-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BhT2vxE0giQdwBAuWv96hK4BMhYMlZwHnuODqygFkSh5sKxU0OQX140sR0PtoAZV XgNPPbUj/8tUEupDrNu/oA== 0000912057-02-042400.txt : 20021114 0000912057-02-042400.hdr.sgml : 20021114 20021114151624 ACCESSION NUMBER: 0000912057-02-042400 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20020930 FILED AS OF DATE: 20021114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PRICELINE COM INC CENTRAL INDEX KEY: 0001075531 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 061528493 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-25581 FILM NUMBER: 02824799 BUSINESS ADDRESS: STREET 1: 800 CONNECTICUT AVE CITY: NORWALK STATE: CT ZIP: 06854 BUSINESS PHONE: 2037053000 10-Q 1 a2093336z10-q.txt FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------- FORM 10-Q (Mark One) /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 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 - -------------------------------------------------------------------------------- (Exact name of Registrant as specified in its charter) Delaware 06-152849 ---------------------------------- ------------------------------ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 800 Connecticut Avenue Norwalk, Connecticut 06854 - -------------------------------------------------------------------------------- (address of principal executive offices) (203) 299-8000 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) N/A - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed, since last report) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. YES /X/. NO / /. Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act. YES /X/. NO / /. Number of shares of Common Stock outstanding at November 13, 2002: Common Stock, par value $0.008 per share 224,709,658 - -------------------------------------------- ----------------------------- (Class) (Number of Shares) priceline.com Incorporated Form 10-Q For the Quarter Ended September 30, 2002 PART I - FINANCIAL INFORMATION Item 1. Unaudited Condensed Consolidated Financial Statements Consolidated Balance Sheets at September 30, 2002 and December 31, 2001...............................3 Consolidated Statements of Operations For the Three and Nine Months Ended September 30, 2002 and 2001................................................................4 Consolidated Statement of Changes in Stockholders' Equity For the Nine Months Ended September 30, 2002.........................................................................5 Consolidated Statements of Cash Flows For the Nine Months Ended September 30, 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...................................33 Item 4. Controls and Procedures......................................................................34 PART II - OTHER INFORMATION Item 1. Legal Proceedings............................................................................34 Item 6. Exhibits and Reports on Form 8-K.............................................................34 SIGNATURES...........................................................................................35 CERTIFICATIONS.......................................................................................36
2 PART I - FINANCIAL INFORMATION ITEM 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS PRICELINE.COM INCORPORATED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
SEPTEMBER 30, DECEMBER 31, 2002 2001 ------------- ------------ ASSETS (UNAUDITED) Current assets: Cash and cash equivalents............................................................ $ 66,857 $ 99,943 Restricted cash...................................................................... 18,174 15,396 Short-term investments............................................................... 67,478 49,269 Accounts receivable, net of allowance for doubtful accounts of $2,581 and $4,170 .... 16,654 15,665 Prepaid expenses and other current assets............................................ 9,068 5,038 ------------ ------------ Total current assets.............................................................. 178,231 185,311 Property and equipment, net............................................................... 25,279 32,266 Goodwill.................................................................................. 10,517 23,646 Other assets, primarily related parties in 2001........................................... 9,791 20,967 ------------ ------------ Total assets...................................................................... $ 223,818 $ 262,190 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable..................................................................... $ 40,972 $ 45,941 Accrued expenses..................................................................... 25,861 36,240 Other current liabilities............................................................ 3,495 5,115 ------------ ------------ Total current liabilities......................................................... 70,328 87,296 Accrued expenses.......................................................................... 1,001 2,838 ------------ ------------ Total liabilities................................................................. 71,329 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 235,542,777 and 229,487,885 shares, respectively.............................................. 1,884 1,836 Treasury stock, 10,837,953 shares and 5,450,236 shares, respectively................. (338,410) (326,633) Additional paid-in capital........................................................... 2,033,938 2,015,849 Accumulated deficit.................................................................. (1,558,458) (1,544,341) Cumulative currency translation adjustment........................................... 65 - ------------ ------------ Total stockholders' equity........................................................ 139,019 146,711 ------------ ------------ Total liabilities and stockholders' equity................................................ $ 223,818 $ 262,190 ============ ============
See notes to unaudited condensed consolidated financial statements. 3 PRICELINE.COM INCORPORATED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 2002 2001 2002 2001 --------- --------- --------- --------- Travel revenues................................... $ 238,121 $ 299,793 $ 800,902 $ 929,305 Other revenues.................................... 1,843 2,196 5,403 7,144 --------- --------- --------- --------- Total revenues................................ 239,964 301,989 806,305 936,449 Cost of travel revenues........................... 201,949 250,952 677,432 780,427 Cost of other revenues............................ 274 605 991 2,369 --------- --------- --------- --------- Total costs of revenues................... 202,223 251,557 678,423 782,796 --------- --------- --------- --------- Gross profit...................................... 37,741 50,432 127,882 153,653 --------- --------- --------- --------- Operating expenses: Sales and marketing........................... 20,794 30,010 66,175 93,451 General and administrative.................... 7,459 6,069 21,883 22,950 Payroll tax on employee stock options......... - 297 120 687 Stock based compensation...................... 250 1,015 750 9,312 Systems and business development.............. 10,138 10,160 31,191 31,164 Restructuring and special charge (reversal)... (92) - (1,116) 1,400 Severance charge (reversal)................... - - (55) 5,412 Impairments of investments in licensees....... 24,229 - 24,229 - --------- --------- --------- --------- Total operating expenses...................... 62,778 47,551 143,177 164,376 --------- --------- --------- --------- Operating (loss) income........................... (25,037) 2,881 (15,295) (10,723) Other income (expenses): Loss on sale of equity investment............. - - - (946) Interest income............................... 656 2,062 2,226 5,654 Equity in net income of pricelinemortgage..... 394 34 1,131 34 Gain on disposal of fixed assets............. 164 - 165 - --------- --------- --------- --------- Total other income............................ 1,214 2,096 3,522 4,742 --------- --------- --------- --------- Net (loss) income................................. (23,823) 4,977 (11,773) (5,981) Preferred stock dividend.......................... (490) (8,563) (2,344) (8,563) --------- --------- --------- --------- Net loss applicable to common stockholders........ $ (24,313) $ (3,586) $ (14,117) $ (14,544) ========= ========= ========= ========= Net loss applicable to common stockholders per basic and diluted common share.............. $ (0.11) $ (0.02) $ (0.06) $ (0.07) ========= ========= ========= ========= Weighted average number of basic and diluted common shares outstanding....................... 227,273 216,132 228,151 198,921 ========= ========= ========= =========
See notes to unaudited condensed consolidated financial statements. 4 PRICELINE.COM INCORPORATED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 (UNAUDITED) (IN THOUSANDS)
COMMON STOCK ADDITIONAL TREASURY STOCK ------------------ PAID-IN ACCUMULATED --------------------- SHARES AMOUNT CAPITAL DEFICIT SHARES AMOUNT ------- ------- ----------- ------------ ------- ---------- Balance, January 1, 2002............... 229,488 $ 1,836 $ 2,015,849 $ (1,544,341) (5,450) $ (326,633) Comprehensive loss: Net loss applicable to common stockholders.......................... - - - (14,117) - - Currency translation adjustment........ - - - - - - Total comprehensive loss............... Repurchase of common stock............. - - - - (5,388) (11,777) Issuance of common stock under deferred compensation plans.................... 184 1 749 - - - Issuance of preferred stock dividend... 696 6 2,338 - - - Exercise of options and warrants....... 5,175 41 15,002 - - - ------- ------- ----------- ------------ ------- ---------- Balance, September 30, 2002............ 235,543 $ 1,884 $ 2,033,938 $ (1,558,458) (10,838) $ (338,410) ======= ======= =========== ============ ======= ========== CUMULATIVE CURRENCY TRANSLATION ADJUSTMENT TOTAL ----------- --------- Balance, January 1, 2002............... $ - $ 146,711 Comprehensive loss: Net loss applicable to common stockholders.......................... - (14,117) Currency translation adjustment........ 65 65 --------- Total comprehensive loss............... $ (14,052) Repurchase of common stock............. - (11,777) Issuance of common stock under deferred compensation plans.................... - 750 Issuance of preferred stock dividend... - 2,344 Exercise of options and warrants....... - 15,043 -------- --------- Balance, September 30, 2002............ $ 65 $ 139,019 ======== =========
See notes to unaudited condensed consolidated financial statements. 5 PRICELINE.COM INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30, 2002 2001 --------- -------- OPERATING ACTIVITIES: Net loss....................................................................... $ (11,773) $ (5,981) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization............................................ 13,799 12,341 Provision for uncollectible accounts..................................... 760 14,168 Net loss on sale of equity investments................................... - 946 Acceleration of stock options............................................ - 61 Non-cash severance....................................................... - 3,076 Amortization of deferred compensation.................................... - 9,274 Equity in net income of pricelinemortgage................................ (1,131) (33) Net gain on disposal of fixed assets..................................... (166) - Impairments of investments in licensees.................................. 24,229 - Changes in assets and liabilities: Accounts receivable...................................................... (1,749) (14,904) Prepaid expenses and other current assets................................ (3,568) 860 Accounts payable and accrued expenses.................................... (17,597) (10,680) Issuance of short-term note receivable................................... - (4,501) Other.................................................................... (807) 541 --------- -------- Net cash provided by operating activities...................................... 1,997 5,168 --------- -------- INVESTING ACTIVITIES: Additions to property and equipment...................................... (7,408) (8,194) Proceeds from sales of fixed assets...................................... 229 - Payment of convertible notes and warrants of licensees................... 1,840 - Proceeds from sale/maturity of investments............................... - 770 Investment in short-term investments/marketable securities............... (18,209) (35,106) Release (funding) of restricted cash and bank certificates of deposits... (2,778) 6,555 --------- -------- Net cash used in investing activities.......................................... (26,326) (35,975) --------- -------- FINANCING ACTIVITIES: Shares reacquired for withholding taxes.................................. - (4,431) Proceeds from sale of common stock, net.................................. - 49,459 Proceeds from exercise of stock options and warrants..................... 3,165 7,768 Repurchase of common stock............................................... (11,777) - --------- -------- Net cash (used in) provided by financing activities............................ (8,612) 52,796 --------- -------- Effect of exchange rate changes on cash and cash equivalents................... (145) - Net (decrease) increase in cash and cash equivalents........................... (33,086) 21,989 Cash and cash equivalents, beginning of period................................. 99,943 77,024 --------- -------- Cash and cash equivalents, end of period....................................... $ 66,857 $ 99,013 ========= ========
See notes to unaudited condensed 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 in the United States ("GAAP") and include all normal and recurring adjustments that management of the Company considers necessary for a fair presentation of its financial position and operating results. The Company prepared the condensed consolidated financial statements following the requirements of the Securities and Exchange Commission for interim reporting. As permitted under those rules, the Company condensed or omitted certain footnotes or other financial information that are normally required by GAAP for annual financial statements. As these are condensed financials, one should also read the financial statements in the Company's Annual Report on Form 10-K for the year ended December 31, 2001. 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 periods' financial statements have been reclassified to conform to the current period 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 and nine months ended September 30, 2002, for the purpose of calculating earnings per share - basic, the weighted average number of common shares outstanding was 227,273,199 and 228,150,756, respectively. Since the Company incurred a loss applicable to common stockholders for the three- and nine-month periods ended September 30, 2002 and the three- and nine-month periods ended September 30, 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 those periods. 3. RECENT ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board (the "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 completed a goodwill impairment review as of January 1, 2002, using a fair value approach in accordance with SFAS 142, and found no impairment. During the third quarter 2002, the Company performed a subsequent impairment test and recorded an impairment charge which is described in more detail in Note 5. In July 2002, the FASB issued Statement of Financial Accounting Standards No. 146, "Accounting for Exit or Disposal Activities" ("SFAS 146"). SFAS 146 will be effective for the Company for disposal activities initiated after December 31, 2002. The Company will adopt the new standard January 1, 2003. 7 4. RESTRUCTURING AND SPECIAL CHARGES 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. During 2002, the Company decreased the liability for the 2000 restructuring charge by approximately $2.9 million. The reductions resulted from the subleasing of office space under more favorable terms than originally anticipated (reflected in the "restructuring and special charge (reversal)" line of the statement of operations) and disbursements made during the year. During 2002, the Company decreased the liability for the 2000 special charge by approximately $2.5 million. The reductions primarily resulted from the favorable resolution of certain matters partially offset by other required charges (reflected in the "restructuring and special charge (reversal)" line of the statement of operations) and disbursements made during the year. (IN THOUSANDS)
RESTRUCTURING SPECIAL TOTAL ------------- ------- ------- Accrued at December 31, 2001...... $ 5,666 $ 2,474 $ 8,140 Adjustments....................... (916) (1,432) (2,348) Disbursed during 2002............. (2,032) (1,040) (3,072) ------- ------- ------- Accrued at September 30, 2002..... $ 2,718 $ 2 $ 2,720 ======= ======= ======= At September 30, 2002: Current portion.............. $ 1,717 $ 2 $ 1,719 Long-term portion............ 1,001 - 1,001
5. ACQUISITION 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. Prior to the acquisition of priceline.com europe, General Atlantic Partners, LLC and its affiliated entities ("GAP") owned approximately 86% of priceline.com Europe Holdings, N.V. 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 nine months ended September 30, 2001, the Company charged priceline.com europe licensing fees of $800,000 and reimbursable expenses of approximately $3.0 million. On a consolidated basis, there were no such fees recorded in the first, second or third quarter of 2002. 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. 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 GAP, have the right to put their shares of priceline.com Europe Holdings, N.V. to the Company, at fair market 8 value, in the event of a change in control, as defined, of the Company. 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 approximately $23 million and was recorded as goodwill. The assets and liabilities were recorded at their estimated fair values as of the acquisition date. The Company expects in the near term that priceline.com europe will continue to incur operating losses and since the other stockholders of priceline.com europe have no commitment to provide financing, the Company has recognized the entire loss for the nine months ended September 30, 2002, in its consolidated financial statements subsequent to the acquisition. During the third quarter of 2002 the Company performed impairment tests and determined that the carrying amount of goodwill of $22.5 million relating to priceline.com europe Ltd. exceeded its implied fair value by approximately $12 million and accordingly recorded an impairment charge of $12 million. The fair value was determined by third party valuations using generally accepted valuation techniques including the market value of comparable companies (including revenue multiple methodology) and discounted cash flow methods. Underlying the impairment was a continued decline in the market value of priceline.com's common stock, which the Company reviews quarterly as an indicator of possible impairment of priceline.com europe Ltd.'s carrying value, a deterioration in priceline.com europe Ltd.'s operations caused primarily by increasingly competitive conditions among European online travel companies, and a decision in the third quarter of 2002 to reconfigure product offerings. 6. OTHER ASSETS Other assets at September 30, 2002 and December 31, 2001 consist of the following (in thousands):
SEPTEMBER 30, 2002 DECEMBER 31, 2001 ------------------ ----------------- Convertible loans and other advances - Hutchison-Priceline Limited......................... $ - $ 11,110 Convertible loans - MyPrice.................................. - 1,840 Investment in pricelinemortgage.............................. 6,356 5,124 Other........................................................ 3,435 2,893 ---------- -------- Total $ 9,791 $ 20,967 ========== ========
Convertible loans and other advances - Hutchison-Priceline Limited represented a convertible note from the Company's Asian licensee, Hutchison Priceline Limited. During the periods ended September 30, 2002 and 2001, the Company charged Hutchison Priceline Limited $375,000 in licensing fees per period, and approximately $199,000 and $426,000, respectively, in reimbursable expenses, in accordance with the Company's agreements. During the third quarter of 2002 the Company performed its periodic evaluation of the progress of the operations of Hutchison Priceline Limited. Factors including increasing negative variances in key operating metrics such as negative gross margins and continuing operating losses, negative net asset position and an increasingly competitive operating environment led the Company to determine that the carrying value of its convertible note no longer reflected its fair value. Accordingly, the Company recorded an impairment charge to reduce the carrying value of its investment in Hutchison Priceline Limited to its fair value. Estimated fair value was determined using cash flow estimates and a review of the market value of comparable companies including the consideration of the decline in the Company's market value and through discussion with third party valuation specialists. Convertible loans - MyPrice represented the carrying value of the amounts due to the Company from its Australian licensee. MyPrice has repaid these amounts during the three months ended September 30, 2002. Investment in pricelinemortgage represents the Company's 49% equity investment in pricelinemortgage. In September 2001, the Company converted a debt instrument into a 49% equity interest in pricelinemortgage and, accordingly, has recognized its pro rata share of pricelinemortgage's net income. At September 30, 2002, the investment in pricelinemortgage consists of the Company's original investment of $4.6 million and the Company's 9 cumulative share of pricelinemortgage's earnings of approximately $1.8 million. Robert J. Mylod, the Company's Chief Financial Officer, is a director of, and an investor in, Alliance Capital Partners Inc., the parent company of Alliance Partners. In 1997, Mr. Mylod invested $50,000 in Alliance Capital Partners Inc. and his investment represents less than 1/10 of one percent of Alliance's outstanding common stock. 7. TREASURY STOCK On July 31, 2002, the Company's Board of Directors authorized the repurchase of up to $40 million of common stock from time to time in the open market or in privately negotiated transactions. As part of the stock repurchase program, the Company purchased 5,387,717 shares of its common stock for its treasury during the period ended September 30, 2002 at an aggregate cost of approximately $11.8 million. All shares were purchased at prevailing market prices. The Company may continue or, from time to time, suspend repurchases of shares under its stock repurchase program, depending on prevailing market conditions, alternate uses of capital and other factors. Whether and when to initiate and/or complete any purchase of common stock and the amount of common stock purchased will be determined in the Company's complete discretion. As of September 30, 2002, there were approximately 224.7 million shares of our common stock outstanding. 8. DELTA AIR LINES During the first quarter of 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 Mandatorily 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 September 30, 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 dividends consisting of 986,491, 454,308 and 241,441 shares of the Company's common stock to Delta on August 6, 2001, February 6, 2002, and August 6, 2002, respectively, and, as a result, the Company recorded non-cash dividend charges, respectively, of $8.6 million, $1.85 million and $490,000 in the third quarter of 2001, the first quarter of 2002 and the third quarter of 2002, respectively. 10 9. COMMITMENTS AND CONTINGENCIES On January 6, 1999, the Company received notice that a third party patent applicant and patent attorney, Thomas G. Woolston, purportedly had filed in December 1998 with the United States Patent and Trademark Office a request to declare an interference between a patent application filed by Woolston and the Company's U.S. Patent 5,794,207. The Company is currently awaiting information from the Patent Office regarding whether it will initiate an interference proceeding. Subsequent to the Company's announcement on September 27, 2000 that revenues for the third quarter 2000 would not meet expectations, it was served with the following putative class action complaints: - Weingarten v. priceline.com Incorporated and Jay S. Walker 3:00 CV 1901 (District of Connecticut). - Twardy v. priceline.com Inc., Richard S. Braddock, Daniel H. Schulman and Jay S. Walker 3:00 CV 1884 (District of Connecticut). - Berdakina v. priceline.com Inc., Richard S. Braddock, Daniel H. Schulman and Jay S. Walker 3:00 CV 1902 (District of Connecticut). - Mazzo v. priceline.com Inc., Richard S. Braddock, Daniel H. Schulman and Jay S. Walker 3:00 CV 1924 (District of Connecticut). - Fialkov v. priceline.com Inc., Richard S. Braddock, Daniel H. Schulman and Jay S. Walker 3:00 CV 1954 (District of Connecticut). - Licht v. priceline.com Incorporated and Jay S. Walker 3:00 CV 2049 (District of Connecticut). - Ayach v. priceline.com Inc., Richard S. Braddock, Daniel H. Schulman and Jay S. Walker 3:00 CV 2062 (District of Connecticut). - Zia v. priceline.com Inc., Richard S. Braddock, Daniel H. Schulman and Jay S. Walker 3:00 CV 1968 (District of Connecticut). - Mazzo v. priceline.com Inc., Richard S. Braddock, Daniel H. Schulman and Jay S. Walker 3:00 CV 1980 (District of Connecticut). - Bazag v. priceline.com Inc., Richard S. Braddock, Daniel H. Schulman and Jay S. Walker 3:00 CV 2122 (District of Connecticut). - Breier v. priceline.com Inc., Richard S. Braddock, Daniel H. Schulman and Jay S. Walker 3:00 CV 2146 (District of Connecticut). - Farzam et al. v. priceline.com Inc., Richard S. Braddock, Daniel H. Schulman and Jay S. Walker 3:00 CV 2176 (District of Connecticut). - Caswell v. priceline.com Inc., Richard S. Braddock, Daniel H. Schulman and Jay S. Walker 3:00 CV 2169 (District of Connecticut). - Howard Gunty Profit Sharing Plan v. priceline.com Inc. Richard S. Braddock, Daniel H. Schulman and Jay S. Walker 3:00 CV 1917 (District of Connecticut). 11 - Cerelli v. priceline.com Inc., Richard S. Braddock, Daniel H. Schulman and Jay S. Walker 3:00 CV 1918 (District of Connecticut) - Mayer v. priceline.com Inc., Richard S. Braddock, Daniel H. Schulman and Jay S. Walker 3:00 CV 1923 (District of Connecticut) - Anish v. priceline.com Inc., Richard S. Braddock, Daniel H. Schulman and Jay S. Walker 3:00 CV 1948 (District of Connecticut) - Atkin v. priceline.com Inc., Richard S. Braddock, Daniel H. Schulman and Jay S. Walker 3:00 CV 1994 (District of Connecticut). - Lyon v. priceline.com Inc., Richard S. Braddock, Daniel H. Schulman and Jay S. Walker 3:00 CV 2066 (District of Connecticut). - Kwan v. priceline.com Inc., Richard S. Braddock, Daniel H. Schulman and Jay S. Walker 3:00 CV 2069 (District of Connecticut). - Krim v. priceline.com Inc., Richard S. Braddock, Daniel H. Schulman and Jay S. Walker 3:00 CV 2083 (District of Connecticut). - Karas v. priceline.com Inc., Richard S. Braddock, Daniel H. Schulman and Jay S. Walker 3:00 CV 2232 (District of Connecticut). - Michols v. priceline.com Inc., Richard S. Braddock, Daniel H. Schulman and Jay S. Walker 3:00 CV 2280 (District of Connecticut). All of these cases have been assigned to Judge Dominick J. Squatrito. On September 12, 2001, Judge Squatrito Ordered that these cases be consolidated under the Master File No. 3:00cv1884 (DJS), and he designated lead plaintiffs and lead plaintiffs' counsel. On October 29, 2001, plaintiffs served a Consolidated Amended Complaint. On February 5, 2002, Amerindo Investment Advisors, Inc., who is one of the lead plaintiffs in the consolidated action, made a motion for leave to withdraw as lead plaintiff 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. That motion has been fully briefed. The Court has yet to rule on that motion. On July 26 and August 1, 2002, the Court issued scheduling orders concerning pretrial proceedings. The Company intends to defend vigorously against this action. In addition, 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 and former executive officers, as well as the Company (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. 12 2576, 01 Civ. 3590 and 01 Civ. 4956). Shives et al. v. Bank of America Securities LLC et al., 01 Civ. 4956, also names other defendants and states claims unrelated to the Company. The complaints allege, among other things, that priceline.com and the individual defendants named in the complaints violated the federal securities laws by issuing and selling priceline.com common stock in priceline.com's March 1999 initial public offering without disclosing to investors that some of the underwriters in the offering, including the lead underwriters, had allegedly solicited and received excessive and undisclosed commissions from certain investors. By Orders of Judge Mukasey and Judge Scheindlin dated August 8, 2001, these cases were consolidated for pre-trial purposes with hundreds of other cases, which contain allegations concerning the allocation of shares in the initial public offerings of companies other than priceline.com, Inc. By Order of Judge Scheindlin dated August 14, 2001, the following cases were consolidated for all purposes: 01 Civ. 2261; 01 Civ. 2576; and 01 Civ. 3590. On April 19, 2002, plaintiffs filed a Consolidated Amended Class Action Complaint in these cases. This Consolidated Amended Class Action Complaint makes similar allegations to those described above but with respect to both 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, Richard Braddock, Jay Walker, Paul Francis, Nancy Peretsman, and Timothy Brier, together with other issuer defendants in the consolidated litigation, filed a joint motion to dismiss on July 15, 2002. That motion is now fully briefed, and oral argument occurred on November 1, 2002. The Court's decision was reserved. The Company intends to defend vigorously against these actions. 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. 10. TAXES For the nine months ended September 30, 2002, the Company has recorded no provision for income taxes due to current losses and the availability of previously fully reserved net operating losses which have been utilized to offset the income tax provision. 11. SUBSEQUENT EVENTS On November 5, 2002, the Company announced a repositioning of its non-travel businesses and a reduction in headcount, each of which will cause a reduction in related expenses. The Company's car service will continue to provide new- and used-car buying information and guaranteed quote requests, but will no longer provide a Name-Your-Own-Price(SM) service, and the Company's telecommunications service will continue to offer long distance calling plans, but will no longer sell Name-Your-Own-Price(SM) calling minutes. The repositioning is designed to reduce operating expenses and focus resources on the Company's travel businesses. As part of the repositioning, the Company reduced its workforce by approximately 65 positions. In connection with the reduction in force and the restructuring of the Company's non-travel businesses, the Company will record a charge in the fourth quarter 2002 of approximately $4 to $5 million, consisting primarily of severance costs. 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: - leisure airline tickets, provided by 9 domestic and 26 international airline participants, and travel insurance; - hotel rooms, in substantially all major United States markets with more than 50 national hotel chains, and in a limited number of markets outside the United States; - rental cars, in substantially all major United States airport markets with five leading rental car chains as participants; - fixed-price cruises and cruise packages, through a third party that accesses major cruise lines; - vacation packages, in many United States markets; - home financing services, in substantially all major United States markets, which includes home mortgage services, home equity loans and refinancing services; - long distance calling plans, through a third party long distance carrier, in substantially all United States markets; and - new and used car buying information and guaranteed quote requests, in substantially all major United States markets. On November 5, 2002, as part of a repositioning of our non-travel businesses, we announced the discontinuance of our Name-Your-Own-Price(SM) service for the purchase of automobiles and long distance calling, including sales of wireless telephone and service plans. We continue to offer new and used car buying information, 14 guaranteed quote requests and long distance calling plans. In certain instances, we have licensed the priceline.com name and demand collection system to third parties to offer a particular product or service (e.g., HOME FINANCING) or to offer a number of products or services in a distinct international region (e.g., ASIA). Pursuant to these license 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 entitling us to acquire a significant percentage of each entity's equity securities upon the occurrence of certain events. Our overall financial prospects are significantly dependant upon our sale of leisure airline tickets and, as a result, the health of our business is directly related to the health of the airline industry. The domestic airline industry has experienced significant revenue declines since the beginning of 2001 and most domestic airlines, and many of our major suppliers, are experiencing severe financial difficulties. Since the terrorist attacks of September 11, 2001, the major airlines have grounded portions of their fleets and significantly reduced the number of available airline seats. As a result, the amount for which an airline needs to sell an existing seat in order to operate profitably, or even to break even, has increased. Because our business is tailored to marginal leisure travel (those customers who increase an airline's "load factor," but pay less than the prescribed fare set by the airlines), some of this additional cost to the airlines has been passed on to us, as airlines attempt to raise their average yield per passenger. Therefore, while we have not seen a deterioration in the average offer price from customers since September 11, 2001, offer prices are lower in proportion to our cost of supply (which is higher), which has negatively affected our "bind rate," or ability to convert demand to sales. Our bind rate has also been negatively impacted by a reduction in available inventory. We believe that the decreased airline capacity discussed above, and the resulting pressure on load factors on existing flights, has reduced the level of inventory available to us as well as other distribution channels dependent on leisure demand. We believe that over time, our lower bind rate may negatively impact demand for our airline tickets. Lingering effects of September 11, continued aggressive discounting by the airlines, competition from other on-line distribution channels, and uncertainty regarding the American economy and hostilities in the Middle East or elsewhere, we believe have, and may continue to, negatively impact our airline ticket demand into 2003. In addition to the factors discussed above, our results for the third quarter were negatively impacted by unusually low sales of airline tickets in September 2002. While September is historically a slow month in the airline industry, we believe that consumer anxiety related to the first anniversary of the September 11 terrorist attacks contributed to an industry-wide decrease in sales of airline tickets in September 2002. As a result, near term forecasting is very difficult and we are not currently forecasting a recovery in the airline industry or an improvement during 2003 in our airline ticketing business. Another important trend in our industry is the growing number of travel providers competing for share in the online travel market. Consumers have accepted the idea that the Internet is an important tool in researching travel plans and destinations and a secure, convenient and cost effective way to make travel reservations. As a result, the number of companies focusing on and exclusively providing these services is growing. As competition in this marketplace has increased, and continues to do so, we have seen, and expect to continue to see, downward margin pressure. See "FACTORS THAT MAY AFFECT FUTURE RESULTS--INTENSE COMPETITION COULD REDUCE OUR MARKET SHARE AND HARM OUR FINANCIAL PERFORMANCE." We intend to combat these trends by continuing to develop our non-air business, in particular our hotel and vacation packages businesses, for which demand remains strong, and to evaluate and implement ways to improve offer quality and our bind rate. However, further terrorist attacks, hostilities in the Middle East, the bankruptcy or insolvency of a major domestic airline or the withdrawal from our system of a major airline or hotel supplier could adversely affect our business and results of operations. A number of travel suppliers, particularly airlines, have indicated publicly that as part of an effort to reduce distribution costs they intend to reduce their dependence over time on what they view to be "expensive" global distribution systems (GDSs) like Worldspan and intend to reduce the amount of fees paid to such GDSs. To this end, a number of travel providers have required that websites rebate to the travel provider all or part of the reservation booking fees associated with each airline ticket or hotel room booking obtained by the website from the GDS used to book the airline ticket or hotel room. For example, Orbitz shares with certain of its airline participants the fees remitted by Worldspan to Orbitz. We have been and believe that we will continue to be under pressure from our travel suppliers to rebate to our suppliers all or a portion of the Worldspan reservation booking fee we receive in connection with the sale of airline tickets and hotel rooms. To the extent we are required to forego all or a significant portion of the Worldspan distribution fees we currently receive, it could have a material adverse effect on our financial condition and results of operations. In addition, on November 12, 2002, the Department of Transportation issued a notice of proposed rulemaking that proposed to eliminate several existing provisions that regulated GDSs, including eliminating the requirement that each airline with an ownership in a GDS participate in competing systems at the same level at which it participates in its own. At this time, we are unable to assess the long-term impact adoption of these proposed rules would have on our business. On July 31, 2002, we announced that our board of directors authorized the repurchase of up to $40 million of our common stock from time to time in the open market or in privately negotiated transactions. In addition, we announced that Cheung Kong (Holdings) Limited and Hutchison Whampoa Limited, who together own 15 approximately 34% of our outstanding common stock, had informed us that they may purchase up to an additional $40 million of priceline.com common stock in the open market or in privately negotiated transactions. As of September 30, 2002, we repurchased 5,387,717 shares of our common stock as part of our stock repurchase program. Whether and when to complete any purchase of common stock and the amount of common stock purchased will be determined by each company in its complete discretion. Any repurchase by us may or may not occur simultaneously or be coordinated with any purchases of common stock by Cheung Kong and Hutchison Whampoa. As of September 30, 2002, there were approximately 224.7 million shares of our common stock outstanding. On July 31, 2002, we announced the promotion of several executives and the corresponding re-alignment of our operating and management structure. Jeffery H. Boyd, our former President and Chief Operating Officer, was named President and Co-Chief Executive Officer. He will share CEO responsibilities with Chairman Richard S. Braddock. Mitch Truwit, former Executive Vice President, Operations, was named as our new Chief Operating Officer. In addition, the scope of the position of Chief Operating Officer was restructured so that the position will oversee our airline tickets, rental cars, mortgage and telecommunications products and operations, as well as customer service, public relations and our international initiatives. Chris Soder, formerly President, Lodging, Automotive and Business Development, was named an Executive Vice President. On August 11, 2002, U.S. Airways Group, Inc. announced that it had filed a voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy Code. In its announcement, U.S. Airways stated that it had adequate resources to fulfill all of its obligations to customers while it restructures and that all tickets on U.S. Airways would continue to be honored and accepted. Our four largest airline suppliers, American Airlines, Delta Air Lines, United Airlines and U.S. Airways, together accounted for approximately 84% of our airline ticket revenue in the third quarter of 2002. While we do not expect U.S. Airways' bankruptcy filing to have a material adverse effect on our business and results of operations over the near term, we are unable at this time to assess the long-term impact of U.S. Airways' bankruptcy filing on our business. If any of our four largest airline suppliers were unable or unwilling to participate in our system, as a result of bankruptcy, voluntary withdrawal, or otherwise, our business and results of operations would be materially and adversely affected. See "FACTORS THAT MAY AFFECT FUTURE RESULTS - WE ARE DEPENDENT ON THE AIRLINE INDUSTRY AND CERTAIN AIRLINES." We believe that our success will depend in large part on our ability to achieve sustained 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. RECENT DEVELOPMENTS On November 5, 2002, we announced a repositioning of our non-travel businesses and a reduction in headcount, each of which will cause a reduction in related expenses. Our car service will continue to provide new- 16 and used-car buying information and guaranteed quote requests, but will no longer provide a Name-Your-Own-Price(SM) service, and our telecommunications service will continue to offer long distance calling plans, but will no longer sell Name-Your-Own-Price(SM) calling minutes. The repositioning is designed to reduce operating expenses and focus resources on our travel businesses. As part of the repositioning, we reduced our workforce by approximately 65 positions. In connection with the reduction in force and the restructuring of our non-travel businesses, we will record a charge in the fourth quarter 2002 of approximately $4 to $5 million, consisting primarily of severance costs. RESULTS OF OPERATIONS THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001 REVENUES
THREE MONTHS ENDED % NINE MONTHS ENDED % SEPTEMBER 30, CHANGE SEPTEMBER 30, CHANGE ----------------------- ------ ----------------------- ------ ($000) ($000) 2002 2001 2002 2001 --------- --------- --------- --------- TRAVEL REVENUES..... $ 238,121 $ 299,793 (20.6%) $ 800,902 $ 929,305 (13.8%) OTHER REVENUES...... 1,843 2,196 (16.1%) 5,403 7,144 (24.4%) --------- --------- --------- --------- TOTAL REVENUES...... $ 239,964 $ 301,989 (20.5%) $ 806,305 $ 936,449 (13.9%)
TRAVEL REVENUES Travel revenues for the three and nine months ended September 30, 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 September 30, 2002, we sold approximately 644,000, 1,145,000 and 741,000 airline tickets, hotel room nights and rental car days, respectively. During the nine months ended September 30, 2002, we sold approximately 2.4 million, 3.1 million and 2.3 million airline tickets, hotel room nights and rental car days, respectively. During the three months ended September 30, 2001, we sold approximately 1.2 million, 879,900 and 895,600 airline tickets, hotel room nights and rental car days, respectively. During the nine months ended September 30, 2001, we sold approximately 3.7 million, 2.0 million and 2.4 million airline tickets, hotel room nights and rental car days, respectively. We believe that the 46% decrease in the number of airline tickets sold during the three months ended September 30, 2002, from the same period a year ago, was due primarily to the relatively lower customer offer prices in proportion to our cost of supply, as increases in our inventory costs exceeded increases in our average offer prices for airline tickets. Additionally, reduced airline capacity has caused a reduction in the inventory of airline seats available to us. These factors have affected our ability to bind customer offers and have negatively impacted our travel revenues. The impact of the decrease in the sale of airline tickets has been partially offset by an increase in the number of hotel room nights sold. Our "bind" rate is the percentage of unique offers that we ultimately fulfill. 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. Our "bind rate" for all unique airline ticket, hotel room and rental car offers were as follows: 17
UNIQUE OFFERS FOR ----------------- AIRLINE HOTEL RENTAL TICKETS ROOMS CARS ------- ----- ------ THREE MONTHS ENDED SEPTEMBER 30, 2002 36.9% 58.0% 47.5% THREE MONTHS ENDED SEPTEMBER 30, 2001 53.9% 61.0% 51.2% NINE MONTHS ENDED SEPTEMBER 30, 2002 39.8% 61.4% 45.9% NINE MONTHS ENDED SEPTEMBER 30, 2001 54.2% 59.0% 49.4%
As discussed in the overview to our Management's Discussion and Analysis of Financial Condition and Results of Operations, 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 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. In an effort to increase yields, some airlines have also raised our cost or limited inventory in certain circumstances. These trends, which negatively impacted our revenues and bind rate in the fourth quarter of 2001, continued through the first three quarters of 2002 and we believe will extend into the fourth quarter of 2002 and into 2003. We added approximately 825,000 and 2.7 million new customers during the three and nine months ended September 30, 2002 as compared to 927,300 and 2.8 million new customers during the three and nine months ended September 30, 2001. In addition, we generated approximately 1.7 and 5.1 million repeat customer offers during the three and nine months ended September 30, 2002, respectively, as compared to 1.6 and 4.4 million repeat customer offers during the three and nine months ended September 30, 2001, respectively. Travel revenues for the three months ended September 30, 2002 decreased approximately 20.6% to $238 million from $300 million for the three months ended September 30, 2001. Travel revenues for the nine months ended September 30, 2002 decreased approximately 13.8% to $801 million from $929 million for the nine months ended September 30, 2001. These decreases are primarily attributable to the factors described above. OTHER REVENUES Other revenues during the three and nine months ended September 30, 2002 and 2001 consisted primarily of: (1) transaction revenues and fees from our long distance phone service; (2) commissions and fees from our home financing and automobile services; (3) license fees from our international licensees; and (4) marketing revenues. Other revenues for the three and nine months ended September 30, 2002 decreased approximately 16.1% and 24.4%, respectively, from the same periods a year ago, primarily as a result of the decrease in revenues from our long distance phone service. As discussed in Recent Developments above, we have repositioned our car and telecommunications services. 18 COST OF REVENUES AND GROSS PROFIT
THREE MONTHS ENDED % NINE MONTHS ENDED % SEPTEMBER 30, CHANGE SEPTEMBER 30, CHANGE -------------------------- ------ --------------------------- ------ ($000) ($000) 2002 2001 2002 2001 --------- --------- --------- --------- COST OF TRAVEL REVENUES.......... $ 201,949 $ 250,952 (19.5%) $ 677,432 $ 780,427 (13.2%) % OF TRAVEL REVENUES......... 84.8% 83.7% 84.6% 84.0% COST OF OTHER REVENUES........... $ 274 $ 605 (54.7%) $ 991 $ 2,369 (58.2%) % OF OTHER REVENUES.......... 14.9% 27.6% 18.3% 33.2% --------- --------- --------- --------- TOTAL COST OF REVENUES........... $ 202,223 $ 251,557 (19.6%) $ 678,423 $ 782,796 (13.3%) % OF REVENUES................ 84.3% 83.3% 84.1% 83.6%
COST OF REVENUES COST OF TRAVEL REVENUES. For the three and nine months ended September 30, 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. While the cost of travel revenues decreased in total dollars due to reduced sales volume, the relative cost of travel revenues as a percentage of travel revenues increased due to the higher cost of airline tickets from our suppliers. COST OF OTHER REVENUES. For the three and nine months ended September 30, 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 % NINE MONTHS ENDED % SEPTEMBER 30, CHANGE SEPTEMBER 30, CHANGE -------------------------- ------ --------------------------- ------ ($000) ($000) 2002 2001 2002 2001 -------- -------- --------- --------- TRAVEL GROSS PROFIT............ $ 36,172 $ 48,841 (25.9%) $ 123,470 $ 148,878 (17.1%) TRAVEL GROSS MARGIN......... 15.2% 16.3% 15.4% 16.0% OTHER GROSS PROFIT............. $ 1,569 $ 1,591 (1.4%) $ 4,412 $ 4,775 (7.6%) OTHER GROSS MARGIN.......... 85.1% 72.4% 81.7% 66.8% TOTAL GROSS PROFIT............. $ 37,741 $ 50,432 (25.2%) $ 127,882 $ 153,653 (16.8%) TOTAL GROSS MARGIN.......... 15.7% 16.7% 15.9% 16.4%
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 margin by controlling the price at which we will cause offers to be fulfilled. For the three- and nine-month periods ended September 30, 2002, travel gross profit and related travel gross margin decreased from the same periods in 2001 due to pressure on our bind rate and margin for airline tickets due to the factors discussed above. This was partially mitigated by an increase in travel gross profit from the growth in sales of 19 our hotel service. The reduction in travel revenues and increased cost of travel revenues also negatively impacted total gross profit and related total gross margin. OPERATING EXPENSES SALES AND MARKETING
THREE MONTHS ENDED % NINE MONTHS ENDED % SEPTEMBER 30, CHANGE SEPTEMBER 30, CHANGE ------------------------ ------ ------------------------- ------ ($000) ($000) 2002 2001 2002 2001 -------- -------- -------- -------- ADVERTISING...................... $ 11,649 $ 9,600 21.3% $ 34,653 $ 39,490 (12.2%) OTHER SALES AND MARKETING.......... 9,145 20,410 (55.2%) 31,522 53,961 (41.6%) -------- -------- -------- -------- TOTAL............................ $ 20,794 $ 30,010 (30.7%) $ 66,175 $ 93,451 (29.2%) % OF REVENUES.................... 8.7% 9.9% 8.2% 10.0%
Sales and marketing consists of advertising expenses and other sales and marketing expenses. Advertising expenses consist primarily of: (1) television and radio advertising; (2) online and e-mail advertisements; and (3) agency fees, creative talent and production costs for television and radio commercials. For the three months ended September 30, 2002, advertising expenses increased over the same period in 2001 primarily due to the timing of the launch of our television advertisements and our increase in on-line advertising. For the nine months ended September 30, 2002, advertising expenses decreased over the same period in 2001 primarily due to the decrease in television advertising which was partially offset by an increase in on-line and radio advertising. In the third quarter 2002, sales and marketing expenses benefited from the favorable resolution of certain previous obligations offset by additional advertising expenditures in the third quarter. The net result of these items did not have a material impact on either the total sales and marketing expense or the total operating results for the quarter. In 2001, we began shifting the focus of our marketing resources from traditional areas of marketing such as television, toward radio advertising and 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. In addition, we expect to increase our advertising expenditures in the first quarter of 2003 and anticipate that we will have one of our largest quarterly advertising expenditures in almost two years in that period. Other sales and marketing expenses consist primarily of: (1) credit card processing fees; (2) provisions for 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 and nine months ended September 30, 2002, other sales and marketing expenses decreased from the same period in 2001 due to the variable nature of these costs and the overall reduction in related sales volume, and by a reduction in the absolute amount of credit card charge-backs. 20 GENERAL AND ADMINISTRATIVE
THREE MONTHS ENDED % NINE MONTHS ENDED % SEPTEMBER 30, CHANGE SEPTEMBER 30, CHANGE ------------------------ ------ ------------------------ ------ ($000) ($000) 2002 2001 2002 2001 ------- ------- -------- -------- GENERAL AND ADMINISTRATIVE.......... $ 7,459 $ 6,069 22.9% $ 21,883 $ 22,950 (4.6%) PAYROLL TAX EXPENSE ON EMPLOYEE STOCK OPTIONS...................... - 297 (100.0%) 120 687 (82.5%) STOCK BASED COMPENSATION............ 250 1,015 (75.4%) 750 9,312 (91.9%) ------- ------- -------- -------- TOTAL............................... $ 7,709 $ 7,381 (4.4%) $ 22,753 $ 32,949 (30.9%) % OF REVENUES....................... 3.2% 2.4% 2.8% 3.5%
General and administrative expenses consist primarily of: (1) costs for personnel; (2) occupancy expenses; (3) telecommunications costs; and (4) fees for outside professionals. For the three months ended September 30, 2002, general and administrative expenses increased over the same period in 2001 primarily as a result of an increase in our directors and officers insurance premium and an increase in costs due to the consolidation of our European operations. General and administrative expenses decreased during the nine months ended September 30, 2002 from the same period in 2001 as a result of a decrease in legal fees and telecom expenses, partially offset by an increase in costs due to the consolidation of our European operations. For the three and nine months ended September 30, 2002, stock based compensation decreased over the same periods in 2001 as a result of the completion of the amortization of restricted stock. SYSTEMS AND BUSINESS DEVELOPMENT
THREE MONTHS ENDED % NINE MONTHS ENDED % SEPTEMBER 30, CHANGE SEPTEMBER 30, CHANGE ------------------------ ------ ---------------------- ------ ($000) ($000) 2002 2001 2002 2001 -------- -------- -------- -------- SYSTEMS AND BUSINESS DEVELOPMENT........................ $ 10,138 $ 10,160 (0.2%) $ 31,191 $ 31,164 0.1% % OF REVENUES....................... 4.2% 3.4% 3.9% 3.3%
Systems and business development expenses 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 and nine months ended September 30, 2002, systems and business development expenses remained relatively the same as the same periods in 2001. In the third quarter 2002, systems and business development expenses were impacted by certain adjustments related to the favorable resolution of certain outstanding obligations. In the absence of such adjustments in the third quarter 2002, systems and business development expense would have been approximately 9.4% higher than the amount recorded during the three months ended September 30, 2001, and 3.2% higher than the amount recorded during the nine months ended September 30, 2001. 21 RESTRUCTURING AND SPECIAL CHARGES During 2002, we decreased the liability for the 2000 restructuring charge by approximately $2.9 million. The reductions resulted from the subleasing of office space under more favorable terms than originally anticipated (reflected in the "restructuring and special charge (reversal)" line of the statement of operations) and disbursements made during the year. During 2002, we decreased the liability for the 2000 special charge by approximately $2.5 million. The reductions primarily resulted from the favorable resolution of certain matters partially offset by other required charges (reflected in the "restructuring and special charge (reversal)" line of the statement of operations) and disbursements made during the year. IMPAIRMENTS IN INVESTMENTS OF LICENSEES During the third quarter of 2002 we performed impairment tests and determined that the carrying amount of goodwill of $22.5 million related to our European licensee exceeded its implied fair value by approximately $12 million and accordingly recorded an impairment charge of $12 million. The fair value was determined by third party valuations using generally accepted valuation techniques including the market value of comparable companies (including revenue multiple methodology) and discounted cash flow. Underlying the impairment was a continued decline in the market value of priceline.com's common stock, which we review quarterly as an indicator of possible impairment of priceline.com europe Ltd.'s carrying value, a deterioration in priceline.com europe Ltd.'s operations caused primarily by increasingly competitive conditions among European online travel companies and a decision in the third quarter of 2002 to reconfigure product offerings. During the third quarter of 2002 we performed a periodic evaluation of the progress of the operations of Hutchison Priceline Limited. Factors including increasing negative variances in key operating metrics such as negative gross margins and continuing operating losses, negative net asset position and an increasingly competitive operating environment led us to determine that the carrying value of our convertible note no longer reflected its fair value. Accordingly, we recorded an impairment charge. Estimated fair value was determined using cash flow estimates and a review of the market value of comparable companies including the consideration of the decline in our market value and through discussion with third party valuation specialists. We may elect to make additional investments in Hutchison Priceline Limited in the future. INTEREST INCOME
THREE MONTHS ENDED % NINE MONTHS ENDED % SEPTEMBER 30, CHANGE SEPTEMBER 30, CHANGE -------------------- ------ -------------------- ------ ($000) ($000) 2002 2001 2002 2001 ------ ------- ------- ------- INTEREST INCOME..................... $ 656 $ 2,062 (68.2%) $ 2,226 $ 5,654 (60.6%)
For the three- and nine-months ended September 30, 2002, interest income on cash and marketable securities decreased primarily due to a lower cash balance and lower interest rates. EQUITY IN NET INCOME OF PRICELINEMORTGAGE Equity in net income of pricelinemortgage for the three and nine months ended September 30, 2002, of $394,000 and $1.1 million represents the Company's pro rata share of income from the Company's 49% equity investment in pricelinemortgage. For the three and nine months ended September 30, 2001, equity in net income of pricelinemortgage was $34,000. 22 TAXES For the three and nine months ended September 30, 2002, we have recorded no provision for income taxes due to current losses and the availability of fully reserved net operating losses which have been utilized to offset the income tax provision. RECENT ACCOUNTING PRONOUNCEMENTS In July 2002, the FASB issued Statement of Financial Accounting Standards No. 146, "Accounting for Exit or Disposal Activities" ("SFAS 146"). SFAS 146 will be effective for us for disposal activities initiated after December 31, 2002. We will adopt the new standard January 1, 2003. LIQUIDITY AND CAPITAL RESOURCES As of September 30, 2002 we had approximately $152.5 million in cash and cash equivalents, short-term investments and restricted cash. Approximately $18.2 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 23 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. Because we collect cash up front from our customers and then pay our suppliers over a ten to fifteen day period, we tend to experience significant swings in supplier payables depending on the absolute level of our cost of revenue during the last few weeks of every quarter. This can cause volatility in working capital levels and impact cash balances more or less than our operating income would indicate. Net cash provided by operating activities was $2.0 million for the nine months ended September 30, 2002. Depreciation and amortization and other non-cash items, including the impairments of investments in licensees, affected our cash provided by operating activities by $37.5 million. A decrease in accounts payable of $17.6 million reduced cash provided by operating activities. Net cash provided by operating activities during the period ended September 30, 2001 was $5.2 million. This was primarily attributable to changes in working capital and operations, primarily accounts receivables and accounts payables. Net cash used in investing activities was $26.3 million and $36.0 million for the nine months ended September 30, 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 nine months ended September 30, 2002 and September 30, 2001 was the purchase of short-term investments and marketable securities in the amount of $18.2 million and $35.1 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, is expected to aggregate approximately $10.0 to $12.0 million in 2002. On July 31, 2002, our board of directors authorized the repurchase of up to $40 million of common stock from time to time in the open market or in privately negotiated transactions. As part of the stock repurchase program, we purchased 5,387,717 shares of our common stock for our treasury during the period ended September 30, 2002 at an aggregate cost of approximately $11.8 million. Net cash used in financing activities was $8.6 million for the nine months ended September 30, 2002. This was primarily the result of our repurchase of our common stock, which was partially offset by proceeds from the exercise of employee stock options. Net cash provided by financing activities was $52.8 million for the nine months ended September 30, 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 Commission, Hutchison Whampoa Limited and Cheung Kong (Holdings) Limited collectively owned approximately 34% of our outstanding common stock as of September 30, 2002. See "FACTORS THAT MAY AFFECT FUTURE RESULTS - TWO LARGE STOCKHOLDERS BENEFICIALLY OWN APPROXIMATELY 34% OF OUR STOCK." We may elect to make additional investments in Hutchison Priceline Limited in the future. 24 We believe that our existing cash balances and liquid resources will be sufficient to fund our operating activities, any share repurchases, capital expenditures and other obligations through at least the next twelve months. However, if during that period or thereafter, we are not successful in generating sufficient cash flow from operations or in raising additional capital when required in sufficient amounts and on terms acceptable to us, we may be required to reduce our planned capital expenditures and scale back the scope of our business plan, either of which could have a material adverse effect on our projected financial condition or results of operations. If additional funds were raised through the issuance of equity securities, the percentage ownership of our then current stockholders would be diluted. 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. SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS Sections of this Form 10-Q including, in particular, our Management's Discussion and Analysis of Financial Condition and Results of Operations above, contain forward-looking statements. These forward-looking statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict; therefore, actual results may differ materially from those expressed, implied or forecasted in any such forward-looking statements. Expressions of future goals and similar expressions including, without limitation, "may," "will," "should," "could," "expects," "does not currently expect," "plans," "anticipates," "believes," "estimates," "predicts," "potential," "targets," or "continue," reflecting something other than historical fact are intended to identify forward-looking statements. The following factors, among others, could cause our actual results to differ materially from those described in the forward-looking statements: adverse changes in 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; legal and regulatory risks and the ability to attract and retain qualified personnel. These factors and others are described in more detail below 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. 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 September 30, 2002, we had an accumulated deficit of $1.6 billion. Despite the progress we have made towards 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 recently announced restructuring on an on-going basis sufficiently to achieve and sustain profitability in this difficult operating environment. 25 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 September 30, 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 five largest airline suppliers accounted for approximately 89.6% and 79.5% of airline ticket revenue for the nine months ended September 30, 2002 and 2001, respectively. As a result, currently we are substantially dependent upon the continued participation of these airlines in the priceline.com service in order to maintain and continue to grow our total airline ticket revenues and, as a consequence, our overall revenues. We currently have 35 participating airlines. However, our arrangements with the airlines that participate in our system: - do not require the airlines to make tickets available for any particular routes; - do not require the airlines to provide any specific quantity of airline tickets; - do not require the airlines to provide particular prices or levels of discount; - do not require the airlines to deal exclusively with us in the public sale of discounted airline tickets; - often limit the manner in which we can sell inventory and, in the case of our agreement with Delta Air Lines, substantially limits which airlines can participate in our system and may prevent our ability to add low cost carriers (such as Southwest or Jet Blue) to our system; and - generally, can be terminated upon little or no notice. As a general matter, during the course of our business, we are in continuous dialogue with our major airline suppliers about the nature and extent of their participation in the priceline.com system. In the second quarter 2002, Northwest Airlines terminated its Airline Participation Agreement with us. Should any of our other major suppliers significantly reduce their participation in the priceline.com system for a sustained period of time 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, 2001. Further, in the aftermath of the September 11, 2001 terrorist attacks, several major U.S. airlines are struggling financially and have either filed for reorganization under the United States Bankruptcy Code or discussed publicly the risks of bankruptcy. To the extent 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 bankruptcy of a major U.S. airline or the possibility of a major U.S. airline declaring bankruptcy could discourage customers from booking airline tickets through us. In addition, given the concentration of the airline industry, particularly in the domestic market, major airlines that are not participating in the priceline.com service, or our competitors, could exert pressure on other 26 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. THE BANKRUPTCY, DISCONTINUANCE OR CONSOLIDATION OF OUR SUPPLIERS COULD HARM OUR BUSINESS We are heavily dependant on our suppliers. In the event that one of our major suppliers voluntarily or involuntarily declares bankruptcy, is unable to successfully emerge from bankruptcy, and we are unable to replace such supplier, our business would be adversely affected. In addition, as discussed in "WE ARE DEPENDENT ON THE AIRLINE INDUSTRY AND CERTAIN AIRLINES," because our customers do not choose the airline, hotel or rental car company on which they are booked, the bankruptcy of a major supplier or even the possibility of a major supplier declaring bankruptcy, could discourage consumers from booking their travel products through us. As of November 7, 2002, three of the five rental car brands that supply our rental car business are currently under the protection of the bankruptcy laws. If any or all of such companies discontinue their business, and we are unable to find other suppliers, our business would suffer. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - RECENT DEVELOPMENTS." If one of our major suppliers merges or consolidates with, or is acquired by, another company who either does not participate in the priceline.com system or who participates on substantially lower levels, the surviving company may elect not to participate in our system or to participate at lower levels than they were previously participating. In such event, if we are unable to divert sales to other suppliers, our business could be adversely affected. INTENSE COMPETITION COULD REDUCE OUR MARKET SHARE AND HARM OUR FINANCIAL PERFORMANCE We compete with both online and traditional sellers of the products and services offered on priceline.com. Current and new competitors can launch new sites at a relatively low cost. In addition, the traditional retail industry for the products and services we offer is intensely competitive. 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 Hotels.com, 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: - Internet travel services such as Expedia, Travelocity.com, Orbitz, Trip.com, Hotels.com and Hotwire, a website that offers discounted fares on opaque inventory; - traditional travel agencies; - consolidators and wholesalers of airline tickets and other travel products, including online consolidators such as Hotel Reservation Network and Cheaptickets.com; - individual or groups of airlines, hotels, rental car companies, cruise operators and other travel service providers (all of which may provide services by telephone or through a website); and - operators of travel industry reservation databases such as Worldspan and Sabre. 27 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, have typically been lower than other online travel providers offering disclosed price fares. Hotwire, which was launched in October 2000, provides airline tickets, hotel room nights and rental car reservations at disclosed prices, although supplier identity and flight times remain opaque. Since its launch, Hotwire has been successful in establishing itself in the online travel marketplace, through aggressive advertising which has had the effect of decreasing our market share. If we are unable to effectively compete with Hotwire, our results will suffer. In addition, in February 2002, several major hotel brands announced the creation of Hotel Distribution System, a joint venture to market hotel 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. 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. FURTHER TERRORIST ATTACKS OR HOSTILITIES OR THE FEAR OF FUTURE ATTACKS 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. Airline bookings in September 2002 were especially weak, attributable in part to fears surrounding the anniversary of the September 11, 2001 terrorist attacks. Further terrorist attacks, the fear of future 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, to affect our business and results of operations materially and adversely. 28 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 pricelinemortgage in connection with our home financing services and to priceline.com europe 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 foreseeable 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, including any future investments we may make, which could have a material adverse effect on our business and results of operations. We recorded approximately $23.6 million of goodwill on our balance sheet as a result of our acquisition of priceline.com europe at the end of 2001. During the third quarter of 2002 we performed impairment tests and determined that the carrying amount of goodwill exceeded its implied fair value by approximately $12 million and accordingly recorded an impairment charge of $12 million. We may elect to make additional investments in Hutchison Priceline Limited in the future. 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. 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. 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 29 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 34% OF OUR STOCK Hutchison Whampoa Limited and its 49.94% shareholder, Cheung Kong (Holdings) Limited, collectively beneficially owned approximately 34% of our outstanding common stock as of September 30, 2002, based on public filings with the Securities and Exchange Commission. Together, Cheung Kong (Holdings) Limited and Hutchison Whampoa Limited have 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 (on a fully diluted basis) in priceline.com, subject to certain limitations. There can be no assurance that Cheung Kong (Holdings) Limited, Hutchison Whampoa Limited, or both, will not make another request for registration and dispose of all or substantially all of our common stock held by them at any time after the effectiveness of a shelf registration statement. Sales of significant amounts of shares held by Cheung Kong (Holdings) Limited or Hutchison Whampoa Limited, or the prospect of these sales, could adversely affect the market price of our common stock. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - RECENT DEVELOPMENTS." 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. 30 Some of our communications infrastructure is provided by WorldCom, Inc. which has filed for bankruptcy protection. If WorldCom is unable, for any reason, to support the communications infrastructure that it provides us, instabilities in our systems could increase until such time as we were able to replace its services. 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. 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: - unanticipated disruptions in service; - slower response times; - decreased customer service and customer satisfaction; or - delays in the introduction of new products and services; any of which could impair our reputation, damage the priceline.com brand and materially and adversely affect our revenues. Publicity about a service disruption also could cause a material decline in our stock price. Like many online businesses, we have experienced system failures from time to time. For example, in May 2001, our primary website was interrupted for a period of 12 hours. In addition to placing increased burdens on our engineering staff, these outages create a significant amount of user questions and complaints that need to be addressed by our customer support personnel. Any unscheduled interruption in our service could result in an immediate loss of revenues that can be substantial and may cause some users to switch to our competitors. If we experience frequent or persistent system failures, our reputation and brand could be permanently harmed. We have been taking steps to increase the reliability and redundancy of our system. These steps are expensive, may reduce our margins and may not be successful in reducing the frequency or duration of unscheduled downtime. We use internally developed systems to operate the priceline.com service, including transaction processing and order management systems that were designed to be scaleable. However, if the number of users of the priceline.com service increases substantially, we will need to significantly expand and upgrade our technology, transaction processing systems and network infrastructure. We do not know whether we will be able to accurately project the rate or timing of any such increases, or expand and upgrade our systems and infrastructure to accommodate such increases in a timely manner. OUR SUCCESS DEPENDS ON OUR ABILITY TO PROTECT OUR INTELLECTUAL PROPERTY We regard our intellectual property as critical to our success, and we rely on trademark, copyright and patent law, trade secret protection and confidentiality and/or license agreements with our employees, customers, partners and others to protect our proprietary rights. If we are not successful in protecting our intellectual property, there could be a material adverse effect on our business. 31 While we believe that our issued patents and pending patent applications help to protect our business, there can be no assurance that: - any patent can be successfully defended against challenges by third parties; - pending patent applications will result in the issuance of patents; - competitors or potential competitors of priceline.com will not devise new methods of competing with us that are not covered by our patents or patent applications; - because of variations in the application of our business model to each of our products and services, our patents will be effective in preventing one or more third parties from utilizing a copycat business model to offer the same product or service in one or more categories; - new prior art will not be discovered which may diminish the value of or invalidate an issued patent; or - a third party will not have or obtain one or more patents that prevent us from practicing features of our business or 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 9 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 9 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. 32 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: - quarterly variations in our operating results; - operating results that vary from the expectations of securities analysts and investors; - changes in expectations as to our future financial performance, including financial estimates by securities analysts and investors; - changes in our capital structure; - changes in market valuations of other Internet or online service companies; - announcements of technological innovations or new services by us or our competitors; - announcements by us or our competitors of significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments; - loss of a major seller participant, such as an airline or hotel chain; - changes in the status of our intellectual property rights; - lack of success in the expansion of our business model horizontally or geographically; - announcements by third parties of significant claims or proceedings against us or adverse developments in pending proceedings; - additions or departures of key personnel; and 33 - 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 company stocks in general, including ours, have experienced extreme price and volume fluctuations. To the extent that the public's perception of the prospects of Internet or e-commerce companies is negative, our stock price could decline further regardless of our results. Other broad market and industry factors may decrease the market price of our common stock, regardless of our operating performance. Market fluctuations, as well as general political and economic conditions, such as a recession or interest rate or currency rate fluctuations, also may decrease the market price of our common stock. The market value of e-commerce stocks has declined dramatically recently based on profitability and other concerns. 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. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We currently have no floating rate indebtedness 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 our 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 our 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, we 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. 34 ITEM 4. CONTROLS AND PROCEDURES Within the 90-day period prior to the date of this report, priceline.com, under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures (the "Evaluation"). Based upon the Evaluation, our Chief Executive Officer and Chief Financial Officer concluded that its disclosure controls and procedures are effective in ensuring that material information relating to priceline.com, including its consolidated subsidiaries, is made known to them by others within those entities, particularly during the period in which this quarterly report was being prepared. There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of the Evaluation. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Please see Note 9 to the Notes to Unaudited Consolidated Financial Statements included in this Form 10-Q and Part I, Item 3 of our Annual Report on Form 10-K for the year ended December 31, 2001. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 10.74 Employment Agreement, dated August 22, 2002, by and between priceline.com Incorporated and Mitch Truwit.
(b) REPORTS ON FORM 8-K On July 31, 2002, we furnished a report on Form 8-K responding to Item 5 in connection with the Board of Directors' authorization to repurchase up to $40 million of the Company's common stock. In addition, we reported that Cheung Kong (Holdings) Limited and Hutchison Whampoa Limited had informed priceline.com that they may purchase up to an additional $40 million of priceline.com common stock in the open market or in privately negotiated transactions. 35 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PRICELINE.COM INCORPORATED (Registrant) Date: November 14, 2002 By: /s/ Robert J. Mylod ----------------------------------- Name: Robert J. Mylod Title: Chief Financial Officer (On behalf of the Registrant and as principal financial officer) 36 CERTIFICATION PURSUANT TO SECTION 302(a) OF THE SARBANES-OXLEY ACT OF 2002 Pursuant to section 302(a) of the Sarbanes-Oxley Act of 2002, the undersigned officer of priceline.com Incorporated, a Delaware corporation (the "Registrant"), hereby certifies that: 1. I, Richard Braddock, have reviewed the Quarterly Report on Form 10-Q for the quarter ended September 30, 2002 (the "Quarterly Report") of the Registrant; 2. Based on my knowledge, this Quarterly Report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Quarterly Report; 3. Based on my knowledge, the financial statements, and other financial information included in this Quarterly Report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this Quarterly Report; 4. The Registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have: a. designed such disclosure controls and procedures to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Quarterly Report is being prepared; b. evaluated the effectiveness of the Registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this Quarterly Report (the "Evaluation Date"); and c. presented in this Quarterly Report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The Registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the Registrant's auditors and the audit committee of the Registrant's board of directors (or persons performing the equivalent function): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant's ability to record, process, summarize and report financial data and have identified for the Registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls; 6. The Registrant's other certifying officers and I have indicated in this Quarterly Report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Dated: November 14, 2002 /s/ Richard S. Braddock ---------------------------------------- Name: Richard S. Braddock Title: Chairman & Co-Chief Executive Officer CERTIFICATION PURSUANT TO SECTION 302(a) OF THE SARBANES-OXLEY ACT OF 2002 Pursuant to section 302(a) of the Sarbanes-Oxley Act of 2002, the undersigned officer of priceline.com Incorporated, a Delaware corporation (the "Registrant"), hereby certifies that: 1. I, Jeffery Boyd, have reviewed the Quarterly Report on Form 10-Q for the quarter ended September 30, 2002 (the "Quarterly Report") of the Registrant; 2. Based on my knowledge, this Quarterly Report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Quarterly Report; 3. Based on my knowledge, the financial statements, and other financial information included in this Quarterly Report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this Quarterly Report; 4. The Registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have: a. designed such disclosure controls and procedures to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Quarterly Report is being prepared; b. evaluated the effectiveness of the Registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this Quarterly Report (the "Evaluation Date"); and c. presented in this Quarterly Report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The Registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the Registrant's auditors and the audit committee of the Registrant's board of directors (or persons performing the equivalent function): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant's ability to record, process, summarize and report financial data and have identified for the Registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls; 6. The Registrant's other certifying officers and I have indicated in this Quarterly Report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Dated: November 14, 2002 /s/ Jeffery H. Boyd ------------------------------------- Name: Jeffery H. Boyd Title: President & Co-Chief Executive Officer CERTIFICATION PURSUANT TO SECTION 302(a) OF THE SARBANES-OXLEY ACT OF 2002 Pursuant to section 302(a) of the Sarbanes-Oxley Act of 2002, the undersigned officer of priceline.com Incorporated, a Delaware corporation (the "Registrant"), hereby certifies that: 1. I, Robert Mylod, have reviewed the Quarterly Report on Form 10-Q for the quarter ended September 30, 2002 (the "Quarterly Report") of the Registrant; 2. Based on my knowledge, this Quarterly Report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Quarterly Report; 3. Based on my knowledge, the financial statements, and other financial information included in this Quarterly Report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this Quarterly Report; 4. The Registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have: a. designed such disclosure controls and procedures to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Quarterly Report is being prepared; b. evaluated the effectiveness of the Registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this Quarterly Report (the "Evaluation Date"); and c. presented in this Quarterly Report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The Registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the Registrant's auditors and the audit committee of the Registrant's board of directors (or persons performing the equivalent function): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant's ability to record, process, summarize and report financial data and have identified for the Registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls; 6. The Registrant's other certifying officers and I have indicated in this Quarterly Report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Dated: November 14, 2002 /s/ Robert J. Mylod --------------------------------- Name: Robert J. Mylod Title: Chief Financial Officer EX-10.74 3 a2093336zex-10_74.txt EXHIBIT 10.74 EXHIBIT 10.74 ----------------------------------------------------------- EMPLOYMENT AGREEMENT BY AND BETWEEN PRICELINE.COM INCORPORATED AND MITCH TRUWIT AUGUST 22, 2002 ----------------------------------------------------------- EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT, dated as of August 22, 2002 (the "EFFECTIVE DATE"), by and between Priceline.com Incorporated, a Delaware corporation, with its principal office at 800 Connecticut Avenue, Norwalk, Connecticut 06854 (the "COMPANY"), and Mitch Truwit ("EXECUTIVE"). W I T N E S S E T H: WHEREAS, the Company desires that Executive be employed as the Executive Vice President and Chief Operating Officer of the Company; WHEREAS, the Company and Executive desire to enter into this agreement (the "AGREEMENT") as to the terms of his employment by the Company; WHEREAS, the Agreement replaces that certain employment letter, dated February 9, 2001, by and between the Company and Executive (the "FEBRUARY 2001 AGREEMENT"); NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein and for other good and valuable consideration, the parties agree as follows: 1. TERM OF EMPLOYMENT. Except for earlier termination as provided in Section 8 hereof, Executive's employment under this Agreement shall be for a two (2) year term (the "INITIAL EMPLOYMENT TERM") commencing on August 22, 2002 (the "COMMENCEMENT DATE"). Subject to Section 8 hereof, the Initial Employment Term shall be automatically extended for additional terms of successive one (1) year periods (the "ADDITIONAL EMPLOYMENT TERM") unless the Company or Executive gives written notice to the other at least ninety (90) days prior to the expiration of the then Initial Employment Term or Additional Employment Term of the termination of Executive's employment hereunder at the end of such Employment Term. The Initial Employment Term and the Additional Employment Term shall be referred to herein as the "EMPLOYMENT TERM." The February 2001 Agreement shall be of no further effect. 2. POSITIONS. (a) Executive shall serve as Executive Vice President and Chief Operating Officer of the Company. Executive shall also serve, if requested by the Chief Executive Officer of the Company, as an executive officer and director of subsidiaries and a director of associated companies of the Company and shall comply with the policy of the Compensation Committee of the Company's Board of Directors (the "COMPENSATION COMMITTEE") with regard to retention or forfeiture of director's fees. (b) Executive shall report directly to the Chief Executive Officer of the Company and, shall have such duties and authority, consistent with his then position as shall be assigned to him from time to time by the Board of Directors (the "BOARD") or the Chief Executive Officer of the Company. (c) During the Employment Term, Executive shall devote substantially all of his business time and efforts to the performance of his duties hereunder; PROVIDED, HOWEVER, that Executive shall be allowed, to the extent that such activities do not materially interfere with the performance of his duties and responsibilities hereunder, to manage his personal financial and legal affairs and to serve on corporate, civic, charitable industry boards or committees. Notwithstanding the foregoing, the Executive shall only serve on corporate boards of directors if approved in advance by the Chief Executive Officer of the Company. 3. BASE SALARY. Commencing on the Effective Date and continuing during the remainder of the Employment Term, the Company shall pay Executive a base salary at the annual rate of not less than $300,000. Base salary shall be payable in accordance with the usual payroll practices of the Company. Executive's Base Salary shall be subject to annual review by the Board or the Compensation Committee during the Employment Term and may be increased, but not decreased, from time to time by the Board or the Compensation Committee. The base salary as determined as aforesaid from time to time shall constitute "BASE SALARY" for purposes of this Agreement. 4. INCENTIVE COMPENSATION. (a) BONUS. Executive shall be eligible to participate in any annual bonus plan the Company may implement at any time during Executive's Employment Term for senior executives at a level commensurate with his position. (b) LONG TERM COMPENSATION. For each fiscal year or portion thereof during the Employment Term, Executive shall be eligible to participate in any long-term incentive compensation plan generally made available to senior executives of the Company at a level commensurate with his position in accordance with and subject to the terms of such plan. (c) STOCK OPTIONS. (i) OPTION GRANT. On the Effective Date, the Company shall grant a Non-Qualified Option (as such term is defined in the Priceline.com Incorporated 1999 Omnibus Plan (the "PLAN")) under the Plan to Executive to purchase five hundred thousand (500,000) shares of the Company's common stock (the "OPTION"). The exercise price with respect to each share of the Company's common stock, par value $0.008 per share (the "COMMON STOCK"), subject to the Option shall be $2.42, the Fair Market Value (as such term is defined in the Plan) of the Common Stock on the Effective Date. (ii) OPTION VESTING. The Option shall vest and become exercisable as to one-third (1/3) of the Option on the first anniversary of the Effective Date (the "FIRST VESTING DATE"). The Option shall vest and become exercisable as to the remaining two-thirds (2/3) of the Option pro rata on the 22nd of each month over the twenty four month period immediately following the First Vesting Date, PROVIDED that Executive is employed by the Company on each such vesting date. For avoidance of doubt, there shall be no proportionate or partial vesting in the periods prior to each vesting date and vesting shall occur only on the appropriate vesting date pursuant to this Section 4(c)(ii). Vesting and exercisability shall be accelerated as follows: (A) upon a Termination without Cause or a Termination for Good Reason, the Option will immediately vest and become exercisable (to the extent not then vested) as follows: one-third (1/3) of the Option if the termination takes place prior to the First Vesting Date; two-thirds (2/3) of the Option if the termination takes place on or after the First Vesting Date and prior to the first anniversary of the First Vesting Date; and all of the Option if the termination takes place thereafter; or (B) upon death or Termination for a Disability, the Option will immediately vest as to half (1/2) of Executive's then unvested shares. (iii) OPTION VESTING UPON A CHANGE IN CONTROL. Upon the occurrence of a Change in Control (as such term is defined in Section 10 of this Agreement), the Option will fully vest and become exercisable in full on the date that is six (6) months from the date of the Change in Control; PROVIDED that Executive is (A) employed by the Company on the date of the Change in Control and (B) employed by the Company on the date that is six (6) months from the date of the Change in Control. In the event of a Termination without Cause or Termination for Good Reason (A) in anticipation of a Change in Control or (B) within six (6) months following a Change in Control, the Option will fully vest and become exercisable in full immediately. In the event that the Option is not to be continued, assumed or substituted for upon a Change in Control, the Option will fully vest and become exercisable in full immediately prior to the Change in Control, PROVIDED that Executive is employed by the Company on the date of the Change in Control. For this purpose, the Option will 3 not be considered substituted for unless the terms and conditions of the substitute Option are no less favorable to Executive than those of the Option. (iv) TERMINATION. Upon Executive's Termination for Cause or Termination without Good Reason, the unvested portion of the Option shall be immediately forfeited and canceled. Upon termination of Executive's employment with the Company, the portion of the Option that is not, and does not become, vested in accordance with the terms hereof shall be immediately forfeited and canceled. The vested portion of the Option shall expire on the earlier of (i) the tenth (10th) anniversary of the Effective Date, or (ii)(A) eighteen (18) months after any termination if the termination is as of the result of Executive's death, Termination for Disability, Termination without Cause, Termination for Good Reason or non-extension of the Employment Term in accordance with Section 1 hereof as a result of notice from the Company, and (B) ninety (90) days after such termination if such termination is a result of Executive's Termination for Cause, voluntary Termination by Executive without Good Reason, or non-extension of the Employment Term in accordance with Section 1 hereof as a result of notice by Executive. (d) OTHER COMPENSATION. The Company may, upon recommendation of the Compensation Committee, award to the Executive such other bonuses and compensation as it deems appropriate and reasonable. 5. EMPLOYEE BENEFITS AND VACATION. (a) During the Employment Term, Executive shall be entitled to participate in all benefit plans and arrangements and fringe benefits and perquisite programs generally provided to comparable senior executives of the Company. (b) During the Employment Term, Executive shall be entitled to vacation each year in accordance with the Company's policies in effect from time to time, but in no event less than four (4) weeks paid vacation per calendar year. The Executive shall also be entitled to such periods of sick leave as is customarily provided by the Company for its senior executive employees. 6. BUSINESS EXPENSES. The Company shall reimburse Executive for the travel, entertainment and other business expenses incurred by Executive in the performance of his duties hereunder, in accordance with the Company's policies as in effect from time to time. 7. TERMINATION. (a) The employment of Executive under this Agreement shall terminate upon the earliest to occur of any of the following events: (i) the death of the Executive; (ii) the termination of the Executive's employment by the Company due to the Executive's Disability pursuant to Section 7(b) hereof; (iii) the termination of the Executive's employment by the Executive for Good Reason pursuant to Section 7(c) hereof; (iv) the termination of the Executive's employment by the Company without Cause; (v) the termination of employment by the Executive without Good Reason upon sixty (60) days prior written notice; or (vi) the termination of the Executive's employment by the Company for Cause pursuant to Section 7(e). (b) DISABILITY. If by reason of the same or related physical or mental illness or incapacity, the Executive is unable to carry out his material duties pursuant to this Agreement for more than 4 six (6) consecutive months, the Company may terminate Executive's employment for Disability. Such termination shall be upon thirty (30) days written notice by a Notice of Disability Termination, at any time thereafter while Executive consecutively continues to be unable to carry out his duties as a result of the same or related physical or mental illness or incapacity. A Termination for Disability hereunder shall not be effective if Executive returns to the full time performance of his material duties within such thirty (30) day period. (c) TERMINATION FOR GOOD REASON. A Termination for Good Reason means a termination by Executive by written notice given within ninety (90) days after the occurrence of the Good Reason event, unless such circumstances are fully corrected prior to the date of termination specified in the Notice of Termination for Good Reason (as defined in Section 7(d) hereof). For purposes of this Agreement, "GOOD REASON" shall mean the occurrence or failure to cause the occurrence, as the case may be, without Executive's express written consent, of any of the following circumstances: (i) any material diminution of Executive's positions, duties or responsibilities hereunder (except in each case in connection with the termination of Executive's employment for Cause or Disability or as a result of Executive's death, or temporarily as a result of Executive's illness or other absence) including, without limitation, a change in Executive's reporting relationship such that Executive no longer reports directly to the Chief Executive Officer of the Company, or, the assignment to Executive of duties or responsibilities that are inconsistent with Executive's then position; (ii) removal of, or the nonreelection of, the Executive from officer positions with the Company specified herein without election to a higher position or removal of the Executive from any of his then officer positions; (iii) a relocation of the Company's executive office in Connecticut to a location more than thirty-five (35) miles from its current location or more than thirty-five (35) miles further from the Executive's residence at the time of relocation; (iv) a failure by the Company (A) to continue any bonus plan, program or arrangement in which Executive is entitled to participate (the "BONUS PLANS"), provided that any such Bonus Plans may be modified at the Company's discretion from time to time but shall be deemed terminated if (x) any such plan does not remain substantially in the form in effect prior to such modification and (y) if plans providing Executive with substantially similar benefits are not substituted therefor ("SUBSTITUTE PLANS"), or (B) to continue Executive as a participant in the Bonus Plans and Substitute Plans on at least the same basis as to potential amount of the bonus as Executive participated in prior to any change in such plans or awards, in accordance with the Bonus Plans and the Substitute Plans; (v) any material breach by the Company of any provision of this Agreement, including without limitation Section 12 hereof; or (vi) failure of any successor to the Company (whether direct or indirect and whether by merger, acquisition, consolidation or otherwise) to assume in a writing delivered to Executive upon the assignee becoming such, the obligations of the Company hereunder. (d) NOTICE OF TERMINATION FOR GOOD REASON. A Notice of Termination for Good Reason shall mean a notice that shall indicate the specific termination provision in Section 7(c) relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for Termination for Good Reason. The failure by Executive to set forth in the Notice of Termination for Good Reason any facts or circumstances which contribute to the showing of Good Reason shall not waive any right of Executive hereunder or preclude Executive from asserting such fact or circumstance in enforcing his rights hereunder. The Notice of Termination for Good Reason shall provide for a date of termination not less than ten (10) nor more than sixty (60) days after the date such Notice of Termination for Good Reason is given, provided that in the case of the events set forth in Sections 7(c)(i) or (ii) or the date may be five (5) days after the giving of such notice. (e) CAUSE. Subject to the notification provisions of Section 7(f) below, Executive's employment hereunder may be terminated by the Company for Cause. For purposes of this Agreement, the term "Cause" shall be limited to (i) willful misconduct by Executive with regard to the Company which has a material adverse effect on the Company; (ii) the willful refusal of Executive to attempt to follow the proper written direction of the Board or a more senior officer of the Company, provided that the foregoing refusal shall not be "Cause" if Executive in good faith believes that such direction is illegal, unethical or immoral and promptly so notifies the Board or the more senior officer (whichever is applicable); (iii) substantial and continuing willful refusal by the Executive to attempt to perform the duties required of him hereunder (other 5 than any such failure resulting from incapacity due to physical or mental illness) after a written demand for substantial performance is delivered to the Executive by the Board or a more senior officer of the Company which specifically identifies the manner in which it is believed that the Executive has substantially and continually refused to attempt to perform his duties hereunder; or (iv) the Executive being convicted of a felony (other than a felony involving a traffic violation or as a result of vicarious liability). For purposes of this paragraph, no act, or failure to act, on Executive's part shall be considered "willful" unless done or omitted to be done, by him not in good faith and without reasonable belief that his action or omission was in the best interests of the Company. A notice by the Company of a non-renewal of the Employment Term pursuant to Section 1 hereof shall be deemed an involuntary termination of Executive by the Company without Cause as of the end of the then Employment Term, but Executive may terminate at any time after the receipt of such notice and shall be treated as if he was terminated without Cause as of such date. (f) NOTICE OF TERMINATION FOR CAUSE. A Notice of Termination for Cause shall mean a notice that shall indicate the specific termination provision in Section 7(e) relied upon and shall set forth in reasonable detail the facts and circumstances which provide for a basis for Termination for Cause. Further, a Notification for Cause shall be required to include a copy of a resolution duly adopted by at least two-thirds (2/3) of the entire membership of the Board at a meeting of the Board which was called for the purpose of considering such termination and which Executive and his representative had the right to attend and address the Board, finding that, in the good faith of the Board, Executive engaged in conduct set forth in the definition of Cause herein and specifying the particulars thereof in reasonable detail. The date of termination for a Termination for Cause shall be the date indicated in the Notice of Termination. Any purported Termination for Cause which is held by a court not to have been based on the grounds set forth in this Agreement or not to have followed the procedures set forth in this Agreement shall be deemed a Termination by the Company without Cause. 8. CONSEQUENCES OF TERMINATION OF EMPLOYMENT. (a) DEATH. If, Executive's employment is terminated by reason of Executive's death, the employment period under this Agreement shall terminate without further obligations to the Executive's legal representatives under this Agreement except for: (i) any compensation earned but not yet paid, including and without limitation, any bonus if declared or earned but not yet paid for a completed fiscal year, any amount of Base Salary earned but unpaid, any accrued vacation pay payable pursuant to the Company's policies, and any unreimbursed business expenses payable pursuant to Section 6 (collectively "ACCRUED AMOUNTS"), which amounts shall be promptly paid in a lump sum to Executive's estate; (ii) any other amounts or benefits owing to the Executive under the then applicable employee benefit plans, long term incentive plans or equity plans and programs of the Company which shall be paid or treated in accordance with Section 4(c) hereof with regard to the Option and otherwise in accordance with the terms of such plans and programs; (iii) continuation of Executive's health benefits for Executive's dependents at the same level and cost as if Executive was an employee of the Company for twelve (12) months; and (iv) if a bonus plan is in place, the product of (x) the target annual bonus for the fiscal year of Executive's death, multiplied by (y) a fraction, the numerator of which is the number of days of the current fiscal year during which Executive was employed by the Company, and the denominator of which is 365, which bonus shall be paid when bonuses for such period are paid to the other executives. (b) DISABILITY. If Executive's employment is terminated by reason of Executive's Disability, Executive shall be entitled to receive the payments and benefits to which his representatives would be entitled in the event of a termination of employment by reason of his death plus, to the extent not duplicative of the foregoing, Executive shall be entitled to continuation of the benefits (including without limitation to health, life, disability and pension) as if Executive had been an employee of the Company for twelve (12) months. 6 (c) TERMINATION BY EXECUTIVE FOR GOOD REASON OR TERMINATION BY THE COMPANY WITHOUT CAUSE. If (i) Executive terminates his employment hereunder for Good Reason during the Employment Term or (ii) Executive's employment with the Company is terminated by the Company without Cause, Executive shall be entitled to receive, (A) over a period of twelve (12) months after such termination an amount equal to two (2) times the sum of his Base Salary and target bonus, if any, for the year in which such termination occurs (provided, however, in the event that the Base Salary or target bonus, if any, has been decreased in the twelve (12) months prior to the termination, the amount to be used shall be the highest Base Salary and target bonus, if any, during such twelve (12) month period); (B) any Accrued Amounts at the date of termination; (C) any other amounts or benefits owing to Executive under the then applicable employee benefit, long term incentive or equity plans and programs of the Company, which shall be paid or treated in accordance with Section 4(c) hereof with regard to the Option and otherwise in accordance with the terms of such plans and programs; (D) continuation of the benefits (including without limitation to health, life, disability and pension) as if Executive was an employee of the Company for twelve (12) months, provided that, if such termination is after a Change in Control, the period of benefit continuation shall be twenty-four (24) months; and (E) if a bonus plan is in place, the product of (x) the target annual bonus for the fiscal year of Executive's termination, multiplied by (y) a fraction, the numerator of which is the number of days of the current fiscal year during which Executive was employed by the Company, and the denominator of which is 365, which bonus shall be paid when bonuses for such period are paid to the other executives. (d) TERMINATION WITH CAUSE OR VOLUNTARY RESIGNATION WITHOUT GOOD REASON OR RETIREMENT. If, Executive's employment hereunder is terminated (i) by the Company for Cause or (ii) by Executive without Good Reason, the Executive shall be entitled to receive only his Base Salary through the date of termination, and any unreimbursed business expenses payable pursuant to Section 6 and, if such termination is by Executive without Good Reason, any bonus that has been declared or earned but not yet paid for a completed fiscal year. Executive's rights under all benefits plans and equity grants shall be determined in accordance with the Company's plans, programs and grants, except as provided in Section 4(c) hereof with respect to the Option. 9. NO MITIGATION; NO SET-OFF. In the event of any termination of employment hereunder, Executive shall be under no obligation to seek other employment and there shall be no offset against any amounts due Executive under this Agreement on account of any remuneration attributable to any subsequent employment that Executive may obtain. The amounts payable hereunder shall not be subject to setoff, counterclaim, recoupment, defense or other right which the Company may have against the Executive or others, except upon obtaining by the Company of a final unappealable judgment against Executive. 10. CHANGE IN CONTROL. (a) For purposes of this Agreement, the term "Change in Control" shall mean the occurrence of any one of the following events: (i) any Person, other than Hutchison Whampoa Limited and/or Cheung Kong (Holdings) Limited and their Affiliates, is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing thirty-five percent (35%) or more of the combined voting power of the Company's then outstanding voting securities; (ii) Hutchison Whampoa Limited and/or Cheung Kong (Holdings) Limited and their Affiliates, is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing fifty-one percent (51%) or more of the combined voting power of the Company's then outstanding voting securities; (iii) the following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who, on the Effective Date, constitute the Board and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of the Company) 7 whose appointment or election by the Board or nomination for election by the Company's stockholders was approved or recommended by a vote of the at least two-thirds (2/3) of the directors then still in office who either were directors on the Effective Date or whose appointment, election or nomination for election was previously so approved or recommended; (iv) there is a consummated merger or consolidation of the Company or any direct or indirect subsidiary of the Company with any other corporation, other than (A) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving or parent entity) more than fifty percent (50%) of the combined voting power of the voting securities of the Company or such surviving or parent equity outstanding immediately after such merger or consolidation or (B) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person, directly or indirectly, acquired twenty-five percent (25%) or more of the combined voting power of the Company's then outstanding securities (not including in the securities beneficially owned by such person any securities acquired directly from the Company or its Affiliates); or (v) the stock holders of the Company approve a plan of complete liquidation of the Company or there is consummated on agreement for the sale or disposition by the Company of all or substantially all of the Company's assets (or any transaction having a similar effect), other than a sale or disposition by the Company of all or substantially all of the Company's assets to an entity, at least fifty percent (50%) of the combined voting power of the voting securities of which are owned by stockholders of the Company in substantially the same proportions as their ownership of the Company immediately prior to such sale. (b) For purposes of this Section 10, the following terms shall have the following meanings: (i) "Affiliate" shall mean an affiliate of the Company, as defined in Rule 12b-2 promulgated under Section 12 of the Securities Exchange Act of 1934, as amended from time to time (the "Exchange Act"); (ii) "Beneficial Owner" shall have the meaning set forth in Rule 13d-3 under the Exchange Act; (iii) "Person" shall have the meaning set forth in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof, except that such term shall not include (1) the Company, (2) a trustee or other fiduciary holding securities under an employee benefit plan of the Company, (3) an underwriter temporarily holding securities pursuant to an offering of such securities or (4) a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of shares of Common Stock of the Company. 11. CONFIDENTIAL INFORMATION. (a) Executive acknowledges that as a result of his employment by the Company, Executive will obtain confidential information as to the Company and its affiliates and the Company and its affiliates will suffer substantial damage, which would be difficult to ascertain, if Executive should use such confidential information and that because of the nature of the information that will be known to Executive it is necessary for the Company and its affiliates to be protected by the Confidentiality restrictions set forth herein. (b) During and for a period of five (5) years after the Employment Term, Executive shall not use for his own benefit or disclose confidential information, knowledge or data relating to the Company 8 and its affiliates, and their respective businesses, including any confidential information as to customers of the Company and its affiliates obtained by Executive during his employment by the Company and its affiliates and not (i) otherwise public knowledge or known within the applicable industry or (ii) in connection with performance of his duties hereunder as he deems in good faith to be necessary or desirable. Executive shall not, without prior written consent of the Company, unless compelled pursuant to the order of a court or other governmental or legal body having jurisdiction over such matter, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by it. In the event Executive is compelled by order of a court or other governmental or legal body to communicate or divulge any such information, knowledge or data to anyone other than the foregoing, he shall promptly notify the Company of any such order so it may seek a protective order. (c) Upon termination of his employment with the Company and its affiliates, or at any time as the Company may request, Executive will promptly deliver to the Company, as requested, all documents (whether prepared by the Company, an affiliate, Executive or a third party) relating to the Company, an affiliate or any of their businesses or property which he may possess or have under his direction or control other than documents provided to Executive in his capacity as a participant in any employee benefit plan, policy or program of the Company or any agreement by and between Executive and the Company with regard to Executive's employment or severance. (d) In the event of a breach or potential breach of this Section 11, Executive acknowledges that the Company and its affiliates will be caused irreparable injury and that money damages may not be an adequate remedy and agree that the Company and its affiliates shall be entitled to injunctive relief (in addition to its other remedies at law) to have the provisions of this Section 11 enforced. It is hereby acknowledged that the provisions of this Section 11 are for the benefit of the Company and all of the affiliates of the Company and each such entity may enforce the provisions of this Section 11 and only the applicable entity can waive the rights hereunder with respect to its confidential information and employees. 12. INDEMNIFICATION. The Company shall indemnify and hold harmless Executive to the fullest extent permitted by law for any action or inaction of Executive while serving as an officer and director of the Company or, at the Company's request, as an officer or director of any other entity or as a fiduciary of any benefit plan. The Company shall cover the Executive under directors and officers liability insurance both during and, while potential liability exists, after the Employment Term in the same amount and to the same extent as the Company covers its other officers and directors. 13. LEGAL FEES. (a) The Company shall pay the Executive's reasonable legal fees and costs associated with entering into this Agreement. (b) All disputes and controversies arising under or in connection with this Agreement, other than the seeking of injunctive or other equitable relief pursuant to Section 11 hereof, shall be settled by arbitration conducted before a panel of three (3) arbitrators sitting in the State of Connecticut or such other location agreed by the parties hereto, in accordance with the rules for expedited resolution of commercial disputes of the American Arbitration Association then in effect. The determination of the majority of the arbitrators shall be final and binding on the parties. Judgment may be entered on the award of the arbitrator in any court having proper jurisdiction. All expenses of such arbitration, including the fees and expenses of the counsel of the Executive, shall be borne by the Company unless the arbitrators determine that Executive's position was overall frivolous or otherwise taken in bad faith, in which case the arbitrators may determine that Executive shall bear his own legal fees. 9 (c) In the event after a Change in Control either party files for arbitration to resolve any dispute as to whether a termination is for Cause or Good Reason, until such dispute is determined by the arbitrators, the Executive shall continue to be treated economically and benefit wise in the manner asserted by him in the arbitration effective as of the date of the filing of the arbitration, subject to the Executive promptly refunding any amounts paid to him, paying the cost of any benefits provided to him and paying to the Company the profits in any stock option or other equity awards exercised or otherwise realized by him during the pendency of the arbitration which he is ultimately held not to be entitled to; provided the arbitrators may terminate such payments and benefits in the event that they determine at any point that the Executive is intentionally delaying conclusion of the arbitration. 14. NON-SOLICITATION/NON-DISPARAGEMENT. Commencing on the date of Executive's cessation of employment with the Company and continuing for twelve (12) months thereafter, (a) Executive shall not (whether for Executive's own account or on behalf of any person, corporation, partnership, or other business entity, and whether directly or indirectly) solicit or endeaver to entice away from the Company or any subsidiary or affiliate, any employee or group of employees thereof provided, however, that the general advertisement for employees or the general solicitation of employees by a recruiter shall not be deemed a violation of this Section 15(a) and (b) neither Executive nor the Company shall publicly or with the intent to become public make any statements, written or oral, which disparage or defame the goodwill or reputation of, in Executive's case, the Company formally or, its directors or senior officers or, in the Company's case, Executive. 15. CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY. (a) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment, award, benefit or distribution (or any acceleration of any payment, award, benefit or distribution) by the Company (or any of its affiliated entities) or any entity which effectuates a Change in Control (or any of its affiliated entities) to or for the benefit of Executive (whether pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 15) (the "PAYMENTS") would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "CODE"), or any interest or penalties are incurred by Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "EXCISE TAX"), then the Company shall pay to Executive an additional payment (a "GROSS-UP PAYMENT") in an amount such that after payment by Executive of all taxes (including any Excise Tax) imposed upon the Gross-Up Payment, Executive retains an amount of the Gross-Up Payment equal to the sum of (x) the Excise Tax imposed upon the Payments and (y) the product of any deductions disallowed because of the inclusion of the Gross-up Payment in Executive's adjusted gross income and the highest applicable marginal rate of federal income taxation for the calendar year in which the Gross-up Payment is to be made. For purposes of determining the amount of the Gross-up Payment, the Executive shall be deemed to (i) pay federal income taxes at the highest marginal rates of federal income taxation for the calendar year in which the Gross-up Payment is to be made, and (ii) pay applicable state and local income taxes at the highest marginal rate of taxation for the calendar year in which the Gross-up Payment is to be made, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes. Notwithstanding the foregoing provisions of this Section 15(a), if it shall be determined that Executive is entitled to a Gross-Up Payment, but that the Payments would not be subject to the Excise Tax if the Payments were reduced by an amount that is less than 5% of the portion of the Payments that would be treated as "parachute payments" under Section 280G of the Code, then the amounts payable to Executive under this Agreement shall be reduced (but not below zero) to the maximum amount that could be paid to Executive without giving rise to the Excise Tax (the "SAFE HARBOR CAP"), and no Gross-Up Payment shall be made to Executive. The reduction of the amounts payable hereunder, if applicable, shall be made by reducing first the payments under Section 15, unless an alternative method of reduction is elected by Executive. For purposes of reducing the Payments to the Safe Harbor Cap, only amounts payable under this Agreement (and no other Payments) shall be reduced. 10 If the reduction of the amounts payable hereunder would not result in a reduction of the Payments to the Safe Harbor Cap, no amounts payable under this Agreement shall be reduced pursuant to this provision. (b) Subject to the provisions of Section 15(a), all determinations required to be made under this Section 15, including whether and when a Gross-Up Payment is required, the amount of such Gross-Up Payment, the reduction of the Payments to the Safe Harbor Cap and the assumptions to be utilized in arriving at such determinations, shall be made by the public accounting firm that is retained by the Company as of the date immediately prior to the Change in Control (the "ACCOUNTING FIRM") which shall provide detailed supporting calculations both to the Company and Executive within fifteen (15) business days of the receipt of notice from the Company or the Executive that there has been a Payment, or such earlier time as is requested by the Company (collectively, the "DETERMINATION"). In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change in Control, Executive may appoint another nationally recognized public accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company and the Company shall enter into any agreement requested by the Accounting Firm in connection with the performance of the services hereunder. The Gross-up Payment under this Section 15 with respect to any Payments shall be made no later than thirty (30) days following such Payment. If the Accounting Firm determines that no Excise Tax is payable by Executive, it shall furnish Executive with a written opinion to such effect, and to the effect that failure to report the Excise Tax, if any, on Executive's applicable federal income tax return will not result in the imposition of a negligence or similar penalty. In the event the Accounting Firm determines that the Payments shall be reduced to the Safe Harbor Cap, it shall furnish Executive with a written opinion to such effect. The Determination by the Accounting Firm shall be binding upon the Company and Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the Determination, it is possible that Gross-up Payments which will not have been made by the Company should have been made ("UNDERPAYMENT") or Gross-up Payments are made by the Company which should not have been made ("OVERPAYMENT"), consistent with the calculations required to be made hereunder. In the event that the Executive thereafter is required to make payment of any Excise Tax or additional Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code) shall be promptly paid by the Company to or for the benefit of Executive. In the event the amount of the Gross-up Payment exceeds the amount necessary to reimburse the Executive for his Excise Tax, the Accounting Firm shall determine the amount of the Overpayment that has been made and any such Overpayment (together with interest at the rate provided in Section 1274(b)(2) of the Code) shall be promptly paid by Executive (to the extent he has received a refund if the applicable Excise Tax has been paid to the Internal Revenue Service) to or for the benefit of the Company. Executive shall cooperate, to the extent his expenses are reimbursed by the Company, with any reasonable requests by the Company in connection with any contests or disputes with the Internal Revenue Service in connection with the Excise Tax. 16. MISCELLANEOUS. (a) GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware without reference to principles of conflict of laws. (b) ENTIRE AGREEMENT/AMENDMENTS. This Agreement and the instruments contemplated herein, contain the entire understanding of the parties with respect to the employment of Executive by the Company from and after the Commencement Date and supersedes any prior agreements between the Company and Executive. There are no restrictions, agreements, promises, warranties, covenants or undertakings between the parties with respect to the subject matter herein other than those expressly set forth herein and therein. This Agreement may not be altered, modified, or amended except by written instrument signed by the parties hereto. 11 (c) NO WAIVER. The failure of a party to insist upon strict adherence to any term of this Agreement on any occasion shall not be considered a waiver of such party's rights or deprive such party of the right thereafter to insist upon strict adherence to that term or any other term of this Agreement. Any such waiver must be in writing and signed by Executive or an authorized officer of the Company, as the case may be. (d) ASSIGNMENT. This Agreement shall not be assignable by Executive. This Agreement shall be assignable by the Company only to an acquirer of all or substantially all of the assets of the Company, provided such acquirer promptly assumes all of the obligations hereunder of the Company in a writing delivered to the Executive and otherwise complies with the provisions hereof with regard to such assumption. (e) SUCCESSORS; BINDING AGREEMENT; THIRD PARTY BENEFICIARIES. This Agreement shall inure to the benefit of and be binding upon the personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees legatees and permitted assignees of the parties hereto. (f) COMMUNICATIONS. For the purpose of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given (i) when faxed or delivered, or (ii) two (2) business days after being mailed by United States registered or certified mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth on the initial page of this Agreement, provided that all notices to the Company shall be directed to the attention of the Secretary of the Company, or to such other address as any party may have furnished to the other in writing in accordance herewith. Notice of change of address shall be effective only upon receipt. (g) WITHHOLDING TAXES. The Company may withhold from any and all amounts payable under this Agreement such Federal, state and local taxes as may be required to be withheld pursuant to any applicable law or regulation. (h) SURVIVORSHIP. The respective rights and obligations of the parties hereunder, including without limitation Section 11 hereof, shall survive any termination of Executive's employment to the extent necessary to the agreed preservation of such rights and obligations. (i) COUNTERPARTS. This Agreement may be signed in counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. (j) HEADINGS. The headings of the sections contained in this Agreement are for convenience only and shall not be deemed to control or affect the meaning or construction of any provision of this Agreement. 12 IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written. Priceline.com Incorporated By: /s/ Richard Braddock ------------------------------------- Richard Braddock Chairman of the Board Priceline.com Incorporated /s/ Mitch Truwit ------------------------------------- Mitch Truwit -----END PRIVACY-ENHANCED MESSAGE-----