inducements to Priceline for [**] Bookings generated by the Priceline Group through the Worldspan GDS in [**]: (a) The [**] Booking Inducement for [**] Bookings in [**] during each Booking Evaluation Period shall be as follows:
=================================================================== INDUCEMENT PER BOOKING EVALUATION PERIOD [**] BOOKING =================================================================== 1 [**] ------------------------------------------------------------------- 2 [**] ------------------------------------------------------------------- 3 [**] ------------------------------------------------------------------- 4 [**] ------------------------------------------------------------------- 5 [**] ===================================================================
(b) The [**] Booking Inducement for [**] Bookings in [**] shall be [**] per [**] Booking, subject to adjustment as described in Paragraph 17(d)(3) below. (c) The [**] Booking Inducement for [**] Bookings in [**] shall be [**] of the booking fee paid to Worldspan by the [**] supplier for the [**] Booking, subject to the provisions of Paragraph 18 below. Payment for each calendar quarter shall be made no later than forty-five (45) days following the end of that calendar quarter, with any reconciliation, if necessary, completed after the end of the applicable Booking Evaluation Period. 12. [**] BOOKING INDUCEMENTS. Worldspan shall pay the following [**] Booking Inducements to Priceline for [**] Bookings generated by the Priceline Group through the Worldspan GDS in [**]: (a) The [**] Booking Inducement for [**] Bookings in [**] shall be [**] per [**] Booking, subject to adjustment as described in Paragraph 17(d)(4) below, but not less than a minimum of [**]. In addition, Worldspan shall pay Priceline a one-time booking bonus of [**] per [**] Booking in [**] for a period of [**] months from the Second Amendment Effective Date. (b) The [**] Booking Inducement for [**] Bookings in [**] shall be [**] per [**] Booking, subject to adjustment as described in Paragraph 17(d)(5) below, but not less than a minimum of [**]. [**] = Confidential Treatment requested for redacted portion; redacted portion has been filed separately with the commission. Page 7 Payment for each calendar quarter shall be made no later than forty-five (45) days following the end of that calendar quarter, with any reconciliation, if necessary, completed after the end of the applicable Booking Evaluation Period. 13. RETAIL BOOKING TARGETS. The Retail Booking target amounts ("Retail Booking Targets") for each calendar quarter during Booking Evaluation Periods 2,3,4 and 5 shall be as follows:
=============================================== BOOKING EVALUATION PERIOD ----------------------------------------------- 2 3 4 5 ============================================================ Q1 [**] [**] [**] [**] ------------------------------------------------------------ Q2 [**] [**] [**] [**] ------------------------------------------------------------ Q3 [**] [**] [**] [**] ------------------------------------------------------------ Q4 [**] [**] [**] [**] ============================================================
Provided, however, that for purposes of the conceptual "Bank Account" described in Paragraph 14 below, for any calendar quarter for which the Priceline Group generated through the Worldspan GDS at least [**] of the total number of Retail Airline Segments, Opaque Airline Segments, Retail Rental Car Segments and Opaque Rental Car Segments, as a whole, generated by the Priceline Group in USA/Canada, the Actual Retail Bookings (as defined in Paragraph 14 below) for that quarter shall be deemed to be the greater of (i) the number of Retail Bookings for that quarter, and (ii) the Retail Booking Target for that quarter. 14. CONCEPTUAL "BANK ACCOUNT". Commencing with the first quarter of 2004, a conceptual "Bank Account" shall be established in order to track cumulative credits and debits that result from the number of Retail Bookings generated by the Priceline Group for that quarter. The "Bank Account" shall have an initial balance of zero. (a) For purposes of this Paragraph, the "Shortfall Factor" shall be [**] as of the Second Amendment Effective Date and may be adjusted from time to time as described in Paragraph 17(d)(4) below, but shall not be less than a minimum of [**]. (b) Promptly after the last day of each calendar quarter of Booking Evaluation Periods 2, 3, 4 and 5, the number of Retail Bookings for that calendar quarter (the "Actual Retail Bookings" for that quarter) shall be determined as discussed in Paragraph 4 above. The "Bank Account" balance shall be increased or decreased by the dollar amount calculated by multiplying (i) the then-current Shortfall Factor, by (ii) the amount (which may be positive or negative) determined by subtracting (x) the Retail Booking Target for that quarter, from (y) the Actual Retail Bookings for that quarter. (c) Promptly after the last day of each calendar quarter of Booking Evaluation Periods 2, 3, 4 and 5, the Parties shall make the adjustment to the "Bank Account" balance discussed in subparagraph (b) above and: (1) If there is a net negative balance in the "Bank Account", then Priceline shall pay Worldspan an amount equal to the absolute value of such negative balance and the balance shall return to zero. (2) If there is a net positive balance in the "Bank Account", then no payment is due by either Party and (i) if the quarter in question is not the fourth quarter of [**], then the balance shall carry forward into the following calendar quarter, and (ii) if the quarter in question is the fourth quarter of [**], then the balance shall expire and be of no further effect. [**] = Confidential Treatment requested for redacted portion; redacted portion has been filed separately with the commission. Page 8 15. [**] BOOKING INDUCEMENTS. Worldspan shall pay the following [**] Booking Inducements to Priceline for Bookings generated by the Priceline Group through the Worldspan GDS in [**]: (a) The [**] Booking Inducement for [**] Bookings in [**] shall be [**] per [**] Booking. (b) The [**] Booking Inducement for [**] Bookings in [**] shall be [**] per [**] Booking. Payment for each calendar quarter shall be made no later than forty-five (45) days following the end of that calendar quarter, with any reconciliation, if necessary, completed after the end of the applicable Booking Evaluation Period. 16. AFFILIATE BOOKING BONUS INCENTIVES. Provided that Priceline complies with its obligations under Paragraph 6 of this Amendment, each of the following bonus incentives will apply. (a) In the event the Affiliates (as a whole) generate more than [**][**] Bookings through the Worldspan GDS in any Booking Evaluation Period, Worldspan shall pay Priceline an additional bonus of [**] no later than forty-five (45) days following the end of the Booking Evaluation Period. (b) In the event the Affiliates (as a whole) generate more than [**][**] Bookings through the Worldspan GDS in any Booking Evaluation Period, Worldspan shall pay Priceline an additional bonus of [**] no later than forty-five (45) days following the end of the Booking Evaluation Period. (c) In the event the Affiliates (as a whole) generate more than [**][**] Bookings through the Worldspan GDS in any Booking Evaluation Period, Worldspan shall pay Priceline an additional bonus of [**] no later than forty-five (45) days following the end of the Booking Evaluation Period. (d) In the event the Affiliates (as a whole) generate more than [**][**] Bookings through the Worldspan GDS in any Booking Evaluation Period, Worldspan shall pay Priceline an additional bonus of [**] no later than forty-five (45) days following the end of the Booking Evaluation Period. (e) In the event the Affiliates (as a whole) generate more than [**][**] Bookings through the Worldspan GDS in any Booking Evaluation Period, Worldspan shall pay Priceline an additional bonus of [**] no later than forty-five (45) days following the end of the Booking Evaluation Period. (f) In the event the Affiliates (as a whole) generate more than [**][**] Bookings through the Worldspan GDS in the time period from April 1, 2003 to [**], Worldspan shall pay Priceline an additional bonus of [**] no later than February 15, 2008. 17. BOOKING FEES PAYABLE BY TRAVEL SUPPLIERS. (a) The Parties acknowledge that the respective Yields resulting from the following types of Bookings generated by the Priceline Group in [**] for the first calendar quarter of calendar year 2003 were as follows: (1) The Yield for [**] Bookings was [**]. (2) The Yield for [**] Bookings was [**]. (3) The Yield for [**] Bookings was [**]. [**] = Confidential Treatment requested for redacted portion; redacted portion has been filed separately with the commission. Page 9 (4) The Yield for [**] Bookings was [**]. In order to reflect the impact of the increases implemented as of April 1, 2003 in its booking fees for [**] Bookings, Worldspan shall determine and notify Priceline of the Yield resulting from [**] Bookings generated in [**] for the second calendar quarter of calendar year 2003 as soon as feasible after the end of that quarter. (b) Worldspan may adjust its booking fees to travel suppliers from time to time in accordance with the following: (1) Worldspan shall provide Priceline with notice of any such booking fee adjustment as soon as practicable, but no later than ten (10) business days after notice to the applicable travel suppliers. (2) Worldspan shall not implement in the second calendar quarter of calendar year 2003 any increases to its booking fees for [**] Bookings other than the increases implemented as of April 1, 2003. (3) In connection with [**] Bookings, Worldspan shall charge [**] suppliers in the same manner (for example, at the same pricing tier) during [**] as it did during [**]. (4) Except as provided in subparagraphs (2) and (3) above, there shall be no restriction on the frequency of any such booking fee adjustments. (c) The Parties acknowledge that the inducements provided in this Amendment are dependent on Worldspan's booking fee rates charged to travel suppliers remaining at levels comparable to the rates charged to travel suppliers as of the Second Amendment Effective Date. In the event that (i) the average booking fee rate charged by Worldspan should decrease by [**] or more compared to the rates charged [**] suppliers as of the Second Amendment Effective Date due to causes beyond the direct control of Worldspan or (ii) except as otherwise provided by Paragraph 17(d)(6) below, Worldspan, Priceline, and a travel supplier agree to implement a substantially modified pricing structure with respect to that travel supplier, then the Parties agree to negotiate in good faith to revise the Subscriber Entity Agreement to conform with the new industry practice. In the event that such negotiations do not result in a modification to the Subscriber Entity Agreement, then Worldspan reserves the right (x) to eliminate the inducements provided for in this Amendment with respect to such Bookings, or (y) to immediately terminate the Subscriber Entity Agreement in its entirety, notwithstanding any provision of the Subscriber Entity Agreement to the contrary; provided, however, that in the event that Worldspan eliminates any such inducements, Priceline shall have the right to immediately terminate the Subscriber Entity Agreement. (d) If and when Worldspan adjusts its booking fees to travel suppliers for Bookings in [**], then the following adjustments shall be prospectively applied. (1) [**] (2) [**] (3) [**] (4) [**] (5) [**] [**] = Confidential Treatment requested for redacted portion; redacted portion has been filed separately with the commission. Page 10 (6) [**] 18. MINIMUM WORLDSPAN HOTEL COMPENSATION. Notwithstanding the provisions of Paragraph 11(c) above, for each Booking Evaluation Period, Worldspan shall be entitled to at least a minimum amount equal to (i) the then-current Worldspan [**] Minimum Rate described below, multiplied by (ii) the total number of [**] Bookings in [**] for that Booking Evaluation Period. Promptly after the end of each Booking Evaluation Period, Worldspan will determine the total amount of booking fees for such [**] Bookings retained by Worldspan for such Booking Evaluation Period and, if it is less than the minimum amount described above, Priceline shall promptly pay the difference to Worldspan. The "Worldspan [**] Minimum Rate" shall be [**] as of the Second Amendment Effective Date and may be reduced from time to time thereafter in accordance with the provisions of this Paragraph. If Worldspan decreases the standard published booking fee it charges a [**] supplier for [**] segments generated in [**] by Worldspan subscribers other than the Priceline Group (the "Non-Priceline Booking Fee" for that [**] supplier) so that the Non-Priceline Booking Fee for that [**] supplier after the decrease is less than the booking fee it charges the [**] supplier for [**] Bookings generated in [**] by the Priceline Group (the "Priceline Booking Fee" for that [**] supplier), then the then-current Worldspan [**] Minimum Rate will be reduced by an amount equal to (i) the amount of such decrease in the Non-Priceline Booking Fee for that [**] supplier, less the amount, if any, by which (x) the Priceline Booking Fee for that [**] supplier prior to the decrease, is less than (y) the Non-Priceline Booking Fee for that [**] supplier prior to the decrease, multiplied by (ii) the percentage obtained by dividing (x) the number of [**] Bookings in [**] for that [**] supplier generated by the Priceline Group for the 12-month period preceding the decrease, by (y) the total number of [**] Bookings generated in [**] by the Priceline Group for that 12-month period. 19. HOTEL IMAGES. The Parties shall use commercially reasonable efforts to obtain hotel images to be loaded into the Worldspan GDS. 20. EPRICING. (a) The Priceline Group shall be entitled to [**] Power Shopper queries for each Booking at [**]. If the number of Power Shopper queries from the Priceline Group in any calendar month is more than [**] times the number of Bookings for that month, then Priceline shall pay [**] for each such excess Power Shopper query. Worldspan will provide to the Priceline Group a "less edited" Power Shopper response, reasonably acceptable to Priceline, that will allow as many as [**] to [**] itinerary alternatives to be retrieved in response to each Power Shopper query. (b) Worldspan shall implement improvements to its ePricing functionality in accordance with Attachment B to this Amendment. (c) Worldspan shall devote appropriate time and resources and otherwise use commercially reasonable efforts to cause its ePricing functionality to be competitive in the performance of services provided by Other GDSs (including, without limitation, [**]), in terms of, for example, and not by way of limitation, cost, availability services and scope of commands. 21. LOW COST CARRIER PARTICIPATION. Worldspan will provide the Priceline Group with access to any low cost carrier (i.e., an air carrier that does not participate in the Worldspan GDS and pay booking fees to Worldspan) upon mutual agreement between Worldspan, Priceline, and the low cost carrier. In such agreements, the implementation fee for Priceline will be [**], but the low cost carrier may be subject to reasonable implementation, participation, and other fees. 22. Lowestfare Conversion Bonus. Upon completion of the Priceline Group's obligation to convert the www.lowestfare.com website so that it ceases generating Basic [**] Segments through [**], by no later than [**], pursuant to Paragraph 6(e)(1) above, Worldspan shall pay Priceline a one-time conversion bonus equal to [**] per [**] Booking generated by means of the www.lowestfare.com website [**] = Confidential Treatment requested for redacted portion; redacted portion has been filed separately with the commission. Page 11 during the period commencing upon the Lowestfare Basic Conversion Completion Date and ending 365 days thereafter, all upon and subject to the following: (a) Promptly after the Lowestfare Basic Conversion Completion Date, Worldspan shall pay Priceline a projected conversion bonus based upon the estimated number of [**] Bookings that will be generated by means of the www.lowestfare.com website during the 365 days following the Lowestfare Basic Conversion Completion Date. Promptly after the end of that 365 day period, the Parties will determine the actual number of [**] Bookings generated by means of the www.lowestfare.com website during that period and the actual conversion bonus resulting from those [**] Bookings, and the applicable Party will pay to the other Party any amounts necessary to reconcile the projected conversion bonus previously paid to Priceline with the actual conversion bonus so determined. (b) Notwithstanding the foregoing, in the event that (i) the www.lowestfare.com website has not completely ceased generating Basic [**] Segments through [**], by [**], as provided in Paragraph 6(e)(1) above or generates one or more Basic [**] Segments through [**], during the 365 day period following the Lowestfare Basic Conversion Date, or (ii) the www.lowestfare.com website has not completely ceased generating Other [**] Segments through [**], by [**], as provided in Paragraph 6(e)(2) above or generates one or more Other [**] Segments through [**], during the period beginning when such conversion with respect to Other [**] Segments is complete and ending 365 days following the Lowestfare Basic Conversion Date, then, in any such event, the conversion bonus described above will not be payable to Priceline and, if and to the extent already paid, will be promptly refunded to Worldspan. 23. SYSTEM USAGE. The Priceline Group will use the Worldspan System, including data provided through such system, solely for the purposes of making legitimate Bookings through the Worldspan System, issuing travel documents relating to such Bookings, performing related accounting and record-keeping functions, conducting testing in accordance with the provisions of this Agreement, utilizing historical data in the ordinary course of the Priceline Group's business, and in accordance with rules and regulations established by travel suppliers and published by Worldspan. The Priceline Group specifically agrees that it shall not use the Worldspan System, including data provided through such system, to make bookings via any means other than the Worldspan System or to develop any of the following types of services for the purpose of reselling such services to third parties: software applications, including without limitation booking engines, corporate booking programs, fare and pricing tools, caching products, and hosting applications. For the avoidance of doubt, the Priceline Group shall not be prohibited from using the Worldspan System, including data provided through such system, in the process of servicing a customer even in the case where the Priceline Group searches an itinerary in the Worldspan System and subsequently books such itinerary through a Direct Connection with a supplier, provided that the Priceline Group did not, as part of the servicing of such customer, search the inventory of such supplier in the Worldspan System. 24. MARKETING INCENTIVE PROGRAM. The letter agreement dated November 13, 2001, regarding the Marketing Incentive Program is hereby terminated. 25. HOTEL DIRECT CONNECTION. If the Priceline Group intends to enter a Direct Connection relationship with one of its top ten hotel suppliers, then the Priceline Group will evaluate the cost and functionality of an outsourced Worldspan Direct Connection solution. If the cost and functionality of such a Worldspan solution compares favorably to the cost and functionality of the other Direct Connection relationship contemplated by the Priceline Group, then the Priceline Group will use commercially reasonable efforts to employ the outsourced Worldspan Direct Connection solution instead of the other Direct Connection relationship. The foregoing shall not be interpreted to limit in any way the ability of Priceline to generate Opaque Hotel Segments on an Other GDS in accordance with this Agreement. 26. TECHNOLOGY SERVICES AGREEMENT. At Priceline's request, based on its need to approximate Direct Connection economics for its major airline partners, Worldspan shall use commercially reasonable efforts to negotiate an agreement structured as a technology services agreement for the Priceline Group, which [**] = Confidential Treatment requested for redacted portion; redacted portion has been filed separately with the commission. Page 12 shall contain terms and conditions that are competitive with other technology services agreements that Worldspan has with its other major customers that have booking volumes and technology requirements similar to those of the Priceline Group. 27. RIGHT OF FIRST REFUSAL. Prior to entering into any arrangement with a third party to obtain any GDS or other travel technology related services that succeeds the Subscriber Entity Agreement or replaces any portion thereof during Booking Evaluation Period 5 or at the end of the Term, Priceline will provide Worldspan written notice of the proposed arrangement (an "ROFR Notice"). It is understood, however, that no ROFR Notice shall be required in connection with arrangements with any third party for such services if and to the extent that Priceline is permitted (or, if the Subscriber Entity Agreement were still in effect, would be permitted) to engage or contract with such third party for such services under the terms of the Subscriber Entity Agreement, such as any arrangement with a third party for the generation through an Other GDS of any Segments that Priceline is not obligated to generate through the Worldspan GDS pursuant to this Amendment. Each ROFR Notice shall include as an attachment the proposed definitive agreement pursuant to which the third party will provide the applicable services or, if such definitive agreement has not been prepared, a detailed description of the applicable services and all material terms and conditions upon which the third party will provide them; provided, however, that Priceline shall not be required to divulge to Worldspan the identity of such third party. Following receipt of an ROFR Notice that satisfies the foregoing requirements, Worldspan will have forty-five (45) days to (i) notify Priceline that Worldspan elects to provide substantially similar material services on material terms and conditions that are substantially similar to, but no less favorable to Priceline than, those described in such ROFR Notice, and (ii) provide to Priceline a proposed signed definitive agreement for such substantially similar material services on such substantially similar, but no less favorable to Priceline, material terms and conditions. In the event Worldspan elects not to provide Priceline with such services, it shall so notify Priceline in writing as soon as practicable. During such 45-day period, (x) Priceline shall devote sufficient commercial, technical, and legal resources to facilitate in good faith Worldspan's evaluation of the proposed arrangement, and (y) Priceline shall not be entitled to change the material terms of such third party arrangement for purposes of this Paragraph. Priceline shall not enter any such arrangement with a third party if Worldspan has elected to provide the services and provided to Priceline a proposed definitive agreement that meets the requirements set forth above. If Worldspan elects not to provide the services or the 45-day period has expired without a response from Worldspan that meets the requirements set forth above, then Priceline may enter into such arrangement with the third party on terms and conditions that do not materially deviate from the terms and conditions included in the ROFR Notice to Worldspan. 28. [**] DEVELOPMENT HOURS. The Parties acknowledge that Worldspan has previously provided consulting and development services to assist Priceline with design of [**] reports and other issues relating to the GDS, Priceline's operations, and back-office functions. In the event that Priceline requires additional consulting and development services beyond those provided prior to the Second Amendment Effective Date, then, upon Priceline's request, Worldspan shall provide qualified individuals to provide other technical services. These services shall be charged to Priceline at the rate of [**] per person-hour or Worldspan's then current standard rate for consulting services, whichever is higher. 29. [**] REPORTS. Worldspan shall provide [**] reports to Priceline in conformity with Priceline's reasonable design requirements. Worldspan shall discount by [**] its fees of [**] per month for this service. 30. SYSTEM DEVELOPMENT HOURS. Worldspan shall provide, at no charge, up to [**] person-hours of annual mainframe or distributed systems development resources for Worldspan system enhancements requested by Priceline, subject to timelines as agreed by the Parties. Priceline acknowledges that these resources have a value of [**] per year. 31. SUPPORT. Worldspan shall make available its Executive Support Help Desk and Message Support Team to Priceline. These groups will provide consultation relating to programming interface development and usage. [**] = Confidential Treatment requested for redacted portion; redacted portion has been filed separately with the commission. Page 13 32. WEB HOSTING. Should Priceline choose Worldspan to host its application and web servers at Worldspan's data center pursuant to a separate Hosting Agreement, Worldspan shall discount its then current monthly fee for this service [**], subject to a maximum monthly discount of [**]. 33. [**] 34. SERVICE LEVEL AGREEMENT. Priceline and Worldspan shall use their best efforts to negotiate a mutually acceptable service level agreement applicable to the services provided under the Subscriber Entity Agreement. In the event that an agreement cannot be reached in such negotiations, then the Subscriber Entity Agreement shall remain in full force and effect. 35. ESTIMATED BOOKINGS. No later than October 1 of each calendar year, Priceline shall provide written documentation to Worldspan of the total number of planned, budgeted and/or projected Bookings to be generated by the Priceline Group through the Worldspan GDS during the following calendar year. 36. EU AFFILIATE TERMINATION. Notwithstanding any provision of the Subscriber Entity Agreement to the contrary, solely with respect to services provided to any Affiliate located in a country of the European Union (an "EU Affiliate"), Priceline and Worldspan may at their respective discretion terminate services to such EU Affiliate without penalty on giving the other at least ninety (90) days' prior written notice. 37. MAINTENANCE AT LOCATIONS. The first sentence of Section 4.A. of the Standard Terms and Conditions is hereby deleted in its entirety and replaced with the following: "Worldspan or its service representative will provide, at Worldspan's expense, normal repairs and maintenance during Worldspan's normal repair hours for the Worldspan Equipment at the Locations. 38. EQUIPMENT RELOCATION. The first sentence of Section 5.C. of the Standard Terms and Conditions is hereby deleted in its entirety and replaced with the following: "Customer shall give Worldspan at least thirty (30) days' prior written notice of its request to relocate or remove the Worldspan Equipment." 39. EQUIPMENT RELOCATION FEES. Section 5.D. of the Standard Terms and Conditions is hereby deleted in its entirety and replaced with the following: "Worldspan reserves the right to levy an additional charge over and above the Standard Fees for installations, relocations or removals that are requested with less than thirty (30) days' prior written notice, or those that are requested outside of normal business hours in accordance with the Table of Services and Charges." 40. TERMINATION DEINSTALLATION FEES. Section 5.E. of the Standard Terms and Conditions is hereby deleted in its entirety and replaced with the following: "Upon any termination of the Subscriber Agreement, Worldspan shall [**] for deinstallation and return of the Worldspan Equipment." 41. EU BOOKINGS. Section 6.B. of the Standard Terms and Conditions is hereby deleted in its entirety and replaced with the following: "For the business activity of the EU Affiliates, "Bookings" shall mean the total of the Segments generated by EU Affiliates through the Worldspan GDS for which Worldspan charges and collects a fee, including EU Airline Bookings, EU Rail Bookings, and EU Car, Hotel, Tour, Cruise, and Ferry Bookings, each as further defined below. [**] = Confidential Treatment requested for redacted portion; redacted portion has been filed separately with the commission. Page 14 1. EU Airline Bookings. "EU Airline Bookings" shall mean those ticketed airline Segments properly booked by an EU Affiliate through the Worldspan GDS for which Worldspan charges and collects a fee, less cancellations through the Worldspan GDS prior to date of departure. "Ticketed airline Segments" shall mean airline Segments (i) for which an EU Affiliate has issued tickets through the Worldspan GDS or (ii) for which an EU Affiliate has systematically informed Worldspan of valid ticket numbers associated with the Segments. 2. EU Rail Bookings. "EU Rail Bookings" shall mean those ticketed rail Segments properly booked by an EU Affiliate through the Worldspan GDS for which Worldspan charges and collects a fee, less cancellations through the Worldspan GDS prior to date of departure, adjusted by any applicable correction ratios to reflect the value of those Bookings to Worldspan. "Ticketed rail Segments" shall mean rail Segments (i) for which an EU Affiliate has issued tickets through the Worldspan GDS, (ii) for which an EU Affiliate has systematically informed Worldspan of valid travel documentation associated with the Segments, or (iii) which are not sold through the principal display of the Worldspan GDS. 3. EU Car, Hotel, Tour, Cruise, and Ferry Bookings. "EU Car, Hotel, Tour, Cruise, and Ferry Bookings" shall mean those Segments for car, hotel, tour, cruise, and ferry services properly booked by an EU Affiliate through the Worldspan GDS for which Worldspan charges and collects a fee and which are not cancelled, adjusted by any applicable correction ratios to reflect the value of those Bookings to Worldspan. For Bookings made by the Affiliates in countries not included in the European Union, airline Bookings mean those Segments properly booked by such Affiliates through the Worldspan GDS for which Worldspan charges and collects a fee, less cancellations through the Worldspan GDS prior to date of departure, excluding unticketed passive bookings. Car, Hotel, Tour Source, Cruise Line Source, CruiseMatch and Worldspan Travel Suppliers Bookings mean those Segments properly booked by such Affiliates through the Worldspan GDS for which Worldspan charges and collects a fee and which are not canceled. Customer consents to any retroactive adjustment by Worldspan of incorrect Booking counts. The determination of the number of Bookings shall be made solely by Worldspan from its books and records, subject to Paragraph 4 of the Second Amendment to the Subscriber Entity Agreement." 42. WORLDSPAN GDS MODIFICATIONS. Section 6.D. of the Standard Terms and Conditions is hereby deleted in its entirety and replaced with the following: "Worldspan may enhance or modify the GDS at its discretion at any time; provided, however, that any such enhancement or modification does not materially adversely affect the services provided to Customer pursuant to the Subscriber Agreement. Worldspan reserves the right to migrate Customer to new computer reservation systems used by Worldspan." 43. MESSAGE LIMIT. Section 6.H.ii. of the Standard Terms and Conditions is hereby deleted in its entirety and replaced with the following: "Message Limit: The "Message Limit" is [**]. The total monthly permitted Messages ("Allowable Messages") is calculated by multiplying the [**] Messages per Booking by the number of Bookings for that month. Worldspan shall charge Customer for excess Messages at a rate of [**] per Message above the Allowable Messages for any month." 44. EXCESS MESSAGE FEES. The Excess Message Fees section of the Table of Services and Charges is hereby deleted in its entirety and replaced with the following: "Excess Message Fees Peak Message Rate (8am-12pm) N [**] Off-Peak Rate (12pm-8am) N [**]" [**] = Confidential Treatment requested for redacted portion; redacted portion has been filed separately with the commission. Page 15 45. SECURITY MEASURES. Section 8.D. of the Standard Terms and Conditions is hereby deleted in its entirety and replaced with the following: "Each party will implement and maintain appropriate security measures for its operations in accordance with technological developments and its evolving security needs. Those appropriate security measures for each party will include, without limitation, establishing a security policy for its computer network, preventing unauthorized access to its computer systems, implementing administrative security controls for its computing operations, installing firewalls in its communications network, protecting its computer resources from insider abuse, having appropriate administrative procedures to ensure that system access capability to its computer systems is given to only authorized users and is promptly withdrawn from terminated employees or other persons who are no longer authorized, establishing a single point of control for responses to incidents involving its security, and monitoring the effectiveness of the security of its computer network." 46. GDS UPTIME. Section 9.A.iv. of the Standard Terms and Conditions is hereby deleted in its entirety and replaced with the following: "it will use its best efforts to maintain the uptime of the GDS." 47. CONDITIONAL FEE REDUCTION. Section 11.D. of the Standard Terms and Conditions is hereby deleted in its entirety and replaced with the following: "Any reduction, waiver or discounting of any fee in the Subscriber Agreement by Worldspan is specifically conditioned upon Customer's generation of Bookings sufficient to meet the Booking Goal to qualify for a [**] Productivity Discount under Article III.A. of the Subscriber Entity Agreement." 48. ASSIGNMENT OF SUBSCRIBER ENTITY AGREEMENT. Section 12. of the Standard Terms and Conditions is hereby deleted in its entirety and replaced with the following: "The Subscriber Agreement will be binding upon, and inure to the benefit of, the parties and their respective successors and assigns. However, neither party may, without the prior written consent of the other, assign or transfer the Subscriber Agreement, or any of its rights or obligations under the Subscriber Agreement, to any person or entity other than one who (i) merges, consolidates, or otherwise combines with that party or otherwise acquires all or substantially all of the operating assets of that party, and (ii) agrees or otherwise becomes legally obligated to comply with and be bound by the provisions of the Subscriber Agreement to the same extent as that party." 49. LEGAL COMPLIANCE. Section 14.A.iv. of the Standard Terms and Conditions is hereby deleted in its entirety and replaced with the following: "Customer commits any material violation(s) of any laws, ordinances or regulations related to the products or services provided under the Subscriber Entity Agreement;" 50. POST-TERMINATION DAMAGES. Section 14.E. of the Standard Terms and Conditions is hereby deleted in its entirety and replaced with the following: "Upon any termination of the Subscriber Entity Agreement pursuant to this Section 14, as a consequence of any default as set forth herein, the non-defaulting party shall be entitled to recover its damages at law from the defaulting party, in addition to any other rights or remedies that the non-defaulting party may have at law, equity, or otherwise." 51. FAILURE TO MEET BOOKING OBLIGATIONS. Section 14.F. of the Standard Terms and Conditions is hereby deleted in its entirety and replaced with the following: [**] = Confidential Treatment requested for redacted portion; redacted portion has been filed separately with the commission. Page 16 "The parties acknowledge that the provisions of this Section 14 shall not apply to any failure by Customer to comply with the obligations of Paragraph 6 of the Second Amendment to the Subscriber Entity Agreement." 52. LIMITATION OF LIABILITY. Section 14. of the Standard Terms and Conditions is hereby amended to include the following new Section 14.G.: "Notwithstanding anything in the Subscriber Entity Agreement to the contrary, Customer's liability under this Agreement shall not exceed the lesser of (i) the number of Expected Bookings, multiplied by [**], or (ii) Twenty-Five Million Dollars ($25,000,000)." 53. NON-DISCLOSURE OF TERMS. Section 17.B. of the Standard Terms and Conditions is hereby deleted in its entirety and replaced with the following: "Customer and Worldspan agree not to disclose the terms and conditions of the Subscriber Agreement without the prior written consent of the other except as required by law. Notwithstanding the foregoing, either party may disclose the terms and conditions of the Subscriber Agreement to its attorneys and accountants who have a need to know and who are advised of such party's obligation contained in this Section 17.B. In addition, in the event that Customer determines that public disclosure of the Subscriber Agreement is required by the securities laws of the United States, Customer shall so notify Worldspan immediately and the parties shall confer to determine the legally permissible means to protect the competitively sensitive material set forth herein." 54. NOTICES TO PRICELINE. Section 17.E. of the Subscriber Entity Agreement is hereby amended to add the following: "Worldspan shall use reasonable business efforts to ensure that notices and communications to be served by Worldspan to Customer shall be sent to the attention of the Chief Information Officer, with a copy to the attention of Chief Operating Officer." 55. ENTIRE AGREEMENT. Section 17.H. of the Standard Terms and Conditions is hereby deleted in its entirety and replaced with the following: "The Subscriber Agreement constitutes the full and final agreement between the parties with respect to the subject matter hereof, and unless otherwise provided, any prior agreements and understandings, whether written or oral, are hereby superseded upon the beginning of the Term of the Subscriber Agreement. The Parties agree that all prior obligations contained in any prior agreements between Worldspan and Customer are deemed, as of the date hereof, satisfied. Worldspan agrees that all prior thresholds pertaining to Customer incentives contained in any prior agreements between Worldspan and Customer are deemed met, as of the date hereof. Except as provided herein, the Subscriber Agreement may not be modified, altered or amended except by agreement and/or consent by authorized representatives of both parties; provided however that the Table of Services and Charges may be modified, altered or amended by Worldspan upon thirty (30) days' prior notice to Customer; and further provided that the Customer Equipment Support Responsibility may be modified, altered or amended by Worldspan upon notice to Customer." 56. CONTINUED EFFECTIVENESS OF SUBSCRIBER ENTITY AGREEMENT. Except to the extent the Subscriber Entity Agreement is amended herein, the Subscriber Entity Agreement remains in full force and effect. To the extent the terms of this Amendment are inconsistent with the terms of the Subscriber Entity Agreement, for purposes of this Amendment the terms of this Amendment shall apply. IN WITNESS WHEREOF, the Parties have caused this Amendment to be executed by their duly authorized undersigned representatives as of the day and year first above written. [**] = Confidential Treatment requested for redacted portion; redacted portion has been filed separately with the commission. Page 17 PRICELINE.COM INCORPORATED, WORLDSPAN, L.P., FOR ITSELF, ITS AFFILIATES, AND THE FOR ITSELF AND ITS SUBSIDIARIES: PRICELINE GROUP: By: By: - -------------------------------------- -------------------------------------- (Signature) (Signature) - -------------------------------------- -------------------------------------- (Print Name) (Print Name) - -------------------------------------- -------------------------------------- (Title) (Title) - -------------------------------------- -------------------------------------- (Date) (Date) [**] = Confidential Treatment requested for redacted portion; redacted portion has been filed separately with the commission. Page 18 ATTACHMENT A FORM OF [**] HOTEL BOOKING FEE AMENDMENT AMENDMENT TO THE WORLDSPAN ASSOCIATE AGREEMENT Internet Bookings - Hotel THIS Amendment to the Worldspan Associate Agreement dated the ___ of ______, 2003 ("Amendment"), is by and between Worldspan, L. P., located at 300 Galleria Parkway, N. W., Atlanta, Georgia 30339 ("Worldspan') and Associate Legal Name: --------------------------------------------------------- dba: --------------------------------------------------------- Address: ----------------------------------------------------------------- City: ------------------------------- State: --------------------- Zip: ------ Contact Name: ---------------------------------- Phone: ------------------------ e-mail address: ---------------------------------------------------------------- BILLING ADDRESS: Same as above (hereinafter referred to as "Associate.") WHEREAS, Worldspan and Associate entered into the Worldspan Agreement dated the ____ of, __________ (the "Agreement"). WHEREAS, Worldspan and Associate now desire to amend the Agreement. NOW, THEREFORE, it is agreed: PART I - REVISION OF FEES FOR SELECT ONLINE BOOKINGS: A. For Bookings of Hotel properties represented by Associate and created via Designated Internet Agencies, as that term is defined in I.B., below, and through the Worldspan System, the following reduced fees shall apply:
------------------------------------------------------------------------------------------- BEFORE AFTER ------------------------------------------------------------------------------------------- Standard Booking: ------------------------------------------------------------------------------------------- AccessPlus Booking: ------------------------------------------------------------------------------------------- Source Booking: -------------------------------------------------------------------------------------------
B. For purposes of the Amendment, "Designated Internet Agencies" shall be defined to include the entities identified in the attached Exhibit "A." [**] = Confidential Treatment requested for redacted portion; redacted portion has been filed separately with the commission. A - 1 PART II - ASSOCIATE AGREEMENT: Except to the extent the Agreement is amended herein, the Agreement remains in full force and effect. To the extent the terms of this Amendment are inconsistent with the terms of the Agreement, for purposes of this Amendment the terms of this Amendment shall apply. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their duly authorized undersigned representative as of the day and year first above written. ASSOCIATE: WORLDSPAN, L. P.: - ------------------------------- (Associate Legal Name) - ------------------------------- (dba) By: By: - ---------------------------------- ---------------------------------- (Signature) (Signature) - ---------------------------------- ---------------------------------- (Print Name) (Print Name) - ---------------------------------- ---------------------------------- (Title) (Title) - ---------------------------------- ---------------------------------- (Date) (Date) [**] = Confidential Treatment requested for redacted portion; redacted portion has been filed separately with the commission. A - 2 EXHIBIT "A" FURTHER to the _________, ___ Amendment ("Amendment") to the Worldspan Associate Agreement dated the __ of ______, ___, by and between Worldspan, LP., ("Worldspan") and ______ ("Associate"), the parties agree that the term "Designated Agencies," as used in the Amendment, shall mean the following entities: [**] [**] [**] [**] [**] [**] [**] [**] [**] = Confidential Treatment requested for redacted portion; redacted portion has been filed separately with the commission. A - 3 ATTACHMENT B [**] - --------- --------------------------------------------------------------------- [**] [**] [**] - --------- --------------------------------------------------------------------- [**] [**] [**] - --------- --------------------------------------------------------------------- [**] [**] [**] - --------- --------------------------------------------------------------------- [**] [**] [**] - --------- --------------------------------------------------------------------- [**] [**] [**] - --------- --------------------------------------------------------------------- [**] [**] [**] - --------- ---------------------------------------------------------------------
[**] = Confidential Treatment requested for redacted portion; redacted portion has been filed separately with the commission. B - 1 EX-31.1 5 a2116831zex-31_1.txt EXHIBIT 31.1 EXHIBIT 31.1 CERTIFICATIONS I, Jeffery H. Boyd, certify that: 1. I have reviewed the Quarterly Report on Form 10-Q for the quarter ended June 30, 2003 (the "Quarterly Report") of the Registrant; 2. Based on my knowledge, this Quarterly Report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Quarterly Report; 3. Based on my knowledge, the financial statements, and other financial information included in this Quarterly Report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this Quarterly Report; 4. The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and we have: a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Quarterly Report is being prepared; b. evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this Quarterly Report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this Quarterly Report based on such evaluation; and c. disclosed in this Quarterly Report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent fiscal quarter (the Registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting; and 5. The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation, of internal control over financial reporting, to the Registrant's auditors and the audit committee of the Registrant's board of directors (or persons performing the equivalent function): a. all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls over financial reporting. Dated: August 14, 2003 /s/ Jeffery H. Boyd --------------------------------------- Name: Jeffery H. Boyd Title: President & Chief Executive Officer A signed original of this written statement required by Section 302 of the Sarbanes-Oxley Act of 2002 has been provided by the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. EX-31.2 6 a2116831zex-31_2.txt EXHIBIT 31.2 EXHIBIT 31.2 CERTIFICATIONS I, Robert J. Mylod, Jr., certify that: 1. I have reviewed the Quarterly Report on Form 10-Q for the quarter ended June 30, 2003 (the "Quarterly Report") of the Registrant; 2. Based on my knowledge, this Quarterly Report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Quarterly Report; 3. Based on my knowledge, the financial statements, and other financial information included in this Quarterly Report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this Quarterly Report; 4. The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and we have: a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Quarterly Report is being prepared; b. evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this Quarterly Report based on such evaluation; and c. disclosed in this report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent fiscal quarter (the Registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting; and 5. The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation, of internal control over financial reporting, to the Registrant's auditors and the audit committee of the Registrant's board of directors (or persons performing the equivalent function): a. all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls over financial reporting. Dated: August 14, 2003 /s/ Robert J. Mylod, Jr. ------------------------------ Name: Robert J. Mylod, Jr. Title: Chief Financial Officer A signed original of this written statement required by Section 302 of the Sarbanes-Oxley Act of 2002 has been provided by the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. EX-32.1 7 a2116831zex-32_1.txt EXHIBIT 32.1 EXHIBIT 32.1 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (SUBSECTIONS (a) AND (b) OF SECTION 1350, CHAPTER 63 OF TITLE 18, UNITED STATES CODE) Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code), the undersigned officer of priceline.com Incorporated, a Delaware corporation (the "Company"), hereby certifies that: The Quarterly Report on Form 10-Q for the 3 months ended June 30, 2003 (the "Report") of the Company fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: August 14, 2003 /s/ Jeffery H. Boyd -------------------------------------- Name: Jeffery H. Boyd Title: President & Chief Executive Officer The foregoing certification is being furnished solely pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code) and is not being filed as part of the Report or as a separate disclosure document. A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. EX-32.2 8 a2116831zex-32_2.txt EXHIBIT 32.2 EXHIBIT 32.2 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (SUBSECTIONS (a) AND (b) OF SECTION 1350, CHAPTER 63 OF TITLE 18, UNITED STATES CODE) Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code), the undersigned officer of priceline.com Incorporated, a Delaware corporation (the "Company"), hereby certifies that: The Quarterly Report on Form 10-Q for the 3 months ended June 30, 2003 (the "Report") of the Company fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: August 14, 2003 /s/ Robert J. Mylod ----------------------------------- Name: Robert J. Mylod Title: Chief Financial Officer The foregoing certification is being furnished solely pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code) and is not being filed as part of the Report or as a separate disclosure document. A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----