SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
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
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(Exact name of Registrant as specified in its charter)
Delaware 06-152849
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
800 Connecticut Avenue
Norwalk, Connecticut 06854
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(address of principal executive offices)
(203) 299-8000
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(Registrant's telephone number, including area code)
N/A
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(Former name, former address and former fiscal year, if changed, since
last report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. YES X . NO .
--- ---
Number of shares of Common Stock outstanding at April 30, 2002:
Common Stock, par value $0.008 per share 229,603,320
----------------------------------------------------- ------------------------
(Class) (Number of Shares)
priceline.com Incorporated
Form 10-Q
For the Quarter Ended March 31, 2002
PART I - FINANCIAL INFORMATION
Item 1. Unaudited Condensed Consolidated Financial Statements
Consolidated Balance Sheets at March 31, 2002 and December 31, 2001......................................3
Consolidated Statements of Operations For the Three Months
Ended March 31, 2002 and 2001.....................................................................4
Consolidated Statement of Changes in Stockholders' Equity For the Three Months
Ended March 31, 2002..............................................................................5
Consolidated Statements of Cash Flows For the Three Months Ended March 31, 2002 and 2001.................6
Notes to Unaudited Condensed Consolidated Financial Statements...........................................7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..........14
Item 3. Quantitative and Qualitative Disclosures About Market Risk.....................................30
PART II - OTHER INFORMATION
Item 1. Legal Proceedings...............................................................................30
Item 6. Exhibits and Reports on Form 8-K................................................................30
SIGNATURES..............................................................................................31
2
PART I - FINANCIAL INFORMATION
ITEM 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------
PRICELINE.COM INCORPORATED
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
MARCH 31, DECEMBER 31,
2002 2001
---- ----
ASSETS (UNAUDITED)
Current assets:
Cash and cash equivalents............................................................ $92,051 $99,943
Restricted cash...................................................................... 17,454 15,396
Short-term investments............................................................... 68,327 49,269
Accounts receivable, net of allowance for doubtful accounts of $2,581 and $4,170..... 20,218 15,665
Prepaid expenses and other current assets............................................ 10,544 5,038
---------------- ----------------
Total current assets.............................................................. 208,594 185,311
Property and equipment, net............................................................... 31,291 32,266
Goodwill.................................................................................. 22,535 23,646
Other assets, primarily related parties................................................... 19,731 20,967
---------------- ----------------
Total assets...................................................................... $282,151 $262,190
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................................................... $62,177 $45,941
Accrued expenses..................................................................... 31,750 36,240
Other current liabilities............................................................ 5,050 5,115
---------------- ----------------
Total current liabilities......................................................... 98,977 87,296
---------------- ----------------
Accrued expenses.......................................................................... 2,365 2,838
---------------- ----------------
Total liabilities................................................................. 101,342 90,134
---------------- ----------------
SERIES B Mandatorily redeemable Preferred Stock, $0.01 par value; 80,000
authorized shares; $1,000 liquidation value per share; 80,000 shares issued;
13,469 and 25,345 shares
outstanding, respectively................................................................. 13,470 25,345
Stockholders' equity:
Common stock, $0.008 par value, authorized 1,000,000,000 shares; issued 234,994,472
and 229,487,885 shares issued, respectively....................................... 1,880 1,836
Treasury stock, 5,450,236 shares..................................................... (326,633) (326,633)
Additional paid-in capital........................................................... 2,032,546 2,015,849
Accumulated deficit.................................................................. (1,540,454) (1,544,341)
---------------- ----------------
Total stockholders' equity......................................................... 167,339 146,711
---------------- ----------------
Total liabilities and stockholders' equity................................................ $282,151 $262,190
================ ================
See notes to consolidated financial statements.
3
PRICELINE.COM INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED MARCH 31,
2002 2001
---- ----
Travel revenues .................................................................. $ 259,899 $ 267,020
Other revenues ................................................................... 1,986 2,684
--------- ---------
Total revenues ............................................................... 261,885 269,704
Cost of travel revenues .......................................................... 219,511 225,496
Cost of other revenues ........................................................... 381 1,093
--------- ---------
Total costs of revenues .................................................. 219,892 226,589
--------- ---------
Gross profit ..................................................................... 41,993 43,115
--------- ---------
Operating expenses:
Sales and marketing .......................................................... 20,791 30,623
General and administrative ................................................... 6,636 9,404
Payroll tax on employee stock options ........................................ 104 23
Stock based compensation ..................................................... 250 5,157
Systems and business development ............................................. 10,533 11,112
Restructuring charge ......................................................... (824) 1,400
--------- ---------
Total operating expenses ..................................................... 37,490 57,719
--------- ---------
Operating income (loss) .......................................................... 4,503 (14,604)
Other income (expenses):
Loss on sale of equity investment ............................................ -- (946)
Interest income .............................................................. 782 1,776
Equity in net income of pricelinemortgage .................................... 492 --
Other ........................................................................ (36) --
--------- ---------
Total other income ........................................................... 1,238 830
--------- ---------
Net income (loss) ................................................................ 5,741 (13,774)
Preferred stock dividend ......................................................... (1,854) --
--------- ---------
Net income (loss) applicable to common stockholders .............................. $ 3,887 $ (13,774)
========= =========
Net income (loss) applicable to common stockholders
per basic common share ....................................................... $ 0.02 $ (0.07)
========= =========
Weighted average number of basic common shares
outstanding .................................................................. 227,503 188,589
========= =========
Net income applicable to common stockholders per
diluted common share ......................................................... $ 0.02 $ (0.07)
========= =========
Weighted average number of diluted common shares
outstanding .................................................................. 239,970 188,589
========= =========
See notes to consolidated financial statements.
4
PRICELINE.COM INCORPORATED
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2002
(UNAUDITED)
(IN THOUSANDS)
COMMON STOCK ADDITIONAL TREASURY STOCK
------------ PAID-IN ACCUMULATED --------------
SHARES AMOUNT CAPITAL DEFICIT SHARES AMOUNT TOTAL
------ ------ ------- ------- ------ ------ -----
Balance, January 1, 2002 ........... 229,488 $1,836 $2,015,849 $(1,544,341) (5,450) $(326,633) $146,711
Net income applicable to common
stockholders ....................... -- -- -- 3,887 -- -- 3,887
Issuance of common stock ........... 184 1 749 -- -- -- 750
Issuance of preferred stock dividend 454 4 1,850 -- -- -- 1,854
Exercise of options and warrants ... 4,868 39 14,098 -- -- -- 14,137
------- ------ ---------- ----------- ------ --------- --------
Balance, March 31, 2002 ............ 234,994 $1,880 $2,032,546 $(1,540,454) (5,450) $(326,633) $167,339
======= ====== ========== =========== ====== ========= ========
See accompanying notes to consolidated financial statements.
5
PRICELINE.COM INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
2002 2001
---- ----
OPERATING ACTIVITIES:
Net income (loss) .................................................. $ 5,741 $(13,774)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization ................................ 4,459 4,099
Provision for uncollectible accounts ......................... (64) 1,875
Net loss on sale of equity investments ....................... -- 946
Acceleration of stock options ................................ -- 61
Amortization of deferred compensation ........................ -- 4,848
Equity in net income of pricelinemortgage .................... (492) --
Changes in assets and liabilities:
Accounts receivable .......................................... (4,489) (8,372)
Prepaid expenses and other current assets .................... (1,324) 603
Accounts payable and accrued expenses ........................ 8,558 3,327
Other ........................................................ 1,686 130
-------- --------
Net cash provided by (used in) operating activities ................ 14,075 (6,257)
-------- --------
INVESTING ACTIVITIES:
Additions to property and equipment .......................... (3,150) (2,816)
Proceeds from sale/maturity of investments ................... -- 770
Investment in short-term investments/marketable securities ... (19,058) (16,003)
Funding of restricted cash and bank certificates
of deposits .................................................. (2,058) (3,946)
-------- --------
Net cash used in investing activities .............................. (24,266) (21,995)
-------- --------
FINANCING ACTIVITIES:
Proceeds from sale of common stock, net ...................... -- 49,471
Proceeds from exercise of stock options and warrants ......... 2,263 455
-------- --------
Net cash provided by financing activities .......................... 2,263 49,926
-------- --------
Effect of foreign exchange rates changes on cash and cash
equivalents ........................................................ 36 --
-------- --------
Net (decrease) increase in cash and cash equivalents................ (7,892) 21,674
Cash and cash equivalents, beginning of period ..................... 99,943 77,024
-------- --------
Cash and cash equivalents, end of period ........................... $ 92,051 $ 98,698
======== ========
See notes to consolidated financial statements.
6
PRICELINE.COM INCORPORATED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The Company is responsible for the unaudited condensed consolidated
financial statements included in this document. The financial statements have
been prepared in accordance with generally accepted accounting principles
("GAAP") and include all normal and recurring adjustments that management of the
Company considers necessary for a fair presentation of its financial position
and operating results. The Company prepared the condensed financial statements
following the requirements of the Securities and Exchange Commission for interim
reporting. As permitted under those rules, the Company condensed or omitted
certain footnotes or other financial information that are normally required by
GAAP for annual financial statements. As these are condensed financials, one
should also read the financial statements in the Company's December 31, 2001,
Form 10-K.
Revenues, expenses, assets and liabilities can vary during each quarter
of the year. Therefore, the results and trends in these interim financial
statements may not be the same as those for the full year.
Certain amounts in prior years' financial statements have been
reclassified to conform to the current year presentation.
2. NET 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 months ended March 31, 2002, for the purpose
of calculating earnings per share - basic, the weighted average number of common
shares outstanding was 227,503,011 and for the purpose of calculating earnings
per share - diluted, the weighted average number of common shares outstanding
was 239,969,718, which includes 12,466,707 shares representing the dilutive
effect of common stock equivalents. Since the Company incurred a loss applicable
to common shareholders for the period ended March 31, 2001, 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.
3. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141 ("SFAS 141"), "Business
Combinations," which eliminated the pooling method of accounting for all
business combinations initiated after June 30, 2001 and addresses the initial
recognition and measurement of goodwill and other intangible assets acquired in
a business combination. The Company adopted this accounting standard for
business combinations initiated after June 30,2001.
In June 2001, FASB issued Statement of Financial Accounting
Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets," which
addresses the financial accounting and reporting standards for the
acquisition of intangible assets outside of a business combination and for
goodwill and other intangible assets subsequent to their acquisition. This
accounting standard requires that goodwill be separately disclosed from other
intangible assets in the statement of financial position, and no longer be
amortized but tested for impairment at least annually. SFAS 142 also requires
the Company to complete a transitional goodwill impairment test six months
from the date of adoption. The Company adopted the provisions of SFAS 142
effective January 1, 2002, and as a result, will not record goodwill
amortization. As the acquisition of the Company's majority interest in
priceline.com europe Ltd. occurred after June 30, 2001, the Company had no
goodwill amortization for the year ended December 31, 2001. The Company is
currently in the process of completing the first step of the initial goodwill
impairment test required by SFAS 142 and will complete this assessment in the
second quarter of 2002.
In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144 ("SFAS 144"), "Accounting for the Impairment or Disposal of
Long-Lived Assets." This statement addresses financial accounting
7
and reporting for the impairment or disposal of long-lived assets. This
statement supersedes FASB Statement No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and the
accounting and reporting provisions of APB Opinion No. 30, "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." This Statement also amends ARB No. 51, "Consolidated Financial
Statements," to eliminate the exception to consolidation for a subsidiary for
which control is likely to be temporary. This Statement requires that one
accounting model be used for long-lived assets to be disposed of by sale,
whether previously held and used or newly acquired. This Statement also broadens
the presentation of discontinued operations to include more disposal
transactions. The Company adopted the provisions of SFAS 144 effective January
1, 2002 and it had no impact on the consolidated financial statements.
4. RESTRUCTURING AND SPECIAL CHARGES
During the first quarter of 2002, the Company decreased the liability
for the 2000 restructuring charge by approximately $824,000. The reduction
resulted from the subleasing of office space vacated in the fourth quarter of
2000 under more favorable terms than originally estimated. The reduction was
reflected in the restructuring line of the statement of operations.
In 2000, the Company recorded restructuring charges of approximately
$32.0 million and a special charge of approximately $34.8 million. The
restructuring charge resulted from the Company's review of its operations with
the intention of increasing efficiencies and refocusing its business principally
on its core travel products. As a result of this review, the Company primarily
decided to reduce its work force, consolidate its real estate and rationalize
certain international markets and potential product line offerings.
RESTRUCTURING SPECIAL TOTAL
------------- ------- -----
Accrued at December 31, 2001 $ 5,666 $ 2,474 $ 8,140
Adjustments ................ --
(824) (824)
Disbursed during 2002 ...... (577) (353) (930)
------- ------- -------
Accrued at March 31, 2002 .. $ 4,265 $ 2,121 $ 6,386
======= ======= =======
At March 31, 2002:
Current portion ....... $ 1,900 $ 2,121 $ 4,021
Long-term portion ..... 2,365 2,365
8
5. ACQUISITIONS
On December 21, 2001, the Company completed the acquisition of
approximately 62% of the issued and outstanding shares of priceline.com
Europe Holdings, N.V., the parent company of priceline.com europe Ltd.
(together with priceline.com Europe Holdings, N.V., "priceline.com europe")
for approximately $24 million, including transaction costs, which was
accounted for as a purchase. Priceline.com europe holds the license to the
Company's business model in Europe. Prior to the acquisition of priceline.com
europe, General Atlantic Partners, LLC and its affiliated entities ("GAP")
owned approximately 86%. At the time of the acquisition, GAP owned
approximately 5.9 million shares of priceline.com Incorporated common stock
according to documents publicly filed with the Securities and Exchange
Commission. During the three months ended March 31, 2001, the Company charged
priceline.com europe licensing fees and reimbursable expenses of approximately
$225,000 and $833,000, respectively. On a consolidated basis, there were no
such fees in the first quarter 2002.
William Ford, a principal of GAP, is a member of the Company's Board of
Directors and chairman of the Company's audit committee. Certain investors in
priceline.com Europe Holdings, N.V., including certain affiliates of General
Atlantic Partners, LLC, have the right to put their shares of priceline.com
Europe Holdings, N.V. to priceline.com Incorporated, at fair market value, in
the event of a change in control, as defined, of priceline.com Incorporated.
These investors own 45,539,999 shares of priceline.com Europe Holdings, N.V.
The excess of the cost of the acquisition over the fair value of the
net assets acquired was recorded as goodwill. The assets and liabilities were
recorded at their estimated fair values as of the acquisition date. Amounts and
allocations of costs recorded may require adjustment based upon information
coming to the Company's attention that is not currently available. The Company
expects in the near term that priceline.com europe will incur operating losses
and since the other stockholders of priceline.com europe have no commitment to
provide financing, the Company will recognize the entire loss in its
consolidated financial statements subsequent to the acquisition.
On January 31, 2002, the Company invested an additional $10 million in
priceline.com Europe Holdings, N.V., which increased the Company's equity
interest in priceline.com europe to approximately 74.6% of the issued and
outstanding shares.
6. OTHER ASSETS
Other assets at March 31, 2002 and December 31, 2001 consist of the
following (in thousands):
MARCH 31, 2002 DECEMBER 31, 2001
-------------- -----------------
Convertible loans and other advances - Hutchison-
Priceline Limited...................................... $11,110 $11,110
Convertible loans - MyPrice................................. 1,840 1,840
Investment in pricelinemortgage/convertible loan............ 5,616 5,124
Other....................................................... 1,154 2,882
-------------------------------------------
Total $19,720 $20,956
===========================================
Convertible loans and other advances-Hutchison Priceline Limited
represents a convertible note from the Company's Asian licensee, Hutchison
Priceline Limited. Included in the prepaid expenses and other current assets
balance is a receivable from the Company's Asian license of approximately
$915,000. During the periods ended March 31, 2002 and 2001, the Company
charged Hutchison Priceline Limited $125,000 in licensing fees per period,
and approximately $92,000 and $79,000, respectively, in reimbursable
expenses, in accordance with the Company's agreements. Convertible
loans-Myprice represents the estimated net realizable value of the amounts
due to the Company from its Australian licensee. 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 net income. At March 31, 2002, the investment in
pricelinemortgage consists of the Company's original investment of $4.6
million and the Company's cumulative share of pricelinemortgage's earnings of
approximately $1 million. Robert J. Mylod Jr., the Company's Chief Financial
Officer, is a director of, and an investor in, Alliance Capital Partners
Inc., the parent company of Alliance
9
Partners. In 1997, Mr. Mylod invested $50,000 in Alliance Capital Partners Inc.
and his investment represents less than 1/10th of one percent of Alliance's
outstanding common stock.
7. DELTA AIR LINES
During the first quarter 2001, Delta and the Company agreed to
restructure Delta's investment in the Company. Delta exchanged 6,000,000 shares
of Series A Convertible Redeemable PIK Preferred Stock for 80,000 shares of a
newly created Series B Redeemable Preferred Stock ("Series B Preferred Stock")
and warrants (the "Warrants") to purchase approximately 27 million shares of the
Company's common stock at an exercise price of $2.97 per share.
Pursuant to the terms of the certificate of designations relating to
the Series B Preferred Stock, the Series B Preferred Stock bears a dividend that
is payable through the issuance of approximately 3.0 million shares of the
Company's common stock each year, subject to adjustment as provided for in the
certificate of designations. The Series B Preferred Stock has a liquidation
preference of $1,000 per share and is subject to mandatory redemption on
February 6, 2007 or is subject to redemption at the option of Delta or the
Company prior to February 6, 2007. In the event the Company consummates any of
certain business combination transactions, 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 also 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 and, in the
event that any of the business combination transactions occurs before November
16, 2002, a premium payment of $625 per share.
The Warrants provide that at any time the closing sales price of the
Company's Common Stock has exceeded $8.90625 (subject to adjustment) for 20
consecutive trading days, the Warrants will automatically be exercised. The
exercise price of the Warrant is paid by surrendering .00296875 shares of Series
B Preferred Stock for each share of Common Stock purchased. As of March 31,
2002, there were 4,537,199 Warrants outstanding.
During 2001, Delta exercised Warrants to purchase approximately 18.4
million shares of the Company's common stock and on January 29, 2002, Delta
exercised Warrants to purchase 4 million shares of the Company's common stock.
As a result, there are 13,469 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 has been reduced to approximately 242,000
shares of Common Stock. In accordance with the terms of the Series B Preferred
Stock, the Company delivered 986,491 shares of the Company's common stock to
Delta on August 6, 2001 and 454,308 shares of Common Stock on February 6, 2002,
as dividend payments and, as a result, the Company recorded a non-cash dividend
of $8.6 million in the third quarter of 2001 and a non-cash dividend of $1.85
million in the first quarter of 2002.
8. COMMITMENTS AND CONTINGENCIES
On January 6, 1999, the Company received notice that a third party
patent applicant and patent attorney, Thomas G. Woolston, purportedly had
filed in December 1998 with the United States Patent and Trademark Office a
request to declare an interference between a patent application filed by
Woolston and the Company's U.S. Patent 5,794,207. The Company is currently
awaiting information from the Patent Office regarding whether it will
initiate an interference proceeding.
On January 19, 1999, Marketel International Inc. ("Marketel"), a
California corporation, filed a lawsuit against priceline.com, among others,
alleging causes of action for misappropriation of trade secrets, conversion,
false advertising and for correction of inventorship of U.S. Patent 5,794,207.
On December 5, 2000, the United States District Court for the Northern
District of California granted priceline.com's motion for summary judgment with
respect to Marketel's theft of trade secret and patent inventorship claims, and
ruled that there were triable issues of fact as to Marketel's false advertising
claims, although Judge Legge volunteered that it was unlikely that Marketel
could establish damages and suggested that these claims should be voluntarily
dismissed. The false advertising claims were subsequently dismissed by
stipulation, and on February 1,
10
2001, Judge Legge clarified his inventorship ruling in favor of priceline.com
and entered final judgment in favor of priceline.com. On April 25, 2002, the
Federal Circuit affirmed the judgment in favor of priceline.com in all respects.
On May 9, 2002, Marketel filed a petition for panel rehearing with the Federal
Circuit, claiming error in the decision affirming the District Court's judgment.
Because petitions for panel rehearing are infrequently granted, priceline.com
may not file an answer to Marketel's petition unless the court directs it to do
so. Pursuant to an indemnification agreement, Walker Digital has agreed to
indemnify, defend and hold priceline.com harmless for legal expenses incurred in
the future in connection with the Marketel litigation.
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:
o Weingarten v. priceline.com Incorporated
and Jay S. Walker
3:00 CV 1901 (District of Connecticut).
o Twardy v. priceline.com Inc.,
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
3:00 CV 1884 (District of Connecticut).
o Berdakina v. priceline.com Inc.,
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
3:00 CV 1902 (District of Connecticut).
o Mazzo v. priceline.com Inc.,
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
3:00 CV 1924 (District of Connecticut).
o Fialkov v. priceline.com Inc.,
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
3:00 CV 1954 (District of Connecticut).
o Licht v. priceline.com Incorporated and
Jay S. Walker 3:00 CV 2049 (District of Connecticut).
o Ayach v. priceline.com Inc.,
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
3:00 CV 2062 (District of Connecticut).
o Zia v. priceline.com Inc.,
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
3:00 CV 1968 (District of Connecticut).
o Mazzo v. priceline.com Inc.,
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
3:00 CV 1980 (District of Connecticut).
o Bazag v. priceline.com Inc.,
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
3:00 CV 2122 (District of Connecticut).
o Breier v. priceline.com Inc.,
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
3:00 CV 2146 (District of Connecticut).
o Farzam et al. v. priceline.com Inc.,
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
3:00 CV 2176 (District of Connecticut).
o Caswell v. priceline.com Inc.,
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
3:00 CV 2169 (District of Connecticut).
o Howard Gunty Profit Sharing Plan v. priceline.com Inc.
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
3:00 CV 1917 (District of Connecticut).
11
o Cerelli v. priceline.com Inc.,
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
3:00 CV 1918 (District of Connecticut)
o Mayer v. priceline.com Inc.,
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
3:00 CV 1923 (District of Connecticut)
o Anish v. priceline.com Inc.,
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
3:00 CV 1948 (District of Connecticut)
o Atkin v. priceline.com Inc.,
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
3:00 CV 1994 (District of Connecticut).
o Lyon v. priceline.com Inc.,
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
3:00 CV 2066 (District of Connecticut).
o Kwan v. priceline.com Inc.,
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
3:00 CV 2069 (District of Connecticut).
o Krim v. priceline.com Inc.,
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
3:00 CV 2083 (District of Connecticut).
o Karas v. priceline.com Inc.,
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
3:00 CV 2232 (District of Connecticut).
o 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 transferred 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 in this action. The court
has yet to rule on that motion. On February 28, 2002, the Company filed a motion
to dismiss the Consolidated Amended Complaint. Plaintiffs have until May 28,
2002 to file papers in opposition to that motion. The Company intends to defend
vigorously against this action.
In addition, the Company has been served with a complaint that purports
to be a shareholder derivative action against its Board of Directors and certain
of its current executive officers, as well as priceline.com (as a nominal
defendant). The complaint alleges breach of fiduciary duty 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. Oral
argument on that motion was conducted on April 23, 2002, and decision was
reserved. The Company intends to defend vigorously against this action.
On March 16, March 26, April 27, and June 5, 2001, respectively, four
putative class action complaints were filed in the U.S. District Court for the
Southern District of New York naming priceline.com, Inc., Richard S. Braddock,
Jay Walker, Paul Francis, Morgan Stanley Dean Witter & Co., Merrill Lynch,
Pierce, Fenner & Smith, Inc., BancBoston Robertson Stephens, Inc. and Salomon
Smith Barney, Inc. as defendants (01 Civ. 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
12
priceline.com and the individual defendants named in the complaints violated the
federal securities laws by issuing and selling priceline.com common stock in
priceline.com's March 1999 initial public offering without disclosing to
investors that some of the underwriters in the offering, including the lead
underwriters, had allegedly solicited and received excessive and undisclosed
commissions from certain investors. 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 described to those above but with respect to
both our March 1999 initial public offering and our 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 has not responded to the Consolidated Amended
Complaint and the time within which to do so has not yet expired. The Company
intends to defend vigorously against these actions.
The Company has been informed that a sub-committee of the board of
directors of Myprice pty. Ltd. has been formed to evaluate whether a lawsuit
should be instituted against is in connection with its investment in Myprice. If
necessary, the Company will defend against any such suit vigorously.
In January 2002, the Company received a letter from the Teradata
Division of NCR Corporation alleging that the Company infringed U.S. Patents
5,699,526, 5,721,906, 5,832,496, 5,951,643, 5,954,798, 5,991,791, 6,026,403,
6,085,223, 6,151,601, 6,169,997, and 6,253,203. Based on advice from its patent
counsel, the Company does not believe that it infringes any of the patents at
issue. If necessary, the Company will defend vigorously against any suit arising
from NCR's claims.
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.
9. TAXES
For the three months ended March 31, 2002, the Company has recorded
no provision for income taxes due to the availability of fully reserved net
operating losses which have been utilized to offset the income tax provision.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-------------------------------------------------------------------------------
OF OPERATIONS
-------------
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH OUR
FINANCIAL STATEMENTS, INCLUDING THE NOTES TO THOSE STATEMENTS, INCLUDED
ELSEWHERE IN THIS FORM 10-Q, AND THE SECTION ENTITLED "SPECIAL NOTE REGARDING
FORWARD LOOKING STATEMENTS" IN THIS FORM 10-Q. AS DISCUSSED IN MORE DETAIL IN
THE SECTION ENTITLED "SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS," THIS
DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND
UNCERTAINTIES. OUR ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THE RESULTS
DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE THOSE
DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "FACTORS THAT
MAY AFFECT FUTURE RESULTS."
OVERVIEW
We have pioneered a unique e-commerce pricing system known as a
"demand collection system" that enables consumers to use the Internet to save
money on products and services while enabling sellers to generate incremental
revenue. Using a simple and compelling consumer proposition - Name Your Own
Price(SM) - we collect consumer demand, in the form of individual customer
offers, 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:
o leisure airline tickets, provided by 10 domestic and 24
international airline participants, and travel insurance;
o hotel rooms, in substantially all major United States markets
with more than 50 national hotel chains, and in a limited
number of markets outside the United States;
o rental cars, in substantially all major United States airport
markets with five leading rental car chains as participants;
o new automobiles, in substantially all major United States
markets;
o home financing services, in substantially all major United
States markets, which includes home mortgage services, home
equity loans and refinancing services;
o long distance telephone calling, provided by three carriers,
and wireless telephone service, including sales of wireless
telephones and service plans, in substantially all United
States markets;
o fixed-price cruises and cruise packages, through a third party
that accesses major cruise lines; and
o vacation packages, in many United States markets.
In certain instances, we have licensed the priceline.com name and
demand collection system to third parties to offer a particular product or
service (HOME FINANCING) or to offer a number of products or services in a
distinct international region (ASIA). Pursuant to these licensee transactions,
we generally receive a royalty under the license and may also receive fees for
services and reimbursement of certain expenses. We also hold convertible
securities
14
entitling us to acquire a significant percentage of such entity's equity
securities upon the occurrence of certain events.
As described in more detail in RESULTS OF OPERATIONS below, our
business, like most in the travel industry, was directly and adversely impacted
by the terrorist attacks on September 11, 2001. While we believe that demand for
airline tickets has substantially recovered since the attacks on September 11,
our airline ticket sales have lagged behind due to, among other things, lower
average offer prices by our customers and less available airline ticket
inventory. We believe that the lower offer prices by our customers are
substantially attributable to the depressed retail environment for airline
tickets, which affords consumers the opportunity to purchase airline tickets at
very low retail rates without making the tradeoffs associated with our air
product. In addition, at the same time that our average offer price has
decreased, many airlines grounded portions of their fleets, thus decreasing
capacity and increasing load factors on existing flights, which we believe has
reduced inventory available to us. These trends - lower offer prices and reduced
inventory - have adversely impacted our overall ability to bind customer offers
and, when coupled with the significant financial difficulties faced by many of
our airline suppliers, contributed to an uncertain competitive environment in
which near-term forecasting is very difficult. We believe that this uncertainty,
which impacted our results of operations in the first quarter of 2002, will
extend into the second quarter of 2002 and perhaps beyond. We intend to combat
these trends by continuing to develop our non-air business, for which demand
remains strong. However, further terrorist attacks or the bankruptcy or
insolvency of a major domestic airline would adversely affect our business and
results of operations.
On January 31, 2002, we invested an additional $10 million in
priceline.com Europe Holdings, N.V., the parent company of priceline.com europe
Ltd. The other investors in priceline.com europe Ltd. include affiliates of
General Atlantic Partners, LLC and certain individual investors. William Ford, a
principle of General Atlantic Partners, is a member of our board of directors
and chairman of our audit committee. Please see Note 5 to our consolidated
financial statements.
On January 31, 2002, we entered into an agreement with eBay Inc.
pursuant to which we will work with eBay to create a new travel booking service
for eBay. The service, which will be powered by priceline.com, will serve as the
cornerstone of eBay's travel business and will include airline, hotel, rental
car, cruises and vacation packages. The new travel booking service will provide
users the ability to book flights, hotel and car reservations in an auction
style or "Buy it Now" format. We will be responsible for the technology,
development, transaction processing infrastructure, and ongoing support of the
booking service.
On February 19, 2002, we launched our vacation packages product, which
allows users to make offers for hotel room reservations and airline tickets as a
bundled package. The vacation packages product is a combination of our air and
hotel products, and uses the same technology to search for available airline
tickets and hotel rooms that meet a user's criteria, including the price set by
the user for the package. There can be no assurance that our vacation packages
product, or other services we may decide to offer, will be successful.
We believe that our success will depend in large part on our ability to
achieve and maintain profitability, primarily from our travel business, to
continue to promote the priceline.com brand and, over time, to offer other
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 increase operating
profits and improve gross margins in an effort to achieve and maintain
profitability. Our limited operating history and the uncertain competitive
environment described above makes the prediction of future results of operations
difficult, and accordingly, we cannot assure you that we will maintain revenue
growth or achieve and maintain profitability.
15
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2002 COMPARED TO THREE MONTHS ENDED MARCH 31, 2001
REVENUES
THREE MONTHS ENDED %
MARCH 31, CHANGE
--------- ------
($000)
2002 2001
---- ----
TRAVEL REVENUES..................... $259,899 $267,020 (3%)
OTHER REVENUES...................... $1,986 $2,684 (26%)
TOTAL REVENUES...................... $261,885 $269,704 (3%)
TRAVEL REVENUES
Travel revenues for the three months ended March 31, 2002 and 2001
consisted primarily of: (1) transaction revenues representing the selling price
of airline tickets, hotel rooms and rental cars; and (2) ancillary fees,
including Worldspan reservation booking fees and customer processing fees
offered in connection with the sale of airline tickets, hotel rooms and rental
cars.
During the three months ended March 31, 2002, we sold approximately
867,000, 909,000 and 738,000 airline tickets, hotel room nights and rental car
days, respectively. During the three months ended March 31, 2001, we sold
approximately 1.1 million, 433,000 and 607,000 airline tickets, hotel room
nights and rental car days, respectively. We believe that the approximately 19%
decrease in the number of airline tickets sold in the three months ended March
31, 2002, from the same period a year ago, was due to lower average offer
prices by our customers, substantially attributable to the low
retail fare environment, which caused the level at which we bind customers'
offers to decline. Additionally, a reduction in the inventory of airline
seats available to us contributed to the decline in airline tickets sold and
the resulting decrease in travel revenues. This was partially offset by an
increase in hotel room nights and, to a lesser extent, an increase in rental
car days sold.
Our "bind" rate is the percentage of unique offers that we ultimately
fulfill. Since April 1999, each initial offer and any resubmitted offers are
treated as a single offer - a unique offer - for purposes of measuring our total
offer volume and our offer fulfillment rates. Previously, each had been counted
as a separate offer. Therefore, comparisons with prior periods may not be
meaningful. Our "bind rate" for all unique airline ticket, hotel room and rental
car offers were as follows:
UNIQUE OFFERS FOR
-----------------
AIRLINE HOTEL RENTAL
TICKETS ROOMS CARS
------- ----- ----
Three Months Ended March 31, 2002 41.7% 66.3% 46.0%
Three Months Ended March 31, 2001 50.9% 53.5% 46.2%
As discussed in the overview to this MD&A, we believe that our travel
revenues and bind rate have been negatively impacted by the weak retail fare
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 trade-off associated with our products in
exchange for savings off of relatively high retail rates, to purchase travel
products at the lower retail rates without having to make any trade-offs. In
addition, many airlines grounded
16
portions of their fleets in the aftermath of the attacks of September 11, thus
decreasing capacity and increasing load factors on existing flights, which we
believe reduced airline inventory available to us. These trends, which
negatively impacted our revenues and bind rate in the fourth quarter of 2001,
continued through the first quarter of 2002 and we believe will extend into the
second quarter of 2002.
We added approximately 875,000 new customers during the three months
ended March 31, 2002 as compared to 891,000 new customers during the three
months ended March 31, 2001. In addition, we generated approximately 1.5 million
repeat customer offers during the three months ended March 31, 2002 as compared
to 1.2 million repeat customer offers during the three months ended March 31,
2001.
Travel revenues for the three months ended March 31, 2002 decreased
approximately 3% to $259,899 million from $267,020 million for the three months
ended March 31, 2001, primarily as a result of the factors described above.
OTHER REVENUES
Other revenues during the three months ended March 31, 2002 and 2001
consisted primarily of: (1) transaction revenues and fees from our long distance
phone service and (2) commissions and fees from our home financing and
automobile services, and license fees from our international licensees.
Other revenues for the three months ended March 31, 2002 decreased
approximately 26% to $2 million from $2.7 million for the three months ended
March 31, 2001, primarily as a result of the decrease in fees earned in
connection with our long distance phone service.
COST OF REVENUES AND GROSS PROFIT
%
THREE MONTHS ENDED -
MARCH 31, CHANGE
--------- ------
($000)
2002 2001
---- ----
COST OF TRAVEL REVENUES............. $219,511 $225,496 (2.7%)
% OF TRAVEL REVENUES............ 84.5% 84.4%
COST OF OTHER REVENUES.............. $381 $1,093 (65.1%)
% OF OTHER REVENUES............. 19.2% 40.7%
TOTAL COST OF REVENUES.............. $219,892 $226,589 (3.0%)
% OF REVENUES................... 84.0% 84.0%
COST OF REVENUES
COST OF TRAVEL REVENUES. For the three months ended March 31, 2002 and
2001, cost of travel 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
tax; and (3) the cost of rental cars from our suppliers, net of applicable
taxes.
17
COST OF OTHER REVENUES. For the three months ended March 31, 2002 and
2001, cost of other revenues consisted of the cost of long distance telephone
service provided by our suppliers.
GROSS PROFIT
%
THREE MONTHS ENDED -
MARCH 31, CHANGE
--------- ------
($000)
2002 2001
---- ----
TRAVEL GROSS PROFIT................. $40,388 $41,524 (2.7%)
TRAVEL GROSS MARGIN............. 15.5% 15.6%
OTHER GROSS PROFIT.................. $ 1,605 $ 1,591 .9%
OTHER GROSS MARGIN............... 80.8% 59.3%
TOTAL GROSS PROFIT.................. $41,993 $43,115 (2.6%)
TOTAL GROSS MARGIN............... 16.0% 16.0%
TRAVEL GROSS PROFIT. Travel gross profit consists of travel revenues
less the cost of travel revenues. We are able to manage the level of gross
margins by controlling the price at which we will cause offers to be fulfilled.
For the three months ended March 31, 2002, travel gross profit and related
travel gross margin decreased over the same period in 2001 as a result of
decreased transactional sales volume, partially offset by an increase in
ancillary fees. Total gross margin remained the same in the three months ended
March 31, 2002 as in the three months ended March 31, 2001.
OPERATING EXPENSES
SALES AND MARKETING
%
THREE MONTHS ENDED -
MARCH 31, CHANGE
--------- ------
($000)
2002 2001
---- ----
ADVERTISING......................... $10,227 $16,189 (36.8%)
OTHER SALES & MARKETING............. $10,564 $14,434 (26.8%)
------- -------
TOTAL............................... $20,791 $30,623 (32.1%)
% OF REVENUES....................... 7.9% 11.4%
Sales and marketing consists of advertising expenses and other sales
and marketing expenses. 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 months ended March 31, 2002, advertising expenses
decreased over the same period in 2001 primarily due to an overall decline in
the cost of advertising and an effort to reduce our advertising spending. In
2001, we began shifting our marketing resources from traditional areas of
marketing such as television and radio, toward online marketing. We intend to
continue to pursue an advertising and branding campaign in order to continue to
attract new users and retain existing users and expect to continue to shift
resources to online marketing.
Other sales and marketing expenses consist primarily of: (1) credit
card processing fees; (2) provisions for
18
credit card charge-backs; (3) fees paid to third-party service providers that
operate our call centers; and (4) compensation for our sales and marketing
personnel. For the three months ended March 31, 2002, other sales and marketing
expenses decreased over the same period in 2001 due to reductions in credit card
chargebacks and customer service transaction costs.
GENERAL AND ADMINISTRATIVE
%
THREE MONTHS ENDED -
MARCH 31, CHANGE
--------- ------
($000)
2002 2001
---- ----
GENERAL & ADMINISTRATIVE............ $6,636 $ 9,404 (29.4%)
PAYROLL TAX EXPENSE ON EMPLOYEE STOCK OPTIONS 104 23 352.2%
STOCK BASED COMPENSATION............ 250 5,157 (95.2%)
------- --------
TOTAL............................... $6,990 $14,584 (52.1%)
% OF REVENUES....................... 2.7% 5.4%
General and administrative expenses consist primarily of: (1) costs for
personnel; (2) occupancy expenses; (3) telecommunications costs; and (4) fees
for outside professionals. General and administrative expenses decreased during
the three months ended March 31, 2002 over the same period in 2001 as a result
of the ongoing benefits of our turn-around and restructuring plan implemented in
the fourth quarter of 2000 partially offset by an increase in costs due to the
consolidation of our European operations. In addition, for the three months
ended March 31, 2002, we recorded charges of approximately $104,000 for payroll
taxes relating to options exercised in accordance with our employee stock option
plans. For the three months ended March 31, 2001, payroll taxes relating to the
exercise of employee stock options were $23,000. Stock based compensation
decreased over the same period in 2001 as a result of the expiration of
amortization of restricted stock in the fourth quarter of 2001.
SYSTEMS AND BUSINESS DEVELOPMENT
THREE MONTHS ENDED %
MARCH 31, CHANGE
--------- ------
($000)
2002 2001
---- ----
Systems & Business Development........... $10,533 $11,112 (5.2%)
% of Revenues............................ 4.0% 4.1%
Systems and business development expenses for both periods consist
primarily of: (1) compensation to our information technology and product
development staff; (2) depreciation and amortization on computer hardware and
software; (3) payments to outside contractors; and (4) data communications and
other expenses associated with operating our Internet site. For the three months
ended March 31, 2002, systems and business development expenses decreased over
the same period in 2001 primarily due to a reduction of payments to outside
contractors partially offset by an increase in costs due to the consolidation of
our European operations.
RESTRUCTURING AND SPECIAL CHARGES
During the first quarter of 2002, we decreased the liability for the
2000 restructuring charge by approximately $824,000. The reduction resulted from
the subleasing of office space vacated in the fourth quarter of 2000 under more
favorable terms than originally estimated. The reduction was reflected in the
restructuring line of the statement of operations.
19
EQUITY IN NET INCOME OF PRICELINEMORTGAGE
Equity in net income of pricelinemortgage for the three months ended
March 31, 2002, of $492 represents the Company's pro rata share of income from
the Company's 49% equity investment in pricelinemortgage. There was no
comparable income for the three months ended March 31, 2001.
INTEREST INCOME
%
THREE MONTHS ENDED -
MARCH 31, CHANGE
--------- ------
($000)
2002 2001
---- ----
INTEREST INCOME..................... $782 $1,776 (56.0%)
For the three months ending March 31, 2002, interest income on cash and
marketable securities decreased primarily due to lower interest rates.
TAXES
For the three months ended March 31, 2002, we have recorded no
provision for income taxes due to the availability of fully reserved net
operating losses which have been utilized to offset the income tax provision.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2002 we had approximately $177.8 million in cash, cash
equivalents, short-term investments and restricted cash. Approximately $17.5
million is restricted cash collateralizing certain letters of credit issued in
favor of certain suppliers and landlords and amounts held by our credit card
processor company. We generally invest excess cash, cash equivalents and
short-term investments predominantly in debt instruments that are highly liquid,
of high-quality investment grade, and predominantly have maturities of less than
one year with the intent to make such funds readily available for operating
purposes.
Net cash provided by operating activities was $14.1 million for the
three months ended March 31, 2002, including $3.9 million of net income adjusted
for non-cash items. An increase in accounts payable and accrued expenses of
$8.6 million increased cash provided by operating activity. Net cash used in
operating activities during the period ended March 31, 2001 was $6.3 million.
This was primarily attributable to net loss from operations.
Net cash used in investing activities was $24.3 million and $22 million
for the three months ended March 31, 2002 and 2001, respectively. In both
periods, 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 three months ended March 31, 2002 and March 31, 2001 was the
purchase of short-term investments and marketable securities in the amount of
$19.1 million and $16 million, respectively.
We have certain commitments for capital expenditures as part of our
ongoing business cycle. None of these commitments are material to our financial
position either individually or in the aggregate. Expenditures for additions to
property and equipment, and to a much lesser extent, resolution of certain
claims, is expected to aggregate approximately $12 to $20 million in 2002.
Net cash provided by financing activities was $2.3 million for the
three months ended March 31, 2002. This was primarily the result of proceeds
from the exercise of employee stock options. Net cash provided by financing
activities was $49.9 million for the three months ended March 31, 2001, and was
primarily the result of the sale of 23.8 million shares of common stock at a
price of $2.10 per share to Hutchison-Whampoa Limited and Cheung Kong (Holdings)
Limited in February 2001. Based on public filings with the Securities and
Exchange
20
Commission, Hutchison-Whampoa Limited and Cheung Kong (Holdings) Limited
collectively own approximately 31% of our outstanding common stock. See "Factors
that May Affect Future Results - Two Large Stockholders Beneficially Own
Approximately 31% of Our Stock."
We may elect to loan additional amounts to Hutchison-Priceline Limited
in 2002.
We believe that our existing cash balances and liquid resources will be
sufficient to fund our operating activities, capital expenditures and other
obligations through at least the next twelve months. However, if during that
period or thereafter, we are not successful in generating sufficient cash flow
from operations or in raising additional capital when required in sufficient
amounts and on terms acceptable to us, we may be required to reduce our planned
capital expenditures and scale back the scope of our business plan, either of
which could have a material adverse effect on our projected financial condition
or results of operation. If additional funds were raised through the issuance of
equity securities, the percentage ownership of our then current stockholders
would be diluted. We cannot assure you that we will generate sufficient cash
flow from operations in the future, that revenue growth will be realized or that
future borrowings or equity contributions will be available in amounts
sufficient to make anticipated capital expenditures or finance our business
plan.
FACTORS THAT MAY AFFECT FUTURE RESULTS
THE FOLLOWING RISK FACTORS AND OTHER INFORMATION INCLUDED IN THIS FORM
10-Q SHOULD BE CAREFULLY CONSIDERED. THE RISKS AND UNCERTAINTIES DESCRIBED BELOW
ARE NOT THE ONLY ONES WE FACE. ADDITIONAL RISKS AND UNCERTAINTIES NOT PRESENTLY
KNOWN TO US OR THAT WE CURRENTLY DEEM IMMATERIAL MAY ALSO IMPAIR OUR BUSINESS
OPERATIONS. IF ANY OF THE FOLLOWING RISKS OCCUR, OUR BUSINESS, FINANCIAL
CONDITION, OPERATING RESULTS AND CASH FLOWS COULD BE MATERIALLY ADVERSELY
AFFECTED.
WE MAY CONTINUE TO INCUR LOSSES
As of March 31, 2002, we had an accumulated deficit of $1.5 billion.
Despite the progress we have made towards sustained profitability, we may incur
losses and may not be profitable in future years. In particular, a depressed
retail environment for the sale of airline tickets and the 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 in connection with our recent restructuring on an on-going
basis sufficiently to achieve and sustain profitability in this difficult
environment.
FURTHER TERRORIST ATTACKS OR HOSTILITIES COULD HAVE A NEGATIVE IMPACT
ON OUR COMPANY
Our business, like most in the travel industry, was directly and
adversely impacted by the terrorist attacks of September 11, 2001. We
experienced an immediate and substantial decline in demand for our travel
products in the days following the attacks and a significant increase in
customer service costs and ticket refunds and cancellations. Further terrorist
attacks or hostilities within the United States or abroad (whether or not such
attacks involve commercial aircraft) or continued or increased hostilities in
the Middle East or elsewhere, are likely to contribute to a general reluctance
by the public to travel by air and, as a result, materially and adversely affect
our business and results of operations.
OUR BUSINESS IS EXPOSED TO RISKS ASSOCIATED WITH CREDIT CARD FRAUD AND
CHARGE-BACKS
To date, our results have been 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 fraud. To date, this project has been successful in reducing
fraud, however, if we are unable to continue to reduce the amount of credit card
fraud on our website, our business could be adversely affected.
21
WE ARE DEPENDENT ON THE AIRLINE INDUSTRY AND CERTAIN AIRLINES
Our financial prospects are significantly dependent upon our sale of
leisure airline tickets. Sales of leisure airline tickets represented a
substantial majority of total revenue for the quarter ended March 31, 2002.
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 and unusual weather patterns also may adversely affect
the leisure travel industry. As a result, our business also is likely to be
affected by those events. Further, work stoppages or labor unrest at any of the
major airlines could materially and adversely affect the airline industry and,
as a consequence, our business.
Sales of airline tickets from our four largest airline suppliers
accounted for approximately 80% of airline ticket revenue for the quarter ended
March 31, 2002. As a result, currently we are substantially dependent upon the
continued participation of these airlines in the priceline.com service in order
to maintain and continue to grow our total airline ticket revenues and, as a
consequence, our overall revenues.
We currently have 34 participating airlines. However, our arrangements
with the airlines that participate in our system:
o do not require the airlines to make tickets available
for any particular routes;
o do not require the airlines to provide any specific
quantity of airline tickets;
o do not require the airlines to provide particular
prices or levels of discount;
o do not require the airlines to deal exclusively with
us in the public sale of discounted airline tickets;
o often limit the manner in which we can sell
inventory; and
o generally, can be terminated upon little or no
notice.
We are in continual dialogue with our major airline suppliers about
the nature and extent of their participation. Should any of our major
suppliers significantly reduce their participation in the priceline.com
system or withdraw completely, our business and results of operations could
be materially and adversely affected.
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 and increase in airline load factors since September 11. Further, in
the aftermath of the September 11 terrorist attacks, several major U.S. airlines
are struggling financially and have discussed publicly the risks of bankruptcy.
For example, U.S. Airways recently warned that it may be forced to file for
bankruptcy if it does not receive significant concessions from its labor unions.
If any of the major U.S. airlines that participate in our system were to seek
the protection of the bankruptcy laws, our business, results of operations and
financial condition could be materially and adversely affected. To the extent
one of the major U.S. airlines that participates in our system declared
bankruptcy, it may be unable or unwilling to honor tickets sold for its 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 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, that compete directly with us.
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POTENTIAL FLUCTUATIONS IN OUR FINANCIAL RESULTS MAKE FINANCIAL
FORECASTING DIFFICULT
Our revenues and operating results have varied significantly from
quarter to quarter and our revenues and operating results may continue to vary
significantly from quarter to quarter. As a result, quarter to quarter
comparisons of our revenues and operating results may not be meaningful. In
addition, due to our limited operating history, a business model that is,
especially when compared to "brick and mortar" companies, still relatively new
and unproven, and an uncertain environment in the travel industry, it may be
difficult to predict our future revenues or results of operations accurately. In
late 2000, our operating results fell below the expectations of securities
analysts and investors and may, in one or more future quarters, fall below such
expectations again. If this happens, the trading price of our common stock would
almost certainly be materially and adversely affected.
NEW BUSINESSES WE MAY ENTER OR OUR EXISTING LICENSEES MAY NOT BE
SUCCESSFUL
We have entered into, and may enter into in the future, licensing or
other arrangements with third parties in connection with the expansion of the
priceline.com service. For example, we license our name and business model to
priceline mortgage in connection with our home financing services and to
priceline.com europe, a majority owned subsidiary, and Hutchison-Priceline in
connection with the development of our business model in Europe and Asia,
respectively. These new businesses typically incur start-up costs and
operating losses and may not be successful. Both priceline.com europe and
Hutchison-Priceline have operating losses and will continue to have operating
losses for the forseeable future. If these new businesses are not favorably
received by consumers or are unsuccessful, the association of our brand name
and business model with these new entities may adversely affect our business
and reputation and may dilute the value of our brand name. Further, to the
extent that these new businesses are not successful, we may not be able to
recover or be reimbursed for our ongoing costs associated with their
development and our investment could be impaired, which could have a material
adverse effect on our business and results of operations.
WE MAY NOT BE ABLE TO INTRODUCE NEW PRODUCTS AND SERVICES
Should we decide to introduce additional products, we may incur
substantial expenses and use significant resources. However, we may not be able
to attract sellers, other participants and licensees to provide such products
and services or consumers to purchase such products and services through the
priceline.com service. In addition, if we or our licensees launch new products
or services that are not favorably received by consumers, our reputation and the
value of the priceline.com brand could be damaged.
The great majority of our experience to date is in the travel industry.
The travel industry is characterized by "expiring" inventories. For example, if
not used by a specific date, an airline ticket, hotel room reservation or rental
car reservation has no value. The expiring nature of the inventory creates
incentives for airlines, hotels and rental car companies to sell seats, hotel
room reservations or rental car reservations at reduced rates. Because we have
only limited experience in selling "non-expiring" inventories on the
priceline.com service, such as new cars or financial services, we cannot predict
whether the priceline.com business model can be successfully applied to such
products and services.
IF WE LOSE OUR KEY PERSONNEL OR CANNOT RECRUIT ADDITIONAL PERSONNEL,
OUR BUSINESS MAY SUFFER
We depend on the continued services and performance of our executive
officers and other key personnel. We do not have "key person" life insurance
policies. If we do not succeed in attracting new employees or retaining and
motivating current and future employees or executive officers, our business
could suffer significantly. Our ability to retain key employees could be
materially adversely affected by recent developments concerning priceline.com
and the decline in the market price of our common stock and by limitations on
our ability to pay cash compensation that is equivalent to cash paid by
traditional businesses and limitations imposed by our employee benefit plans to
issue additional equity incentives.
TWO LARGE STOCKHOLDERS BENEFICIALLY OWN APPROXIMATELY 31% OF OUR STOCK
Hutchison Whampoa Limited and its 49.94% shareholder, Cheung Kong
(Holdings) Limited, collectively beneficially owned approximately 31% of our
outstanding common stock, based on public filings with the Securities and
Exchange Commission. Together, Cheung Kong (Holdings) Limited and Hutchison
Whampoa Limited have
23
appointed three of the twelve 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 stockholder approval, including the election of directors and approval
of significant corporate transactions. Such concentration of ownership may also
have the effect of delaying or preventing a change in control of our company. In
addition, both Cheung Kong (Holdings) Limited and Hutchison Whampoa Limited have
registration rights with respect to their shares of priceline.com. On September
20, 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 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.
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. In 2001, we saw the
continuation of a trend in the online travel industry toward vertical
integration. For example, in October 2001, Cendant Corporation, a diversified
global provider of business and consumer services which owns, among other
things, Avis and is the world's largest franchiser of hotels, purchased online
travel provider Cheaptickets.com as well as Galileo International, Inc., a
global distribution system. In addition, in February 2002, USA Networks, Inc.,
which owns a controlling stake in Hotel Reservations Network, acquired a
controlling stake in Expedia, Inc. If this trend continues, we might 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:
o Internet travel services such as Expedia,
Travelocity.com, Orbitz and Hotwire, a website that
offers discounted fares on opaque inventory;
o traditional travel agencies;
o consolidators and wholesalers of airline tickets and
other travel products, including online consolidators
such as Hotel Reservation Network and
Cheaptickets.com;
o 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 a website); and
o operators of travel industry reservation databases
such as Worldspan 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 may be dependant, such as commissions and global distribution system
fees. Orbitz's prices, which unlike ours, are disclosed to the consumer, are
typically lower than other online travel providers offering disclosed price
fares. In addition, in February 2002, several major hotel brands announced the
creation of Hotel Distribution System, a joint venture to market hotel
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rooms over the Internet through multiple websites. Competition from these and
other sources could have a material adverse effect on our business, results of
operations and financial condition.
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.
With respect to long distance and wireless services, our current or
potential competitors include long distance and wireless providers, local
exchange providers that may be entering the long distance market and Internet
Protocol telephone services.
With respect to the sale of new automobiles, our competitors include
online companies as well as traditional car dealers, many of which offer online
shopping capabilities.
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 and search engines and large traditional retailers, have longer
operating histories, larger customer bases, greater brand recognition and
significantly greater financial, marketing, technical and other resources than
we have. Some of these competitors may be able to secure products and services
on more favorable terms than we can. In addition, many of these competitors may
be able to devote significantly greater resources to: (1) marketing and
promotional campaigns, (2) attracting traffic to their websites, (3) attracting
and retaining key employees, (4) securing vendors and inventory and (5) website
and systems development.
Increased competition could result in reduced operating margins and
loss of market share and could damage our brand. There can be no assurance that
we will be able to compete successfully against current and future competitors
or that competition will not have a material adverse effect on our business,
results of operations and financial condition.
WE RELY ON THIRD-PARTY SYSTEMS
We rely on certain third-party computer systems and third-party service
providers, including the computerized central reservation systems of the airline
and hotel industries to satisfy demand for airline tickets and hotel room
reservations. In particular, our travel business is substantially dependent upon
the computerized reservation system of Worldspan, an operator of a database for
the travel industry. Any interruption in these third-party services systems,
including Worldspan's, or deterioration in their performance could prevent us
from booking airline, hotel and rental car reservations and have a material
adverse effect on our business. Our agreements with third-party service
providers are terminable upon short notice and often do not provide recourse for
service interruptions. In the event our arrangement with any of such third
parties is terminated, we may not be able to find an alternative source of
systems support on a timely basis or on commercially reasonable terms and, as a
result, our business and results of operations could be materially and adversely
affected.
Substantially all of our computer hardware for operating our services
is currently located at Exodus Communications, Inc. in New Jersey. On September
26, 2001, Exodus filed a petition for Chapter 11 bankruptcy protection. On
February 1, 2002, Exodus announced that Cable and Wireless plc had completed the
acquisition of a majority of the business activities of Exodus and substantially
all of its U.S. customer contracts, including our contract. If Exodus 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 adversely affect our results.
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We do not maintain fully redundant systems or hosting services, and we
do not carry business interruption insurance sufficient to compensate us for
losses that may occur.
CAPACITY CONSTRAINTS AND SYSTEM FAILURES COULD HARM OUR BUSINESS
Substantially all of our computer hardware for operating our services
currently is located at the facilities of Exodus Communications, Inc. in New
Jersey. These systems and operations are vulnerable to damage or interruption
from human error, floods, fires, power loss, telecommunication failures and
similar events. They are also subject to break-ins, sabotage, intentional acts
of vandalism and similar misconduct. In addition, we could experience
interruptions as a result of Exodus' bankruptcy or the transfer of its business
to Cable and Wireless plc. Despite any precautions we may take, the occurrence
of a natural disaster or other unanticipated problems at the Exodus facility
could result in lengthy interruptions in our services. In addition, the failure
by Exodus to provide our required data communications capacity could result in
interruptions in our service. Any system failure that causes an interruption in
service or decreases the responsiveness of the priceline.com service could
impair our reputation, damage our brand name and materially adversely affect our
business and results of operations.
If our systems cannot be expanded to cope with increased demand or
fails to perform, we could experience:
o unanticipated disruptions in service;
o slower response times;
o decreased customer service and customer satisfaction;
or
o delays in the introduction of new products and
services;
any of which could impair our reputation, damage the priceline.com
brand and materially and adversely affect our revenues. Publicity about a
service disruption also could cause a material decline in our stock price.
Like many online businesses, we have experienced system failures from
time to time. For example, in May 2001, our primary website was interrupted for
a period of 12 hours. In addition to placing increased burdens on our
engineering staff, these outages create a 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, there could be a material adverse
effect on our business.
While we believe that our issued patents and pending patent
applications help to protect our business, there can be no assurance that:
26
o any patent can be successfully defended against
challenges by third parties;
o pending patent applications will result in the
issuance of patents;
o competitors or potential competitors of priceline.com
will not devise new methods of competing with us that
are not covered by our patents or patent
applications;
o because of variations in the application of our
business model to each of our products and services,
our patents will be effective in preventing one or
more third parties from utilizing a copycat business
model to offer the same product or service in one or
more categories;
o new prior art will not be discovered which may
diminish the value of or invalidate an issued patent;
or
o a third party will not have or obtain one or more
patents that prevent us from practicing features of
our business or will require us to pay for a license
to use those features.
There has been recent discussion in the press regarding the examination
and issuance of so called "business-method" patents. As a result, the United
States Patent and Trademark Office has indicated that it intends to intensify
the review process applicable to such patent applications. The new procedures
are not expected to have a direct effect on patents already granted. We cannot
anticipate what effect, if any, the new process will have on our pending patent
applications.
We pursue the registration of our trademarks and service marks in the
U.S. and internationally. However, effective trademark, service mark, copyright
and trade secret protection may not be available in every country in which our
services are made available online. We have licensed in the past, and expect to
license in the future, certain of our proprietary rights, such as trademarks or
copyrighted material, to third parties. These licensees may take actions that
might diminish the value of our proprietary rights or harm our reputation.
LEGAL PROCEEDINGS
We are a party to the legal proceedings described in Note 8 to
Unaudited Consolidated Financial Statements included in this Form 10-Q and Part
I, Item 3 of our Annual Report on Form 10-K for the year ended December 31,
2001. The defense of the actions described in Note 8 may increase our expenses
and an adverse outcome in any of such actions could have a material adverse
effect on our business and results of operations.
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.
27
ONLINE SECURITY BREACHES COULD HARM OUR BUSINESS
The secure transmission of confidential information over the Internet
is essential in maintaining consumer and supplier confidence in the
priceline.com service. Substantial or ongoing security breaches - whether
instigated internally or externally - on our system or other Internet-based
systems could significantly harm our business. We currently require buyers to
guarantee their offers with their credit card, either online or through our
toll-free telephone service. We rely on licensed encryption and authentication
technology to effect secure transmission of confidential information, including
credit card numbers. It is possible that advances in computer capabilities, new
discoveries or other developments could result in a compromise or breach of the
technology used by us to protect customer transaction data.
We incur substantial expense to protect against and remedy security
breaches and their consequences. However, we cannot guarantee that our security
measures will prevent security breaches. A party that is able to circumvent our
security systems could steal proprietary information or cause significant
interruptions in our operations. For instance, several major 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.
OUR STOCK PRICE IS HIGHLY VOLATILE
The market price of our common stock is highly volatile and is likely
to continue to be subject to wide fluctuations in response to factors such as
the following, some of which are beyond our control:
o quarterly variations in our operating results;
o operating results that vary from the expectations of
securities analysts and investors;
o changes in expectations as to our future financial
performance, including financial estimates by
securities analysts and investors;
o changes in our capital structure;
o changes in market valuations of other Internet or
online service companies;
o announcements of technological innovations or new
services by us or our competitors;
o announcements by us or our competitors of significant
contracts, acquisitions, strategic partnerships,
joint ventures or capital commitments;
o loss of a major seller participant, such as an
airline or hotel chain;
o changes in the status of our intellectual property
rights;
o lack of success in the expansion of our business
model horizontally or geographically;
28
o announcements by third parties of significant claims
or proceedings against us or adverse developments in
pending proceedings;
o additions or departures of key personnel; and
o stock market price and volume fluctuations.
Sales of a substantial number of shares of our common stock could
adversely affect the market price of our common stock by introducing a large
number of sellers to the market. Given the volatility that exists for our
shares, such sales could cause the market price of our common stock to decline.
In addition, the trading prices of Internet stocks in general,
including ours, have experienced extreme price and volume fluctuations. To the
extent that the public's perception of the prospects of Internet or e-commerce
companies is negative, our stock price could decline further regardless of our
results. Other broad market and industry factors may decrease the market price
of our common stock, regardless of our operating performance. Market
fluctuations, as well as general political and economic conditions, such as a
recession or interest rate or currency rate fluctuations, also may decrease the
market price of our common stock. The market value of e-commerce stocks has
declined dramatically recently based on profitability and other concerns. The
recent declines in the value of our common stock and market conditions could
adversely affect our ability to raise additional capital.
We are 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. Securities and other litigation could
result in substantial costs and divert management's attention and resources. See
Part II, Item 1 - Legal Proceedings
UNCERTAINTY REGARDING STATE TAXES
We file tax returns in such states as required by law based on
principles applicable to traditional businesses. In addition, we do not collect
sales or other similar taxes in respect of transactions conducted through the
priceline.com service (other than the federal air transportation tax). However,
one or more states could seek to impose additional income tax obligations or
sales tax collection obligations on companies, such as ours, which engage in or
facilitate online commerce. A number of proposals have been made at state and
local levels that could impose such taxes on the sale of products and services
through the Internet or the income derived from such sales. Such proposals, if
adopted, could substantially impair the growth of e-commerce and adversely
affect our opportunity to achieve and sustain profitability.
REGULATORY AND LEGAL UNCERTAINTIES COULD HARM OUR BUSINESS
The products and services we offer through the priceline.com service
are regulated by federal and state governments. Our ability to provide such
products and services is and will continue to be affected by such regulations.
The implementation of unfavorable regulations or unfavorable interpretations of
existing regulations by courts or regulatory bodies could require us to incur
significant compliance costs, cause the development of the affected markets to
become impractical and otherwise adversely affect our financial performance.
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
Sections of this Form 10-Q contain forward-looking statements. These
forward-looking statements are not guarantees of future performance and are
subject to certain risks, uncertainties and assumptions that are difficult to
predict; therefore, actual results may differ materially from those expressed,
implied or forecasted in any such forward-looking statements.
Expressions of future goals and similar expressions including, without
limitation, "may," "will," "should," "could," "expects," "does not currently
expect," "plans," "anticipates," "believes," "estimates," "predicts,"
"potential," "targets," or "continue," reflecting something other than
historical fact are intended to identify forward-
29
looking statements. The following factors, among others, could cause our
actual results to differ materially from those described in the
forward-looking statements: adverse changes in general market conditions for
leisure and other travel products as the result of, among other things,
terrorist attacks or hostilities; adverse changes in our relationships with
airlines and other product and service providers, including, without
limitation, the withdrawal of providers from the priceline.com system; the
bankruptcy or insolvency of a major domestic airline; the effects of
increased competition; systems-related failures and/or security breaches; our
ability to protect our intellectual property rights; losses by us and our
licensees; any adverse impact from negative publicity as a result of recent
events and negative customer reaction to such publicity; legal and regulatory
risks and the ability to attract and retain qualified personnel. These
factors and others are described in more detail above in the section entitled
"Factors That May Affect Future Results." Unless required by law, we
undertake no obligation to update publicly any forward-looking statements,
whether as a result of new information, future events or otherwise. However,
readers should carefully review the reports and documents we file from time
to time with the Securities and Exchange Commission, particularly the
Quarterly Reports on Form 10-Q and any Current Reports on Form 8-K.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
------------------------------------------------------------------
Priceline.com currently has no floating rate indebtedness, holds no
derivative instruments other than through investments in licensees and does not
earn significant foreign-sourced income. Accordingly, changes in interest rates
or currency exchange rates do not generally have a direct material effect on
priceline.com's financial position. However, changes in currency exchange rates
may affect the cost of international airline tickets and international hotel
reservations offered through the priceline.com service, and so indirectly affect
consumer demand for such products and priceline.com's revenue. In 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.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
-------------------------
Please see Note 8 to the Notes to Unaudited Consolidated Financial
Statements included in this Form 10-Q and Part I, Item 3 of priceline.com's
Annual Report on Form 10-K for the year ended December 31, 2001.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
----------------------------------------
REPORTS ON FORM 8-K
On January 7, 2002, we furnished a report on Form 8-K in connection
with the attendance at the Morgan Stanley Internet, Software & Networking
Conference in Scottsdale, Arizona by Jeffery H. Boyd. On February 4, 2002, we
filed a report on Form 8-K in connection with our fourth quarter 2001 earnings
announcement. On February 26, 2002, we furnished a report on Form 8-K in
connection with the attendance at the CIBC World Markets Annual Gaming, Lodging
& Leisure Conference in New York City by Jeffery H. Boyd.
30
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PRICELINE.COM INCORPORATED
(Registrant)
Date: May 15, 2002 By: /s/ Robert Mylod
---------------------------------
Name: Robert Mylod
Title: Chief Financial Officer
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