-----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, BTySXz0XDbEWmzK+kvMi36ylwNJWhRAtWs1onuHIXu2hbwMeZRXAVIymmzGxmj/N 7xBvrvuJctoz1+GIA9NBLw== 0001047469-03-018883.txt : 20030515 0001047469-03-018883.hdr.sgml : 20030515 20030515150643 ACCESSION NUMBER: 0001047469-03-018883 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20030331 FILED AS OF DATE: 20030515 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: 03704289 BUSINESS ADDRESS: STREET 1: 800 CONNECTICUT AVE CITY: NORWALK STATE: CT ZIP: 06854 BUSINESS PHONE: 2037053000 10-Q 1 a2111225z10-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 March 31, 2003 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________ to __________ Commission File Number 0-25581 PRICELINE.COM INCORPORATED - -------------------------------------------------------------------------------- (Exact name of Registrant as specified in its charter) Delaware 06-152849 - -------------------------------------- ------------------------------- (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 May 7, 2003: Common Stock, par value $0.008 per share 225,615,266 - ----------------------------------------------- ----------------------------- (Class) (Number of Shares) priceline.com Incorporated Form 10-Q For the Quarter Ended March 31, 2003 PART I - FINANCIAL INFORMATION Item 1. Consolidated Condensed Financial Statements Consolidated Balance Sheets at March 31, 2003 (unaudited) and December 31, 2002..........................3 Consolidated Statements of Operations For the Three Months Ended March 31, 2003 and 2002 (unaudited).............................................................4 Consolidated Statement of Changes in Stockholders' Equity For the Three Months Ended March 31, 2003 (unaudited)......................................................................5 Consolidated Statements of Cash Flows For the Three Months Ended March 31, 2003 and 2002 (unaudited) Notes to Unaudited Consolidated Financial Statements.....................................................6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...........14 Item 3. Quantitative and Qualitative Disclosures About Market Risk......................................34 Item 4. Controls and Procedures.........................................................................34 PART II - OTHER INFORMATION Item 1. Legal Proceedings...............................................................................35 Item 6. Exhibits and Reports on Form 8-K................................................................35 SIGNATURES..............................................................................................36 CERTIFICATIONS..........................................................................................37
2 PART I - FINANCIAL INFORMATION ITEM 1. CONSOLIDATED CONDENSED FINANCIAL STATEMENTS PRICELINE.COM INCORPORATED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
MARCH 31, DECEMBER 31, 2003 2002 ------------- ------------ (UNAUDITED) ASSETS Current assets: Cash and cash equivalents.................................................................. $ 52,560 $ 67,182 Restricted cash............................................................................ 17,025 18,248 Short-term investments .................................................................... 70,194 64,154 Accounts receivable, net of allowance for doubtful accounts of $1,262 at March 31, 2003 and December 31, 2002............................................ 16,106 13,636 Prepaid expenses and other current assets.............................................. 6,243 6,348 ------------- ------------- Total current assets................................................................... 162,128 169,568 Property and equipment, net..................................................................... 17,690 21,413 Goodwill........................................................................................ 10,517 10,517 Other assets, primarily related parties......................................................... 17,923 9,664 ------------- ------------- Total assets............................................................................ $ 208,258 $ 211,162 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable........................................................................... $ 36,020 $ 35,375 Accrued expenses........................................................................... 24,983 27,889 Other current liabilities.................................................................. 2,833 2,063 ------------- ------------- Total current liabilities............................................................... 63,836 65,327 Long-term accrued expenses...................................................................... 422 715 ------------- ------------- Total liabilities....................................................................... 64,258 66,042 ------------- ------------- Commitments and Contingencies (See Notes) SERIES B MANDATORILY REDEEMABLE PREFERRED STOCK, $0.01 par value; 80,000 authorized shares; $1,000 liquidation value per share; 80,000 shares issued; 13,470 and 13,470 shares outstanding, respectively......................................... 13,470 13,470 Stockholders' equity: Common stock, $0.008 par value, authorized 1,000,000,000 shares; issued 235,806,652 and 235,549,173 shares, respectively..................................................... 1,886 1,884 Treasury stock, 10,837,953 shares and 10,837,953 shares, respectively ..................... (338,410) (338,410) Additional paid-in capital................................................................. 2,040,850 2,033,944 Accumulated deficit........................................................................ (1,573,796) (1,565,768) ------------- ------------- Total stockholders' equity................................................................ 130,530 131,650 ------------- ------------- Total liabilities and stockholders' equity...................................................... $ 208,258 $ 211,162 ============= =============
See Notes to Unaudited Consolidated Financial Statements. 3 PRICELINE.COM INCORPORATED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED MARCH 31, 2003 2002 ------------- ------------- Merchant revenues............................................................................... $ 198,608 $ 259,667 Agency revenues................................................................................. 1,005 218 Other revenues.................................................................................. 874 2,000 ------------- ------------- Total revenues.............................................................................. 200,487 261,885 Cost of merchant revenues....................................................................... 167,500 219,511 Cost of agency revenues......................................................................... - - Cost of other revenues.......................................................................... - 381 ------------- ------------- Total costs of revenues................................................................. 167,500 219,892 ------------- ------------- Gross profit.................................................................................... 32,987 41,993 ------------- ------------- Operating expenses: Advertising................................................................................. 11,098 10,227 Sales and marketing......................................................................... 8,064 10,564 General and administrative.................................................................. 6,568 6,487 Stock based compensation.................................................................... - 250 Systems and business development............................................................ 4,930 6,328 Depreciation and amortization............................................................... 3,912 4,458 Restructuring charge (reversal)............................................................. - (824) Warrant costs............................................................................... 6,638 - ------------- ------------- Total operating expenses.................................................................... 41,210 37,490 ------------- ------------- Operating (loss) income......................................................................... (8,223) 4,503 Other income: Interest income............................................................................. 492 782 Equity in net income of pricelinemortgage................................................... - 492 Other....................................................................................... - (36) ------------- ------------- Total other income.......................................................................... 492 1,238 ------------- ------------- Net (loss) income............................................................................... (7,731) 5,741 Preferred stock dividend........................................................................ (297) (1,854) ------------- ------------- Net (loss) income applicable to common stockholders............................................. $ (8,028) $ 3,887 ============= ============= Net (loss) income applicable to common stockholders per basic common share...................................................................... $ (0.04) $ 0.02 ============= ============= Weighted average number of basic common shares outstanding................................................................... 224,860 227,503 ============= ============= Net (loss) income applicable to common stock- holders per diluted common share............................................................ $ (0.04) $ 0.02 ============= ============= Weighted average number of diluted common shares outstanding................................................................................. 224,860 239,970 ============= =============
See Notes to Unaudited Consolidated Financial Statements. 4 PRICELINE.COM INCORPORATED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE THREE MONTHS ENDED MARCH 31, 2003 (UNAUDITED) (IN THOUSANDS)
COMMON STOCK ADDITIONAL TREASURY STOCK PAID-IN ACCUMULATED SHARES AMOUNT CAPITAL DEFICIT SHARES AMOUNT TOTAL --------------------------------------------------------------------------------------------------- Balance, January 1, 2003.... 235,549 $ 1,884 $ 2,033,944 $ (1,565,768) (10,838) $ (338,410) $ 131,650 Net loss applicable to common stockholders....... - - - (8,028) - - (8,028) Warrants to purchase common stock.............. - - 6,638 - - - 6,638 Issuance of preferred stock dividend.................. 242 2 295 - - - 297 Exercise of options and other..................... 16 - (27) - - - (27) --------------------------------------------------------------------------------------------------- Balance, March 31, 2003..... 235,807 $ 1,886 $ 2,040,850 $ (1,573,796) (10,838) $ (338,410) $ 130,530 ===================================================================================================
See Notes to Unaudited Consolidated Financial Statements. 5 PRICELINE.COM INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)
THREE MONTHS ENDED MARCH 31, 2003 2002 ------------- ------------- OPERATING ACTIVITIES: Net (loss) income............................................................................... $ (7,731) $ 5,741 Adjustments to reconcile net (loss)/income to net cash provided by operating activities: Depreciation and amortization............................................................. 3,912 4,459 Provision for uncollectible accounts, net................................................. 673 (64) Warrant costs............................................................................. 6,638 - Equity in net income of pricelinemortgage................................................. - (492) Changes in assets and liabilities: Accounts receivable....................................................................... (3,143) (4,489) Prepaid expenses and other current assets................................................. 105 (1,324) Accounts payable and accrued expenses..................................................... (1,784) 8,558 Other..................................................................................... 490 1,686 ------------- ------------- Net cash (used in)/provided by operating activities............................................. (840) 14,075 ------------- ------------- INVESTING ACTIVITIES: Additions to property and equipment....................................................... (484) (3,150) Investment in short-term investments/marketable securities, net........................... (6,040) (19,058) Return/(funding) of restricted cash and bank certificate of deposit....................... 1,223 (2,058) Investment in Travelweb LLC............................................................... (8,653) - ------------- ------------- Net cash used in investing activities........................................................... (13,954) (24,266) ------------- ------------- FINANCING ACTIVITIES: Proceeds from exercise of stock options and warrants...................................... 14 2,263 ------------- ------------- Net cash provided by financing activities....................................................... 14 2,263 ------------- ------------- Effect of exchange rate changes on cash and cash equivalents.................................... 158 36 Net decrease in cash and cash equivalents....................................................... (14,622) (7,892) Cash and cash equivalents, beginning of period.................................................. 67,182 99,943 ------------- ------------- Cash and cash equivalents, end of period........................................................ $ 52,560 $ 92,051 ============= =============
See Notes to Unaudited Consolidated Financial Statements. 6 PRICELINE.COM INCORPORATED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION Priceline.com Incorporated ("priceline.com" or the "Company") is responsible for the consolidated financial statements included in this document. The financial statements have been prepared in accordance with generally accepted accounting principles in the United States ("GAAP") and include all normal and recurring adjustments that management of the Company considers necessary for a fair presentation of its financial position and operating results. The Company prepared the consolidated financial statements following the requirements of the Securities and Exchange Commission for interim reporting. As permitted under those rules, the Company condensed or omitted certain footnotes or other financial information that are normally required by GAAP for annual financial statements. These statements should be read in combination with the consolidated financial statements in the Company's Annual Report on Form 10-K for the year ended December 31, 2002. During the first quarter of 2003, the Company enhanced its financial reporting format. In the past, the Company reported revenue segmented between travel and other revenue, a format that was driven by the Company's pursuit of businesses outside of the travel industry. With the repositioning of the Company's long distance and new car products in the fourth quarter of 2002, the Company's ongoing plan to keep its strategic focus on the online travel sector and its recent commitment to compliment its core Name Your Own Price(R) products by developing agency-based retail travel products, the decision was made to provide revenue and gross profit reporting in three categories: Merchant (encompassing substantially all of its Name Your Own Price(R) travel services), Agency (encompassing substantially all of its priced-disclosed retail services) and Other (encompassing all remaining revenue, the largest component of which is advertising revenue). The Company believes that this presentation is more useful to the reader. Historical results have been presented to conform to the current period presentation. In addition, certain other amounts in prior periods' financial statements have been reclassified to conform to the current period presentation. Revenues, expenses, assets and liabilities can vary during each quarter of the year. Therefore, the results and trends in these interim financial statements may not be the same as those for the full year. 2. STOCK BASED EMPLOYEE COMPENSATION The following table summarizes relevant information as to reported results under the Company's APB Opinion No. 25 method of accounting for stock options with supplemental information as if the fair value recognition provisions of SFAS No. 123, "Accounting for Stock Based Compensation," had been applied (in thousands, except per share amounts):
FOR THE THREE MONTHS ENDED MARCH 31, ---------------------------- 2003 2002 ---------------------------- Net loss applicable to common stockholders, $ (8,028) $ 3,887 as reported Add: Stock-based compensation, as reported - 250 Deduct: Total stock-based compensation determined under fair value based method for all stock based compensation (7,054) (28,506) ---------------------------- Adjusted net loss, fair value method for all stock based compensation $ (15,082) $ (24,369) ----------------------------
7 Basic and diluted loss per share as reported $ (0.04) $ 0.02 Basic and diluted loss per share SFAS 123 adjusted $ (0.07) $ (0.10)
The fair value of stock options granted was determined on the date of grant using the Black-Scholes option-pricing model, assuming no expected dividends and the following weighted average assumptions:
2003 2002 --------------- ------------ Risk-free interest rate 2.2% 2.8% Expected lives 3 years 3 years Volatility 90% 99%
3. NET (LOSS) INCOME PER SHARE The Company computes basic and diluted earnings per share in accordance with Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings per Share." SFAS 128 requires the Company to report both basic earnings per share, which is based on the weighted average number of common shares outstanding, and diluted earnings per share, which is based on the weighted average number of common shares outstanding and all dilutive potential common shares outstanding. For the three months ended March 31, 2003, for the purpose of calculating earnings per share - basic, the weighted average number of common shares outstanding was 224,859,514. Since the Company incurred a loss applicable to common stockholders for the three-month period ended March 31, 2003, the inclusion of options and warrants in the calculation of weighted average common shares is anti-dilutive and, therefore, there is no difference between basic and diluted earnings per share for this period. For the three months ended March 31, 2002, for the purpose of calculating earnings per share - basic, the weighted average number of common shares outstanding was 227,503,011 and for the purpose of calculating earnings per share - diluted, the weighted average number of common shares outstanding was 239,969,718, which includes 12,466,707 shares representing the dilutive effect of common stock equivalents. 4. RECENT ACCOUNTING PRONOUNCEMENTS In May 2002, the Financial Standards Board ("FASB") issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections". Among other things, under the provision of FSAS No. 145, gains and losses from the early extinguishment of debt are no longer classified as an extraordinary item, net of income taxes, but are included in the determination of pretax earnings. The adoption of this standard, effective January 1, 2003, had no effect on the Company's financial statements. In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS 146"). This statement addresses significant issues regarding the recognition, measurement, and reporting of costs that are associated with exit and disposal activities, including restructuring activities that are currently accounted for pursuant to the guidance that the Emerging issues Task Force ("EITF") as set forth in EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The principal difference between SFAS 146 and EITF 94-3 is that SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred versus the EITF 94-3 where a liability was recognized on the date an entity committed to an exit plan. SFAS 146 is effective for exit and disposal activities that are initiated after December 31, 2002. The Company adopted the new standard on January 1, 2003, with no effect on the Company's financial statements. In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." This 8 interpretation expands the disclosures to be made by a guarantor in its financial statements about its obligations under certain guarantees and requires the guarantor to recognize a liability for the fair value of an obligation assumed under a guarantee. In general, FIN 45 applies to contracts or indemnification agreements that contingently require the guarantor to make payments to the guaranteed party based on changes in an underlying instrument that is related to an asset, liability, or equity security of the guaranteed party. Certain guarantee contracts are excluded from both the disclosure and recognition requirements of this interpretation. Other guarantees are subject to the disclosure requirements of FIN 45 but not to the recognition provisions and include, among others, a guarantee accounted for as a derivative instrument under SFAS 133. The disclosure requirements of FIN 45 are effective for the Company as of December 31, 2002, and require disclosure of the nature of the guarantee, the maximum potential amount of future payments that the guarantor could be required to make under the guarantee, and the current amount of the liability, if any, for the guarantor's obligations under the guarantee. The recognition requirements of FIN 45 are to be applied prospectively to guarantees issued or modified after December 31, 2002. The adoption of FIN 45 did not have a material impact on results of operations, financial position or liquidity. In January 2003, the FASB issued FASB Interpretation No. 46 "Consolidation of Variable Interest Entities" which clarifies the application of Accounting Research Bulletin No. 51, CONSOLIDATED FINANCIAL STATEMENTS, to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. This interpretation applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. The Company does not have any equity investments in variable interest entities. 5. RESTRUCTURING CHARGE In the fourth quarter of 2002, the Company recorded a restructuring charge of approximately $4.7 million. This restructuring charge resulted from the repositioning of the Company's non-travel businesses, and a reduction in headcount by 50 full-time employees at its Norwalk, Connecticut location, and 4 full-time employees at its Europe location. The repositioning was designed to reduce operating expenses and focus resources on the Company's travel business. The charge related to severance payments, real estate costs and asset impairments. In 2000, the Company recorded a restructuring charge of approximately $32.0 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 the first quarter of 2002, as a result of the sub-leasing of office space under more favorable terms than originally anticipated (reflected in the "Restructuring charge (reversal)" line of the Company's Consolidated Statements of Operations), the Company decreased the liability for the restructuring charge by $824,000. During the first quarter 2003, the liability for the restructuring charge decreased by approximately $1.8 million. The reductions resulted entirely from cash payments made during the quarter.
(IN THOUSANDS) ------------- RESTRUCTURING ------------- Accrued at December 31, 2002...... $ 5,073 Disbursed during 2003............. (1,813) ------------- Accrued at March 31, 2003......... $ 3,260 ============= At March 31, 2003: Current portion.............. $ 2,838
9 Long-term portion............ $ 422
At March 31, 2003, the restructuring liability consisted of estimated remaining severance, real estate costs and other professional fees related to the Company's 2002 restructuring plan and estimated remaining real estate costs related to the Company's 2000 restructuring plan. 6. OTHER ASSETS Other assets at March 31, 2003 and December 31, 2002 consist of the following (in thousands):
MARCH 31, 2003 DECEMBER 31, 2002 --------------- ----------------- Investment in Travelweb LLC $ 8,653 $ - Investment in pricelinemortgage 6,356 6,356 Other 2,914 3,308 --------------- ----------------- Total $ 17,923 $ 9,664 =============== =================
In March 2003, Lowestfare.com, a wholly-owned subsidiary of the Company, invested approximately $8.6 million (including fees relating to the transaction) in Travelweb LLC. Lowestfare.com's investment represents approximately 14% of the outstanding equity of Travelweb LLC. The investment is accounted for under the equity method of accounting. The Company recognizes its pro rata share of Travelweb LLC's results of operations. The Company's share of the results of operations (Travelweb LLC is currently incurring operating losses) of Travelweb LLC was not material in the first quarter 2003. In connection with the investment, Lowestfare.com and the Company entered into a distribution agreement with Travelweb LLC. Under the terms of the distribution agreement, Travelweb LLC will become the exclusive provider of published-price, net rate hotel inventory in the U.S. and Canada that will be available on both Lowestfare.com and on priceline.com. Lowestfare.com also has a seat on Travelweb LLC's Board of Directors. Investment in pricelinemortgage represents the Company's 49% equity investment in pricelinemortgage. In September 2001, the Company converted a debt instrument into a 49% equity interest in pricelinemortgage and, accordingly, has recognized its pro rata share of pricelinemortgage's operating results, not to exceed an amount that the Company believes represents the investments' estimated fair value. The Company's pro rata share of pricelinemortgage's net income for the three months ended March 31, 2003 was approximately $700,000. The Company earned advertising fees from pricelinemortgage of approximately $204,000 and approximately $477,000 for the period ended March 31, 2003 and 2002, respectively. The excess of the carrying value of the Company's equity investments in Travelweb LLC and pricelinemortgage over its equity in the underlying net assets of the investees is approximately $8.1 million. 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 December 31, 2002 at an aggregate cost of approximately $11.8 million. All shares were purchased at prevailing market prices. The Company may continue or, from time to time, suspend repurchases of shares under its stock repurchase program, depending on prevailing market conditions, alternate uses of capital and other factors. Whether and when to initiate and/or complete any purchase of common stock and the amount of common stock purchased will be determined in the Company's complete discretion. As of March 31, 2003, there were approximately 225.0 million shares of the Company's common stock outstanding. 10 8. DELTA AIR LINES During the first quarter of 2001, Delta Air Lines, Inc. ("Delta") received 80,000 shares of a newly created Series B Preferred Stock and warrants (the "Warrants") to purchase approximately 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 be entitled to receive an amount equal to the sum of the dividend payments that would have accrued or cumulated on the shares to be redeemed through the remaining scheduled dividend payment dates. During 2001, Delta exercised Warrants to purchase approximately 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 13,470 shares of Series B Preferred Stock outstanding with an aggregate liquidation preference of approximately $13.5 million and the Company's future semi-annual dividend 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 to Delta 241,441, 241,441 and 454,308 shares of the Company's common stock as dividend payments on February 6, 2003, August 6, 2002 and February 6, 2002, respectively. As a result, the Company recorded a non-cash dividend of approximately $297,000, approximately $490,000 and approximately $1.85 million in the first quarter of 2003, third quarter of 2002 and the first quarter of 2002. The Warrants provide that at any time the closing sales price of the Company's common stock has exceeded $8.90625 (subject to adjustment) for 20 consecutive trading days, the Warrants will automatically be exercised. The exercise price of the Warrant is paid by surrendering .00296875 shares of Series B Preferred Stock for each share of common stock purchased. As of March 31, 2003, there were 4,537,199 Warrants outstanding. 9. MARRIOTT WARRANTS In March 2003, in connection with the renewal of a marketing agreement with Marriott International, Inc. ("Marriott"), the Company issued Marriott 5,000,000 warrants to purchase shares of the Company's common stock at an exercise price of $1.64 per share. The warrants, which are not transferable, are fully vested, non-forfeitable, and will be exercisable no earlier than three years from the date of issuance (subject to certain limited exceptions in the event of a reorganization, recapitalization, merger or consolidation involving priceline.com). In connection with the issuance of the warrants, the Company recorded a charge of approximately $6.6 million in the first quarter of 2003. 10. COMMITMENTS AND CONTINGENCIES A description of the material litigation to which the Company is a party is contained in Part I, Item 3 of the Company's Annual Report on Form 10-K for the year ended December 31, 2003. On November 1, 2000 the Company was served with a complaint that purported to be a shareholder derivative action against its Board of Directors and certain of its current and former executive officers, as well as the Company (as a nominal defendant). The complaint alleged breach of fiduciary duty and waste of corporate assets. The action is captioned Mark Zimmerman v. Richard Braddock, J. Walker, D. Schulman, P. Allaire, R. Bahna, P. Blackney, W. Ford, M. Loeb, N. Nicholas, N. Peretsman, and priceline.com Incorporated 18473-NC (Court of Chancery of Delaware, County of New Castle, State of Delaware). On February 6, 2001, all defendants moved to dismiss the complaint for failure to make a demand upon the Board of Directors and failure to state a cause of action upon which relief can be granted. Pursuant to a stipulation by the parties, an amended complaint was filed on June 21, 2001. Defendants renewed their motion to dismiss on August 20, 2001, and plaintiff served his opposition to that motion 11 on October 26, 2001. Defendants filed their reply brief on January 7, 2002. On December 20, 2002, the Court granted Defendants' motion without prejudice. On April 25, 2003, a second amended complaint was filed. The Company intends to defend vigorously against this action. On March 16, March 26, April 27, and June 5, 2001, respectively, four putative class action complaints were filed in the U.S. District Court for the Southern District of New York naming priceline.com, Inc., Richard S. Braddock, Jay Walker, Paul Francis, Morgan Stanley Dean Witter & Co., Merrill Lynch, Pierce, Fenner & Smith, Inc., BancBoston Robertson Stephens, Inc. and Salomon Smith Barney, Inc. as defendants (01 Civ. 2261, 01 Civ. 2576, 01 Civ. 3590 and 01 Civ. 4956). Shives ET AL. v. Bank of America Securities LLC ET AL., 01 Civ. 4956, also names other defendants and states claims unrelated to the Company. The complaints allege, among other things, that 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 the Company's March 1999 initial public offering and the Company's August 1999 second public offering of common stock. The named defendants are priceline.com, Inc., Richard S. Braddock, Jay S. Walker, Paul E. Francis, Nancy B. Peretsman, Timothy G. Brier, Morgan Stanley Dean Witter & Co., Goldman Sachs & Co., Merrill Lynch, Pierce, Fenner & Smith, Inc., Robertson Stephens, Inc. (as successor-in-interest to BancBoston), Credit Suisse First Boston Corp. (as successor-in-interest to Donaldson Lufkin & Jenrette Securities Corp.), Allen & Co., Inc. and Salomon Smith Barney, Inc. Priceline, Richard Braddock, Jay Walker, Paul Francis, Nancy Peretsman, and Timothy Brier, together with other issuer defendants in the consolidated litigation, filed a joint motion to dismiss on July 15, 2002. On November 18, 2002, the cases against the individual defendants were dismissed without prejudice and without costs. In addition, counsel for plaintiffs and the individual defendants executed Reservation of Rights and Tolling Agreements, which toll the statutes of limitations on plaintiffs' claims against those individuals. On February 19, 2003, Judge Scheindlin issued an Opinion and Order granting in part and denying in part that motion. None of the claims against the Company were dismissed. 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. 11. TAXES For the three months ended March 31, 2003 and 2002, the Company has recorded no provision for income taxes due to current losses and the availability of previously fully reserved net operating losses which have been utilized to offset the income tax provision. 12. SUBSEQUENT EVENTS On May 1, 2003, the Company announced that its Board of Directors had authorized the Company to seek stockholder approval of four alternative amendments to the Company's amended and restated certificate of incorporation to effect a reverse stock split of all outstanding shares of priceline.com's common stock at a ratio of one-for-six, one-for-seven, one-for-eight or one-for-nine. 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH OUR FINANCIAL STATEMENTS, INCLUDING THE NOTES TO THOSE STATEMENTS, INCLUDED ELSEWHERE IN THIS FORM 10-Q, AND THE SECTION ENTITLED "SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS" IN THIS FORM 10-Q. AS DISCUSSED IN MORE DETAIL IN THE SECTION ENTITLED "SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS," THIS DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE THOSE DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "FACTORS THAT MAY AFFECT FUTURE RESULTS." OVERVIEW We have pioneered a unique e-commerce pricing system known as a "demand collection system" that enables consumers to use the Internet to save money on products and services while enabling sellers to generate incremental revenue. Using a simple and compelling consumer proposition - NAME YOUR OWN PRICE(R) - we collect consumer demand, in the form of individual customer offers, for a particular product or service at a price set by the customer. We then access databases or, in some instances, communicate that demand to participating sellers to determine whether we can fulfill the customer's offer. For most of these transactions, we establish the price we will accept, have total discretion in supplier selection, purchase and take title to the particular product and are the merchant of record. Consumers agree to hold their offers open for a specified period of time and, once fulfilled, offers generally cannot be canceled. We benefit consumers by enabling them to save money, while at the same time benefiting sellers by providing them with an effective revenue management tool capable of identifying and capturing incremental revenues. By requiring consumers to be flexible with respect to brands, sellers and product features, we enable sellers to generate incremental revenue without disrupting their existing distribution channels or retail pricing structures. Our business model and brand are currently, through us or independent licensees, supporting several products and service offerings, including the following: - leisure airline tickets, provided by 9 domestic and 26 international airline participants, and travel insurance; - hotel rooms, in substantially all major United States markets with more than 50 national hotel chains, and in a limited number of markets outside the United States; - rental cars, in substantially all major United States airport markets with five leading rental car chains as participants; - home financing services, in substantially all major United States markets, which includes home mortgage services, home equity loans and refinancing services; - fixed-price cruises and cruise packages, through a third party that accesses major cruise lines; and - vacation packages, in many United States and certain international markets. In certain instances, we have licensed the priceline.com name and demand collection system to third parties to offer a particular product or service (HOME FINANCING) or to offer a number of products or services in a distinct international region (ASIA). Pursuant to these licensee transactions, we generally receive a royalty under the license and may also receive fees for services and reimbursement of certain expenses. We also hold a significant percentage of equity in such entities. In the days following the commencement of the military conflict with Iraq on March 19, 2003, we experienced a substantial decline in demand for our travel products and an increase in customer service costs and ticket refunds and cancellations. While demand for our travel products gradually recovered, our first quarter 2003 13 financial results were adversely affected by the war in Iraq. Our overall financial prospects are significantly dependent upon our sale of leisure airline tickets and, as a result, the health of our business is directly related to the health of the airline industry. The domestic airline industry has experienced significant revenue declines since the beginning of 2001 and most domestic airlines, and many of our major suppliers, are experiencing significant losses which worsened as a result of the war in Iraq. If the major airlines are unable to stem these losses, additional bankruptcy filings by major airlines are likely. See "FACTORS THAT MAY AFFECT FUTURE RESULTS - THE BANKRUPTCY, DISCONTINUANCE OR CONSOLIDATION OF OUR SUPPLIERS COULD HARM OUR BUSINESS." Since the terrorist attacks of September 11, 2001, and, more recently, following the outbreak of war with Iraq, the major airlines have grounded portions of their fleets, significantly reducing the number of available airline seats, and have deeply discounted retail airline tickets to stimulate demand. These actions have had a detrimental effect on our business. Deep retail discounting by the airlines affects our demand and our "bind rate" (the percentage of unique offers that we ultimately fulfill) by hurting our value proposition and making users less willing to accept the trade-offs associated with our opaque leisure airline tickets. In addition, decreased airline capacity hurts our business by reducing the levels of inventory available to us and increasing our cost of inventory. Customer offer prices have not kept pace with the increase in our cost of inventory and are, therefore, lower in proportion to our average cost of supply, negatively affecting our bind rate. We believe that over time, our lower bind rate may also negatively impact demand for our airline tickets. Lingering effects of September 11, 2001, the war in Iraq, and the outbreak of Severe Acute Respiratory Syndrome ("SARS"), continued aggressive discounting by the airlines, competition from other on-line distribution channels and low-cost carriers, and uncertainty regarding our domestic economy and additional or protracted hostilities in the Middle East or elsewhere, we believe have, and may continue to, negatively impact our airline ticket demand throughout 2003. As a result, near term forecasting is very difficult and we are not currently forecasting a recovery in the airline industry or an improvement during 2003 in our airline ticketing business. We intend to continue to develop our non-air business, in particular our hotel business, for which demand and bind remains relatively strong, continue to evaluate and implement ways to improve offer quality and our bind rate, diversify our revenue among non-opaque products (such as retail travel products offered through our wholly-owned subsidiary, Lowestfare.com) and broaden our customer appeal through marketing efforts relating to both priceline.com and Lowestfare.com. However, further terrorist attacks, hostilities in the Middle East, the insolvency of a major domestic airline now in bankruptcy, the bankruptcy of an additional carrier or the withdrawal from our system of a major airline or hotel supplier could adversely affect our business and results of operations. A number of travel suppliers, particularly airlines, have indicated publicly that, as part of an effort to reduce distribution costs, they intend to reduce their dependence over time on what they view to be "expensive" distribution channels such as global distribution systems (GDSs). A number of travel suppliers have reached agreements with travel distributors that require rebates of all or part of the fees received from the GDS. Additionally, travel suppliers are encouraging distributors, such as us, to develop technology enabling direct connections therefore bypassing the GDS. Development of direct connection technology would require the use of information technology resources and could cause us to incur additional operating expenses and delay other projects. We have been and believe that we will continue to be under pressure from travel suppliers to rebate all or part of the travel booking fees we receive from Worldspan, L.P. To the extent that we are required to rebate travel booking fees we currently receive from our GDS to travel suppliers, and are unable to recover such amounts by charging customers, it could have a material adverse effect on our business, results of operations and financial condition. In addition, in March 2003, a corporation newly formed by Citigroup Venture Capital Equity Partners L.P. and Teachers' Merchant Bank, agreed to purchase Worldspan, L.P. from its airline owners. It is unclear what effect, if any, a change in control of Worldspan, L.P. will have on our relationship with Worldspan, L.P. or our business, results of operations or financial condition. 14 On March 18, 2003, we and Lowestfare.com, our wholly-owned subsidiary, entered into a distribution agreement with Travelweb LLC. Travelweb LLC is a full-service automated hotel distribution network owned by various respective affiliates of Marriott International, Inc., Hilton Hotels Corporation, Hyatt Corporation, Six Continents Hotels, Inc., Starwood Hotels & Resorts Worldwide, Inc. and Pegasus Solutions, Inc. Under the terms of the distribution agreement, Travelweb LLC will become the exclusive provider of published-price, net rate hotel inventory in the U.S. and Canada that will be available on both Lowestfare.com and on priceline.com. In connection with the distribution agreement, Lowestfare.com made an approximately $8.6 million (including fees relating to the transaction) investment in Travelweb LLC and received approximately 14% of the equity of Travelweb LLC and a seat on Travelweb LLC's Board of Directors. On March 20, 2003, in connection with the renewal of a marketing agreement with Marriott International, Inc., we issued Marriott 5,000,000 warrants to purchase shares of our common stock at $1.64 per share. The warrants, which are not transferable, are fully vested, non-forfeitable, and will be exercisable no earlier than three years from the date of issuance (subject to certain limited exceptions in the event of a reorganization, recapitalization, merger or consolidation involving priceline.com). In connection with the issuance of the warrants, we recorded a charge in the first quarter of 2003 of approximately $6.6 million, or approximately $(0.03) per share. We believe that our success will depend in large part on our ability to achieve and maintain profitability, primarily from our travel business, to continue to promote the priceline.com brand and, over time, to offer other travel products and services on our website. We intend to continue to invest in marketing and promotion, technology and personnel within parameters consistent with attempts to improve operating results. Our goal is to reduce operating losses and improve gross margins in an effort to achieve and maintain profitability. Our limited operating history and the uncertain environment described above makes the prediction of future results of operations difficult, and accordingly, we cannot assure you that we will achieve revenue growth or achieve and sustain profitability. FINANCIAL PRESENTATION During the first quarter of 2003, we enhanced our financial reporting format. In the past, we reported revenue segmented between travel and other revenue, a format that was driven by our pursuit of businesses outside of the travel industry. With the repositioning of our long distance and new car products in the fourth quarter of 2002, our ongoing plan to keep our strategic focus on the online travel sector and our recent commitment to compliment our core Name Your Own Price(R) products by developing agency-based retail travel products, the decision was made to provide revenue and gross profit reporting in three categories: Merchant (encompassing substantially all of our Name Your Own Price(R) travel services), Agency (encompassing substantially all of our priced-disclosed retail services) and Other (encompassing all remaining revenue, the largest component of which is advertising revenue). RECENT DEVELOPMENTS On May 1, 2003, we announced that our Board of Directors had authorized us to seek stockholder approval of four alternative amendments to our amended and restated certificate of incorporation to effect a reverse stock split of all outstanding shares of priceline.com's common stock at a ratio of one-for-six, one-for-seven, one-for-eight or one-for-nine. 15 RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO THE THREE MONTHS ENDED MARCH 31, 2002 REVENUES
THREE MONTHS ENDED % MARCH 31, CHANGE ---------------------- ---------- ($000) 2003 2002 ---------- ---------- MERCHANT REVENUES ....... $ 198,608 $ 259,667 (23.5%) AGENCY REVENUES ......... 1,005 218 361.0% OTHER REVENUES .......... 874 2,000 (56.3%) ---------- ---------- TOTAL REVENUES .......... $ 200,487 $ 261,885 (23.4%)
MERCHANT REVENUES Merchant revenues are derived from transactions where we are the merchant of record and determine the price to be paid by the customer. Merchant revenues for the three months ended March 31, 2003 and 2002 consisted primarily of: (1) transaction revenues representing the selling price of Name Your Own Price(R) airline tickets, hotel rooms and rental cars; (2) ancillary fees, including Worldspan, L.P. reservation booking fees for merchant transactions only; and (3) customer processing fees charged in connection with the sale of Name Your Own Price(R) airline tickets, hotel rooms and rental cars. During the three months ended March 31, 2003, we sold approximately 439,000, 1.2 million and 636,000 airline tickets, hotel room nights and rental car days, respectively. During the three months ended March 31, 2002, we sold approximately 867,000, 909,000 and 738,000 airline tickets, hotel room nights and rental car days, respectively. We believe that the approximately 49% decrease in the number of airline tickets sold in the three months ended March 31, 2003, compared to the three months ended March 31, 2002 continued to be due primarily to the weak retail environment for airline tickets and reduced airline inventory available to us. In particular, we believe that lower retail pricing causes customers who might normally be willing to make the tradeoff associated with our products in exchange for savings off of higher retail rates, to purchase travel products at the lower retail rates or from low-cost carriers without having to make any trade-offs. In addition, many airlines grounded portions of their fleets in the aftermath of the terrorist attacks of September 11, 2001, and upon the outbreak of war in Iraq, thus decreasing capacity on existing flights, which we believe reduced airline inventory available to us. In the past, we have "subsidized" certain offers to purchase airline tickets by adding a variable amount to some customers' offers to increase the likelihood that such customers' offers would be successful. These "subsidies" had the effect of, among other things, increasing our revenues and bind rate. At the end of 2002, we made the strategic decision to reduce sales of airline tickets at a loss. To this end, we reduced subsidies we have historically applied to certain airline ticket offers. While this had the effect of reducing our revenue in the first quarter 2003, it resulted in an increase in our gross margin and positively contributed to our gross profit. Our "bind" rate is the percentage of unique offers that we ultimately fulfill. Our "bind rate" for all unique airline ticket, hotel room and rental car offers were as follows: 16
UNIQUE OFFERS FOR ----------------- AIRLINE HOTEL RENTAL TICKETS ROOMS CARS ------- ----- ------ THREE MONTHS ENDED MARCH 31, 2003 27.3% 65.9% 50.5% THREE MONTHS ENDED MARCH 31, 2002 41.7% 66.3% 46.0%
We believe that our merchant revenues and bind rate have been negatively impacted by the weak retail environment for airline tickets and reduced airline inventory available to us. In particular, we believe that lower retail pricing causes customers who might normally be willing to make the tradeoff associated with our products in exchange for savings off of higher retail rates, to purchase travel products at the lower retail rates or from low-cost carriers without having to make any trade-offs. In addition, many airlines grounded portions of their fleets in the aftermath of the terrorist attacks of September 11, 2001, and upon the outbreak of war in Iraq, thus decreasing capacity on existing flights, which we believe reduced airline inventory available to us. Finally, at the end of 2002, we reduced the subsidies applied to certain Name Your Own Price(R) ticket sales, which also negatively affected our revenues. These trends, which negatively impacted our revenues and bind rate in the first quarter of 2002 and 2003, are expected to continue throughout 2003. We added approximately 749,000 new customers during the three months ended March 31, 2003, compared to approximately 875,000 new customers during three months ended March 31, 2002. In addition, we generated approximately 1.5 million repeat customer offers during the three months ended March 31, 2003, and approximately the same amount for the same period last year. Merchant revenues for the three months ended March 31, 2003 decreased approximately 24% to approximately $199 million from approximately $260 million for the three months ended March 31, 2002, primarily as a result of the weak retail environment for airline tickets, reduced airline inventory available to us and a corresponding decrease in rental car days sold. In particular, we believe that lower retail pricing causes customers who might normally be willing to make the tradeoff associated with our products in exchange for savings off of higher retail rates, to purchase travel products at the lower retail rates or from low-cost carriers without having to make any trade-offs. In addition, many airlines grounded portions of their fleets in the aftermath of the terrorist attacks of September 11, 2001, and upon the outbreak of war in Iraq, thus decreasing capacity on existing flights, which we believe reduced airline inventory available to us. Finally, at the end of 2002, we reduced the subsidies applied to certain Name Your Own Price(R) ticket sales, which also negatively affected our revenues. Offsetting the approximately 49% reduction in airline tickets sold was an approximately 35% increase in hotel room nights sold, which was principally driven by our recent emphasis on our hotel business, and specifically by an advertising campaign focused on our hotel product. Ancillary fee revenues for the three months ended March 31, 2003 decreased from the same period a year ago as a result of a decrease in Worldspan, L.P. reservation booking fees and customer processing fees in the airline and rental car services. Merchant revenues, particularly airline tickets, continue to account for the majority of our revenue. Seasonal variations in our travel business have historically and are expected to continue to impact our quarter to quarter travel revenues. AGENCY REVENUES Agency revenues are derived from travel related transactions where we are not the merchant of record. Agency revenues for the three months ended March 31, 2003 and 2002 consisted primarily of (1) travel commissions and processing fees, principally earned through Lowestfare.com, related to the sale of travel products including the sale of price disclosed airline tickets, cruises and other travel services; and (2) ancillary fees, including GDS reservation booking fees related to price-disclosed transactions. Agency revenues for the three months ended March 31, 2003 increased approximately 361% to approximately $1.0 million from approximately $218 for the three months ended March 31, 2002 primarily as a result of the increase in travel commissions earned. OTHER REVENUES Other revenues during the three months ended March 31, 2003 and 2002 consisted primarily of: (1) 17 marketing revenues; (2) commissions and fees from our home financing and automobile services; (3) transaction revenues and fees from our long distance phone service, which we repositioned in 2002; and (4) in 2002, license fees from Hutchison-Priceline Limited. Other revenues for the three months ended March 31, 2003 decreased approximately 56% to approximately $874,000 from approximately $2.0 million for the three months ended March 31, 2002, primarily as a result of the decrease in fees earned from our home financing service, and due to our repositioning of our long distance phone service. There were no revenues generated from our long distance phone service in 2003. COST OF REVENUES AND GROSS PROFIT
THREE MONTHS ENDED % MARCH 31, CHANGE ----------------------------- ------ ($000) 2003 2002 ----------- ------------- COST OF MERCHANT REVENUES......... $ 167,500 $ 219,511 (23.7%) % OF MERCHANT REVENUES........ 84.3% 84.5% COST OF AGENCY REVENUES........... $ - $ - - % OF AGENCY REVENUES.......... 0.0% 0.0% COST OF OTHER REVENUES............ $ - $ 381 (100.0%) % OF OTHER REVENUES........... 0.0% 19.1% ----------- ------------- TOTAL COST OF REVENUES............ $ 167,500 $ 219,892 (23.8%) % OF REVENUES................. 83.5% 84.0%
COST OF REVENUES COST OF MERCHANT REVENUES For the three months ended March 31, 2003 and 2002, cost of merchant revenues consisted primarily of: (1) the cost of airline tickets from our suppliers, net of the federal air transportation tax, segment fees and passenger facility charges imposed in connection with the sale of airline tickets; (2) the cost of hotel rooms from our suppliers, net of hotel occupancy tax; and (3) the cost of rental cars from our suppliers, net of applicable taxes. Cost of merchant revenues for the three months ended March 31, 2003, decreased approximately 23.7% primarily due to a decrease in sales of airline tickets, as discussed in the factors above. COST OF AGENCY REVENUES Agency revenues are recorded at their net amount, which are amounts received less amounts paid to suppliers, if any. COST OF OTHER REVENUES For the three months ended March 31, 2002, cost of other revenues consisted of the cost of long distance telephone service provided by our suppliers. For the three months ended March 31, 2003, there were no such fees due to the repositioning of our long distance and new car products in the fourth quarter of 2002. 18 GROSS PROFIT
THREE MONTHS ENDED % MARCH 31, CHANGE ----------------------- ------ ($000) 2003 2002 -------- ---------- MERCHANT GROSS PROFIT.............. $ 31,108 $ 40,156 (22.5%) MERCHANT GROSS MARGIN........... 15.7% 15.5% AGENCY GROSS PROFIT................ $ 1,005 $ 218 361.0% AGENCY GROSS MARGIN............. 100.0% 100.0% OTHER GROSS PROFIT................. $ 874 $ 1,619 (46.0%) OTHER GROSS MARGIN.............. 100.0% 81.0% TOTAL GROSS PROFIT................. $ 32,987 $ 41,993 (21.4%) TOTAL GROSS MARGIN.............. 16.5% 16.0%
MERCHANT GROSS PROFIT Merchant gross profit consists of merchant revenues less the cost of merchant revenues. We are able to manage the level of gross margins by controlling the price at which we will cause offers to be fulfilled. For the three months ended March 31, 2003, merchant gross profit decreased from the same period in 2002, primarily due to the weak retail environment for airline tickets and reduced airline inventory available to us. In particular, we believe that lower retail pricing causes customers who might normally be willing to make the tradeoff associated with our products in exchange for savings off of higher retail rates, to purchase travel products at the lower retail rates or from low cost carriers without having to make any tradeoffs. In addition, many airlines grounded portions of their fleets in the aftermath of the terrorist attacks of September 11, 2001, and upon the outbreak of war in Iraq, thus decreasing capacity on existing flights, which we believe reduced airline inventory available to us. Finally, at the end of 2002, we strategically reduced subsidies applied to certain Name Your Own Price(R) ticket sales. While this resulted in a reduction in revenue, the subsidy reduction positively affected our gross profit and increased our gross margin. AGENCY GROSS PROFIT Agency gross profit consists of agency revenues which is recorded net of agency costs. For the three months ended March 31, 2003, agency gross profit increased over the same period in 2002 due to an increase in agency revenues. OTHER GROSS PROFIT For the three months ended March 31, 2003, other gross profit decreased over the same period in 2002 as a result of the decrease in fees earned in connection with our long distance phone service, a decrease in fees earned from our home financing service and the fact that we collected no license fees from Hutchison-Priceline Limited in the first quarter of 2003. OPERATING EXPENSES 19 ADVERTISING
THREE MONTHS ENDED % MARCH 31, CHANGE ------------------------- --------- ($000) 2003 2002 --------- ---------- ADVERTISING......................... $ 11,098 $ 10,227 8.5% % OF REVENUES....................... 5.5% 3.9%
Advertising expenses consist primarily of: (1) television and radio advertising; (2) online and email advertisements; and (3) agency fees, creative talent and production costs for television and radio commercials. For the three months ended March 31, 2003, advertising expenses increased over the same period in 2002 primarily due to the increase in television production and advertising fees, which was partially offset by a decrease in radio production and advertising fees. We intend to promote the priceline.com brand aggressively throughout 2003, and will focus the majority of our marketing resources on our hotel product. SALES AND MARKETING
THREE MONTHS ENDED % MARCH 31, CHANGE ------------------------- --------- ($000) 2003 2002 --------- ---------- SALES AND MARKETING................. $ 8,064 $ 10,564 (23.7%) % OF REVENUES....................... 4.0% 4.0%
Sales and marketing expenses consist primarily of (1) credit card processing fees; (2) fees paid to third-party service providers that operate our call centers; (3) provisions for credit card charge-backs; and (4) compensation for our sales and marketing personnel. For the three months ended March 31, 2003, sales and marketing expenses decreased over the same period in 2002 due to a decrease in credit card processing fees, a reduction in the absolute amount of credit card charge-backs, and a reduction in call center expenses, which are all primarily variable in nature. GENERAL AND ADMINISTRATIVE
THREE MONTHS ENDED % MARCH 31, CHANGE ------------------------- --------- ($000) 2003 2002 --------- ---------- GENERAL AND ADMINISTRATIVE.......... $ 6,568 $ 6,487 1.2% STOCK BASED COMPENSATION............ - 250 (100.0%) --------- ---------- TOTAL............................... $ 6,568 $ 6,737 (2.5%) % OF REVENUES....................... 3.3% 2.6%
General and administrative expenses consist primarily of: (1) costs for personnel; (2) occupancy expenses; (3) telecommunications costs; and (4) fees for outside professionals. General and administrative expenses decreased during the three months ended March 31, 2003 compared with the same period in 2002 as a result of the elimination 20 of stock based compensation, partially offset by higher premiums on our Directors and Officers liability insurance policy. SYSTEMS AND BUSINESS DEVELOPMENT
THREE MONTHS ENDED % MARCH 31, CHANGE ------------------------- --------- ($000) 2003 2002 --------- ---------- SYSTEMS AND BUSINESS DEVELOPMENT........................ $ 4,930 $ 6,328 (22.1%) % OF REVENUES....................... 2.5% 2.4%
Systems and business development expenses consist primarily of: (1) compensation to our information technology and product development staff; (2) data communications and other expenses associated with operating our Internet site; and (3) payments to outside contractors. For the three months ended March 31, 2003, systems and business development expenses decreased over the same period in 2002, primarily as a result of the decrease in consultant expense, and a decrease in compensation to our information technology staff as a result of the fourth quarter 2002 restructuring. DEPRECIATION AND AMORTIZATION
THREE MONTHS ENDED % MARCH 31, CHANGE ------------------------- --------- ($000) 2003 2002 --------- ---------- DEPRECIATION AND AMORTIZATION....... $ 3,912 $ 4,458 (12.2%) % OF REVENUES....................... 2.0% 1.7%
Depreciation and amortization expenses consist of: (1) amortization of internally developed and purchased software; (2) depreciation of computer equipment, (3) depreciation of our leasehold improvements, office equipment and furniture and fixtures, and (4) amortization of our intangible assets. For the three months ended March 31, 2003, depreciation and amortization expense decreased over the same period in 2002, primarily as a result of full depreciation and amortization of certain assets in prior periods. RESTRUCTURING CHARGE During the first quarter of 2002, we decreased the liability for the restructuring charge by approximately $824,000. The reduction resulted from the subleasing of office space under more favorable terms than originally anticipated (reflected in the "Restructuring charge (reversal)" line on our Consolidated Statements of Operations). WARRANT CHARGE 21
THREE MONTHS ENDED MARCH 31, ------------------------- ($000) 2003 2002 --------- ---------- WARRANT CHARGE...................... $ 6,638 $ - % OF REVENUES....................... 3.3% 0.0%
The warrant charge for the three months ended March 31, 2003, related to the issuance of warrants to purchase priceline.com common stock to Marriott International, Inc. INTEREST INCOME
THREE MONTHS ENDED % MARCH 31, CHANGE ------------------------- --------- ($000) 2003 2002 --------- ---------- INTEREST INCOME..................... $ 492 $ 782 (37.1%)
For the three months ended March 31, 2003, interest income on cash and marketable securities decreased over the same period in 2002 due to a lower cash balance and lower interest rates. EQUITY IN NET INCOME OF PRICELINEMORTGAGE
THREE MONTHS ENDED % MARCH 31, CHANGE ------------------------- --------- ($000) 2003 2002 --------- ---------- EQUITY IN NET INCOME OF PRICELINEMORTGAGE.............. $ - $ 492 (100.0%)
We did not record income of approximately $700,000 from our 49% equity investment in pricelinemortgage during the three months ended March 31, 2003 as the carrying value of the investment approximated its estimated fair value. Equity in net income of pricelinemortgage for the three months ended March 31, 2002 of $492,000 represented our pro rata share of the net income of pricelinemortgage. TAXES For the three months ended March 31, 2003 and March 31, 2002, we have recorded no provision for income taxes due to current losses and the availability of fully reserved net operating losses which have been utilized to offset the income tax provision, respectively. LIQUIDITY AND CAPITAL RESOURCES As of March 31, 2003, we had approximately $139.8 million in cash, cash equivalents, short-term investments and restricted cash. Approximately $17.0 million is restricted cash collateralizing certain letters of credit issued in favor of certain suppliers and landlords. Also included in restricted cash are amounts held by our credit card processor company. We generally invest excess cash to make such funds readily available for operating 22 purposes. Cash equivalents and short-term investments are primarily comprised of highly liquid, high quality, investment grade debt instruments, having maturities of less than one year. 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 used in operating activities for the three months ended March 31, 2003, was approximately $840,000, resulting from a net loss of approximately $7.7 million together with approximately $4.3 million of negative changes in working capital offset by non-cash items not affecting first quarter cash flows of approximately $11.2 million. The changes in working capital for the three months ended March 31, 2003, were primarily related to an approximately $3.1 million increase in accounts receivable, and an approximately $1.8 million decrease in accounts payable and accrued expenses. The increase in accounts receivable was primarily due to the increase in revenue from the three months ended December 31, 2002. The decrease in accounts payable and accrued expenses is primarily due to cash severance payments resulting from the 2002 restructuring, and the settlement of other liabilities. Non-cash items were primarily associated with the Marriott warrant charge and the depreciation and amortization of property and equipment. Net cash provided by operating activities for the three months ended March 31, 2002 was approximately $14.1 million, resulting from our net income of approximately $5.7 million, offset by non-cash items of approximately $3.9 million and positive changes in working capital of approximately $4.4 million. Net cash used in investing activities was approximately $14.0 million and approximately $24.3 million for the three months ended March 31, 2003 and 2002, respectively. During the three months ended March 31, 2003, Lowestfare.com, our wholly-owned subsidiary, invested approximately $8.6 million in Travelweb LLC. In both years, net cash used in investing activities was partially related to purchases of property and equipment. Also affecting net cash used in investing activities in the three months ended March 31, 2003 and March 31, 2002 was the purchase of short-term investments and marketable securities in the amount of approximately $6.0 million and approximately $19.1 million, respectively. Capital expenditures for additions to property and equipment is expected to aggregate approximately $8 to $12 million in 2003. On July 31, 2002, our board of directors authorized the repurchase of up to $40 million of common stock from time to time in the open market or in privately negotiated transactions. We may purchase additional shares of our common stock in the future. We believe that our existing cash balances and liquid resources will be sufficient to fund our operating activities, capital expenditures and other obligations through at least the next twelve months. However, if during that period or thereafter, we are not successful in generating sufficient cash flow from operations or in raising additional capital when required in sufficient amounts and on terms acceptable to us, we may be required to reduce our planned capital expenditures and scale back the scope of our business plan, either of which could have a material adverse effect on our projected financial condition or results of operations. If additional funds were raised through the issuance of equity securities, the percentage ownership of our then current stockholders would be diluted. There are no assurances that we will generate sufficient cash flow from operations in the future, that revenue growth will be realized or that future borrowings or equity contributions will be available in amounts sufficient to make anticipated capital expenditures or finance our business plan. SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS Sections of this Form 10-Q including, in particular, our Management's Discussion and Analysis of Financial Condition and Results of Operations above, contain forward-looking statements. These forward-looking statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict; therefore, actual results may differ materially from those expressed, implied or forecasted in any such forward-looking statements. Expressions of future goals and expectations similar expressions including, without limitation, "may," "will," "should," "could," "expects," "does not currently expect," "plans," "anticipates," "intends," "believes," 23 "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 war; adverse changes in our relationships with airlines, hotels and other product and service providers including, without limitation, the withdrawal of suppliers from the priceline.com system, the bankruptcy or insolvency of a major domestic airline; the effects of increased competition; systems-related failures and/or security breaches; our ability to protect our intellectual property rights; losses by us and our licensees; any adverse impact from negative publicity and negative customer reaction to such publicity; legal and regulatory risks and the ability to attract and retain qualified personnel. These factors and others are described in more detail 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 ANNUAL REPORT SHOULD BE CAREFULLY CONSIDERED. THE RISKS AND UNCERTAINTIES DESCRIBED BELOW ARE NOT THE ONLY ONES WE FACE. ADDITIONAL RISKS AND UNCERTAINTIES NOT PRESENTLY KNOWN TO US OR THAT WE CURRENTLY DEEM IMMATERIAL MAY ALSO IMPAIR OUR BUSINESS OPERATIONS. IF ANY OF THE FOLLOWING RISKS OCCUR, OUR BUSINESS, FINANCIAL CONDITION, OPERATING RESULTS AND CASH FLOWS COULD BE MATERIALLY ADVERSELY AFFECTED. WE MAY CONTINUE TO INCUR LOSSES As of March 31, 2003, we had an accumulated deficit of approximately $1.6 billion, and for the three months ended March 31, 2003, a net loss of approximately $8.0 million. Despite the progress we have made towards improving our financial results, 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 a general decline in leisure travel since the events of September 11, 2001, have had a negative impact on our business and results of operations. We may not have decreased our operating expenses sufficiently to achieve and sustain profitability in this difficult operating environment. OUR BUSINESS WAS NEGATIVELY IMPACTED BY THE WAR IN IRAQ AND COULD BE FURTHER DAMAGED BY TERRORIST ATTACKS OR THE FEAR OF FUTURE TERRORIST ATTACKS In the weeks following the commencement of the military conflict with Iraq on March 19, 2003, we experienced a substantial decline in demand for our travel products and an increase in customer service costs and ticket refunds and cancellations. Our first quarter 2003 financial results were adversely affected by the war in Iraq. Further military conflict in that region could have a material adverse effect on our business, results of operations and financial condition. In addition, terrorist attacks (whether or not such attacks involve commercial aircraft), the fear of future terrorist attacks or hostilities involving the United States in other areas of the world, are likely to contribute to a general reluctance by the public to travel and, as a result, to have a material adverse effect on our business, results of operations and financial condition. WE ARE DEPENDENT ON THE AIRLINE INDUSTRY AND CERTAIN AIRLINES Our financial prospects are significantly dependent upon our sale of leisure airline tickets. Leisure airline tickets represented 30% of booked offers, and an even greater percentage of our revenue for the three months ended March 31, 2003. Leisure travel, including the sale of leisure airline tickets, is dependent on personal discretionary spending levels. As a result, sales of leisure airline tickets and other leisure travel products tend to decline during general economic downturns and recessions. In addition, unforeseen events, such as terrorist attacks, political instability, regional hostilities, increases in fuel prices, imposition of taxes or surcharges by regulatory authorities, travel-related accidents 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 24 major airlines could materially and adversely affect the airline industry and, as a consequence, have a material adverse effect on our business, results of operations and financial condition. During the three months ended March 31, 2003, sales of airline tickets from our five largest and two largest airline suppliers accounted for approximately 92.6% and 52.1% of airline ticket revenue, respectively. As a result, currently we are substantially dependent upon the continued participation of these airlines in the priceline.com service in order to maintain and continue to grow our total airline ticket revenues and, as a consequence, our overall revenues. We currently have 35 participating airlines. However, our arrangements with the airlines that participate in our system: - do not require the airlines to make tickets available for any particular routes; - do not require the airlines to provide any specific quantity of airline tickets; - do not require the airlines to provide particular prices or levels of discount; - do not require the airlines to deal exclusively with us in the public sale of discounted airline tickets; - often limit the manner in which we can sell inventory and, in the case of our agreement with Delta Air Lines, substantially limits which airlines can participate in our system; and - generally, can be terminated upon little or no notice. As a general matter, during the course of our business, we are in continuous dialogue with our major airline suppliers about the nature and extent of their participation in the priceline.com system. In the second quarter 2002, Northwest Airlines terminated its Airline Participation Agreement with us. The significant reduction on the part of any of our other major suppliers of their participation in the priceline.com system for a sustained period of time or their complete withdrawal could have a material adverse effect on our business, results of operations and financial condition. Due to our dependence on the airline industry, we could be severely affected by changes in that industry, and, in many cases, we will have no control over such changes or their timing. For example, we believe that our business has been adversely affected by the general reduction in airline capacity since September 11, 2001. Further, since the September 11, 2001 terrorist attacks, several major U.S. airlines are struggling financially and have either filed for reorganization under the United States Bankruptcy Code or discussed publicly the risks of bankruptcy. To the extent other major U.S. airlines that participate in our system declare bankruptcy, they may be unable or unwilling to honor tickets sold for their flights. Our policy in such event would be to direct customers seeking a refund or exchange to the airline, and not to provide a remedy ourselves. Because we are the merchant-of-record on sales of airline tickets to our customers, however, we could experience a significant increase in demands for refunds or credit card charge-backs from customers which would materially and adversely affect our business. In addition, because our customers do not choose the airlines on which they are to fly, the bankruptcy of a major U.S. airline or the possibility of a major U.S. airline declaring bankruptcy could discourage customers from booking airline tickets through us. In addition, given the concentration of the airline industry, particularly in the domestic market, major airlines that are not participating in the priceline.com service, or our competitors, could exert pressure on other airlines not to supply us with tickets. Moreover, the airlines may attempt to establish their own buyer-driven commerce service or participate or invest in other similar services, like Hotwire, a website that offers discounted fares on opaque inventory, or Orbitz, an airline-owned website that competes directly with us. 25 THE BANKRUPTCY, DISCONTINUANCE OR CONSOLIDATION OF OUR SUPPLIERS COULD HARM OUR BUSINESS We are heavily dependent on our suppliers. One of our largest airline suppliers, United Airlines, is currently operating under the protection of federal bankruptcy laws and certain other major suppliers, including American Airlines, have disclosed publicly the possibility of seeking the protection of the federal bankruptcy laws. If any of our suppliers currently in bankruptcy liquidates or does not emerge from bankruptcy and we are unable to replace such supplier as a participant in priceline.com, our business would be adversely affected. Additionally, in the event that another of our major suppliers voluntarily or involuntarily declares bankruptcy and is subsequently unable to successfully emerge from bankruptcy, and we are unable to replace such supplier, our business would be adversely affected. 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 May 7, 2003, two of the five rental car brands that supply our rental car business are operating under the protection of the bankruptcy laws. If any or all of such companies discontinue their business, and we are unable to find other suppliers, it could have a material adverse effect on our business, results of operations and financial condition. 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. Recently, we have seen 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 Interactive, Inc., which owns a controlling stake in Hotels.com, acquired a controlling stake in Expedia, Inc. and, in early 2003, agreed to acquire all of Expedia, Inc. shares it does not already own. In addition, USA Interactive, Inc. agreed to acquire all of Hotels.com shares it does not already own. Finally, Hilton Hotels Corporation, Hyatt Corporation, Marriott International, Inc., Six Continents Hotels, Starwood Hotels and Pegasus Solutions, Inc. recently formed Travelweb LLC, a full-service automated distributor of hotel rooms that will compete with us in the online hotel space. If this trend continues, we 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, 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; 26 - individual or groups of airlines, hotels, rental car companies, cruise operators and other travel service providers (all of which may provide services by telephone or through their branded website); and - operators of travel industry reservation databases such as Worldspan, L.P. and Sabre. A number of airlines, including a number that participate in our system, have invested in and offer discount airfares and travel services through the Orbitz Internet travel service, and a number of airlines, including a number that participate in our system, participate in and have received an equity stake from Hotwire. The June 2001 launch of Orbitz has had a strong impact on the online travel industry. Specifically, because Orbitz is airline-owned, it is in a position to forego certain revenue streams upon which other online travel suppliers 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 rooms and rental car reservations at disclosed prices, although supplier identity and flight times remain opaque. Since its launch, Hotwire has been successful in establishing itself in the online travel marketplace, through aggressive advertising which has had the effect of decreasing our market share. If we are unable to effectively compete with Hotwire, our results will suffer. 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. In May 2003, USA Interactive, Inc. announced an agreement to acquire Lending Tree. We potentially face competition from a number of large Internet companies and services that have expertise in developing online commerce and in facilitating Internet traffic, including Amazon.com and Yahoo!, who could choose to compete with us either directly or indirectly through affiliations with other e-commerce or off-line companies. Other large companies with strong brand recognition, technical expertise and experience in Internet commerce could also seek to compete with us. Competition from these and other sources could have a material adverse effect on our business, results of operations and financial condition. Many of our current and potential competitors, including Internet directories and search engines and large traditional retailers, have longer operating histories, larger customer bases, greater brand recognition and significantly greater financial, marketing, technical and other resources than we have. Some of these competitors may be able to secure products and services on more favorable terms than we can. In addition, many of these competitors may be able to devote significantly greater resources to: (1) marketing and promotional campaigns, (2) attracting traffic to their websites, (3) attracting and retaining key employees, (4) securing vendors and inventory and (5) website and systems development. Increased competition could result in reduced operating margins and loss of market share and could damage our brand. There can be no assurance that we will be able to compete successfully against current and future competitors or that competition will not have a material adverse effect on our business, results of operations and financial condition. WE MAY LOSE OR BE SUBJECT TO REDUCTION OF GDS FEES We rely on fees paid to us by Worldspan, L.P. for travel bookings made through Worldspan, L.P.'s global distribution system (GDS) for a substantial portion of our gross profit and net income. A number of travel suppliers, particularly airlines, have indicated publicly that, as part of an effort to reduce distribution costs, they intend to reduce their dependence over time on what they view to be "expensive" distribution channels such as GDSs. A number of travel suppliers have reached agreements with travel distributors that require rebates of all or part of the fees received from the GDS. Additionally, travel suppliers are encouraging distributors, such as us, to develop technology enabling direct connections therefore bypassing the GDS. Development of direct connection technology would require the use of information technology resources and could cause us to incur additional operating expenses 27 and delay other projects. We have been and believe that we will continue to be under pressure from travel suppliers to rebate all or part of the travel booking fees we receive from Worldspan, L.P. To the extent that we are required to rebate travel booking fees we currently receive to travel suppliers, and are unable to recover such amounts by charging customers, it could have a material adverse effect on our business, results of operations and financial condition. In addition, in March 2003, a corporation newly formed by Citigroup Venture Capital Equity Partners L.P. and Teachers' Merchant Bank, agreed to purchase Worldspan, L.P. from its airline owners. It is unclear what effect, if any, a change in control of Worldspan, L.P. will have on our relationship with Worldspan, L.P. or our business, results of operations or financial condition. 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 pay sales and other taxes to suppliers on our purchases of travel services sold through the priceline.com service. In certain cases, where appropriate, we remit taxes directly to the tax authorities. We believe that this practice is consistent with the tax laws of all jurisdictions. However, one or more states could seek to impose additional income tax obligations, sales tax collection obligations, or other tax obligations on companies, such as ours, which engage in or facilitate online commerce. A number of proposals have been made at state and local levels that could impose such taxes on the sale of products and services through the Internet or the income derived from such sales. We are currently conducting an on-going review and interpretation of the tax laws in various states and jurisdictions relating to state and local hotel occupancy taxes. Several jurisdictions have indicated that they may take the position that hotel occupancy tax is applicable to the gross profit on merchant hotel transactions. Historically, we have not paid such taxes. Some state and local jurisdictions could rule that we are subject to hotel occupancy taxes on the gross profit and could seek to collect such taxes, either retroactively or prospectively or both. To the extent that any tax authority succeeds in asserting that a tax collection responsibility applies to transactions conducted through the priceline.com service, we might have additional tax exposure. Such actions could have a material adverse effect on our business, results of operations and financial condition. We will continue to assess the risks of any potential financial impact, and to the extent appropriate, we will reserve for those contingencies. 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 the fraudulent use of credit cards. To date, this project has been successful in reducing fraud; however, if we are unable to continue to reduce the fraudulent use of credit cards on our website, it could have a material adverse effect on our business, results of operations and financial condition. 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. 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 28 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 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. 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. TWO LARGE STOCKHOLDERS BENEFICIALLY OWN APPROXIMATELY 34% OF OUR STOCK Hutchison Whampoa Limited and its 49.97% shareholder, Cheung Kong (Holdings) Limited, collectively beneficially owned approximately 34% of our outstanding common stock as of March 31, 2003, based on public filings with the Securities and Exchange Commission. Together, Cheung Kong (Holdings) Limited and Hutchison Whampoa Limited have appointed three of the thirteen members of our Board of Directors. As a result of their ownership and positions, Cheung Kong (Holdings) Limited and Hutchison Whampoa Limited collectively are able to significantly influence all matters requiring stockholders approval, including the election of directors and approval of significant corporate transactions. Such concentration of ownership may also have the effect of delaying or preventing a change in control of our company. In addition, both Cheung Kong (Holdings) Limited and Hutchison Whampoa Limited have registration rights with respect to their shares of priceline.com. On September 19, 2001, Cheung Kong (Holdings) Limited and Hutchison Whampoa Limited withdrew a request they had made for us to file a shelf registration statement to sell shares and obtained rights to purchase up to a 37.5% stake (on a fully diluted basis) in priceline.com, subject to certain limitations. There can be no assurance that Cheung Kong (Holdings) Limited, Hutchison Whampoa Limited, or both, will not make another request for registration and dispose of all or substantially all of our common stock held by them at any time after the effectiveness of a shelf registration statement. Sales of significant amounts of shares held by Cheung Kong (Holdings) Limited or Hutchison Whampoa Limited, or the prospect of these sales, could adversely affect the market price of our common stock. 29 WE RELY ON THIRD-PARTY SYSTEMS We rely on certain third-party computer systems and third-party service providers, including the computerized central reservation systems of the airline, hotel and rental car industries to satisfy demand for airline tickets and hotel room reservations. In particular, our travel business is substantially dependent upon the computerized reservation system of Worldspan, L.P., an operator of a database for the travel industry. Any interruption in these third-party services systems, including Worldspan, L.P.'s, or deterioration in their performance could prevent us from booking airline, hotel and rental car reservations and have a material adverse effect on our business. Our agreements with third-party service providers are terminable upon short notice and often do not provide recourse for service interruptions. In the event our arrangement with any of such third parties is terminated, we may not be able to find an alternative source of systems support on a timely basis or on commercially reasonable terms and, as a result, it could have a material adverse effect on our business, results of operations and financial condition. Substantially all of our computer hardware for operating our services is currently located at Cable & Wireless plc. in Jersey City, New Jersey. If Cable & Wireless is unable, for any reason, to support our primary web hosting facility, we would need to activate our secondary site at AT&T which would be a substantial burden to us and have a material adverse effect on our business, results of operations and financial condition. Some of our communications infrastructure is provided by WorldCom, Inc. which has filed for bankruptcy protection. If WorldCom, Inc. 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. While we do maintain redundant systems and hosting services, it is possible that we could experience an interruption in our business, and we do not carry business interruption insurance sufficient to compensate us for losses that may occur. CAPACITY CONSTRAINTS AND SYSTEM FAILURES COULD HARM OUR BUSINESS Substantial amounts of our computer hardware for operating our services currently is located at the facilities of Cable & Wireless plc. in New Jersey. These systems and operations are vulnerable to damage or interruption from human error, floods, fires, power loss, telecommunication failures and similar events. They are also subject to break-ins, sabotage, intentional acts of vandalism and similar misconduct. Despite any precautions we may take, the occurrence of a natural disaster or other unanticipated problems at the Cable & Wireless facility could result in lengthy interruptions in our services. In addition, the failure by Cable & Wireless to provide our required data communications capacity could result in interruptions in our service. Any system failure that causes an interruption in service or decreases the responsiveness of the priceline.com service could impair our reputation, damage our brand name and have a material adverse effect on our business, results of operations and financial condition. If our systems cannot be expanded to cope with increased demand or fails to perform, we could experience: - unanticipated disruptions in service; - slower response times; - decreased customer service and customer satisfaction; or - delays in the introduction of new products and services; any of which could impair our reputation, damage the priceline.com brand and materially and adversely affect our revenues. Publicity about a service disruption also could cause a material decline in our stock price. Like many online businesses, we have experienced system failures from time to time. For example, in May 2001, our primary website was interrupted for a period of 12 hours. In addition to placing increased burdens on our engineering staff, these outages create a significant amount of user questions and complaints that need to be 30 addressed by our customer support personnel. Any unscheduled interruption in our service could result in an immediate loss of revenues that can be substantial and may cause some users to switch to our competitors. If we experience frequent or persistent system failures, our reputation and brand could be permanently harmed. We have been taking steps to increase the reliability and redundancy of our system. These steps are expensive, may reduce our margins and may not be successful in reducing the frequency or duration of unscheduled downtime. We use internally developed systems to operate the priceline.com service, including transaction processing and order management systems that were designed to be scaleable. However, if the number of users of the priceline.com service increases substantially, we will need to significantly expand and upgrade our technology, transaction processing systems and network infrastructure. We do not know whether we will be able to accurately project the rate or timing of any such increases, or expand and upgrade our systems and infrastructure to accommodate such increases in a timely manner. OUR SUCCESS DEPENDS ON OUR ABILITY TO PROTECT OUR INTELLECTUAL PROPERTY We regard our intellectual property as critical to our success, and we rely on trademark, copyright and patent law, trade secret protection and confidentiality and/or license agreements with our employees, customers, partners and others to protect our proprietary rights. If we are not successful in protecting our intellectual property, it could have a material adverse effect on our business, results of operations and financial condition. While we believe that our issued patents and pending patent applications help to protect our business, there can be no assurance that: - any patent can be successfully defended against challenges by third parties; - pending patent applications will result in the issuance of patents; - competitors or potential competitors of priceline.com will not devise new methods of competing with us that are not covered by our patents or patent applications; - because of variations in the application of our business model to each of our products and services, our patents will be effective in preventing one or more third parties from utilizing a copycat business model to offer the same product or service in one or more categories; - new prior art will not be discovered which may diminish the value of or invalidate an issued patent; or - a third party will not have or obtain one or more patents that prevent us from practicing features of our business or require us to pay for a license to use those features. There has been recent discussion in the press regarding the examination and issuance of so called "business-method" patents. As a result, the United States Patent and Trademark Office has indicated that it intends to intensify the review process applicable to such patent applications. The new procedures are not expected to have a direct effect on patents already granted. We cannot anticipate what effect, if any, the new review process will have on our pending patent applications. We pursue the registration of our trademarks and service marks in the U.S. and internationally. However, effective trademark, service mark, copyright and trade secret protection may not be available in every country in which our services are made available online. We have licensed in the past, and expect to license in the future, certain of our proprietary rights, such as trademarks or copyrighted material, to third parties. These licensees may take actions that might diminish the value of our proprietary rights or harm our reputation. 31 LEGAL PROCEEDINGS We are a party to the legal proceedings described in Note 10 to our Unaudited Consolidated Financial Statements of this Quarterly Report on Form 10-Q for the three months ended March 31, 2003. The defense of the actions described in Note 10 may increase our expenses and an adverse outcome in any of such actions could have a material adverse effect on our business, results of operations and financial condition. WE MAY NOT BE ABLE TO KEEP UP WITH RAPID TECHNOLOGICAL AND OTHER CHANGES The markets in which we compete are characterized by rapidly changing technology, evolving industry standards, frequent new service and product announcements, introductions and enhancements and changing consumer demands. We may not be able to keep up with these rapid changes. In addition, these market characteristics are heightened by the emerging nature of the Internet and the apparent need of companies from many industries to offer Internet-based products and services. As a result, our future success will depend on our ability to adapt to rapidly changing technologies, to adapt our services to evolving industry standards and to continually improve the performance, features and reliability of our service in response to competitive service and product offerings and the evolving demands of the marketplace. In addition, the widespread adoption of new Internet, networking or telecommunications technologies or other technological changes could require us to incur substantial expenditures to modify or adapt our services or infrastructure. 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 - 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 32 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 Note 10 to Unaudited Consolidated Financial Statements REGULATORY AND LEGAL UNCERTAINTIES COULD HARM OUR BUSINESS The products and services we offer through the priceline.com service are regulated by federal and state governments. Our ability to provide such products and services is and will continue to be affected by such regulations. The implementation of unfavorable regulations or unfavorable interpretations of existing regulations by courts or regulatory bodies could require us to incur significant compliance costs, cause the development of the affected markets to become impractical and otherwise have a material adverse effect on our business, results of operations and financial condition. THE priceline.com WEBSITE. We maintain a website with the address www.priceline.com. We are not including the information contained on our website as a part of, or incorporating it by reference into, this Quarterly Report on Form 10-Q. We make available free of charge through our website our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and amendments to these reports, as soon as reasonably practicable after we electronically file such material with, or furnish such material to, the Securities and Exchange Commission. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Priceline.com currently has no floating rate indebtedness, holds no derivative instruments (other than through investments in licensees described in this Quarterly Report on Form 10-Q) and does not earn significant foreign-sourced income. Accordingly, changes in interest rates or currency exchange rates do not generally have a material direct effect on priceline.com's financial position. However, changes in currency exchange rates may affect the cost of international airline tickets and international hotel reservations offered through the priceline.com service, and so may indirectly affect consumer demand for such products and priceline.com's revenue. Additionally, fixed rate investments are subject to interest rate volatility. In the event of such weakness, such additional US Dollars would have reduced purchasing power. In addition, to the extent that changes in interest rates and currency exchange rates affect general economic conditions, priceline.com would also be affected by such changes. If the US Dollar weakens versus the British Pound Sterling, we may have to invest additional US Dollars in priceline.com europe Ltd. to fund its ongoing operations. ITEM 4. CONTROLS AND PROCEDURES Within 90 days prior to the date of this report, we carried out an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information required to be included in our periodic SEC reports. It should be noted that the design of any system of controls is based in part upon certain assumptions, and there can be no assurance that any design will succeed in achieving its stated goals. In addition, we reviewed our internal controls, and there have been no significant changes in our internal controls or in other factors that could significantly affect those controls to the date of their last evaluation. 33 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS A description of material legal proceedings to which we are a party is contained in Part I, Item 3 of our Annual Report on Form 10-K for the year ended December 31, 2002. A description of material changes to such proceedings is contained in Note 10 to the Notes to Unaudited Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for the quarter ended March 31, 2003. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 10.75 Warrant Agreement, dated March 17, 2003, by and between priceline.com Incorporated and Marriott International, Inc. 99.1 Certification of Jeffery H. Boyd, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code). 99.2 Certification of Robert J. Mylod, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code).
(b) REPORTS ON FORM 8-K On January 24, 2003, we furnished a report on Form 8-K in connection with the retirement of William E. Ford from our Board of Directors, and the appointment of Howard "Skip" Barker, Jr. to our Board of Directors. On February 11, 2003, we furnished a report on Form 8-K in connection with our fourth quarter 2002 earnings announcement. On February 24, 2003, we furnished a report on Form 8-K in connection with the presentation materials to be presented at the Goldman Sachs Technology Investment Symposium in La Quinta, California on February 24, 2003. On March 20, 2003, we furnished a report on Form 8-K in connection with the renewal of a marketing agreement with Marriott International, Inc., and the related issuance of warrants to purchase 5,000,000 shares of priceline.com common stock, par value $0.008. 34 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PRICELINE.COM INCORPORATED (Registrant) Date: May 15, 2003 By: /s/ Robert J. Mylod, Jr. ------------------------------------------ Name: Robert J. Mylod, Jr. Title: Chief Financial Officer (On behalf of the Registrant and as principal financial officer) 35 CERTIFICATIONS I, Jeffery H. Boyd, certify that: 1. I have reviewed the Quarterly Report on Form 10-Q for the quarter ended March 31, 2003 (the "Quarterly Report") of the Registrant; 2. Based on my knowledge, this Quarterly Report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Quarterly Report; 3. Based on my knowledge, the financial statements, and other financial information included in this Quarterly Report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this Quarterly Report; 4. The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-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 officer 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 officer 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: May 15, 2003 /s/ Jeffery H. Boyd ------------------------------------ Name: Jeffery H. Boyd Title: President & Chief Executive Officer CERTIFICATIONS I, Robert J. Mylod, Jr., certify that: 1. I have reviewed the Quarterly Report on Form 10-Q for the quarter ended March 31, 2003 (the "Quarterly Report") of the Registrant; 2. Based on my knowledge, this Quarterly Report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Quarterly Report; 3. Based on my knowledge, the financial statements, and other financial information included in this Quarterly Report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this Quarterly Report; 4. The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-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 officer 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 officer 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: May 15, 2003 /s/ Robert J. Mylod, Jr. ------------------------------------ Name: Robert J. Mylod, Jr. Title: Chief Financial Officer EX-10.75 3 a2111225zex-10_75.txt EXHIBIT 10.75 EXHIBIT 10.75 THE WARRANTS ISSUED PURSUANT TO THIS WARRANT AGREEMENT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE SECURITIES LAWS. THEY MAY NOT BE SOLD OR OFFERED FOR SALE, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER SAID ACT AND APPLICABLE STATE SECURITIES LAWS UNLESS THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED TO EFFECTUATE SUCH TRANSACTION. WARRANT AGREEMENT To Purchase 5,000,000 Shares of Common Stock Dated as of March 17, 2003 PRICELINE.COM INCORPORATED a Delaware Corporation Issue Date: March 17, 2003 THIS CERTIFIES THAT, Marriott International, Inc., a Delaware Corporation (the "WARRANT HOLDER"), with its principal place of business at 10400 Fernwood Road, Bethesda, Maryland 20817, for value received, is entitled, upon the terms and subject to the conditions of this Warrant Agreement (this "WARRANT AGREEMENT"), to subscribe for and purchase fully-paid and non-assessable shares of common stock, par value $.008 per share (the "COMMON STOCK"), of priceline.com Incorporated, a Delaware corporation (the "COMPANY"). 1. ISSUANCE OF WARRANTS. On the Issue Date, by virtue of this Warrant Agreement, the Warrant Holder is the holder of warrants (the "WARRANTS") to acquire 5,000,000 shares of the Common Stock, subject to adjustment as hereinafter provided pursuant to Section 10 of this Warrant Agreement (the "SHARES"). 2. EXERCISE PRICE. The Warrants shall have an exercise price per share of Common Stock equal to the closing price of the Common Stock as reported on The NASDAQ Stock Market on March 31, 2003, subject to adjustment as hereinafter provided pursuant to Section 10 of this Warrant Agreement (the "EXERCISE PRICE"). 3. TERM. The Warrants are fully vested on the Issue Date and may be exercised in accordance with Section 4. The right to exercise the Warrants expires at 5:00 p.m. New York time on the eighth (8th) anniversary of the Issue Date (the "EXPIRATION DATE"). 4. EXERCISE RIGHTS. The Warrant Holder shall have the right, at any time after the third (3rd) anniversary of the Issue Date and prior to the Expiration Date, to exercise the Warrants, in whole or in part, PROVIDED that there has not been, at any time before the third (3rd) anniversary of the Issue Date, an Acceleration Event (as such term is used in that certain Amended and Restated Preferred Hotel Provider Agreement, dated March 14, 2003, by and between the Company and Warrant Holder (the "PREFERRED AGREEMENT")). Unless otherwise exercisable at an earlier date in accordance with this Section 4, all of the Warrants shall be fully exercisable during the period commencing on the seventh (7th) anniversary of the Issue Date and expiring on the Expiration Date. 5. EXERCISE OF PURCHASE RIGHTS. (a) PAYMENT OF EXERCISE PRICE. The purchase rights represented by this Warrant Agreement are exercisable by the Warrant Holder, in whole or in part, subject to the terms of Sections 3 and 4 above, at any time, or from time to time, by tendering to the Company at its principal office a duly completed and executed notice of exercise in the form attached hereto as EXHIBIT A (the "NOTICE OF EXERCISE") and the original Warrant Agreement, each having been duly endorsed to the Company, and payment of the aggregate Exercise Price in lawful money of the United States or conversion of the Warrants in accordance with Section 5(b). Upon receipt of such items, the Company shall issue to the 2 Warrant Holder a certificate for the number of shares of Common Stock purchased. The Warrant Holder, upon exercise of the Warrants, shall be deemed to have become the holder of the Shares represented thereby (and such Shares shall be deemed to have been issued) immediately prior to the close of business on the date or dates upon which the Warrants are properly exercised. In the event of any exercise of the rights represented by the Warrants, certificates for the Shares so purchased shall be delivered to the Warrant Holder or its designee as soon as practical and in any event within ten (10) business days after receipt of such notice and, unless the Warrants have been fully exercised or expired, a new Warrant Agreement representing the remaining portion of the Warrants and the underlying Shares, if any, with respect to which this Warrant Agreement shall not then have been exercised shall also be issued to the Warrant Holder as soon as possible and in any event within such ten-day period. (b) RIGHT TO CONVERT. Notwithstanding anything to the contrary contained in Section 5(a), if the current fair market value of one share of Common Stock is greater than the Exercise Price (as of the date of surrender of this Warrant Agreement at the principal office of the Company together with the Warrant Holder's notice of its election to exercise all or any portion of the Warrants), Warrant Holder may elect to exercise the Warrants in whole or in part by canceling a portion of the Warrants, in which event the Company shall issue to the Warrant Holder certificates for the total number of whole Shares of Common Stock computed using the following formula: X = Y(A - B) -------- A Where: X = the number of Shares to be issued to Warrant Holder Y = the number of Shares with respect to which the Warrants are being exercised A = the current fair market value of one share of Common Stock B = the Exercise Price As used herein, current fair market value of Common Stock as of a specified date shall mean with respect to each share of Common Stock the average of the closing prices of the Common Stock sold on all exchanges on which the Common Stock may at the time be listed, or, if there have been no sales on any such exchange on such day, the average of the highest bid and lowest asked prices on all such exchanges at the end of such day, or, if on such day the Common Stock is not so listed, the average of the representative bid and asked prices quoted in the NASDAQ System as of 4:00 p.m., New York City time, or, if on such day the Common Stock is not quoted in the NASDAQ System, the average of the highest bid and lowest asked price on such day in the domestic over-the-counter market as reported by the National Quotation Bureau, Incorporated, or any similar successor organization, in each case on the trading day immediately preceding the date of exercise. If on the date for which current fair market value is to be determined the Common Stock is not listed on any securities exchange or quoted in the NASDAQ System or the over-the-counter market, the current fair market value of Common Stock shall be determined in good faith by the Board of Directors of the Company and communicated in writing to the Warrant Holder upon Warrant Holder's written request. 6. RESERVATION OF SHARES. The Company will at all times have authorized and reserved a sufficient number of shares of Common Stock to provide for the exercise of the rights to purchase the Shares as provided in this Warrant Agreement. 7. NO FRACTIONAL SHARES. No fractional shares or scrip representing fractional shares shall be issued upon the exercise of the Warrant Holder's rights to purchase the Shares. 8. NO RIGHTS AS SHAREHOLDER. This Warrant Agreement does not entitle the Warrant Holder to any voting rights or other rights as a shareholder of the Company with respect to the underlying Shares prior to the exercise of the Warrant Holder's rights to purchase the Shares as provided for herein. 9. REDEMPTION. The Warrants represented by this Warrant Agreement are not redeemable by the Company. 3 10. ADJUSTMENT RIGHTS. The Exercise Price and the number of shares of Common Stock purchasable hereunder are subject to adjustment from time to time, as follows: (a) MERGER, ETC. If at any time there shall occur a reorganization, recapitalization, merger or consolidation involving the Company in which the Common Stock is converted into or exchanged for securities, cash or other property (other than a transaction covered by Sections 10(b), 10(c) or 10(d)), then, following any such reorganization, recapitalization, consolidation or merger, the Warrant Holder shall thereafter be entitled to immediately exercise the Warrants and, upon payment of the aggregate Exercise Price, receive the kind and amount of shares of stock or other securities or property to which a holder of the stock deliverable upon exercise of the rights granted in this Warrant Agreement would have been entitled to receive if such rights had been exercised immediately before such reorganization, recapitalization, merger or consolidation. In any such case, appropriate adjustment (as determined in good faith by the Board of Directors of the Company) shall be made in the application of the provisions of this Warrant Agreement with respect to the rights and interests of the holder after the reorganization, recapitalization, merger or consolidation. (b) RECLASSIFICATION, ETC. If the Company at any time shall, by subdivision, combination or reclassification of securities or otherwise, change any of the securities as to which purchase rights under this Warrant Agreement exist into the same or a different number of securities of any other class or classes, this Warrant Agreement shall thereafter represent the right to acquire such number and kind of securities as would have been issuable as the result of such change with respect to the securities which were subject to the purchase rights under this Warrant Agreement immediately prior to such subdivision, combination, reclassification or other change. (c) SPLIT, SUBDIVISION OR COMBINATION OF SHARES. If the Company at any time shall split or subdivide its Common Stock, the Exercise Price shall be proportionately decreased and the number of Shares issuable pursuant to this Warrant Agreement shall be proportionately increased. If the Company at any time shall combine or reverse split its Common Stock, the Exercise Price shall be proportionately increased and the number of Shares issuable pursuant to this Warrant Agreement shall be proportionately decreased. (d) STOCK DIVIDENDS. If the Company at any time shall pay a dividend payable in Common Stock to all holders of Common Stock, then the Exercise Price shall be adjusted, from and after the date of determination of stockholders entitled to receive such dividend, to that price determined by multiplying the Exercise Price in effect immediately prior to such date of determination by a fraction (i) the numerator of which shall be the total number of shares of Common Stock outstanding immediately prior to such dividend and (ii) the denominator of which shall be the total number of shares of Common Stock outstanding immediately after such dividend. The Warrant Holder shall thereafter be entitled to purchase, at the Exercise Price resulting from such adjustment, the number of shares of Common Stock (calculated to the nearest whole share) obtained by multiplying (i) the Exercise Price in effect immediately prior to such adjustment by (ii) the number of shares of Common Stock issuable upon the exercise hereof immediately prior to such adjustment and dividing the product thereof by the Exercise Price resulting from such adjustment. (e) OTHER CHANGES. If any other change in the outstanding Common Stock of the Company or any other event occurs as to which the other provisions of this Section 10 are not strictly applicable or if strictly applicable, would not fairly protect the purchase rights of the Warrant Holder in accordance with such provisions, then the Board of Directors of the Company shall make an adjustment in the number of and class of shares available under the Warrants, the Exercise Price or the application of such provisions, so as to protect the purchase rights of the Warrant Holder. The adjustment shall be such as will give the Warrant Holder upon exercise for the same aggregate Exercise Price the total number, class and kind of shares or other property as the Warrant Holder would have owned had the Warrants been exercised prior to the event and had the Warrant Holder continued to hold such shares until after the event requiring adjustment. (f) NOTICE OF ADJUSTMENTS; NOTICES. Whenever the Exercise Price or number of shares purchasable hereunder shall be adjusted pursuant to this Section 10 hereof, the Company shall issue a certificate signed by its Chief Executive Officer or Chief Financial Officer setting forth, in reasonable detail, the event requiring the adjustment, the amount of the adjustment, the method by which such adjustment was calculated and the Exercise Price and number of shares purchasable hereunder after giving effect to such adjustment, and shall cause a copy of such certificate to be mailed (by first class mail, postage prepaid) to the holder of this Warrant. The Company shall give 4 written notice to the Warrant Holder at least 10 days prior to the date on which the Company closes its books or takes a record for determining rights to receive any dividends or distributions. The Company shall also give written notice to the Warrant Holder at least 10 business days prior to the date on which a merger or consolidation of the Company with or into another corporation when the Company is not the surviving corporation shall take place. (g) NO CHANGE OF WARRANT NECESSARY. Irrespective of any adjustment in the Exercise Price or in the number or kind of securities issuable upon exercise of the Warrant, unless the Warrant Holder otherwise requests, this Warrant Agreement may continue to express the same price and number and kind of shares of Common Stock as are stated in this Warrant Agreement as initially executed. 11. REPRESENTATIONS AND WARRANTIES. Each of the Warrant Holder and the Company hereby represents and warrants to the other as follows: (a) EXISTENCE AND POWER. It (i) is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation and (ii) has the corporate power and authority to execute, deliver and perform its obligations under this Warrant Agreement. (b) AUTHORIZATION; NO CONTRAVENTION. The execution, delivery and performance by it of this Warrant Agreement and the transactions contemplated hereby (i) have been duly authorized by all necessary corporate action and (ii) do not contravene the terms of its Certificate of Incorporation or By-laws, each as amended as of and through the Issue Date. (c) GOVERNMENTAL AUTHORIZATION; THIRD PARTY CONSENTS. No approval, consent, compliance, exemption or authorization of any governmental authority or agency, or of any other person or entity, is necessary or required in connection with the execution, delivery or performance by, or enforcement against, it of this Warrant Agreement or the transactions contemplated hereby. (d) BINDING EFFECT. This Warrant Agreement has been duly executed and delivered and constitutes a valid and binding obligation, enforceable against it in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, fraudulent conveyance or transfer, moratorium or similar laws affecting the enforcement of creditors' rights generally or by equitable principles relating to enforceability (regardless of whether considered in a proceeding at law or in equity). The Warrant Holder hereby represents and warrants to the Company as follows: (a) PURCHASE FOR OWN ACCOUNT. The Warrants issued to the Warrant Holder pursuant to this Warrant Agreement, and the Shares to be issued upon vesting and exercise thereof, are being or will be acquired for the Warrant Holder's own account and with no intention of distributing or reselling such securities or any part thereof in any transaction that would be in violation of the securities laws of the United States of America, or any state. (b) RESTRICTED SECURITIES. The Warrant Holder understands that the Warrants and the Shares issuable upon vesting and exercise of the Warrants, will not be registered at the time of their issuance under the Securities Act of 1933, as amended (the "SECURITIES ACT") for the reason that the sale provided for in this Agreement is exempt pursuant to the Securities Act, and that reliance of the Company on such exemption is predicated in part on such Warrant Holder's representations set forth herein. The Warrant Holder represents that it is experienced in evaluating companies such as the Company, has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of its investment and has the ability to suffer the total loss of the investment. The Warrant Holder further represents that it has had the opportunity to ask questions of and receive answers from the Company concerning the terms and conditions of the Warrants, the business of the Company, and to obtain additional information to such Warrant Holder's satisfaction. (c) ACCREDITED INVESTOR. The Warrant Holder is an "Accredited Investor" within the meaning of Rule 501 of Regulation D under the Securities Act, as presently in effect. 5 12. COMPLIANCE WITH SECURITIES ACT; TRANSFERABILITY OF WARRANT OR SHARES OF COMMON STOCK. (a) COMPLIANCE WITH SECURITIES ACT. The Warrant Holder, by acceptance hereof, agrees that the Warrants, and the shares of Common Stock to be issued upon exercise of the Warrants, are being acquired for investment and that such Warrant Holder will not offer, sell or otherwise dispose of the Warrants, or any shares of Common Stock to be issued upon exercise of the Warrants except under circumstances which will not result in a violation of the Securities Act or any applicable state securities laws. The Warrants and all shares of Common Stock issued upon exercise of the Warrants (unless registered under the Securities Act and any applicable state securities laws) shall be stamped or imprinted with a legend in substantially the following form: "THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAW. THEY MAY NOT BE SOLD OR OFFERED FOR SALE, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO UNDER SAID ACT AND APPLICABLE STATE SECURITIES LAWS OR UNLESS THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED TO EFFECTUATE SUCH TRANSACTION." (b) EXCHANGE, TRANSFER, ASSIGNMENT. Warrant Holder shall not, without the prior written consent of the Company, sell, exchange, assign, hedge or transfer, directly or indirectly (whether through establishment of an offsetting derivative position, or otherwise), the Warrants or any interest therein or in the Shares issuable upon exercise thereof, except for a transfer of the Warrants (subject to compliance with section 12(a)) to a successor to the lodging business currently operated by the Warrant Holder. 13. MISCELLANEOUS. (a) NO CONSEQUENTIAL DAMAGES. No party hereto shall be entitled to consequential damages as a result of any breach of a covenant, representation or warranty contained herein. (b) NOTICES. All notices, demands and other communications provided for or permitted hereunder shall be made in writing and shall be by registered or certified first-class mail, return receipt requested, telecopier, courier service or personal delivery: (i) if to the Company, to: priceline.com Incorporated 800 Connecticut Avenue Norwalk, CT 06854 Telecopy: (203) 299-8915 Attention: General Counsel (ii) if to the Warrant Holder, to: Marriott International, Inc. 10400 Fernwood Road Bethesda, MD 20817 Telecopy: (301) 380-1811 Attention: General Counsel With a copy to the same address: Telecopy: (301) 380-6727 Attention: Assistant General Counsel, Corporate Affairs and eCommerce Dept. 52/923.23 6 All such notices and communications shall be deemed to have been duly given when delivered by hand, if personally delivered; when delivered by courier, if delivered by commercial courier service; five (5) business days after being deposited in the mail, postage prepaid, if mailed; and when receipt is mechanically acknowledged, if telecopied. (c) SUCCESSORS; THIRD PARTY BENEFICIARIES. This Warrant Agreement shall inure to the benefit of and be binding upon the successors of the parties hereto. No person, other than the parties hereto and their successors, is intended to be a beneficiary of this Warrant Agreement. (d) AMENDMENT AND WAIVER. (i) No failure or delay on the part of the Company, or the Warrant Holder in exercising any right, power or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, power or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy. The remedies provided for herein are cumulative and are not exclusive of any remedies that may be available to the Company and the Warrant Holder at law, in equity or otherwise. (ii) Any amendment, supplement or modification of or to any provision of this Warrant Agreement, any waiver of any provision of this Warrant Agreement, and any consent to any departure by the Company or the Warrant Holder from the terms of any provision of this Agreement, shall be effective only if it is made or given in writing and signed by the Company and the Warrant Holder. (e) COUNTERPARTS. This Warrant Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. (f) HEADINGS. The headings in this Warrant Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. (g) GOVERNING LAW. THIS WARRANT AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE, WITHOUT REGARD TO THE PRINCIPLES OF CONFLICTS OF LAW OF ANY JURISDICTION. (h) SEVERABILITY. If any one or more of the provisions contained herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions hereof shall not be in any way impaired, unless the provisions held invalid, illegal or unenforceable shall substantially impair the benefits of the remaining provisions hereof. (i) ENTIRE AGREEMENT. This Warrant Agreement, together with the exhibits hereto and the Preferred Agreement, is intended by the parties as a final expression of their agreement and intended to be a complete and exclusive statement of the agreement and understanding of the parties hereto in respect of the subject matter contained herein. This Warrant Agreement, together with the exhibits hereto and the Preferred Agreement, supersedes all prior agreements and understandings between the parties with respect to such subject matter. (j) PUBLICITY. Except as may be required by law, none of the parties hereto shall issue a publicity release or public announcement or otherwise make any disclosure concerning this Warrant Agreement or the transactions contemplated hereby, without prior approval by the other party (which approval shall not be unreasonably withheld); PROVIDED, HOWEVER, that nothing in this Warrant Agreement shall restrict either party from disclosing information (a) that is already publicly available, (b) to its attorneys, accountants, consultants and other advisors to the extent reasonably necessary to obtain their services in connection with the Warrant Holder's investment or participation in the Company, (c) as required by law, and (d) to Warrant Holder's hotel owners and franchisees participating in or benefiting from the Warrant Holder's reservation system or the Preferred Agreement. If any announcement is required by law to be made by any party hereto concerning this Warrant Agreement or the transactions contemplated hereby, prior to making such announcement such party will deliver a draft of such announcement to the other party and shall give the other party an 7 opportunity to comment thereon. (k) CHARGES; TAXES AND EXPENSES. Issuance of certificates for shares upon the exercise of the Warrants shall be made without charge to the Warrant Holder for any issue or transfer tax or other incidental expense in respect of the issuance of such certificates, all of which taxes and expenses shall be paid by the Company. (l) SATURDAYS, SUNDAYS, HOLIDAYS, ETC. If the last or appointed day for the taking of any action or the expiration of any right required or granted herein shall be a Saturday, Sunday or a legal holiday, then such action may be taken or such right may be exercised on the next succeeding day not a Saturday, Sunday or a legal holiday. (m) LOST WARRANTS. The Company covenants to the Warrant Holder that, upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant Agreement and, in the case of any such loss, theft or destruction, upon receipt of an indemnity reasonably satisfactory to the Company, or in the case of any such mutilation, upon surrender and cancellation of this Warrant Agreement, the Company will make and deliver a new Warrant Agreement of like tenor, in lieu of the lost, stolen, destroyed or mutilated document. (n) FURTHER ASSURANCES. Each of the parties shall execute such documents and perform such further acts (including, without limitation, obtaining any consents, exemptions, authorizations or other actions by, or giving any notices to, or making any filings with, any governmental authority or any other person, and otherwise fulfilling, or causing the fulfillment of, the various obligations made herein), as may be reasonably required or desirable to carry out or to perform the provisions of this Warrant Agreement and to consummate and make effective as promptly as reasonably possible the transactions contemplated by this Warrant Agreement. IN WITNESS WHEREOF, this Warrant Agreement has been duly executed and delivered by the authorized officers of each of the undersigned. PRICELINE.COM INCORPORATED By: ------------------------------------------ Robert J. Mylod Chief Financial Officer Marriott International, Inc. By: ------------------------------------------ Name: Title: EXHIBIT A NOTICE OF EXERCISE TO: priceline.com Incorporated 8 1. The undersigned hereby elects to purchase (check applicable box): / / __________ shares of the Common Stock of priceline.com Incorporated pursuant to the terms of the Warrant Agreement, dated as of March 17, 2003, by and between priceline.com Incorporated and the undersigned (the "Warrant Agreement"); or / / the maximum number of shares of Common Stock covered by such Warrant Agreement pursuant to the cashless exercise procedure set forth in Section 5(b). 2. The undersigned tenders herewith payment of the purchase price for such shares in full as provided by Section 2 of the Warrant Agreement at the price per share provided for in the Warrant Agreement. Such payment takes the form of (check applicable box or boxes): / / $__________ in lawful money of the United States; and/or / / the cancellation of such portion of the Warrants provided for in the Warrant Agreement as is exercisable for a total of ________ Shares (using a current fair market value of $_____ per share for purposes of such calculation); and/or / / the cancellation of such number of Warrants as is necessary to exercise the Warrants with respect to the maximum number of Shares purchasable pursuant to the cashless exercise procedures set forth in Section 5(b). 3. Please issue a certificate or certificates representing said shares in the name of the undersigned. Marriott International, Inc. By: ------------------------------- ---------------------------------- (Print Name of Signatory) ---------------------------------- (Title of Signatory) Date: -------------- EX-99.1 4 a2111225zex-99_1.txt EXHIBIT 99.1 Exhibit 99.1 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (SUBSECTIONS (a) AND (b) OF SECTION 1350, CHAPTER 63 OF TITLE 18, UNITED STATES CODE) Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code), the undersigned officer of priceline.com Incorporated, a Delaware corporation (the "Company"), hereby certifies that: The Quarterly Report on Form 10-Q for the 3 months ended March 31, 2003 (the "Report") of the Company fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: May 15, 2003 /s/ Jeffery H. Boyd ------------------------------------ Name: Jeffery H. Boyd Title: President & Chief Executive Officer The foregoing certification is being furnished solely pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code) and is not being filed as part of the Report or as a separate disclosure document. A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. EX-99.2 5 a2111225zex-99_2.txt EXHIBIT 99.2 Exhibit 99.2 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (SUBSECTIONS (a) AND (b) OF SECTION 1350, CHAPTER 63 OF TITLE 18, UNITED STATES CODE) Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code), the undersigned officer of priceline.com Incorporated, a Delaware corporation (the "Company"), hereby certifies that: The Quarterly Report on Form 10-Q for the 3 months ended March 31, 2003 (the "Report") of the Company fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: May 15, 2003 /s/ Robert J. Mylod ------------------------------- Name: Robert J. Mylod Title: Chief Financial Officer The foregoing certification is being furnished solely pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code) and is not being filed as part of the Report or as a separate disclosure document. A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----