-----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, HPOUrCJzCtf5jnVHSgVDeUDyss5RoaGMlZmx0xa7p10By1TJEnWo1fO3fJigXUOe /JJfG7Wj4MjK8RgPhIRZjA== 0001047469-99-030573.txt : 19990811 0001047469-99-030573.hdr.sgml : 19990811 ACCESSION NUMBER: 0001047469-99-030573 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 8 FILED AS OF DATE: 19990810 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: S-1/A SEC ACT: SEC FILE NUMBER: 333-83513 FILM NUMBER: 99682261 BUSINESS ADDRESS: STREET 1: FIVE HIGH RIDGE PARK CITY: STAMFORD STATE: CT ZIP: 06905 BUSINESS PHONE: 2037053000 S-1/A 1 FORM S-1/A AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 10, 1999 REGISTRATION NO. 333-83513 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------------- AMENDMENT NO. 2 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 PRICELINE.COM INCORPORATED (Exact Name of Registrant as Specified in Its Charter) DELAWARE 4541 06-1528493 (State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer of Classification Code Number) Identification Incorporation or Organization) No.)
FIVE HIGH RIDGE PARK STAMFORD, CONNECTICUT 06905 (203) 705-3000 (Address, Including Zip Code, and Telephone Number, including Area Code, of Registrant's Principal Executive Offices) -------------------------- MELISSA M. TAUB, ESQ. SENIOR VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY PRICELINE.COM INCORPORATED FIVE HIGH RIDGE PARK STAMFORD, CONNECTICUT 06905 (203) 705-3000 (Name, Address, including Zip Code, and Telephone Number, including Area Code, of Agent For Service) -------------------------- COPIES TO: PATRICIA MORAN CHUFF, ESQ. ALAN DEAN, ESQ. Skadden, Arps, Slate, Meagher & Flom Davis Polk & Wardwell LLP 450 Lexington Avenue One Rodney Square New York, New York 10017 Wilmington, Delaware 19801 (212) 450-4000 (302) 651-3000 -------------------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT. If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box. / / If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement number for the same offering. / / If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / ____ If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / ____ If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / / -------------------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- EXPLANATORY NOTE This registration statement contains three separate prospectuses. Two prospectuses relate to a public offering of our common stock, par value $0.008 per share. One of the common stock prospectuses will be used in connection with a United States and Canadian offering and the other will be used in a concurrent international offering. The two common stock prospectuses will be identical, except for the front cover page. The form of the U.S. common stock prospectus is included in this registration statement and the form of the cover page for the international common stock prospectus follows the front cover page of the U.S. prospectus. The third prospectus relates to a concurrent offering of % convertible subordinated notes due 2006. We intend to file final forms of each prospectus with the Securities and Exchange Commission pursuant to section 424(b) of the Securities Act of 1933, as amended. THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. PROSPECTUS (SUBJECT TO COMPLETION) ISSUED AUGUST 10, 1999 5,500,000 SHARES [LOGO] COMMON STOCK PRICELINE.COM INCORPORATED IS SELLING 2,000,000 SHARES OF COMMON STOCK AND THE SELLING STOCKHOLDERS ARE SELLING 3,500,000 SHARES OF COMMON STOCK. PRICELINE.COM WILL NOT RECEIVE ANY OF THE PROCEEDS FROM THE SALE OF SHARES OF COMMON STOCK BY THE SELLING STOCKHOLDERS. CONCURRENT WITH THIS OFFERING, PRICELINE.COM IS OFFERING $250,000,000 AGGREGATE PRINCIPAL AMOUNT OF ITS % CONVERTIBLE SUBORDINATED NOTES DUE 2006. THE NOTES WILL BE CONVERTIBLE AT THE OPTION OF THE HOLDER INTO SHARES OF OUR COMMON STOCK. THE NOTE OFFERING WILL BE MADE PURSUANT TO A SEPARATE PROSPECTUS. CLOSING OF THE NOTE OFFERING IS NOT A CONDITION TO THE CLOSING OF THIS OFFERING. ------------------------ THE COMMON STOCK IS TRADED ON THE NASDAQ NATIONAL MARKET UNDER THE SYMBOL "PCLN." ON AUGUST 9, 1999, THE LAST REPORTED SALE PRICE FOR THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET WAS $70.00 PER SHARE. ------------------------ INVESTING IN THE COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 4. --------------------- PRICE $ A SHARE ------------------------
UNDERWRITING PROCEEDS TO PRICE TO DISCOUNTS AND PROCEEDS TO SELLING PUBLIC COMMISSIONS PRICELINE.COM STOCKHOLDERS ------------------ ------------------ ------------------ ------------------ PER SHARE........................... $ $ $ $ TOTAL............................... $ $ $ $
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE NOT APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE SELLING STOCKHOLDERS HAVE GRANTED THE UNDERWRITERS THE RIGHT TO PURCHASE UP TO AN ADDITIONAL 825,000 SHARES OF COMMON STOCK TO COVER OVER-ALLOTMENTS. MORGAN STANLEY & CO. INCORPORATED EXPECTS TO DELIVER THE SHARES OF COMMON STOCK TO PURCHASERS ON AUGUST , 1999. ------------------------ MORGAN STANLEY DEAN WITTER GOLDMAN, SACHS & CO. ALLEN & COMPANY INCORPORATED BANCBOSTON ROBERTSON STEPHENS DONALDSON, LUFKIN & JENRETTE MERRILL LYNCH & CO. , 1999 THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. PROSPECTUS (SUBJECT TO COMPLETION) ISSUED AUGUST 10, 1999 5,500,000 SHARES [LOGO] COMMON STOCK PRICELINE.COM INCORPORATED IS SELLING 2,000,000 SHARES OF COMMON STOCK AND THE SELLING STOCKHOLDERS ARE SELLING 3,500,000 SHARES OF COMMON STOCK. PRICELINE.COM WILL NOT RECEIVE ANY OF THE PROCEEDS FROM THE SALE OF SHARES OF COMMON STOCK BY THE SELLING STOCKHOLDERS. CONCURRENT WITH THIS OFFERING, PRICELINE.COM IS OFFERING $250,000,000 AGGREGATE PRINCIPAL AMOUNT OF ITS % CONVERTIBLE SUBORDINATED NOTES DUE 2006. THE NOTES WILL BE CONVERTIBLE AT THE OPTION OF THE HOLDER INTO SHARES OF OUR COMMON STOCK. THE NOTE OFFERING WILL BE MADE PURSUANT TO A SEPARATE PROSPECTUS. CLOSING OF THE NOTE OFFERING IS NOT A CONDITION TO THE CLOSING OF THIS OFFERING. ------------------------ THE COMMON STOCK IS TRADED ON THE NASDAQ NATIONAL MARKET UNDER THE SYMBOL "PCLN." ON AUGUST 9, 1999, THE LAST REPORTED SALE PRICE FOR THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET WAS $70.00 PER SHARE. ------------------------ INVESTING IN THE COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 4. --------------------- PRICE $ A SHARE ------------------------
UNDERWRITING PROCEEDS TO PRICE TO DISCOUNTS AND PROCEEDS TO SELLING PUBLIC COMMISSIONS PRICELINE.COM STOCKHOLDERS ------------------ ------------------ ------------------ ------------------ PER SHARE........................... $ $ $ $ TOTAL............................... $ $ $ $
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE NOT APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE SELLING STOCKHOLDERS HAVE GRANTED THE UNDERWRITERS THE RIGHT TO PURCHASE UP TO AN ADDITIONAL 825,000 SHARES OF COMMON STOCK TO COVER OVER-ALLOTMENTS. MORGAN STANLEY & CO. INCORPORATED EXPECTS TO DELIVER THE SHARES OF COMMON STOCK TO PURCHASERS ON AUGUST , 1999. ------------------------ MORGAN STANLEY DEAN WITTER GOLDMAN SACHS INTERNATIONAL ALLEN & COMPANY INCORPORATED BANCBOSTON ROBERTSON STEPHENS INTERNATIONAL LIMITED DONALDSON, LUFKIN & JENRETTE MERRILL LYNCH INTERNATIONAL , 1999 DESCRIPTION OF ARTWORK: [At the top of the page, a picture of a person using the Internet in the middle of the following text: BUYER-DRIVEN COMMERCE] [On the right side of the page, a page screen shot of the priceline.com homepage, including a button menu of the various services offered by the priceline.com service. Below the priceline.com homepage, four smaller cascading page screen shots with textual descriptions of the various services offered and steps involved in the priceline.com process; the following captions flow below the smaller cascading screen shots] "Priceline.com's name-your-price process was carefully designed to be fast and easy to use." "In just a few minutes, and at no cost, a consumer can name a guaranteed ready-to-buy price for a flexible range of goods. Priceline.com then searches for a seller who wants the sale." On the left side of the page, the following text: A UNIQUE E-COMMERCE SYSTEM WHERE BUYERS NAME THEIR PRICE, AND PRICELINE.COM "COLLECTS" INCREMENTAL DEMAND FOR SELLERS TO CONSIDER. Priceline.com is a multi-category pricing system which uses a simple and compelling consumer proposition--name your price. Subject to the buyer's agreed range of product flexibility, we find a seller willing to accept the buyer's offer. Buyers get the price they want and sellers get incremental sales. [The button menu of services that the priceline.com service offers is duplicated from the page screen shot of the priceline.com homepage, with each button bearing an icon depicting the textual description on the button: [Icon of an airplane with the text] "Domestic Airline Tickets" [Icon of an airplane with the text] "International Airline Tickets" [Icon of a suitcase with the text] "Hotel Rooms" [Icon of a car with the text] "New Cars (N.Y. Metro)" [Icon of a house with the text] "Home Mortgages" [Icon of a house with the text] "Home Refinancing" [Icon with a house with the dollar sign on it with the text] "Home Equity Loans" Underneath the button menu, the following text: As of July 1999, six consumer services are available through priceline.com. Currently available services are in two broad categories; travel and financial services. Our seventh service, new cars, is being tested in the New York metropolitan area and is priceline.com's first service in the automotive category. priceline.com(SM) priceline.com and the priceline.com logo are service marks of priceline.com Incorporated. The gatefold consists of four sections, each with visual page screen shots and textual descriptions of each of the categories available through the priceline.com service: airline tickets, hotel rooms, home financing or new cars. On right side, top half of the first page of the gatefold, a picture of an airline, with the following heading flowing around it: priceline.com(SM) airline tickets 2 Below the heading, three page screen shots with textual descriptions of the airline tickets services offered by priceline.com with the following caption: "Airline Tickets. . . Priceline.com's inaugural name-your-price service was launched on April 6, 1998. During the second quarter of 1999, priceline.com sold over 440,000 airline tickets." On the left side, top half of the first page of the gatefold, the first two buttons in the button menu of services that the priceline.com service offers are duplicated: [Icon of an airplane with the text] "Domestic Airline Tickets" [Icon of an airplane with the text] "International Airline Tickets" Below the buttons, the following text: AIRLINE TICKETS Name your price for leisure travel on a major airline. . . With priceline.com's airline ticket service, a leisure traveler names his price and dates of travel and agrees to accept non-changeable tickets at any time of the day, on any major airline that agrees to his price. On right side, bottom half of the first page of the gatefold, a picture of a hotel, with the following heading flowing around it: priceline.com(SM) hotel rooms Below the heading, three page screen shots with textual descriptions of the hotel rooms services offered by priceline.com with the following caption: "Hotel Rooms . . . Priceline.com's second travel service was initially launched in October 1998 and was launched nationally in April 1999." On the left side, bottom half of the first page of the gatefold, the third button in the button menu of services that the priceline.com service offers is duplicated: [Icon of a suitcase with the text] "Hotel Rooms" Below the button, the following text: HOTEL ROOMS Name your price for a hotel room in over 1100 U.S. cities. . . With priceline.com's hotel room service, a traveler names his price, quality rating and geographic zone in any of over 1100 U.S. cities. The buyer agrees to stay in any major hotel that accepts his price. priceline.com(SM) On the right side, top half of the second page of the gatefold, a picture of a house, with the following heading flowing around it: priceline.com(SM) home financing Below the heading, three page screen shots with textual descriptions of the home financing services offered by priceline.com with the following caption: "Home Financing. . . Priceline.com introduced three home financing services in the first quarter of 1999. Consumers can name their own interest rate and points on mortgages, home equity loans and home refinancings. 3 On the left side, top half of the second page of the gatefold, the last three buttons in the button menu of services that the priceline.com service offers are duplicated: [Icon of a house with the text] "Home Mortgages" [Icon of a house with the text] "Home Refinancing" [Icon with a house with the dollar sign on it with the text] "Home Equity Loans" Below the buttons, the following text: HOME FINANCING Name your interest rate and points for a mortgage, refinancing or home equity loan. . . With priceline.com's home financing services, the consumer names his interest rate and points for any of three home financing services. Priceline.com works to find a lender who agrees to the consumer's offer. On the right side, bottom half of the second page of the gatefold, a picture of a car, with the following heading flowing around it: priceline.com(SM) new cars Below the heading, three page screen shots with textual descriptions of the new cars services offered by priceline.com with the following caption: "New Cars. . . Priceline.com introduced its new car service in the New York market as a test in the third quarter of 1998. Unlike other Internet services, priceline's service is not a lead-generating system and is open to all factory-authorized dealers with no up-front fees or exclusivity." On the left side, bottom half of the second page of the gatefold, the third button in the button menu of services that the priceline.com service offers is duplicated: [Icon of a car with the text] "New Cars (N.Y. Metro)" Below the button, the following text: NEW CARS Name your price for the exact car you want and let priceline.com get a dealer to agree. . . With priceline.com's new car service, the buyer names his price for the exact car he wants. The buyer never talks to a car salesman until AFTER priceline finds a local factory-authorized dealer who agrees to the buyer's price in writing. priceline.com(SM) 4 TABLE OF CONTENTS
PAGE ----- Prospectus Summary............................. 1 Risk Factors................................... 4 Special Note Regarding Forward-Looking Statements................................... 25 Use of Proceeds................................ 26 Price Range of Common Stock.................... 26 Dividend Policy................................ 26 Capitalization................................. 27 Dilution....................................... 28 Selected Financial Data........................ 29 Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 30 PAGE ----- Business....................................... 45 Management..................................... 69 Certain Transactions........................... 85 Principal and Selling Stockholders............. 88 Certain United States Federal Tax Consequences To Non-U.S. Investors........................ 91 Description of Capital Stock................... 93 Shares Eligible for Future Sale................ 95 Underwriters................................... 98 Legal Matters.................................. 101 Experts........................................ 101 Additional Information......................... 101 Index to Financial Statements.................. F-1
Our principal executive offices are located at Five High Ridge Park, Stamford, Connecticut 06905, and our telephone number is (203) 705-3000. Our World Wide Web site is www.priceline.com. The information on our Web site is not incorporated by reference into this prospectus. In this prospectus, the terms "company," "priceline.com," "we," "us" and "our" refer to priceline.com Incorporated and, unless the context otherwise requires, "common stock" refers to the common stock, par value $0.008 per share, of priceline.com. Our financial statements as of and for the periods ended December 31, 1997 and December 31, 1998 (restated) are presented on a combined basis with the financial statements of Priceline Travel, Inc., previously a separate company owned by Mr. Jay S. Walker, our Founder and Vice Chairman. Priceline Travel, which owned our travel agency license, was merged with and into priceline.com as of March 24, 1999. This prospectus includes statistical data regarding our company, the Internet and the industries in which we compete. Such data are based on our records or are taken or derived from information published or prepared by various sources, including International Data Corporation, a provider of market and strategic information for the information technology industry, and a market research organization that we retain from time to time to measure consumer awareness of our brand and services and of other leading Internet brands and their products. You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that which is contained in this prospectus. We are offering to sell shares of common stock and seeking offers to buy shares of common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of the common stock. Unless otherwise indicated, all information in this prospectus (1) reflects a 1.25 for one stock split of our common stock on March 26, 1999 and the conversion of all outstanding shares of our convertible preferred stock into 38,907,728 shares of common stock on March 29, 1999; (2) reflects the consummation of the merger between priceline.com and Priceline Travel, Inc. as of March 24, 1999; and (3) assumes no exercise of the underwriters' over-allotment option in this offering or the concurrent note offering. See "Description of Capital Stock." i PROSPECTUS SUMMARY Priceline.com has pioneered a unique e-commerce pricing system known as a "demand collection system" that enables consumers to use the Internet to save money on a wide range of products and services while enabling sellers to generate incremental revenue. Using a simple and compelling consumer proposition--"name your price"--we collect consumer demand, in the form of individual customer offers guaranteed by a credit card, for a particular product or service at a price set by the customer. We then either communicate that demand directly to participating sellers, or access participating sellers' private databases to determine whether we can fulfill the customer's offer on the basis of the pricing information and rules established by the sellers. Consumers agree to hold their offers open for a specified period of time and, once fulfilled, offers cannot be canceled. By requiring consumers to be flexible with respect to brands, sellers and/or product features, we enable sellers to generate incremental revenue without disrupting their existing distribution channels or retail pricing structures. We commenced the priceline.com service on April 6, 1998 with the sale of leisure airline tickets. Since that time, our business has grown significantly and the priceline.com service now includes the following products and services: - leisure airline tickets, provided by six domestic and 16 international airline participants; - new automobiles, which was launched on a test basis in the New York metropolitan area in July 1998; - hotel room reservations, which was launched in October 1998, offers hotel rooms in substantially all major United States markets and includes as participants more than 10 leading national hotel chains; and - home financing services, which was launched in January 1999 with home mortgage services and now also includes home equity loans and refinancing services. Through the innovative use of "adaptive marketing programs," we also market customer acquisition programs for third parties. These programs facilitate the completion of a higher percentage of successful transactions through the priceline.com service while generating fee income for us. We generate revenues in a variety of ways depending on the product or service sold. With respect to our airline ticket and hotel room reservation services, we recognize as revenue the customer's named price, net of taxes, and record as the cost of revenue the fare or rate charged by the seller. With respect to our automobile service, we earn a fixed fee from both the customer and the seller after the transaction is consummated. With respect to our home financing service, we receive marketing fees equal to a percentage of the net revenue generated by the service, which is operated in conjunction with LendingTree, Inc. With respect to our adaptive marketing programs, we recognize as revenue the fees due to us from our adaptive marketing partners. We believe that the priceline.com service already has achieved significant consumer acceptance and widespread brand awareness. During the period from launch through June 30, 1999, we collected guaranteed offers for approximately 5.1 million airline tickets, representing approximately $1.1 billion in total consumer demand. This demand resulted in sales of approximately 762,000 airline tickets, representing approximately $165.2 million in revenue. We intend to continue to leverage the priceline.com brand by expanding our product offerings to include other leisure travel products and other financial services products and by expanding our new car sales service to the entire U.S. market. We also are exploring expansion of our core "name your price" business model to other areas of e-commerce, such as retail merchandise and the consumer-to-consumer market. THE OFFERING Common stock offered......................... 5,500,000 shares 2,000,000 shares by priceline.com 3,500,000 shares by the selling stockholders Common stock offered in United States offering................. 4,400,000 shares International offering................. 1,100,000 shares Common stock to be outstanding after the offering................................... 146,782,296 shares(a) Use of proceeds.............................. For working capital and general corporate purposes. See "Use of Proceeds." Nasdaq National Market symbol................ PCLN
- ------------------------ (a) Excludes 46,865,964 shares of common stock issuable upon the exercise of outstanding options and warrants and the shares of common stock issuable upon conversion of the % convertible subordinated notes due 2006, to be offered concurrent with this offering. See "Capitalization." CONCURRENT CONVERTIBLE NOTE OFFERING Concurrent with this offering, we are making a public offering of $250.0 million aggregate principal amount of our % convertible subordinated notes due 2006. The convertible subordinated notes will be convertible, at the option of the holder, at any time, into shares of our common stock at a conversion price of $ per share, subject to adjustment in accordance with their terms. The note offering will be made pursuant to a separate prospectus. Closing of the note offering is not a condition to the closing of this offering. 2 SUMMARY FINANCIAL INFORMATION
JULY 18, 1997 (INCEPTION) TO YEAR ENDED SIX MONTHS DECEMBER 31, DECEMBER 31, ENDED 1997 1998 JUNE 30, 1999 ------------- --------------- --------------- RESTATED(A) STATEMENT OF OPERATIONS DATA:(B) Revenues.................................................. $ -- $ 35,236,860 $ 160,974,391 Cost of revenues: Product costs........................................... -- 33,495,745 144,323,527 Supplier warrant costs(c)............................... -- 3,029,014 761,518 ------------- --------------- --------------- Total cost of revenues.................................... -- 36,524,759 145,085,045 ------------- --------------- --------------- Gross profit (loss)..................................... -- (1,287,899) 15,889,346 Expenses: Supplier start-up warrant costs(c)...................... -- 57,978,678 -- Sales and marketing..................................... 441,479 24,388,061 34,871,086 General and administrative.............................. 1,011,600 18,004,585(d) 9,169,869 Systems and business development........................ 1,060,091 11,131,650 5,652,423 ------------- --------------- --------------- Total expenses.......................................... 2,513,170 111,502,974 49,693,378 ------------- --------------- --------------- Operating loss............................................ (2,513,170) (112,790,873) (33,804,032) Interest income (expense), net............................ (312) 548,374 2,387,104 ------------- --------------- --------------- Net loss.................................................. (2,513,482) (112,242,499) (31,416,928) Accretion on preferred stock(e)........................... -- (2,183,424) (8,353,973) ------------- --------------- --------------- Net loss applicable to common shareholders................ $ (2,513,482) $ (114,425,923) $ (39,770,901) ------------- --------------- --------------- ------------- --------------- --------------- Per share basic and diluted net loss applicable to common stockholders............................................ $ (0.05) $ (1.41) $ (0.29) ------------- --------------- --------------- ------------- --------------- --------------- Weighted average common shares outstanding................ 50,833,756 81,231,425 137,436,399
AS OF JUNE 30, 1999 ------------------------------ ACTUAL AS ADJUSTED(F) -------------- -------------- BALANCE SHEET DATA(B): Cash and cash equivalents...................................................... $ 142,803,134 $ 519,389,830 Working capital................................................................ 150,043,651 526,630,347 Total assets................................................................... 204,794,892 589,507,254 Total liabilities.............................................................. 33,485,681 283,485,681 Total stockholders' equity..................................................... 171,309,211 306,021,573
- ------------------------ (a) As restated, see Note 13 to the 1998 combined financial statements. (b) Presented on a combined basis with Priceline Travel, Inc. as of and for the periods ended December 31, 1997 and December 31, 1998. Priceline Travel, which previously owned our travel agency license, was merged into priceline.com as of March 24, 1999. (c) Represents non-cash charges for warrants issued to certain of our participating airlines. (d) Includes a non-cash charge of $6,500,000 with respect to 8,125,000 shares of common stock issued as executive compensation. (e) Represents amortization of the beneficial conversion feature on the Series B preferred stock that ceased upon conversion of the Series B preferred stock into common stock on March 29, 1999. (f) As adjusted to reflect the receipt by priceline.com of the estimated net proceeds of (x) $133,295,666 from the sale of the 2,000,000 shares of common stock offered by priceline.com in this offering (after deducting the estimated offering expenses and underwriting discounts and commissions), based upon an assumed public offering price of $70.00 per share; (y) $1,416,696 from the exercise of warrants to purchase 1,523,329 shares of common stock by Delta Airlines at an exercise price of $0.93 per share; and (z) $241,874,334 from the sale of $250.0 million aggregate principal amount of % convertible subordinated notes in the concurrent note offering (after deducting estimated offering expenses and underwriting discounts and commissions). 3 RISK FACTORS YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISKS BEFORE MAKING AN INVESTMENT DECISION. THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE DUE TO ANY OF THESE RISKS, AND YOU COULD LOSE ALL OR PART OF YOUR INVESTMENT. YOU ALSO SHOULD REFER TO THE OTHER INFORMATION SET FORTH IN THIS PROSPECTUS, INCLUDING OUR FINANCIAL STATEMENTS AND THE RELATED NOTES THERETO. THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS. THESE STATEMENTS RELATE TO FUTURE EVENTS OR FUTURE FINANCIAL PERFORMANCE. IN SOME CASES, YOU CAN IDENTIFY FORWARD-LOOKING STATEMENTS BY TERMINOLOGY SUCH AS "MAY," "WILL," "SHOULD," "COULD," "EXPECTS," "PLANS," "ANTICIPATES," "BELIEVES," "ESTIMATES," "PREDICTS," "POTENTIAL," OR "CONTINUE" OR THE NEGATIVE OF SUCH TERMS AND OTHER COMPARABLE TERMINOLOGY. THESE STATEMENTS ARE ONLY PREDICTIONS. IN EVALUATING THESE STATEMENTS, YOU SHOULD SPECIFICALLY CONSIDER VARIOUS FACTORS, INCLUDING THE RISKS OUTLINED BELOW. THESE FACTORS MAY CAUSE OUR ACTUAL RESULTS TO DIFFER MATERIALLY FROM ANY FORWARD-LOOKING STATEMENT. SEE "SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS." OUR LIMITED OPERATING HISTORY MAKES EVALUATING OUR BUSINESS DIFFICULT Priceline.com was formed in July 1997 and began operations on April 6, 1998. As a result, we have only a limited operating history on which you can base an evaluation of our business and prospects. Our prospects must be considered in the light of the risks, uncertainties, expenses and difficulties frequently encountered by companies in their early stages of development, particularly companies in new and rapidly evolving markets, such as online commerce, using new and unproven business models. To address these risks and uncertainties, we must, among other things: - attract leading sellers and consumers to the priceline.com service; - maintain and enhance our brand, and expand our product and service offerings; - attract, integrate, retain and motivate qualified personnel; and - adapt to meet changes in our markets and competitive developments. We may not be successful in accomplishing these objectives. WE ARE NOT PROFITABLE AND EXPECT TO CONTINUE TO INCUR LOSSES We have incurred net losses of $88.1 million during the period from July 18, 1997 (inception) through June 30, 1999, before giving effect to $68.6 million of non-cash charges arising from equity issuances to a number of our participating airlines, our chief executive officer and other parties, which resulted in total net losses of $156.7 million for such period. We have not achieved profitability and expect to continue to incur losses for at least the next two years. The principal causes of our losses are likely to continue to be significant brand development costs, marketing and promotion costs and technology and systems development costs. Almost all of our revenues to date have been derived from airline ticket sales, hotel room reservations and related adaptive marketing programs. In order to increase airline, hotel room and adaptive marketing revenues, build a record of successful transactions and enhance the priceline.com brand, we have sold a substantial portion of our airline tickets and hotel room reservations below cost. In addition, as our business model evolves, we have introduced and expect to continue to introduce a number of new products and services. With respect to both current and future product and service offerings, we expect to increase significantly our operating expenses in order to increase our customer base, enhance our brand image and support our growing infrastructure. For us to make a profit, our revenues and gross profit margins will need to increase sufficiently to cover these and other future costs. Otherwise, we may never achieve profitability. 4 WE ARE DEPENDENT ON ADAPTIVE MARKETING PROGRAMS Our adaptive marketing programs permit consumers to increase the amount of their offers at no additional cost by participating in sponsor promotions during the process of making an offer through the priceline.com service. The fees paid to us by sponsors offering the promotions generate significant revenues. Since these fees historically have involved no direct costs, they have had a disproportionately positive impact on our gross profit margins. A significant reduction in consumer acceptance of our adaptive marketing programs, costs that we may incur in connection with adaptive marketing programs, reductions in fees paid to us in connection with such programs or any material decline in such programs could result in a material reduction in our revenues and our gross profit. We may not be able to replace such revenues through other programs or through product sales. During 1998 and the first two quarters of 1999, a substantial majority of our adaptive marketing revenues were derived from fees paid by credit card issuers for qualifying credit card applications submitted over the priceline.com service in connection with customer offers for airline tickets. Through May 1, 1999, almost all of our adaptive marketing revenues were derived from fees related to a credit card adaptive marketing program with Capital One Bank. In May 1999, we replaced Capital One Bank with First USA Bank, a leading national credit card issuer. Since that time, our credit card adaptive marketing program revenues have been attributable to our adaptive marketing relationship with First USA. Both the Capital One and First USA adaptive marketing programs enable our customers to increase the amount of their offers by a specified amount by applying online for a credit card. However, the fee structure of the First USA program is based on different factors than the factors that were applicable under the Capital One program. For example, under the Capital One program we received fees based upon the submission of qualifying applications, while the First USA program ties a portion of our fees to account activation and usage. However, since the First USA program only recently commenced, we have no method of accurately predicting such activation and usage rates. In addition, unlike the Capital One program, a portion of the fees earned under the First USA program is required to be reinvested in program incentives. Accordingly, the First USA program may or may not generate revenues or gross profits comparable to those previously generated under the Capital One program. The First USA agreement has a term of five years, subject to certain earlier termination and repricing rights of First USA. For example, subject to priceline.com's rights of renegotiation, First USA has the right to terminate the agreement after one year (and earlier under certain circumstances) if its financial returns under the adaptive marketing program are not at least equivalent to certain agreed upon levels. The full financial statement impact of the shift from the Capital One adaptive marketing program to the First USA adaptive marketing program will not be known until completion of future periods. In addition to our credit card adaptive marketing program with First USA, we have an adaptive marketing program with E*TRADE for online brokerage services and expect to commence adaptive marketing programs with Discover Financial Services, Inc. for credit cards, Sprint Communications Company L.P. for long distance telecommunications services and Earthlink Network, Inc. for the provision of Internet services. Our adaptive marketing program with E*TRADE is based on an oral agreement which may be terminated at any time and most of our other adaptive marketing programs may be terminated on short notice. We cannot guarantee that any of our adaptive marketing programs will continue beyond their initial terms or, even if continued, that they will be successful. If they are not successful, our gross profit and results of operations could be adversely affected. POTENTIAL FLUCTUATIONS IN OUR FINANCIAL RESULTS MAKES FINANCIAL FORECASTING DIFFICULT We expect our revenues and operating results to vary significantly from quarter to quarter. As a result, quarter to quarter comparisons of our revenues and operating results may not be meaningful. In addition, due to our limited operating history and our new and unproven business model, we cannot predict our 5 future revenues or results of operations accurately. It is likely that in one or more future quarters our operating results will fall below the expectations of securities analysts and investors. If this happens, the trading price of our common stock would almost certainly be materially and adversely affected. Our business has no backlog and almost all of our revenues for a particular quarter are derived from transactions that are both initiated and completed during that quarter. Our current and future expense levels are based largely on our investment plans and estimates of future revenues and are, to a large extent, fixed. Accordingly, we may be unable to adjust spending in a timely manner to compensate for any unexpected revenue shortfall, and any significant shortfall in revenues relative to our planned expenditures could have an immediate adverse effect on our business and results of operations. Our limited operating history and rapid growth makes it difficult for us to assess the impact of seasonal factors on our business. Nevertheless, we expect our business to be subject to seasonal fluctuations, reflecting a combination of seasonality trends for the products and services offered by the priceline.com service and seasonality patterns affecting Internet use. For example, with regard to our travel products, demand for leisure travel may increase over summer vacations and holiday periods, while Internet usage may decline during the summer months. Our results also may be affected by seasonal fluctuations in the inventory made available to the priceline.com service by participating sellers. Airlines, for example, typically enjoy high demand for tickets through traditional distribution channels for travel during Thanksgiving and the year-end holiday period. As a result, during those periods, airlines may have less excess inventory to offer through the priceline.com service at discounted prices. Our business also may be subject to cyclical variations for the products and services offered; for example, leisure travel and home mortgage financing tend to decrease in economic downturns. WE ARE DEPENDENT ON THE AIRLINE INDUSTRY AND CERTAIN AIRLINES Our near term, and possibly long term, prospects are significantly dependent upon our sale of leisure airline tickets. Sales of leisure airline tickets represented approximately 83.7% of total revenue for the six months ended June 30, 1999. 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. Unforeseen events, such as political instability, regional hostilities, increases in fuel prices, travel-related accidents and unusual weather patterns also may adversely affect the leisure travel industry. As a result, our business also is likely to be affected by those events. Significantly reducing our dependence on the airline and travel industries is likely to take a long time and there can be no guarantee that we will succeed in reducing that dependence. Sales of airline tickets from priceline.com's four largest airline suppliers, exclusive of Continental Airlines, Inc., which joined the priceline.com service in July 1999, accounted for approximately 92.0% of airline ticket revenue for the six months ended June 30, 1999. As a result, currently we are substantially dependent upon the continued participation of these four airlines in the priceline.com service in order to maintain and continue to grow our total airline ticket revenues. We currently have 22 participating airlines. However, our airline participation agreements: - 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; and - generally, can be terminated upon relatively short notice. These agreements also outline the terms and conditions under which ticket inventory provided by the airlines may be sold. 6 Our agreement with Delta, subject to various exceptions, requires Delta's approval of the addition of new carriers to the priceline.com service, restricts the routes for which tickets may be offered by specified carriers through the priceline.com service and imposes limitations on the code share arrangements of specified carriers. Delta also may require the exclusion of specific markets in order for certain other airlines to participate. These provisions could limit our ability to expand our airline ticket service. In addition, our ability to transfer or license our intellectual property to other travel providers is limited in the manner set forth in the agreement. It is possible that, as the priceline.com service grows and becomes a significant channel of distribution for airline tickets and as other carriers seek participation in the priceline.com service, these competitively restrictive provisions of the Delta agreement could raise issues under federal and state antitrust laws. If that happened, either a federal or state government agency or private party could initiate litigation seeking to enjoin us and Delta from enforcing these provisions or seeking to collect treble damages. The outcome of any such litigation would be uncertain. If, however, such a lawsuit resulted in an injunction or subjected us to damages, our business and financial condition could suffer. Due to our dependence on the airline industry, we could be severely affected by changes in that industry, and, in many cases, we will have no control over such changes or their timing. For example, if the Federal Aviation Administration grounded a popular aircraft model, excess seat capacity could be dramatically reduced and, as a result, our source of inventory could be significantly curtailed. In addition, given the concentration of the airline industry, particularly in the domestic market, major airlines that are not participating in the priceline.com service could exert pressure on other airlines not to supply us with tickets. Alternatively, the airlines could attempt to establish their own buyer-driven commerce service or other similar service to compete with us. We also could be materially adversely affected by the bankruptcy, insolvency or other material adverse change in the business or financial condition of one or more of our airline participants. The sale of shares of common stock by the selling stockholders in this offering is being made pursuant to the "piggyback" registration rights contained in the registration rights agreement. Priceline.com obtained from parties to the registration rights agreement that hold shares (or presently exercisable warrants to purchase shares) of common stock available for sale in this offering a waiver of a 30-day notice period under the agreement and a consent to the assignment of registration rights by Messrs. Jay Walker and Richard Braddock, each of whom chose to sell less than his pro rata number of shares in this offering. Priceline.com did not obtain such waiver and consent from certain other parties to the registration rights agreement (comprised of certain airline participants) because they do not have shares (or presently exercisable warrants to purchase shares) of common stock available for sale in this offering. Priceline.com believes that no damages arise as a result of the failure to obtain such waiver and consent since such airline participants do not have shares (or presently exercisable warrants to purchase shares) of common stock available for sale. Nevertheless, if a disagreement with such airline participants were to arise, priceline.com can not be certain as to the effect, if any, that it could have on its relationship with such airline participants or whether damages or other remedies could be imposed. OUR BUSINESS MODEL IS NOVEL AND UNPROVEN The priceline.com service is based on a novel and unproven business model. We will be successful only if consumers and sellers actively use the priceline.com service. Prior to the launch of the priceline.com service, consumers and sellers had never bought and sold products and services through a demand collection system over the Internet. Therefore, it is impossible to predict the degree to which consumers and sellers will use the priceline.com service. Many of the factors influencing consumers' and sellers' willingness to use the priceline.com service are outside our control. For example, a labor dispute that disrupts airline service or an airline accident could make consumers unwilling to use a service like priceline.com that does not permit the customer to 7 designate the airline on which the customer purchases a ticket. In addition, a breach of security on the Internet, even if we were not involved, could make consumers unwilling to guarantee orders online with a credit card. Consequently, it is possible that consumers and sellers will never utilize the priceline.com service to the degree necessary for us to achieve profitability. WE NEED TO SELL NEW PRODUCTS AND SERVICES We are unlikely to make significant profits unless we make new or complementary products and services and a broader range of existing products and services available through the priceline.com service. We will incur substantial expenses and use significant resources in trying to expand the type and range of the products and services that we offer. However, we may not be able to attract sellers and other participants to provide such products and services or consumers to purchase such products and services through the priceline.com service. In addition, if we launch new products or services and they are not favorably received by consumers, our reputation and the value of the priceline.com brand could be damaged. Almost all of our experience to date is in the travel industry. The travel industry is characterized by "expiring" inventories. For example, if not used by a specific date, an airline ticket or hotel room reservation has no value. The expiring nature of the inventory creates incentives for airlines and hotels to sell seats or room reservations at reduced rates. Because we have only limited experience in selling "non-expiring" inventories on the priceline.com service, such as new cars or financial services, we cannot predict whether the priceline.com business model can be successfully applied to such products and services. TWO NEW BUSINESSES WE ARE EVALUATING MAY NOT BE SUCCESSFUL In addition to broadening the products and services offered through the priceline.com service, we may expand our current "name your price" business model into other areas of e-commerce. We currently are evaluating the licensing of our business model to two new companies. One of these companies is developing a consumer-to-consumer business in which buyers would make conditional purchase offers to acquire goods from other consumers. The other would enable consumers to use the Internet to name the price that they are willing to pay for retail merchandise, which they would pick up from participating retailers. However, we have not determined the structure of our relationship with these companies, which may include, among other things, our licensing of the priceline.com brand and "name your price" business model and investment in such entities. These new businesses may not be launched and, if launched, may not be successful. If these new businesses are not favorably received by consumers, the association of our brand name and business model with these new entities may adversely affect our business and reputation and may dilute the value of our brand name. In addition, to the extent that we may need to invest funds and/or management resources for the development of these entities, our core business may suffer. Expansion of our core business model would expose us to additional risks not currently applicable to our existing operations. For example, expansion into retail products would give rise to operational challenges not applicable to our existing products, such as consumer pick-up arrangements. Moreover, a consumer-to-consumer service would create risks that we do not face currently, such as deceptive or fraudulent activities conducted by users on the Web site. The additional risks associated with an expansion of our core business could have a material adverse effect on our business generally. OUR BRAND MAY NOT ACHIEVE THE BROAD RECOGNITION NECESSARY TO SUCCEED We believe that broader recognition and a favorable consumer perception of the priceline.com brand are essential to our future success. Accordingly, we intend to continue to pursue an aggressive brand-enhancement strategy, which will include mass market and multimedia advertising, promotional programs and public relations activities. These initiatives will involve significant expense. If our brand enhancement 8 strategy is unsuccessful, these expenses may never be recovered and we may be unable to increase future revenues. Successful positioning of the priceline.com brand will largely depend on: - the success of our advertising and promotional efforts; - an increase in the number of successful transactions on the priceline.com service; and - the ability to continue to provide high quality customer service. We believe that consumers currently associate the priceline.com brand primarily with the sale of discount airline tickets. To grow our business, we will need to expand awareness of the priceline.com brand to a wide range of products and services. Sales and marketing expense was $34.9 million during the six months ended June 30, 1999. To increase awareness of the priceline.com brand and expand it to a wide range of products and services, we will need to continue to spend significant amounts on advertising and promotions. These expenditures may not result in a sufficient increase in revenues to cover such advertising and promotions expenses. In addition, even if brand recognition increases, the number of new users or the number of transactions on the priceline.com service may not increase. Also, even if the number of new users increases, those users may not use the priceline.com service on a regular basis. WE FACE POTENTIAL CONFLICTS OF INTEREST RELATING TO WALKER DIGITAL Because of our relationship with Walker Digital and our interlocking directors, officers and stockholders, we are likely to face potential conflicts of interest relating to Walker Digital. The priceline.com service and the business model and related intellectual property rights underlying the priceline.com service were developed in part by executives, employees and/or consultants associated with Walker Digital Corporation, a technology research and development company that was founded and is controlled by Mr. Jay S. Walker, who is the Founder and Vice Chairman of priceline.com. These individuals assigned all of their intellectual property rights relating to the priceline.com service to Walker Digital's affiliate, Walker Asset Management Limited Partnership. Walker Asset Management, subsequently transferred the patent rights relating to the priceline.com service and other related intellectual property rights to us. We, in turn, granted Walker Digital a perpetual, non-exclusive, royalty-free right and license to use certain intellectual property related to the priceline.com service for non-commercial internal research and development purposes. Walker Digital also provides us with, among other things, a right to purchase at fair market value any intellectual property that is in process or has been fully developed and that is owned and subsequently acquired, developed or discovered by Walker Digital or Walker Asset Management that will provide significant value in the use or commercial exploitation of the initially transferred patent and related intellectual property rights. Conflicts of interest may arise from time to time between Walker Digital and us with respect to the potential purchase by us of additional intellectual property rights at fair market value and the pursuit of overlapping corporate opportunities. Walker Digital currently owns assets and intellectual property related to two new areas of e-commerce into which we may expand our "name your price" business model, one involving consumer-to-consumer sales and the other involving the sale of retail merchandise. We may license our brand name and "name your price" business model to two new companies formed to develop these businesses. Walker Digital may contribute assets and intellectual property to these companies in return for an equity interest in these companies. Walker Digital owns the intellectual property rights underlying the technology associated with our adaptive marketing programs. Walker Digital has licensed to priceline.com the right to use these intellectual property rights under a perpetual, non-exclusive, royalty-free license agreement. Walker Digital has pending several United States patent applications directed to different aspects of the processes and technology supporting our adaptive marketing programs. 9 Walker Digital also provides us with various services, including (1) research and development assistance; (2) patent planning, maintenance and prosecution; and (3) other intellectual property services, including technical support. Walker Digital also subleases a portion of its Stamford, Connecticut facilities to us on a month-to-month basis. Priceline.com, in turn, provides Walker Digital with various management and administrative services, for which Priceline.com collects fees from Walker Digital. We also have guaranteed Walker Digital's obligations under a lease whereby it leases office space that is used by both companies. Certain of our executive officers and other key employees also are directors, officers, employees or serve on advisory boards of Walker Digital and either own, or hold an option to purchase, equity securities of Walker Digital. Accordingly, because we have interlocking directors and officers and board level advisors with Walker Digital, there may be inherent conflicts of interest between Walker Digital and us. If a conflict arises between the management decisions of priceline.com and Walker Digital, we could lose valuable management input from our directors and officers who have conflicting obligations. Additionally, many of the options granted to employees and consultants of priceline.com under our 1997 Omnibus Plan entitle holders of such options to continue to vest options for the then current vesting period during which their employment or consulting arrangement with priceline.com terminates if such individuals continue to perform services, throughout the remainder of such vesting period, for another entity controlled by Mr. Jay S. Walker. Consequently, we could lose valuable personnel to an entity controlled by Mr. Walker, while such personnel continue to vest options granted to them by priceline.com for up to one vesting period. We have not adopted any formal plan or arrangement to address these potential conflicts of interest with Walker Digital or other entities controlled by Mr. Walker. We intend to review all related-party transactions and any potential conflicts with Walker Digital and these other entities on a case-by-case basis. Walker Digital owns directly approximately 5.2% of the outstanding common stock of priceline.com. Additionally, Walker Digital has established an option plan for its officers and employees that provides for the grant of options to purchase priceline.com stock owned by Walker Digital. Mr. Jay S. Walker, as the Founder of Walker Digital and as our Founder, has performed an essential role in the establishment and development of the priceline.com service. Mr. Walker also serves as Chairman of Walker Digital and as non-executive Chairman of NewSub Services, Inc., a direct marketing company also co-founded by him. Mr. Walker devotes, and expects to continue to devote, a substantial portion of his time to Walker Digital. Mr. Walker also expects to devote a considerable portion of his time developing and implementing the consumer-to-consumer and retail merchandise Internet businesses. Mr. Walker has not committed to devote any specific percentage of his business time to us. In July 1998, Mr. Richard S. Braddock replaced Mr. Walker as our Chairman and Chief Executive Officer, and in July 1999, Mr. Daniel H. Schulman joined priceline.com as our President and Chief Operating Officer. As a result, Mr. Walker's role with priceline.com has been reduced, and we expect that Mr. Walker will continue to reduce his involvement with us over time. Mr. Walker's skills and experience have benefitted, and continue to benefit, us significantly. Priceline.com could lose valuable management expertise as Mr. Walker further reduces his day-to-day involvement with priceline.com. WE MAY BE UNABLE TO EFFECTIVELY MANAGE OUR RAPID GROWTH We have rapidly and significantly expanded our operations and anticipate that further expansion will be required to realize our growth strategy. Our rapid growth has placed significant demands on our management and other resources which, given our expected future growth rate, is likely to continue. To manage our future growth, we will need to attract, hire and retain highly skilled and motivated officers and employees and improve existing systems and/or implement new systems for: (1) transaction processing; (2) operational and financial management; and (3) training, integrating and managing our growing employee base. 10 IF WE LOSE OUR KEY PERSONNEL OR CANNOT RECRUIT ADDITIONAL PERSONNEL, OUR BUSINESS MAY SUFFER Competition for personnel with experience in Internet commerce is intense. If we do not succeed in attracting new employees or retaining and motivating our current and future employees, our business could suffer significantly. Since our formation in July 1997, we have expanded from 10 to 266 full-time employees as of August 10, 1999. We also have employed many key personnel since our launch in April 1998, including our Chairman and Chief Executive Officer and our President and Chief Operating Officer, and a number of key managerial, marketing, planning, financial, technical and operations personnel. We expect to continue to add additional key personnel in the near future. We do not have "key person" life insurance policies on any of our key personnel. We believe our performance is substantially dependent on: - our ability to retain and motivate our senior management and other key employees; and - our ability to identify, attract, hire, train, retain and motivate other highly skilled technical, managerial, marketing and customer service personnel. CAPACITY CONSTRAINTS AND SYSTEM FAILURES COULD HARM OUR BUSINESS If our systems cannot be expanded to cope with increased demand or fail to perform, we could experience: - 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. We use internally developed systems to operate the priceline.com service, including transaction processing and order management systems that were designed to be scalable. However, if the number of users of the priceline.com service increases substantially, we will need to significantly expand and upgrade our technology, transaction processing systems and network infrastructure. We do not know whether we will be able to accurately project the rate or timing of any such increases, or expand and upgrade our systems and infrastructure to accommodate such increases in a timely manner. Our ability to facilitate transactions successfully and provide high quality customer service also depends on the efficient and uninterrupted operation of our computer and communications hardware systems. The priceline.com service has experienced periodic system interruptions, which we believe will continue to occur from time to time. Our systems and operations also are vulnerable to damage or interruption from human error, natural disasters, power loss, telecommunication failures, break-ins, sabotage, computer viruses, intentional acts of vandalism and similar events. While we currently maintain redundant servers at our Stamford, Connecticut premises to provide limited service during system disruptions at our production site hosted by Exodus Communications, Inc., we do not have fully redundant systems, a formal disaster recovery plan or alternative providers of hosting services. In addition, we do not carry sufficient business interruption insurance to compensate for losses that could occur. Any system failure that causes an interruption in service or decreases the responsiveness of the priceline.com service could impair our reputation, damage our brand name and materially adversely affect our revenues. 11 WE RELY ON THIRD-PARTY SYSTEMS We rely on certain third-party computer systems or third-party service providers, including: - the computerized central reservation systems of the airline and hotel industries to satisfy demand for airline tickets and hotel room reservations; - the computer systems of LendingTree, Inc. to satisfy offers for home financing services; - Exodus Communications to host our systems infrastructure, web and database servers; and - CallTech Communications Incorporated to operate our call center. Any interruption in these third-party services, or a deterioration in their performance, could be disruptive to our business. We currently do not have any contractual arrangement with Exodus Communications and our agreements with CallTech Communications and LendingTree are terminable upon short notice. In the event our arrangement with any of such third parties is terminated, we may not be able to find an alternative source of systems support on a timely basis or on commercially reasonable terms. INTENSE COMPETITION COULD REDUCE OUR MARKET SHARE AND HARM OUR FINANCIAL PERFORMANCE The markets for the products and services offered on the priceline.com service are intensely competitive. We compete with both traditional distribution channels and online services. Increased competition could diminish our ability to become profitable or result in loss of market share and damage the priceline.com brand. 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 agents such as Travelocity, Preview Travel and Microsoft's Expedia; - traditional travel agencies; - consolidators and wholesalers of airline tickets and other travel products, including online consolidators such as Cheaptickets.com; - individual airlines, hotels, rental car companies, cruise operators and other travel service providers; and - operators of travel industry reservation databases such as Worldspan and Sabre. Our current or potential competitors with respect to new automobiles include traditional and online auto dealers, including newly developing auto superstores such as AutoNation, Auto-by-Tel and Microsoft's CarPoint. With respect to financial service products, our competitors include: - banks and other financial institutions; - online and traditional mortgage and insurance brokers, including mortgage.com, Quicken Mortgage, E-Loan and iOwn, Inc.; and - insurance companies. We also potentially face competition from a number of large online services that have expertise in developing online commerce and in facilitating Internet traffic. These potential competitors include Amazon.com, America Online, Microsoft, and Yahoo! who could choose to compete with us either directly or indirectly through affiliations with other e-commerce companies. Other large companies with strong brand recognition, technical expertise and experience in online commerce and direct marketing could also seek to compete in the buyer-driven commerce market. In addition, as we expand our business through the introduction of new products and services, we will face competition from established providers of these products and services. For example, if we expand into the consumer-to-consumer market either directly or 12 through a licensing arrangement, we will face competition from established web site operators such as eBay. Many of our competitors have significant competitive advantages. For example, airlines, hotels, financial institutions and other suppliers also sell their products and services directly to consumers and have established Web sites. Internet directories, search engines and large traditional retailers have significantly greater operating histories, customer bases, technical expertise, brand recognition and/or online commerce experience than us. In addition, certain competitors may be able to devote significantly greater resources than us to: - marketing and promotional campaigns; - attracting traffic to their Web sites; - attracting and retaining key employees; and - Web site and systems development. OUR SUCCESS DEPENDS ON OUR ABILITY TO PROTECT OUR INTELLECTUAL PROPERTY We have developed a comprehensive program for securing and protecting rights in patentable inventions, trademarks, trade secrets and copyrightable materials. If we are not successful in protecting our intellectual property, there could be a material adverse effect on our business. PATENTS We currently hold one issued United States patent directed to a unique Internet-based buyer-driven commerce method and system underlying our business model. We also hold one issued United States patent directed to a method and system for pricing and selling airline ticket options and one issued United States patent directed to methods and systems for generating airline-specified time tickets. In addition, we have pending 25 United States and four international patent applications directed to different aspects of our technology and business processes. We also have instituted an invention development program to identify and protect new inventions and a program for international filing of selected patent applications. Nevertheless, it is possible that: - our core buyer-driven commerce patent and any other issued patents could be successfully challenged by one or more third parties, which could result in our loss of the right to prevent others from exploiting the buyer-driven commerce system claimed in the patent or the inventions claimed in any other issued patents; - because of variations in the application of our business model to each of our products and services, our core buyer-driven commerce patent may not 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; - our ability to practice our core buyer-driven commerce patent through offering one or more of our products or services could be successfully prevented if one or more third parties prevail in an interference action in the U.S. Patent and Trademark Office and thereby obtain priority of invention for the subject matter claimed in our core buyer-driven commerce patent; - newly discovered prior art could diminish the value of or invalidate an issued patent; - our pending patent applications may not result in the issuance of patents; and - current and future competitors could devise new methods of competing with our business that are not covered by our issued patents or patent applications. 13 While our core patent is directed to a unique buyer-driven commerce system and method, it does not necessarily prevent competitors from developing and operating Internet commerce businesses that use customer-offer based business models. It is possible for a competitor to develop and utilize a business model that appears similar to our patented buyer-driven commerce system, but which has sufficient distinctions that it does not fall within the scope of our patent. For example, we are aware of Internet travel services that appear to use customer-offer based transaction models, but based on the information we have obtained to date, may not infringe our patent. Walker Digital currently owns assets and intellectual property related to two new areas of e-commerce into which we may expand our "name your price" business model, one involving consumer-to-consumer sales and the other involving the sale of retail merchandise. We may license our brand name and "name your price" business model to two new companies formed to develop these businesses. Walker Digital may contribute assets and intellectual property to these companies in return for an equity interest in these companies. Walker Digital owns the intellectual property rights underlying the technology associated with our adaptive marketing programs. Walker Digital has licensed to priceline.com the right to use these intellectual property rights under a perpetual, non-exclusive, royalty-free license agreement. Walker Digital has pending several United States patent applications directed to different aspects of the processes and technology supporting adaptive marketing programs. PENDING INTERFERENCE ACTION On January 6, 1999, we received notice that a third party patent applicant and patent attorney, Thomas G. Woolston, purportedly had filed in December 1998 with the United States Patent and Trademark Office a request to declare an "interference" between a patent application filed by Woolston describing an electronic market for used and collectible goods and our core buyer-driven commerce patent. We have received a copy of a Petition for Interference from Woolston, the named inventor in at least three United States Patent applications titled "Consignment Nodes," one of which has issued as a patent (U.S. Patent Number: 5,845,265). We recently received a notice from the United States Patent and Trademark Office that an undisclosed patent applicant who we believe is Woolston is seeking to provoke an interference on our core buyer-driven commerce patent. We are awaiting information from the Patent Office regarding whether it will initiate an interference proceeding concerning Woolston's patent application and our core buyer-driven commerce patent. An interference is an administrative proceeding instituted in the Patent Office to determine questions of patentability and priority of invention between two or more parties claiming the same patentable invention. There is no statutory period within which the Patent Office must act on an interference request. If an interference is declared and proceeds through a final hearing in the Patent Office, a final judgment is made by the Patent Office as to inventorship. Following such final judgment, appeals could be made in Federal court. While there can be no certainty as to time periods, interference proceedings typically take years to resolve. As a threshold to the initiation of an interference proceeding, Woolston must show that his patent application supports claims that he copied from our core buyer-driven commerce patent. In order to make this showing, he would have to prove, among other things, that he invented the subject matter of the priceline.com claims before the inventors of our patent. If the Patent Office were to find that Woolston's patent application supported the copied priceline.com claims, it would resolve the interference by awarding inventorship to the party with the earliest proven date of invention. Woolston announced in February 1999 an agreement to license his issued patent and pending patent applications to the owner of a competing Internet travel service. While the interference process is still at an early stage, we believe that we have meritorious defenses to Woolston's claim, which we intend to pursue vigorously. Among other things, we believe that the Woolston patent application does not disclose the inventions covered by the priceline.com patent claims. 14 However, it is impossible to predict the outcome of an interference with certainty. While Woolston claims to have an earlier invention date by a period of approximately sixteen months, the final decision as to priority of invention would be made by the Patent Office after considering facts provided by each party during the interference proceeding. If an interference is declared and thereafter resolved in favor of Woolston, such resolution could result in an award of some or all of the disputed patent claims to Woolston. If, following such award, Woolston were successful in a patent infringement action against us, including prevailing over all defenses available to us, such as those of non-infringement and invalidity, this could require us to obtain licenses from Woolston and pay damages from the date such patent issued at a cost which could significantly adversely affect our business. If Woolston prevailed in both an interference and an infringement action, then we could be enjoined from conducting business through the priceline.com service to the extent covered by the patent claims awarded to Woolston. In addition, defense of the interference action may be expensive and may divert management attention away from our business. TRADEMARKS, COPYRIGHTS AND TRADE SECRETS We regard the protection of our copyrights, service marks, trademarks, trade dress and trade secrets as critical to our future success. We rely on a combination of laws and contractual restrictions, such as confidentiality agreements, to establish and protect our proprietary rights. However, laws and contractual restrictions may not be sufficient to prevent misappropriation of our technology or deter others from developing similar technologies. We also attempt to register our trademarks and service marks in the United States and internationally. However, effective trademark, service mark, copyright and trade secret protection may not be obtainable and/or available in every country in which our services are made available online. PENDING LITIGATION On January 19, 1999, a complaint was filed in the United States District Court for the Northern District of California by Marketel International, Inc., a California corporation, under the caption Marketel International Inc. v. Priceline.com et. al., No. C-99-1061 (N.D. CA 1999), against priceline.com, Priceline Travel, Walker Asset Management, Walker Digital, Mr. Jay S. Walker, our Founder and Vice Chairman, and Mr. Andre Jaeckle, an individual who made a $1.0 million loan to us bearing interest at a rate of 6% per year and, in connection with the loan, received warrants, which have subsequently been fully exercised, to purchase 62,500 shares of our common stock. On February 22, 1999, Marketel filed an amended complaint, and on March 17, 1999, Marketel filed a second amended complaint. The second amended complaint includes as defendants, Mr. Timothy G. Brier, our Executive Vice President, Travel, Mr. Bruce Schneier, an individual and consultant to Walker Digital, and Mr. James Jorasch, an individual and employee of Walker Digital, and alleges causes of action for, among other things, misappropriation of trade secrets, breach of contract, conversion, breach of confidential relationship, copyright infringement, fraud, unfair competition and false advertising, and seeks injunctive relief and damages in an unspecified amount. In its second amended complaint, Marketel alleges, among other things, that the defendants conspired to misappropriate Marketel's business model, which it describes as a buyer-driven electronic marketplace for travel services and its appurtenant techniques, market research, forms, plans and processes, and which an executive of Marketel allegedly provided to Messrs. Walker and Jaeckle in confidence approximately ten years ago. The second amended complaint also alleges that three former Marketel employees are the actual sole inventors or co-inventors of priceline.com's core buyer driven commerce patent (U.S. patent No. 5794207), which was issued on August 11, 1998 with Messrs. Jay S. Walker, Bruce Schneier and James Jorasch listed as the inventors and which patent was assigned to Walker Digital and thereafter assigned to priceline.com. Marketel asks that the patent's inventorship be corrected accordingly. Based upon publicly available information, we believe that Marketel's fax and fee-based business was launched in 1991 and ceased operations seven months later. Our Internet-based model was independently 15 developed at Walker Digital and priceline.com, and practiced by priceline.com starting in 1998. Based on publicly available information and Marketel's second amended complaint, we understand that Marketel operated a fax-based travel information service which offered consumers, travel agents and/or consolidators the opportunity to purchase specially printed forms. These forms, when accompanied by an additional non-refundable fee, allowed prospective ticket buyers to fax to Marketel credit-card guaranteed bids for airline travel at a bid price specified by the buyer. We believe that Marketel has not engaged in any regular commercial activities since ceasing operations in 1992. Based upon publicly available information, Marketel reactivated its status as a corporation by satisfying its back-due tax obligations to the State of California shortly after the filing of the original complaint. On February 5, 1999, February 10, 1999 and March 31, 1999, the defendants filed their answer, amended answer and answer to second amended complaint, respectively, in which they denied the material allegations of liability in the complaints. We and all other defendants strongly dispute the material legal and factual allegations contained in Marketel's second amended complaint and believe that the second amended complaint is without merit. We intend to defend vigorously against the action. Since May 28, 1999, there has been a discovery stay in effect, which was caused by the withdrawal of Marketel's counsel. Marketel has retained new counsel, and we now anticipate moving forward with discovery. Defending the Marketel litigation may involve significant expense and, due to the inherent uncertainties of litigation, there can be no certainty as to the ultimate outcome. Pursuant to the indemnification obligations contained in the Purchase and Intercompany Services Agreement with Walker Digital, Walker Digital has agreed to indemnify, defend and hold priceline.com harmless for damages, liabilities and legal expenses incurred in connection with the Marketel litigation. DOMAIN NAMES We currently hold the Internet domain name "priceline.com," as well as various other related names. Domain names generally are regulated by Internet regulatory bodies. The regulation of domain names in the United States and in foreign countries is subject to change. Regulatory bodies could establish additional top-level domains, appoint additional domain name registrars or modify the requirements for holding domain names. As a result, we may not acquire or maintain the "priceline.com" domain name in all of the countries in which we conduct business. The relationship between regulations governing domain names and laws protecting trademarks and similar proprietary rights is unclear. Therefore, we could be unable to prevent third parties from acquiring domain names that infringe or otherwise decrease the value of our trademarks and other proprietary rights. LICENSES In the future, we may license portions of our intellectual property, including our issued patents, to third parties or to joint ventures or other entities in which we may have an interest. To date, we have granted a small business providing online travel services immunity from suit under our core Internet-based buyer-driven commerce system patent, on the condition that the nature and scope of such business is not significantly changed. If the nature or scope of such immunity were disputed, we would need to institute proceedings to enforce our rights either under the immunity agreement or under the patent. THE SUCCESS OF OUR BUSINESS WILL DEPEND ON CONTINUED GROWTH OF INTERNET COMMERCE The market for the purchase of products and services over the Internet is a new and emerging market. As an Internet commerce business, our future revenues and profits are substantially dependent upon the widespread acceptance and use of the Internet and other online services as a medium for commerce by consumers and sellers. If acceptance and growth of Internet use does not occur, our business and financial performance will suffer. Rapid growth in the use of and interest in the Internet and other online services is 16 a recent phenomenon. This growth may not continue. A sufficiently broad base of consumers may not adopt, or continue to use, the Internet as a medium of commerce. Demand for and market acceptance of recently introduced products and services over the Internet are subject to a high level of uncertainty, and there are few proven products and services. For us to grow, consumers who historically have purchased through traditional means of commerce, such as a travel agent for airline tickets or a branch of a bank for home financings, will need to elect to purchase online products and services. Sellers of products and services will need to adopt or expand use of the Internet as a channel of distribution. The Internet has experienced, and is expected to continue to experience, significant growth in the number of users and amount of traffic. Our success will depend upon the development and maintenance of the Internet's infrastructure to cope with this increased traffic. This will require a reliable network backbone with the necessary speed, data capacity and security, and the timely development of complementary products, such as high-speed modems, for providing reliable Internet access and services. The Internet has experienced a variety of outages and other delays as a result of damage to portions of its infrastructure and could face such outages and delays in the future. Outages and delays are likely to affect the level of Internet usage generally, as well as the processing of transactions on the priceline.com Web site. It is unlikely that the level of orders lost in those circumstances could be made up by increased phone orders. In addition, the Internet could lose its viability due to delays in the development or adoption of new standards to handle increased levels of activity or due to increased government regulation. The adoption of new standards or government regulation may, however, require us to incur substantial compliance costs. WE MAY NOT BE ABLE TO KEEP UP WITH THE 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. YEAR 2000 RISKS MAY HARM OUR BUSINESS The risks posed by Year 2000 issues could adversely affect our business in a number of significant ways. Although we believe that our internally developed systems and technology are Year 2000 compliant, our information technology systems nevertheless could be substantially impaired or cease to operate due to Year 2000 problems. Additionally, we rely on information technology supplied by third parties, and our participating sellers also are heavily dependent on information technology systems and on their own third party vendors' systems. Year 2000 problems experienced by us or any of such third parties could materially adversely affect our business. Additionally, the Internet could face serious disruptions arising from the Year 2000 problem. 17 We are evaluating our internal information technology systems and contacting our information technology suppliers and participating sellers to ascertain their Year 2000 status. However, we cannot guarantee that our own systems will be Year 2000 compliant in a timely manner, that any of our participating sellers or other Web site vendors will be Year 2000 compliant in a timely manner, or that there will not be significant interoperability problems among information technology systems. We also cannot guarantee that consumers will be able to visit our Web site without serious disruptions arising from the Year 2000 problem. Given the pervasive nature of the Year 2000 problem, we cannot guarantee that disruptions in other industries and market segments will not adversely affect our business. Further, the costs related to Year 2000 compliance could be significant. Moreover, participating sellers in priceline.com services could experience substantial slow-downs in business if consumers avoid products and services such as air travel both before and after January 1, 2000 arising from concerns about reliability and safety because of the Year 2000 issue. ONLINE SECURITY BREACHES COULD HARM OUR BUSINESS The secure transmission of confidential information over the Internet is essential in maintaining consumer and supplier confidence in the priceline.com service. Substantial or ongoing security breaches on our system or other Internet-based systems could significantly harm our business. We currently require buyers to guarantee their offers with their credit card, either online or through our toll-free telephone service. We rely on licensed encryption and authentication technology to effect secure transmission of confidential information, including credit card numbers. It is possible that advances in computer capabilities, new discoveries or other developments could result in a compromise or breach of the technology used by us to protect customer transaction data. We incur substantial expense to protect against and remedy security breaches and their consequences. However, we cannot guarantee that our security measures will prevent security breaches. A party that is able to circumvent our security systems could steal proprietary information or cause interruptions in our operations. Security breaches also could damage our reputation and expose us to a risk of loss or litigation and possible liability. Our insurance policies carry low coverage limits, which may not be adequate to reimburse us for losses caused by security breaches. We also face risks associated with security breaches affecting third parties conducting business over the Internet. Consumers generally are concerned with security and privacy on the Internet and any publicized security problems could inhibit the growth of the Internet and, therefore, the priceline.com service as a means of conducting commercial transactions. OUR STOCK PRICE IS HIGHLY VOLATILE The market price of our common stock is highly volatile and is likely to continue to be subject to wide fluctuations in response to factors such as the following, some of which are beyond our control: - quarterly variations in our operating results; - operating results that vary from the expectations of securities analysis and investors; - changes in expectations as to our future financial performance, including financial estimates by securities analysts and investors; - 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; 18 - changes in the status of our intellectual property rights; - loss of a major adaptive marketing partner; - announcements by third parties of significant claims or proceedings against us or adverse developments in pending proceedings; - additions or departures of key personnel; - future sales of our common stock; and - stock market price and volume fluctuations. In addition, the trading prices of Internet stocks in general, including ours, have experienced extreme price and volume fluctuations in recent months. These fluctuations often have been unrelated or disproportionate to the operating performance of these companies. The valuations of many Internet stocks, including ours, are extremely high based on conventional valuation standards, such as price to earnings and price to sales ratios. The trading price of our common stock has increased significantly from the initial public offering price. These trading prices and valuations may not be sustained. Any negative change in the public's perception of the prospects of Internet or e-commerce companies could depress our stock price regardless of our results. Other broad market and industry factors may decrease the market price of our common stock, regardless of our operating performance. Market fluctuations, as well as general political and economic conditions, such as a recession or interest rate or currency rate fluctuations, also may decrease the market price of our common stock. In the past, securities class action litigation often has been brought against a company following periods of volatility in the market price of their securities. We may in the future be the target of similar litigation. Securities litigation could result in substantial costs and divert management's attention and resources. SUBSTANTIAL SALES OF COMMON STOCK ELIGIBLE FOR RESALE COULD ADVERSELY AFFECT OUR STOCK PRICE Sales of a substantial number of shares of common stock after the offering 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. Upon completion of this offering, we will have outstanding 146,782,296 shares of common stock. Of these shares, the 5,500,000 shares of common stock sold in this offering, the 10,000,000 shares of common stock in our initial public offering and the 938,540 shares of common stock sold by employees upon exercise of stock options pursuant to the option exercise program will be freely tradeable without restriction under the Securities Act of 1933, as amended, which is commonly referred to as the "Securities Act," unless purchased by "affiliates" of priceline.com as defined in Rule 144 under the Securities Act. The shares of common stock issuable upon conversion of the % convertible subordinated notes sold in the concurrent note offering will be freely tradeable in a similar manner. In addition, 26,582,391 shares are issuable upon exercise of outstanding options granted under the 1997 Omnibus Plan and the 1999 Omnibus Plan. We have filed a registration statement on Form S-8 covering the shares of common stock issuable upon exercise of such options. As a result, when the options are exercised, the shares issued will be freely tradeable after September 25, 1999 under the Securities Act unless purchased by "affiliates" of priceline.com as defined in Rule 144 under the Securities Act. The balance of our outstanding shares of common stock and the shares of common stock issuable upon exercise of outstanding warrants will be "restricted securities" under the Securities Act, subject to restrictions on the timing, manner and volume of sales of these shares. Each of the selling stockholders and Mr. Jay S. Walker who, after this offering, will own an aggregate of 147,835,331 shares of common stock, including shares issuable upon exercise of options and warrants owned by them, have agreed, subject to limited exceptions, for a period of 180 days after the date of this 19 prospectus that they will not, without the prior written consent of Morgan Stanley & Co. Incorporated, directly or indirectly, offer to sell, sell, pledge or otherwise dispose of any shares of common stock. In addition, holders who will own 3,547,311 shares of common stock after this offering and options to purchase an additional 4,532,504 shares after this offering agreed in connection with our initial public offering to similar restrictions until after September 25, 1999. In connection with our option exercise program, holders of options to purchase 7,676,356 shares of common stock registered on our Form S-8 entered into lock-up agreements restricting the exercise of their options and sale of the underlying shares until 180 days after the date of this prospectus without our prior written consent. After giving effect to these contractual restrictions, holding periods under Rule 144 and shares that may be issued upon exercise of outstanding options and warrants, we estimate that additional shares of common stock will be available for sale in the public market as follows:
APPROXIMATE NUMBER OF SHARES ELIGIBLE FOR DATE SALE - --------------------------------------------------------------------------------------------------- ------------- September 26, 1999................................................................................. 5,140,000 October through November 1999...................................................................... 1,520,000 December 1999 through January 2000................................................................. 11,580,000 Thereafter......................................................................................... 150,650,000
Since many of these shares were purchased at prices substantially below current market prices, we believe a significant number of these shares will be sold when eligible for resale. Upon consummation of this offering and subject to the foregoing lock-up agreements, holders of up to 142,104,432 shares of common stock and securities exercisable for shares of common stock will have various rights to request the registration of their shares under the Securities Act. Of such shares, approximately 10,010,000 shares are not subject to the 180-day lock-up relating to this offering. "Demand" registration rights with respect to an aggregate of approximately 5,190,000 shares could be exercised following expiration of the initial public offering lock-up on September 25, 1999, excluding warrants to purchase up to 1,125,000 shares which, by their terms, are not exercisable during the 180-day lock-up period relating to this offering. In the event such a demand is made, approximately 3,690,000 additional shares could be registered pursuant to "piggy-back" registration rights. If such rights are exercised in respect of shares that, at that time, are not available for sale publicly pursuant to Rule 144, then such shares could be sold in the public market on dates earlier than the dates as of which such shares are reflected as available for sale in the table above. We believe holders of registration rights are likely to exercise those rights as to some or all of their shares when they are eligible to do so. Upon the effectiveness of such a registration, all shares covered by such registration statement will be freely transferable. Walker Digital also owns directly approximately 5.2% of our outstanding common stock. Walker Digital has established an option plan for its officers and employees that provides for the grant of options to purchase common stock held by Walker Digital. Future sales of our common stock, or the availability of our common stock for sale, could adversely affect the market price for our common stock or our ability to raise capital by offering equity securities. 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 20 development of the affected markets to become impractical and otherwise adversely affect our financial performance. TRAVEL SERVICES We are subject to the laws and regulations of a number of states governing the offer and/or sale of travel services. For example, priceline.com is registered as a "seller of travel" under the California Seller of Travel Act and is a member of the Airlines Reporting Corporation. In addition, a number of state travel laws and regulations require compliance with specific disclosure, bond and/or other requirements. NEW CAR SALES A number of states have laws and regulations governing the registration and conduct of automobile dealers and brokers. Such laws generally provide that any person receiving direct or indirect compensation for selling automobiles or brokering automobile transactions must register as an automobile broker or dealer. Registration for automobile dealers/brokers may, among other things, require the registrant to maintain a physical office in the applicable state, a dealer lot zoned for automobile sales within the applicable state, and/or a franchise agreement with the manufacturers of the automobiles to be sold. With the planned expansion of our new automobile service from the New York metropolitan area to all 48 contiguous states, priceline.com will attempt to register as an automobile broker/dealer in the jurisdictions where registration is required, provided that it can reasonably comply with the requirements for registration imposed by each jurisdiction. However, we may not be able to register in all states. For example, we will not be able to register in a jurisdiction that requires a dealer zoned lot or a franchise agreement with manufacturers of the automobiles to be sold. We will work with the regulators of the various jurisdictions where enforcement officials advise us that registration is required to obtain waivers of such requirements, but we may not be successful in our efforts. In jurisdictions where we cannot obtain registration, it is possible that state regulatory bodies could take a strict enforcement position and we may be unable to continue to make our new automobile services available in those jurisdictions. HOME FINANCING SERVICES Most states have laws and regulations governing the registration or licensing and conduct of persons providing mortgage brokerage services. Such laws and regulations also typically require certain consumer protection disclosures and compliance with loan solicitation procedures and a variety of other practices, throughout the various stages of the mortgage solicitation, application and approval process. In addition to state law, mortgage brokerage services are heavily regulated by federal law. For example, the Real Estate Settlement Procedures Act, prohibits the payment and receipt of mortgage loan referral fees. The act, however, does permit persons to be compensated for the fair market value of non-referral services actually rendered. We introduced our home financing service in January 1999. LendingTree serves as the back-end processing system, which presents offers we receive to multiple mortgage lending institutions for consideration, for all of priceline.com's home financing services. We provide and are responsible for maintaining the home financing service on our Web site and develop and purchase all advertising. LendingTree compensates us for the fair market value of our non-referral services. We believe that offering the home financing service does not require our registration under or compliance with the mortgage or similar brokerage laws of any jurisdiction. However, it is possible that one or more regulatory authorities could seek to enforce existing laws, or otherwise enact new legislation, requiring our registration and compliance and could scrutinize our compensation arrangement with LendingTree under Real Estate Settlement Procedures Act or other federal or state laws. Such action could severely interfere with the conduct of our business. 21 LendingTree provides the back-end processing system, which presents offers we receive to multiple mortgage lending institutions for consideration, for the home financing service on our Web site and is responsible for maintaining the necessary and appropriate state registrations and licenses associated with LendingTree's mortgage brokerage services. If a state or federal regulatory authority, or an aggrieved customer, should in the future claim that LendingTree has failed to comply fully with applicable state or federal law requirements pertaining to LendingTree's provision of mortgage brokerage services, our home financing service could be materially and adversely affected and we may be unable to continue to make our home financing service available. We are exploring the possibility of acquiring a minority interest in, and licensing the priceline.com name and business model to, a newly formed subsidiary of a federally chartered savings and loan association. This entity may be known as "priceline.mortgage.com" and also may serve as an entity that could accept mortgage applications or mortgage qualification loans. CONSUMER PROTECTION AND RELATED LAWS All of our services are subject to federal and state consumer protection laws and regulations prohibiting unfair and deceptive trade practices. We also are subject to related "plain language" statutes in place in many jurisdictions, which require the use of simple, easy to read, terms and conditions in contracts with consumers. Although there are very few laws and regulations directly applicable to the protection of consumers in an online environment, it is possible that legislation will be enacted in this area and could cover such topics as permissible online content and user privacy, including the collection, use, retention and transmission of personal information provided by an online user. Furthermore, the growth and demand for online commerce could result in more stringent consumer protection laws that impose additional compliance burdens on online companies. Such consumer protection laws could result in substantial compliance costs and interfere with the conduct and growth of our business. BUSINESS QUALIFICATION LAWS Because our service is available over the Internet in multiple states, and because we sell to numerous consumers resident in such states, such jurisdictions may claim that we are required to qualify to do business as a foreign corporation in each such state. We are qualified to do business in a limited number of states, and our failure to qualify as a foreign corporation in a jurisdiction where we are required to do so could subject us to taxes and penalties for the failure to so qualify and limit our ability to conduct litigation in such states. INTERNATIONAL EXPANSION We intend to explore opportunities for expanding our business into international markets. It is possible, however, that the priceline.com demand collection system will not be readily adaptable to the regulatory environments of certain foreign jurisdictions. In addition, there are various other risks associated with international expansion. They include language barriers, unexpected changes in regulatory requirements, trade barriers, problems in staffing and operating foreign operations, changes in currency exchange rates, difficulties in enforcing contracts and other legal rights, economic and political instability and problems in collection. OUR BUSINESS IS SUBJECT TO TAX UNCERTAINTIES POTENTIAL FEDERAL AIR TRANSPORTATION TAX LIABILITY A federal air transportation tax is imposed upon the sale of airline tickets and generally is collected by the airlines selling the tickets. The tax is based upon a percentage of the cost of transportation, which was 22 9% for periods prior to October 1, 1998 and 8% thereafter. Because of the unique pricing structures employed in the priceline.com service, such as the amount paid by the customer for a ticket being different than the amount charged by the airline for the same ticket with the excess payment, if any, going to us as a charge for the use of our proprietary business method, it is not clear how this federal tax should be calculated when sales occur using the priceline.com service. We have been calculating this tax based on the price charged by the airline for a ticket, rather than the price paid by the customer. There is a possibility that current law requires computation of the tax based on the price paid by the customer to us. Due to the uncertainty of how the federal air transportation tax applies to sales of airline tickets using the priceline.com service, we have submitted a written request to the United States Internal Revenue Service seeking a determination of our federal air transportation tax obligations. We recently met with representatives of the Internal Revenue Service to informally discuss our submission. We intend to revise and resubmit our request to address certain factual and legal inquiries raised during our meeting. The actual ruling by the Internal Revenue Service may not be favorable and may require us to collect the federal air transportation tax on the total amount paid by consumers for air travel. If the determination of the Internal Revenue Service is unfavorable, we could owe approximately $766,339 in additional taxes as of June 30, 1999. We have accrued for such potential liability in our condensed balance sheet as of June 30, 1999 and are providing for such potential liability on an ongoing basis. We have agreed to indemnify and hold harmless certain of our participating airlines from any liability with respect to such taxes, as well as to secure the payment of such taxes by a letter of credit. STATE TAXES We file tax returns in such states as required by law based on principles applicable to traditional businesses. In addition, we do not collect sales or other similar taxes in respect of transactions conducted through the priceline.com service (other than the federal air transportation tax referred to above). However, one or more states could seek to impose additional income tax obligations or sales tax collection obligations on out-of-state companies, such as ours, which engage in or facilitate online commerce. A number of proposals have been made at state and local levels that could impose such taxes on the sale of products and services through the Internet or the income derived from such sales. Such proposals, if adopted, could substantially impair the growth of e-commerce and adversely affect our opportunity to become profitable. Legislation limiting the ability of the states to impose taxes on Internet-based transactions recently has been enacted by the United States Congress. However, this legislation, known as the Internet Tax Freedom Act, imposes only a three-year moratorium, which commenced October 1, 1998 and ends on October 21, 2001, on state and local taxes on (1) electronic commerce where such taxes are discriminatory and (2) Internet access unless such taxes were generally imposed and actually enforced prior to October 1, 1998. It is possible that the tax moratorium could fail to be renewed prior to October 21, 2001. Failure to renew this legislation would allow various states to impose taxes on Internet-based commerce. The imposition of such taxes could adversely affect our ability to become profitable. PAYROLL TAXES RELATED TO OPTION EXERCISES We currently have outstanding non-qualified stock options to purchase 26,582,391 shares issued to various employees, consultants and directors pursuant to the 1997 Omnibus Plan and the 1999 Omnibus Plan. The options entitle the holders to purchase common stock at a weighted average exercise price of approximately $11.46 per share, subject to adjustment in accordance with the 1997 Omnibus Plan and the 1999 Omnibus Plan. Upon exercise of an option, we will be required to make payments on behalf of the option holders for certain payroll related taxes such as Social Security and Medicare. These payroll taxes will appear as a general and administrative expense on our statement of operations and will amount to approximately 1.5% to 2.0% of the difference between the exercise price and the then fair market value of 23 the common stock at the time of exercise. However, upon exercise of outstanding options, we will be paid the exercise price of the options that are exercised. We also will be entitled to an income tax deduction equal to the sum of (1) the difference between the exercise price of the option and the then fair market value of the common stock at the time of exercise and (2) the total amount of payroll related tax payments. As the calculation of this expense is directly dependent upon our stock price and the exercise of options is in the sole discretion of the holder of the options, the amount and timing of the expense and the timing of the corresponding income tax deduction are not currently able to be determined and are not within our control. CONCENTRATED CONTROL COULD ADVERSELY AFFECT STOCKHOLDERS Upon consummation of this offering, Mr. Jay S. Walker, the Founder and Vice Chairman of priceline.com, and Mr. Richard S. Braddock, Chief Executive Officer of priceline.com, together with their respective affiliates (including, with respect to Mr. Walker, Walker Digital) beneficially own approximately 42.4 and 12.0 percent, of our outstanding common stock, subject to certain adjustments. As a result, if Messrs. Walker and Braddock act together, they will have the ability to control the outcome on all matters requiring stockholder approval, including the election and removal of directors and any merger, consolidation or sale of all or substantially all of our assets, and the ability to control our management and affairs. Such control could discourage others from initiating potential merger, takeover or other change of control transactions. As a result, the market price of our common stock could be adversely affected. WE MAY BE UNABLE TO MEET OUR FUTURE CAPITAL REQUIREMENTS Based on our current operating plan, we anticipate that the net proceeds of our recent initial public offering, this offering and our concurrent offering of convertible subordinated debt, together with our available funds, will be sufficient to satisfy our anticipated needs for working capital, capital expenditures and business expansion for at least the next three years. After that time, we may need additional capital. Alternatively, we may need to raise additional funds sooner in order to fund more rapid expansion, to develop new or enhanced services, or to respond to competitive pressures. If we raise additional funds by issuing equity or convertible subordinated debt securities, the percentage ownership of our stockholders will be diluted. Furthermore, any new securities could have rights, preferences and privileges senior to those of the common stock. We currently do not have any commitments for additional financing. We cannot be certain that additional financing will be available when and to the extent required or that, if available, it will be on acceptable terms. If adequate funds are not available on acceptable terms, we may not be able to fund our expansion, develop or enhance our products or services or respond to competitive pressures. ANTI-TAKEOVER PROVISIONS AFFECTING US COULD PREVENT OR DELAY A CHANGE OF CONTROL Provisions of our certificate of incorporation and by-laws and provisions of applicable Delaware law may discourage, delay or prevent a merger or other change of control that a stockholder may consider favorable. Our board of directors has the authority to issue up to 150,000,000 shares of preferred stock par value $0.01 per share, of priceline.com and to determine the price and the terms, including preferences and voting rights, of those shares without stockholder approval. Although we have no current plans to issue additional shares of our preferred stock, any such issuance could: - have the effect of delaying, deferring or preventing a change in control of our company; - discourage bids for our common stock at a premium over the market price; or - adversely affect the market price of, and the voting and other rights of the holders of, our common stock. 24 We are subject to certain Delaware laws that could have the effect of delaying, deterring or preventing a change in control of our company. One of these laws prohibits us from engaging in a business combination with any interested stockholder for a period of three years from the date the person became an interested stockholder, unless certain conditions are met. In addition, certain provisions of our certificate of incorporation and by-laws, and the significant amount of common stock held by our executive officers, directors and affiliates, could together have the effect of discouraging potential takeover attempts or making it more difficult for stockholders to change management. OUR MANAGEMENT HAS BROAD DISCRETION OVER USE OF THE PROCEEDS FROM THIS OFFERING The net proceeds of our sale of 2,000,000 shares of common stock in this offering are estimated to be approximately $133.3 million and the net proceeds of our sale of % convertible subordinated notes in the concurrent note offering are estimated to be approximately $241.9 million, in each case, after deducting underwriting discounts and commissions and estimated offering expenses. Our management will retain broad discretion as to the allocation of the proceeds of this offering and the concurrent note offering. YOU WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION Purchasers of common stock in this offering will suffer immediate and substantial dilution. The dilution will be $67.96 per share in the net tangible book value of the common stock from the assumed public offering price of $70.00 per share. As of August 10, 1999, there are (1) 26,582,391 shares of common stock issuable upon exercise of options outstanding, with a weighted average exercise price of approximately $11.46 per share, of which, 8,041,442 shares are not vested; (2) 17,096,073 shares of common stock issuable upon exercise of outstanding warrants at an exercise price of approximately $0.93 per share; (3) 937,500 shares of common stock issuable upon exercise of outstanding warrants at an exercise price of $3.20 per share; (4) 1,250,000 shares of common stock issuable upon exercise of warrants at an exercise price of $6.40 per share; and (5) 1,000,000 shares of common stock issuable upon exercise of warrants at an exercise price of $97.41 per share. However, none of the options issued or to be issued pursuant to the 1997 Omnibus Plan or the 1999 Omnibus Plan may be exercised until September 26, 1999. If such outstanding options and warrants to purchase shares of common stock are exercised, there would be further dilution. SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS Some of the statements under "Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business" and elsewhere in this prospectus constitute forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance, or achievements to be materially different from any future results, levels of activity, performance, or achievements expressed or implied by such forward-looking statements. Such factors include, among other things, those listed under "Risk Factors" and elsewhere in this prospectus. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "could," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "potential," or "continue" or the negative of such terms or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of such statements. We are under no duty to update any of the forward-looking statements after the date of this prospectus. 25 USE OF PROCEEDS Priceline.com will not receive any proceeds from the sale of shares of common stock by the selling stockholders in this offering. The net proceeds to priceline.com from the sale of the 2,000,000 shares of common stock offered by it are estimated to be approximately $133.3 million, after deducting estimated offering expenses of $1.5 million and the underwriting discounts and commissions payable by priceline.com. The net proceeds to priceline.com from the sale of its % convertible subordinated notes in the concurrent note offering are estimated to be approximately $241.9 million, after deducting estimated offering expenses of $0.6 million and the underwriting discounts and commissions payable by priceline.com. Priceline.com intends to use the net proceeds, over time, for general corporate purposes, including working capital, funding of anticipated operating losses, expenses associated with our advertising campaigns, brand-name promotions and other marketing efforts, funding of product and service expansion and capital expenditures. Priceline.com also could use a portion of the net proceeds, currently intended for general corporate purposes, to invest in joint ventures or other collaborative arrangements, or to invest in or acquire businesses, technologies, products or services. In particular, a portion of the proceeds may be used to make investments in and/or loans to two new business entities with which priceline.com is exploring the possibility of licensing its brand name and "name your price" business model. As of the date of this prospectus, priceline.com cannot specify with certainty the particular uses for the net proceeds to be received upon the consummation of this offering. Accordingly, priceline.com's management will have broad discretion in the application of the net proceeds. Pending such uses, priceline.com intends to invest the net proceeds from this offering in short-term, interest-bearing, investment-grade securities. See "Risk Factors--We May Be Unable to Meet Our Future Capital Requirements" and "Risk Factors--Our Management Has Broad Discretion Over Use of the Proceeds of this Offering." PRICE RANGE OF COMMON STOCK Priceline.com common stock has been quoted on the Nasdaq National Market under the symbol "PCLN" since priceline.com's initial public offering on March 29, 1999. Prior to such time, there was no public market for the common stock of priceline.com. The following table sets forth, for the periods indicated, the high and low closing sales prices per share of the common stock as reported on the Nasdaq National Market:
1999 HIGH LOW - ----------------------------------------------------------------------- ---------- ----------- First Quarter (from March 29, 1999).................................... $ 87 7/8 $ 69 Second Quarter......................................................... 162 3/8 59 7/8 Third Quarter (through August 9, 1999)................................. 112 66 1/4
On August 9, 1999, the last reported sale price for priceline.com common stock on the Nasdaq National Market was $70.00 per share. DIVIDEND POLICY Priceline.com has not declared or paid any cash dividends on its capital stock since its inception and does not expect to pay any cash dividends for the foreseeable future. Priceline.com currently intends to retain future earnings, if any, to finance the expansion of its business. 26 CAPITALIZATION The following table sets forth the capitalization of priceline.com as of June 30, 1999: (1) on an actual basis; and (2) as adjusted to reflect the receipt by priceline.com of the estimated net proceeds of (x) $133.3 million from the sale of the 2,000,000 shares of common stock offered by priceline.com in this offering (after deducting the estimated offering expenses and underwriting discounts and commissions), based upon an assumed public offering price of $70.00 per share; (y) $1.4 million from the exercise of warrants to purchase 1,523,329 shares of common stock by Delta Airlines at an exercise price of $0.93 per share; and (z) $241.9 million from the sale of $250.0 million aggregate principal amount of % convertible subordinated notes in the concurrent note offering (after deducting the estimated offering expenses and underwriting discounts and commissions). This table does not give effect to the exercise of options pursuant to the option exercise program. This table should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements and related notes thereto included elsewhere in this prospectus.
AS OF JUNE 30, 1999 -------------------------------- ACTUAL AS ADJUSTED --------------- --------------- Capital lease obligations--net of current portion.............................. $ 12,248 $ 12,248 % Convertible Subordinated Notes due 2006................................... -- 250,000,000 --------------- --------------- Total debt................................................................... 12,248 250,012,248 Stockholders' equity:(a) Common stock, $0.008 par value--authorized, 1,000,000,000 shares; issued and outstanding, 142,320,427 and 145,843,756 shares, actual and as adjusted, respectively................................................................. 1,138,564 1,166,750 Additional paid-in capital..................................................... 326,880,953 461,565,129 Accumulated deficit............................................................ (156,710,306) (156,710,306) --------------- --------------- Total stockholders' equity................................................... 171,309,211 306,021,573 --------------- --------------- Total capitalization....................................................... $ 171,321,459 $ 556,033,821 --------------- --------------- --------------- ---------------
- ------------------------ (a) Excludes (1) 27,422,057 shares of common stock issuable upon exercise of options outstanding as of June 30, 1999, with a weighted average exercise price of approximately $10.82 per share; (2) 5,827,943 additional shares of common stock reserved for issuance under the 1997 Omnibus Plan and the 1999 Omnibus Plan; (3) 17,096,073 shares of common stock issuable upon exercise of outstanding warrants at an exercise price of approximately $0.93 per share; (4) 937,500 shares of common stock issuable upon exercise of outstanding warrants at an exercise price of $3.20 per share; (5) 1,250,000 shares of common stock issuable upon exercise of outstanding warrants at an exercise price of $6.40 per share; (6) 1,000,000 shares of common stock issuable upon exercise of outstanding warrants at an exercise price of $97.41 per share; and (7) the shares issuable on conversion of the % convertible subordinated notes due 2006 sold in the concurrent note offering. 27 DILUTION The net tangible book value of priceline.com as of June 30, 1999 was $171.3 million, or $1.20 per share. Net tangible book value per share is determined by dividing the number of outstanding shares of common stock into the net tangible book value of priceline.com (total tangible assets less total liabilities). Assuming the sale by priceline.com of the 2,000,000 shares of common stock offered hereby (after deducting the underwriting discounts and commissions and estimated offering expenses), the adjusted net tangible book value of priceline.com as of June 30, 1999 would have been approximately $297.9 million, or $2.04 per share. This represents an immediate increase in net tangible book value of $0.84 per share to existing stockholders and an immediate dilution of $67.96 per share to new investors purchasing shares in this offering. The following table illustrates the per share dilution: Assumed public offering price per share................................. $ 70.00 Net tangible book value per share as of June 30, 1999............... $ 1.20 Increase in net tangible book value per share attributable to new investors......................................................... 0.84 --------- Adjusted net tangible book value per share after the offering........... 2.04 --------- Dilution per share to new investors..................................... $ 67.96 --------- ---------
The foregoing discussion and table exclude (1) 27,422,057 shares of common stock issuable upon exercise of options outstanding as of June 30, 1999, with a weighted average exercise price of approximately $10.82 per share; (2) 5,827,943 additional shares of common stock reserved for issuance under the 1997 Omnibus Plan and the 1999 Omnibus Plan; (3) 17,096,073 shares of common stock issuable upon exercise of outstanding warrants at an exercise price of approximately $0.93 per share; (4) 937,500 shares of common stock issuable upon exercise of outstanding warrants at an exercise price of $3.20 per share; (5) 1,250,000 shares of common stock issuable upon exercise of outstanding warrants at an exercise price of $6.40 per share; (6) 1,000,000 shares of common stock issuable upon exercise of outstanding warrants at an exercise price of $97.41 per share; and (7) the shares of common stock issuable on conversion of the % convertible subordinated notes due 2006 sold in the concurrent note offering. 28 SELECTED FINANCIAL DATA The following selected financial data should be read in conjunction with the financial statements and related notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this prospectus.
JULY 18, 1997 SIX MONTHS (INCEPTION) TO YEAR ENDED ENDED DECEMBER 31, 1997 DECEMBER 31, 1998 JUNE 30, 1999 ----------------- ----------------- -------------- RESTATED(A) STATEMENT OF OPERATIONS DATA:(B) Revenues.............................................. $ -- $ 35,236,860 $ 160,974,391 Cost of revenues: Product costs....................................... -- 33,495,745 144,323,527 Supplier warrant costs(c)........................... -- 3,029,014 761,518 ----------------- ----------------- -------------- Total cost of revenues................................ -- 36,524,759 145,085,045 ----------------- ----------------- -------------- Gross profit (loss)................................. -- (1,287,899) 15,889,346 Expenses: Supplier start-up warrant costs(c).................. -- 57,978,678 -- Sales and marketing................................. 441,479 24,388,061 34,871,086 General and administrative.......................... 1,011,600 18,004,585(d) 9,169,869 Systems and business development.................... 1,060,091 11,131,650 5,652,423 ----------------- ----------------- -------------- Total expenses........................................ 2,513,170 111,502,974 49,693,378 ----------------- ----------------- -------------- Operating loss........................................ (2,513,170) (112,790,873) (33,804,032) Interest income (expense), net........................ (312) 548,374 2,387,104 ----------------- ----------------- -------------- Net loss.............................................. (2,513,482) (112,242,499) (31,416,928) Accretion on preferred stock(e)....................... -- (2,183,424) (8,353,973) ----------------- ----------------- -------------- Net loss applicable to common stockholders............ $ (2,513,482) $ (114,425,923) $ (39,770,901) ----------------- ----------------- -------------- ----------------- ----------------- -------------- Per share basic and diluted net loss applicable to common stockholders................................. $ (0.05) $ (1.41) $ (0.29) ----------------- ----------------- -------------- ----------------- ----------------- -------------- Weighted average common shares outstanding............ 50,833,756 81,231,425 137,436,399
AS OF JUNE 30, 1999 ----------------------------------- ACTUAL AS ADJUSTED(F) -------------- ------------------- BALANCE SHEET DATA: (B) Cash and cash equivalents................................................... $ 142,803,134 $519,389,830 Working capital............................................................. 150,043,651 526,630,347 Total assets................................................................ 204,794,892 589,507,254 Long-term debt and capital lease obligation................................. 12,248 250,012,248 Total liabilities........................................................... 33,485,681 283,485,681 Total stockholders' equity.................................................. 171,309,211 306,021,573
- ------------------------ (a) As restated, see Note 13 to the 1998 combined financial statements. (b) Presented on a combined basis with Priceline Travel, Inc. as of and for the periods ended December 31, 1997 and December 31, 1998. Priceline Travel, which previously owned priceline.com's travel agency license, was merged into priceline.com on March 24, 1999. (c) Represents non-cash charges for warrants issued to certain of our participating airlines. (d) Includes a non-cash charge of $6,500,000 with respect to 8,125,000 shares of common stock issued as executive compensation. (e) Represents amortization of the beneficial conversion feature on the Series B preferred stock that ceased upon conversion of the Series B preferred stock into common stock on March 29, 1999. (f) As adjusted to reflect the receipt by priceline.com of the estimated net proceeds of (x) $133,295,666 from the sale of the 2,000,000 shares of common stock offered by priceline.com in this offering (after deducting the estimated offering expenses and underwriting discounts and commissions), based upon an assumed public offering price of $70.00 per share; (y) $1,416,696 from the exercise of warrants to purchase 1,523,329 shares of common stock by Delta Airlines at an exercise price of $0.93 per share; and (z) $241,874,334 from the sale of $250.0 million aggregate principal amount of % convertible subordinated notes in the concurrent note offering (after deducting the estimated offering expenses and underwriting discounts and commissions). 29 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. ACTUAL EVENTS OR RESULTS MAY DIFFER MATERIALLY FROM THOSE INDICATED IN SUCH FORWARD-LOOKING STATEMENTS. SEE "SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS." THE FOLLOWING DISCUSSION OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF PRICELINE.COM ALSO SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS AND RELATED NOTES THERETO INCLUDED ELSEWHERE IN THIS PROSPECTUS. OVERVIEW Priceline.com has pioneered a unique e-commerce pricing system known as a "demand collection system" that enables consumers to use the Internet to save money on a wide range of products and services while enabling sellers to generate incremental revenue. Using a simple and compelling consumer proposition--"name your price"--priceline.com collects consumer demand, in the form of individual customer offers guaranteed by a credit card, for a particular product or service at a price set by the customer. Priceline.com then either communicates that demand directly to participating sellers or accesses participating sellers' private databases to determine whether it can fulfill the customer's offer on the basis of the pricing information and rules established by the sellers. Consumers agree to hold their offers open for a specified period of time and, once fulfilled, offers cannot be canceled. Priceline.com benefits consumers by enabling them to save money, while at the same time benefitting 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, priceline.com enables sellers to generate incremental revenue without disrupting their existing distribution channels or retail pricing structures. Priceline.com was formed in July 1997 and its primary activities during the period prior to launch consisted of recruiting and training employees, developing its business model, implementing systems to support its business model, developing relationships with seller participants and developing the priceline.com brand. Priceline.com commenced operations in April 1998 with the sale of leisure airline tickets. Since that time, priceline.com's business has grown significantly and the priceline.com service now includes the following products and services: - leisure airline tickets, provided by six domestic and 16 international airline participants; - new automobiles, which was launched on a test basis in the New York metropolitan area in July 1998; - hotel room reservations, which was launched in October 1998, offers hotel rooms in substantially all major United States markets and includes as participants more than 10 leading national hotel chains; and - home financing services, which was launched in January 1999 with home mortgage services and now also includes home equity loans and refinancing services. Through the innovative use of "adaptive marketing programs," priceline.com also markets customer acquisition programs for third parties. These programs facilitate the completion of a higher percentage of successful transactions through the priceline.com service while generating fee income for the company. Priceline.com also is exploring expansion of its core "name your price" business model to other areas of e-commerce, such as retail merchandise and the consumer-to-consumer market. The number of full-time employees of priceline.com increased from 10 to 261 during the period from inception to June 30, 1999, and as of August 10, 1999, priceline.com had 266 full-time employees. Priceline.com generates revenues in a variety of ways depending on the product or service sold. With respect to its airline ticket and hotel room reservation services, priceline.com recognizes as revenue the 30 customer's named price, net of taxes, and records as the cost of revenue the fare or rate charged by the seller. With respect to its automobile service, it earns a fixed fee from both the customer and the seller after the transaction is consummated. With respect to its home financing service, it receives marketing fees equal to a percentage of the net revenue generated by the service, which is operated in conjunction with LendingTree, Inc. Priceline.com also generates revenues through adaptive marketing programs with third parties that pay priceline.com fees for marketing their customer acquisition programs. Additionally, priceline.com generates revenues from third party sources, including airline ticket processing fees from consumers and ancillary reservation booking fees from the Worldspan reservation system for priceline.com's booking of airline flight segments and hotel reservations through the Worldspan system. Consumer fees are payable and recognized only upon completion of successful transactions. All offers made through the priceline.com service are guaranteed by a customer credit card and credit cards are the only form of payment accepted by priceline.com. The manner in which and time at which revenues are recognized differs depending on the product or service sold through the priceline.com service. With respect to airline ticket and hotel room reservation services, revenues are generated by transactions with customers who make offers to purchase airline tickets and reserve hotel rooms supplied by participating sellers. Revenues and related costs are recognized if, and when, priceline.com accepts the customer's offer and charges the customer's credit card. Because priceline.com is the merchant of record in these transactions, revenue for these services includes the offer price paid by the customer, net of certain taxes and fees. Airline and hotel revenues also may include fees from third parties for adaptive marketing programs. With respect to automobile services, fees or other payments payable by the seller and/or the customer are recognized as revenue. With respect to home financing services, priceline.com receives no fees from consumers. Priceline.com recognizes revenue from marketing fees paid directly by LendingTree through the operation of its home financing services. Because priceline.com acts as an intermediary between the customer and the seller in auto and home financing transactions, revenues for these products and services is recorded at the amount of the fee received, and not on the value of the underlying transaction, when the transaction is completed. Automobile and home financing services revenues also may include fees from third parties for adaptive marketing programs. When making offers through the priceline.com service, consumers are permitted to make only one offer within a seven day period unless they change some feature of their itinerary, such as the date on which or the airport from which they are willing to fly. In April 1999, priceline.com introduced a new "checkstatus" feature on its Web site that invites consumers whose initial requests are not satisfied to change a feature of their itinerary and resubmit revised offers without having to start the offer submission process over again. Commencing with the second quarter of 1999, priceline.com treats each initial offer and any resubmitted offer made in response to the checkstatus invitation as a single offer for purposes of measuring its offer fulfillment rates. During the period from launch through June 30, 1999, priceline.com collected guaranteed offers for approximately 5.1 million airline tickets, representing approximately $1.1 billion in total consumer demand. This demand resulted in sales of approximately 762,000 airline tickets, representing approximately $165.2 million in revenue. Because the priceline.com system does not set minimum offer thresholds, and consumers are not charged to make offers for airline tickets and other products, it is expected that priceline.com will receive a significant number of unreasonable or fantasy offers. Accordingly, priceline.com also analyzes the percentage of "reasonable" ticket requests that it is able to fill. Priceline.com considers an offer for an airline ticket to be "reasonable" when it is no more than 30% lower than the lowest generally available advance- purchase fare for the same route. Using this standard, the overall percentage of ticket requests considered reasonable for the six-month period ended June 30, 1999 was approximately 55.3%. The 626,860 tickets sold through priceline.com during the six-month period represented approximately 34.7% of the combined reasonable ticket requests for domestic and international flights. For domestic routes where priceline.com's airline participants have strong coverage, that percentage was higher, with approximately 40.0% 31 of all reasonable requests fulfilled for the same six-month period. The percentage of reasonable offers that priceline.com is able to fill can also vary depending on the particular route. The following table sets forth, for the periods presented, data regarding the total percentage of "reasonable" ticket requests fulfilled by priceline.com:
QUARTER ENDED -------------------------------------------------------------- JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, 1998 1998 1998 1999 1999 (1) --------- ------------- ------------ ---------- ---------- Total ticket requests.................................. 492,240 639,089 737,630 1,396,381 1,868,728 "Reasonable" ticket requests........................... 275,186 374,984 425,135 763,600 1,043,227 Tickets sold........................................... 30,678 36,027 68,743 186,521 440,339 "Reasonable" fill rate................................. 11.1% 9.6% 16.2% 24.4% 42.2%
- ------------------------ (1) For this period, due to the introduction of the new "checkstatus" feature, initial offers and any resubmitted offers made in response to this feature were treated as a single offer; comparisons with other periods may not be meaningful as resubmitted offers were considered separate offers in prior periods. Since its inception, priceline.com has incurred net losses in each fiscal quarter. Priceline.com incurred net losses of $88.1 million during the period from July 18, 1997 (inception) through June 30, 1999, before giving effect to $68.6 million of non-cash charges arising from equity issuances to a number of our participating airlines, its chief executive officer and other parties, as more fully described below. As of June 30, 1999, priceline.com had an accumulated deficit of $156.7 million. Priceline.com believes that its continued growth will depend in large part on its ability to continue to promote the priceline.com brand and to apply the priceline.com business model to a wide range of products and services. Accordingly, priceline.com intends to continue to invest heavily in marketing and promotion, technology and personnel. As a result, it expects to incur additional losses for at least the next two years. See "Risk Factors--We Are Not Profitable and Expect to Continue to Incur Losses." In addition, priceline.com's limited operating history makes the prediction of future results of operations difficult, and accordingly, there can be no assurance that it will achieve or sustain revenue growth or profitability. See "Risk Factors--Potential Fluctuations in Our Financial Results Makes Financial Forecasting Difficult." Priceline.com currently has outstanding non-qualified stock options to purchase 26,582,391 shares issued to various employees, consultants and directors pursuant to the 1997 Omnibus Plan and the 1999 Omnibus Plan. The options entitle the holders to purchase common stock at a weighted average exercise price of approximately $11.46 per share, subject to adjustment in accordance with the 1997 Omnibus Plan and the 1999 Omnibus Plan. Upon exercise of an option, priceline.com will be required to make payments on behalf of the option holders for certain payroll related taxes such as Social Security and Medicare. These payroll taxes will appear as a general and administrative expense on priceline.com's statement of operations and will amount to approximately 1.5% to 2.0% of the difference between the exercise price and the then fair market value of the common stock at the time of exercise. However, upon exercise of outstanding options, priceline.com will be paid the exercise price of the options that are exercised. Priceline.com also will be entitled to an income tax deduction equal to the sum of (1) the difference between the exercise price of the option and the then fair market value of the common stock at the time of exercise and (2) the total amount of payroll related tax payments. As the calculation of this expense is directly dependent upon priceline.com's stock price and the exercise of options is in the sole discretion of the holder of the options, the amount and timing of the expense and the timing of the corresponding income tax deduction are not currently able to be determined and are not within priceline.com's control. Priceline.com estimates that, in connection with the exercise of outstanding options pursuant to the option exercise program, in the third quarter of 1999 it will (x) record expenses of approximately $1.3 million in respect of such payroll related taxes; (y) increase additional paid-in capital by approximately $944,000 in 32 respect of the exercise price of such options; and (z) increase common stock by approximately $7,700 in respect of the par value of the shares purchased upon exercise of such options. For the year ended December 31, 1998, priceline.com recorded aggregate non-cash charges of $67.9 million. Of this amount, $6.5 million related to the issuance of 8,125,000 shares of common stock to Mr. Richard S. Braddock, the Chairman and Chief Executive Officer of priceline.com, and $61.1 million related to the issuance of warrants to purchase 19,744,402 shares of common stock, including warrants to purchase 19,556,902 shares of common stock issued to a number of our participating airlines. In August 1998, priceline.com entered into a warrant agreement with Delta to purchase up to 18,892,603 shares of common stock at an exercise price of approximately $0.93 per share. Vesting was contingent upon achievement of certain predetermined performance thresholds. However, there was no penalty for failure to provide ticket inventory to satisfy these performance thresholds. Accordingly, no expense was recorded when the warrant was issued. On December 31, 1998, priceline.com amended its agreement with Delta to eliminate the vesting contingencies and fix the number of shares subject to the warrant at 18,619,402. The amended warrant issued to Delta will become exercisable at the earlier of seven years or upon the achievement of certain performance thresholds. However, the agreement does not require Delta to make any performance commitments, is non-exclusive and allows Delta to participate in other programs similar to the priceline.com service. Included in the non-cash charges described above is approximately $58.7 million reflecting the fair value of the Delta warrant on December 31, 1998. During July 1999, priceline.com issued to Continental Airlines a warrant to purchase common stock that will become exercisable upon the earlier of July 2004 or upon the achievement of certain performance thresholds. However, the agreement does not require Continental to make any performance commitments. Accordingly, priceline.com will incur a non-cash charge of approximately $88.4 million during the quarter ending September 30, 1999 representing the fair value of the warrant on the grant date. Priceline.com's travel agency license was previously held by Priceline Travel, a separate company that was owned by Mr. Jay S. Walker, priceline.com's Founder and Vice Chairman, and all of its airline ticket sales were effected through Priceline Travel, which was merged with and into priceline.com as of March 24, 1999. Accordingly, the financial statements of Priceline Travel as of December 31, 1997 and December 31, 1998 (restated) and for the period July 18, 1997 (Inception) to December 31, 1997 and for the year ended December 31, 1998 (restated) are presented on a combined basis with priceline.com. RESULTS OF OPERATIONS Priceline.com was formed in July 1997, but did not commence operations until April 1998. Accordingly, comparisons with prior periods are not meaningful. SIX MONTHS ENDED JUNE 30, 1999 REVENUES Total revenues for the six months ended June 30, 1999 were $161.0 million. Revenues for the period were comprised primarily of (1) transaction revenues representing the selling price of airline tickets and hotel room reservations; (2) fee income from adaptive marketing programs offered in connection with priceline.com's product offerings; (3) ancillary revenues consisting of Worldspan reservation booking fees and airline ticket processing fees; and (4) fee income from priceline.com's home financing and auto programs. On April 23, 1999, the adaptive marketing program with Capital One ended and priceline.com commenced its credit card adaptive marketing program with First USA. The fee structure of the First USA program is based on different factors and may or may not result in revenues comparable to those under the Capital One program. For example, under the Capital One program priceline.com's fees were based upon the submission of qualifying credit card applications, while the First USA program ties a portion of 33 priceline.com's fees to account activation and usage. Because, to date, there is no meaningful activation and usage experience upon which to draw, priceline.com cannot predict the degree to which revenues ultimately will be recognized under the First USA program. In addition, priceline.com expects that future contributions to adaptive marketing revenues from credit card adaptive marketing programs may decline on a percentage basis, as agreements with new adaptive marketing suppliers are reached and become operative. At the same time, increased transaction activity, particularly associated with airline ticket sales and related processing fees, is likely to provide an increasing portion of revenues. All of these factors are likely to diminish the proportion of priceline.com's revenues provided by its credit card adaptive marketing programs. During the six months ended June 30, 1999, priceline.com also earned revenue from its Customer Affinity Share Purchase Program, the first phase of its adaptive marketing program with E*TRADE. Revenues from this program related specifically to the referral of priceline.com customers to E*TRADE in connection with priceline.com's initial public offering and, therefore, are not recurring. Priceline.com also commenced the second phase of its adaptive marketing program with E*TRADE under which E*TRADE compensates priceline.com for offering priceline.com customers the opportunity to open an account with E*TRADE while visiting or making an offer on the priceline.com Web site. Priceline.com intends to continue to add adaptive marketing programs so that consumers have a variety of programs from which to choose and priceline.com has a diversified source of adaptive marketing revenues. See "Risk Factors--We are Dependent on Adaptive Marketing Programs." Priceline.com's ancillary revenues for the six month period increased as a result of volume driven increases in Worldspan reservation booking fees and a recently introduced processing fee. Revenues from these sources are linked to airline ticket sales and, accordingly, will increase or decrease in future periods in relation to changes in the volume of airline ticket sales. Worldspan reservation booking fees also are linked to hotel reservations booked through the Worldspan system. COST OF REVENUES AND GROSS PROFIT Cost of revenues for the six months ended June 30, 1999 totaled $145.1 million, consisting of product costs of $144.3 million and supplier warrant costs of $761,518. Product costs were comprised of the cost of airline tickets from priceline.com's suppliers, net of the federal air transportation tax, segment fees and passenger facility charges imposed in connection with the sale of airline tickets. Product costs also included the cost of hotel rooms from priceline.com's suppliers, net of hotel tax. Supplier warrant costs represent a non-cash expense related to the issuance of common stock warrants to one of priceline.com's airline program participants in January 1999. Priceline.com anticipates that it will recognize additional supplier warrant costs in the amount of approximately $381,000 in each of the next six fiscal quarters. Gross profit, which is comprised of revenues less cost of revenues, was $15.9 million for the six months ended June 30, 1999. Gross margin was 9.9% for the period. Excluding the effect of non-cash supplier warrant costs, priceline.com would have had gross profit of $16.7 million and gross margin of 10.3% for the six months ended June 30, 1999. Gross profit and gross margin are affected by the price at which priceline.com causes offers to be fulfilled and by the level of fees generated by adaptive marketing programs. Priceline.com is able to manage the level of gross margins by controlling the price at which it will cause offers to be fulfilled. During the first quarter of 1999, priceline.com chose to sell a substantial number of tickets below its cost in order to increase airline and adaptive marketing revenues, build a record of successful transactions and enhance the priceline.com brand. As a result of the growth of the priceline.com service, priceline.com reduced the percentage of airline tickets that it chose to sell below cost during the second quarter, thereby improving gross margins on airline ticket sales. Because the fees generated by adaptive marketing revenue and ancillary revenues did not involve separate costs, adaptive marketing revenues and ancillary revenues had a disproportionately positive impact on total gross margins and made a very substantial contribution to priceline.com's gross profit for the six months ended June 30, 34 1999. If our transaction activity continues to grow, priceline.com expects the proportion of its gross profit and gross margin attributable to adaptive marketing revenues to decline. Gross margins for the six months ended June 30, 1999 also were affected by a somewhat lower gross margin in the second quarter of 1999 compared to the first quarter of 1999. See "Quarterly Results of Operations" below. Gross margins for the second quarter of 1999 were affected by a change in revenue mix, resulting from a greater percentage of revenues being attributable to transaction revenues rather than fee based revenues. Fee-based revenues, such as adaptive marketing revenues, ancillary revenues and revenues from financial services and automobiles, have higher margins than transaction revenues, which are derived from the spread between customer offers and the product costs. OPERATING EXPENSES SALES AND MARKETING. Sales and marketing expenses for the six months ended June 30, 1999 totaled $34.9 million, or 21.7% of revenues. Approximately 65.0% of sales and marketing expenses were comprised of advertising and promotion expenses. The remaining expenses consisted primarily of (1) fees payable to a third party service provider that operates priceline.com's call center; (2) credit card processing fees; (3) provisions for customer credit card charge-backs (based upon a percentage reflecting priceline.com's historical experience); and (4) compensation for priceline.com's sales and marketing personnel. GENERAL AND ADMINISTRATIVE. General and administrative expenses for the six months ended June 30, 1999 totaled $9.2 million, or 5.7% of revenues. General and administrative expenses for the period were comprised primarily of compensation for personnel, fees for outside professionals, telecommunications and other overhead costs, including occupancy expense. SYSTEMS AND BUSINESS DEVELOPMENT. Systems and business development expenses for the six months ended June 30, 1999 totaled $5.7 million, or 3.5% of revenues. Systems and business development expenses for the period were comprised primarily of compensation to priceline.com's information technology and product development staff and payments to outside contractors, data communications and other expenses associated with operating priceline.com's Web site and, to a lesser extent, depreciation on computer hardware and licensing fees for computer software. In March 1998, the American Institute of Certified Public Accountants issued Statement of Position ("SOP") 98-1, "Accounting for Costs of Computer Software Developed or Obtained for Internal Use." This SOP requires capitalization of certain costs of computer software developed or obtained for internal use. Priceline.com adopted this SOP on January 1, 1999 and, during the six-month period ended June 30, 1999, priceline.com capitalized approximately $5.7 million of computer software developed or obtained for internal use. Amortization of such costs aggregated approximately $149,000 during the six month period ended June 30, 1999. INTEREST INCOME, NET Interest income, net for the six months ended June 30, 1999 totaled $2.4 million, reflecting approximately $2.5 million of interest income earned by priceline.com on its cash balances, net of interest expense for the period. Cash balances increased during this period due to priceline.com's initial public offering in April 1999. SIX MONTHS ENDED JUNE 30, 1998 Priceline.com commenced its service on April 6, 1998 with the sale of leisure airline tickets. Revenues from the sale of airline tickets during the six month period ended June 30, 1998 were $7.0 million. Cost of revenues during this period exceeded such revenues by approximately $900,000. Priceline.com chose to sell a substantial number of leisure airline tickets below its cost during this period in order to increase airline revenues, build a record of successful transactions and enhance the priceline.com brand. 35 In addition, priceline.com incurred operating expenses of $17.9 million, consisting of sales and marketing expenses of $7.8 million, general and administrative expenses of $4.8 million and systems and business development expenses of $5.4 million. These activities resulted in an operating loss of $18.9 million and, after consideration of interest income, a net loss of $18.7 million for the six month period ended June 30, 1998. YEAR ENDED DECEMBER 31, 1998 RESTATEMENT Subsequent to the issuance of priceline.com's combined 1998 financial statements, priceline.com's management determined that the calculation of the fair value of the Delta warrant, other airline warrants and the beneficial conversion feature on the Series B preferred stock should be revised. The fair value of the Delta warrant and the other airline warrants has been revised to reflect the change in the volatility assumption from 50% to 132%, eliminate the "large block" and lack of marketability discounts, and consider the warrant's anti-dilution and exercisability features. As a result, the 1998 combined financial statements have been restated from the amounts previously reported to recognize an additional $22.0 million of expense based upon the revised fair value of the warrants at December 31, 1998, of which $3.0 million is included in the cost of revenues-supplier warrant costs and $19.0 million is included in expenses-supplier start-up warrant costs. In addition, the value of the beneficial conversion feature on the Series B preferred stock has been revised to calculate such amount based on 22,500,000 shares. As a result, additional paid-in capital and accumulated deficit have been restated from amounts previously reported to recognize an additional $883,424 of accretion of preferred stock based on the revalued beneficial conversion feature. A summary of the significant effects of the restatement is as follows:
AS PREVIOUSLY REPORTED AS RESTATED -------------- --------------- At December 31, 1998: Additional paid-in capital................................................. $ 148,224,070 $ 171,155,186 Accumulated deficit........................................................ (94,008,289) (116,939,405) For the year ended December 31, 1998: Cost of revenues-supplier warrant costs.................................... -- 3,029,014 Expenses-supplier start-up warrant costs................................... 38,960,000 57,978,678 Net loss................................................................... (90,194,807) (112,242,499) Accretion on preferred stock............................................... (1,300,000) (2,183,424) Net loss applicable to common stockholders................................. (91,494,807) (114,425,923) Per share basic and diluted loss applicable to common stockholders......... (1.13 (1) (1.41)
- ------------------------ (1) Per share basic and diluted loss applicable to common stockholders as previously reported has been restated for a 1.25 for one stock split. REVENUES Total revenues for the year ended December 31, 1998 were $35.2 million. Since commencement of operations in April 1998, essentially all revenues consisted of airline ticket sales, hotel room reservations and related adaptive marketing programs. Approximately $4.0 million of total revenues were attributable to adaptive marketing programs, all of which were attributable to priceline.com's third-party credit card marketing program with Capital One Bank. See "--Cost of Revenues and Gross Profit (Loss)." Priceline.com's automobile sales service, which was launched on a test basis in the New York metropolitan area in July 1998, did not contribute materially to revenues during the period. 36 COST OF REVENUES AND GROSS PROFIT (LOSS) Cost of revenues for the year ended December 31, 1998 totaled $36.5 million, consisting of product costs of $33.5 million and supplier warrant costs of $3.0 million. Product costs represent the cost of airline tickets from priceline.com's suppliers, net of the federal air transportation tax, segment fees and passenger facility charges imposed in connection with the sale of airline tickets. Supplier warrant costs represent a non-cash expense related to the pro-rata amount of the Delta warrant earned prior to December 31, 1998, the date on which the Delta warrant was amended. Priceline.com anticipates that it will recognize additional supplier warrant costs in the amount of $1.6 million in each of 1999 and 2000 in connection with additional warrants issued to a participating airline in January 1999. Gross profit (loss), which is comprised of revenues less cost of revenues, was $(1.3) million for the year ended December 31, 1998. Excluding the effect of the non-cash supplier warrant costs, priceline.com would have had gross profit of $1.7 million for the year ended December 31, 1998. Priceline.com is able to manage the level of gross margins by controlling the price at which it will cause offers to be fulfilled. Priceline.com has chosen to sell a substantial number of tickets below its cost in order to increase airline and adaptive marketing revenues, build a record of successful transactions, and enhance the priceline.com brand. Because the fees generated by adaptive marketing programs have historically involved no separate costs, adaptive marketing revenues have had a disproportionately positive impact on priceline.com's total gross margin. The Capital One adaptive marketing program accounted for all of priceline.com's adaptive marketing revenues in 1998. OPERATING EXPENSES SUPPLIER START-UP WARRANT COSTS. Supplier start up warrant costs for the year ended December 31, 1998 totaled $58.0 million, or 164.5% of revenues. Supplier start up warrant costs consist of a non-cash charge representing the fair value of warrants issued to certain participating airlines in the priceline.com service in connection with securing priceline.com's relationship with those airlines. SALES AND MARKETING. Sales and marketing expenses for the year ended December 31, 1998 totaled $24.4 million, or 69.2% of revenues. Approximately 50% of sales and marketing expenses were comprised of radio and newspaper advertising expenses. The balance was comprised of (1) fees payable to a third party service provider, which operates priceline.com's call center, (2) credit card processing fees, (3) provisions for customer credit card charge-backs (based upon a percentage reflecting priceline.com's historical experience), and (4) compensation for priceline.com's sales and marketing personnel. SYSTEMS AND BUSINESS DEVELOPMENT. Systems and business development expenses for the year ended December 31, 1998 totaled $11.1 million, or 31.6% of revenues. Systems and business development expenses are comprised primarily of compensation to priceline.com's information technology and product development staff and payments to outside contractors, data communications and other expenses associated with operating priceline.com's Web site and, to a lesser extent, depreciation on computer hardware and licensing fees for computer software. GENERAL AND ADMINISTRATIVE. General and administrative expenses for the year ended December 31, 1998 totaled $18.0 million or 51.1% of revenues. General and administrative expenses consist primarily of compensation for personnel, fees for outside professionals, telecommunications and other overhead costs, including occupancy expense. Also included is a one-time non-cash charge of $6.5 million relating to the issuance to Mr. Richard S. Braddock of a profits interest with respect to 6.5 million units in priceline.com's predecessor, priceline.com LLC. These units were granted to Mr. Braddock in connection with his employment by priceline.com, and were subsequently converted into 8,125,000 shares of common stock. 37 INTEREST INCOME (EXPENSE), NET Interest income (expense), net for the year ended December 31, 1998 totaled $548,374, reflecting approximately $633,000 of interest income earned by priceline.com on its cash balances, net of interest expense for the period. PERIOD ENDED DECEMBER 31, 1997 During the period from its formation in July 1997 through December 31, 1997, priceline.com was engaged in start-up activities and incurred $2.5 million of operating expenses. These operating expenses primarily consisted of investments in technology and personnel related expenses. No revenues were earned during the period. As of December 31, 1997, priceline.com had a cumulative net loss of $2.5 million. QUARTERLY RESULTS OF OPERATIONS The following table sets forth, for the periods presented, data regarding priceline.com's revenues, cost of revenues and gross profit (loss). Such data has been derived from priceline.com's unaudited financial statements which, in the opinion of priceline.com's management, have been prepared on substantially the same basis as the audited financial statements, subject to normal year end adjustments. The operating results in any quarter are not necessarily indicative of the results that may be expected for any future period.
QUARTER ENDED -------------------------------------------------------------------------- JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, 1998 1998 1998 1999 1999 ------------ ------------- -------------- ------------- -------------- Revenues............................ $ 7,030,913 $ 9,212,820 $ 18,993,127 $ 49,410,542 $ 111,563,849 Cost of revenues: Product costs..................... 7,951,584 8,842,313 16,701,848 43,659,184 100,664,343 Supplier warrant costs............ -0- -0- 3,029,014 380,759 380,759 ------------ ------------- -------------- ------------- -------------- Total cost of revenues............ 7,951,584 8,842,313 19,730,862 44,039,943 101,045,102 ------------ ------------- -------------- ------------- -------------- Gross profit (loss)................. (920,671) 370,507 (737,735) 5,370,599 10,518,747 Adjusted gross profit*............ (920,671) 370,507 2,291,279 5,751,358 10,899,506 Gross margin........................ (13.1)% 4.0% (3.9 )% 10.9% 9.4% Adjusted gross margin*............ (13.1)% 4.0% 12.1% 11.6% 9.8%
- ------------------------ * Adjusted Gross Profit and Adjusted Gross Margin reflect the elimination of non-cash charges associated with the supplier warrants. Revenues increased in each quarter since the commencement of operations in April 1998. The increase in each quarter is due primarily to an increase in airline ticket sales resulting from expanded inventory, improved fill rates and an expanded customer base due to increased market awareness and acceptance of the priceline.com service. In addition to the foregoing, (1) the increase in revenue in the fourth quarter of 1998 is due to the addition of a significant new airline partner and the inclusion for a full quarter of priceline.com's Capital One adaptive marketing program, as well as, to a lesser extent, the introduction of priceline.com's hotel room reservation service in October 1998; and (2) the increase in revenue in the first and second quarters of 1999 is due to increased customer offers, an increased supply of airline seats from our existing airline partners and, to a lesser extent, the national launch of our hotel room reservation service in March 1999. Cost of revenues, which consists of product costs and supplier warrant costs, increased in each quarter of 1998 and the first and second quarters of 1999. Product costs, which are associated primarily with the amounts paid to priceline.com's airline partners for airline tickets, net of federal air transportation tax, 38 segment fees and passenger facility charges imposed in connection with the sale of airline tickets, also increased each quarter in conjunction with increases in total revenue. Supplier warrant costs consist of a non-cash expense related to the pro-rata amount of the Delta warrant earned prior to December 31, 1998, the date on which the Delta warrant agreement was amended. Excluding the effect of the non-cash supplier warrant costs, priceline.com's gross profit would have increased every quarter from the quarter ended June 30, 1998 to the quarter ended June 30, 1999. The decreases in adjusted gross margins for the quarters ended March 31, 1999 and June 30, 1999 were primarily due to the more rapid growth of transaction-based revenues compared to fee-based revenues during those periods. As a result of the differences in growth rates, our revenue mix changed compared to prior periods with a greater percentage of revenues being attributable to transaction revenues rather than fee-based revenues. Fee-based revenues, such as adaptive marketing revenues, ancillary revenues and revenues from financial services and automobiles, have higher margins than transaction revenues, which are derived from the spread between customer offers and the product costs. Priceline.com's quarterly operating results will be affected by a variety of factors, many of which are outside its control. Factors that may affect priceline.com's quarterly operating results include: - its ability to increase both consumers' and sellers' use of the priceline.com service; - its ability to attract new sellers of products and services to participate in the priceline.com service; - its ability to expand the products and services offered; - its ability to increase gross margins on products and services sold while still increasing sales; - the fulfillment rate of customers' offers; - the results of its adaptive marketing programs; - the exercise of employee stock options that give rise to social security and medicare payroll taxes; - the announcement or introduction of new sites, services and products by its competitors; - the success of its brand building and marketing campaigns; - price competition in the sale of products and services offered over the priceline.com system; - its ability to upgrade and develop its systems and infrastructure to accommodate growth; - its ability to attract new personnel in a timely and effective manner; - the occurrence of technical difficulties or service interruptions; - the amount and timing of operating costs and capital expenditures relating to expansion of its business, operations and infrastructure; - changes in governmental regulation by federal or local governments; and - general economic conditions and economic conditions specific to the Internet and online commerce industries, as well as the individual industries, for the products and services sold through the priceline.com system. As a result of priceline.com's limited operating history and the emerging nature of the market for online commerce, it is difficult for priceline.com to forecast its revenues or earnings accurately. In addition, priceline.com has no backlog, with virtually all of its revenues for a particular quarter being derived from offers that are made and accepted during that quarter. Priceline.com's current and future expense levels are based largely on its investment plans and estimates of future revenues and are, to a large extent, fixed. Priceline.com may be unable to adjust spending in a timely manner to compensate for any unexpected revenue shortfall. Accordingly, any significant shortfall in revenues relative to priceline.com's 39 planned expenditures would have an immediate adverse effect on its business, results of operations and financial condition. Priceline.com's limited operating history and rapid growth makes it difficult for it to assess the impact of seasonal factors on its business. Nevertheless, priceline.com expects its business to be subject to seasonal fluctuations, reflecting a combination of seasonality trends for the products and services offered by the priceline.com service and seasonality patterns affecting Internet use. For example, with regard to priceline.com's travel products, demand for leisure travel may increase over summer vacations and holiday periods, while Internet usage may decline during the summer months. Priceline.com's results also may be affected by seasonal fluctuations in the inventory made available to the priceline.com service by participating sellers. Airlines, for example, typically enjoy high demand for tickets through traditional distribution channels for travel during Thanksgiving and the year-end holiday period. As a result, during those periods, airlines may have less excess inventory to offer through priceline.com at discounted prices. Priceline.com's business also may be subject to cyclical variations for the products and services offered; for example, leisure travel and home mortgage financing tends to decrease in economic downturns. Due to the foregoing factors, priceline.com's quarterly revenues and operating results are difficult to forecast. Priceline.com believes that period-to-period comparisons of its operating results may not be meaningful and should not be relied upon as an indication of future performance. In addition, it is possible that in one or more future quarters priceline.com's operating results will fall below the expectations of securities analysts and investors. In such event, the trading price of the common stock would almost certainly be materially adversely affected. LIQUIDITY AND CAPITAL RESOURCES Since its inception, priceline.com has financed its operations primarily through the sale of equity securities. Net proceeds from financing activities since inception through June 30, 1999 totaled approximately $246.6 million. Priceline.com's initial equity capital of approximately $27.0 million was provided by Mr. Jay S. Walker, other high net worth individuals and a partnership affiliated with General Atlantic Partners, LLC, a private equity firm that invests worldwide in software and information technology companies. An additional $20.0 million was invested by two partnerships affiliated with General Atlantic in July 1998. On December 8, 1998, priceline.com received approximately $54.4 million in proceeds from the sale of equity securities in a private offering to a group of corporate and institutional investors and high net worth individuals, including two partnerships affiliated with General Atlantic; Vulcan Ventures, Incorporated; Liberty PL, Inc., a wholly owned subsidiary of Liberty Media Corporation; Quantum Industrial Partners LDC, a fund managed by Soros Fund Management, LLC and Allen & Company Incorporated. Allen & Company Incorporated also has served as priceline.com's financial advisor. On April 1, 1999, priceline.com completed its initial public offering in which it sold 10,000,000 shares of its common stock at a price of $16.00 per share, raising $160.0 million in gross proceeds. Offering proceeds to priceline.com, net of approximately $11.2 million in aggregate underwriters discounts and commissions and $4.4 million in related expenses, were approximately $144.4 million. As of June 30, 1999, priceline.com had approximately $142.8 million in cash and cash equivalents. In April 1998, priceline.com received proceeds from a loan of $1.0 million for working capital from a high net worth individual who also was issued a warrant to purchase 62,500 shares of common stock at an exercise price of $0.80 per share. This loan expires on April 15, 2003 and bears interest at a rate of 6.0%. The related warrant has been fully exercised, and as of the date of this prospectus, the loan has been repaid. In April 1999, priceline.com made a $3.3 million loan to Mr. Richard S. Braddock for the payment of taxes related to the issuance to Mr. Braddock of 8,125,000 shares of common stock in August 1998. The loan bears interest at 5.28% per annum. Interest is payable annually and principal is payable in January 2004. 40 In July 1999, priceline.com made a $6.0 million loan to Mr. Daniel H. Schulman, pursuant to the terms of his employment agreement dated June 14, 1999. The loan bears interest annually at 5.82% per annum. Subject to prepayment obligations and to forgiveness in the event of certain changes of control, death, or termination without cause, pursuant to the terms of the loan, accrued interest and principal are payable in July 2004. Concurrent with this offering, priceline.com is making an offering of $250.0 million aggregate principal amount of % convertible subordinated notes due 2006, which will be convertible into shares of priceline.com common stock at a conversion price of $ per share, subject to adjustment. Priceline.com expects the proceeds from the concurrent note offering (after deducting the estimated offering expenses and net of underwriting discounts and commissions), to be approximately $241.9 million. Net cash used in operating activities was $33.8 million for the six months ended June 30, 1999. Net cash used in operating activities was primarily attributable to net losses. Net cash used in investing activities was $20.6 million for the six months ended June 30, 1999. Net cash used in investing activities was primarily related to purchases of property and equipment. Net cash provided by financing activities was $143.6 million for the six months ended June 30, 1999. Net cash provided by financing activities resulted primarily from priceline.com's initial public offering of 10,000,000 shares of its common stock, for which priceline.com received approximately $149.0 million in cash, net of underwriting discounts and commissions on April 1, 1999. Priceline.com had commitments for capital expenditures as of June 30, 1999 of approximately $1.2 million. Capital expenditures were $11.3 million for the six months ended June 30, 1999, and priceline.com expects such expenditures to be at least $22.0 million for the full year of 1999. As a result of its rapid growth, priceline.com expects to increase capital expenditures for purchased software, internally developed software, computer equipment and leasehold improvements. Priceline.com believes that, based upon its current operating plan, its existing cash and cash equivalents, the net proceeds from its initial public offering, the net proceeds from this offering and its concurrent note offering and any cash generated from operations will be sufficient to fund its operating activities, capital expenditures and other obligations through at least the next three years. However, if during that period or thereafter priceline.com is not successful in generating sufficient cash flow from operations or in raising additional capital when required in sufficient amounts and on terms acceptable to priceline.com, these failures could have a material adverse effect on priceline.com's business, results of operations and financial condition. If additional funds are raised through the issuance of equity securities, the percentage ownership of its then-current stockholders would be diluted. MARKET-RELATED RISKS Priceline.com currently has no floating rate indebtedness, holds no derivative instruments and does not earn significant foreign-sourced income. Accordingly, changes in interest rates or currency exchange rates do not generally have a direct effect on priceline.com's financial position. However, changes in currency exchange rates may affect the cost of international airline tickets and international hotel room reservations offered through the priceline.com service, and so indirectly affect consumer demand for such products and priceline.com's revenue. 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. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, Statement of Financial Accounting Standards ("SFAS") No. 133 "Accounting for Derivative Instruments and Hedging Activities" was released. The statement requires the recognition of all derivatives as either assets or liabilities in the balance sheet and the measurement of those instruments at fair value. The accounting for changes in the fair value of a derivative depends on the planned use of the 41 derivative and the resulting designation. Priceline.com is required to implement the statement in the first quarter of fiscal 2001. Priceline.com has not used derivative instruments and believes the impact of adoption of this statement will not have significant effect on its financial statements. TAX MATTERS NET OPERATING LOSS CARRYFORWARDS Through July 31, 1998, priceline.com operated as a limited liability company, and income taxes (benefits) accrued to its members. During the year ended December 31, 1998, priceline.com had a net loss, and since converting from a limited liability company to a corporation in July 1998, it has incurred a tax net operating loss of $54.2 million. Utilization of priceline.com's net operating loss carryforwards, which begin to expire in 2018, may be subject to certain limitations under Section 382 of the Internal Revenue Code of 1986, as amended. Priceline.com has provided a full valuation allowance on the deferred tax asset, consisting primarily of net operating loss carryforwards, because of uncertainty regarding its realization. Priceline.com's accounting for deferred taxes under Statement of Financial Accounting Standards No. 109 involves the evaluation of a number of factors concerning the realizability of its deferred tax assets. In concluding that a full valuation allowance was required, management primarily considered such factors as priceline.com's history of losses from operations and expected future losses. See Notes 2 and 8 of Notes to Combined Financial Statements included elsewhere in this prospectus. FEDERAL AIR TRANSPORTATION TAX ON AIRLINE TICKET SALES A federal air transportation tax is imposed upon the sale of airline tickets and generally is collected by the airlines selling the tickets. The tax is based upon a percentage of the cost of transportation, which was 9% for periods prior to October 1, 1998 and 8% thereafter. Because of the unique pricing structures employed in the priceline.com service, such as the amount paid by the customer for a ticket being different than the amount charged by the airline for the same ticket with the excess payment, if any, going to priceline.com as a charge for the use of its proprietary business method, it is not clear how this federal tax should be calculated when sales occur using the priceline.com service. Priceline.com has been calculating this tax based on the fare paid to the airline for a ticket, rather than the price paid by the customer. There is a possibility that current law requires computation of the tax based on the price paid by the customer to priceline.com. Due to the uncertainty of how the federal air transportation tax applies to sales of airline tickets using the priceline.com service, priceline.com has submitted a written request to the United States Internal Revenue Service seeking a determination of priceline.com's federal air transportation tax obligations. Such determination may not be favorable and may require priceline.com to collect federal air transportation tax on the total amount paid by consumers for air travel. If the determination of the Internal Revenue Service is unfavorable, priceline.com could owe $766,339 in additional taxes as of June 30, 1999. Priceline.com has accrued for such potential liability in its condensed balance sheet as of June 30, 1999 and is providing for such potential liability on an ongoing basis. Priceline.com has agreed to indemnify and hold harmless certain of its participating airlines from any liability with respect to such taxes as well as to secure the payment of such taxes by a letter of credit. NON-QUALIFIED STOCK OPTIONS Priceline.com currently has outstanding non-qualified stock options to purchase 26,582,391 shares issued to various employees, consultants and directors pursuant to the 1997 Omnibus Plan and the 1999 Omnibus Plan. The options entitle holders to purchase common stock at a weighted average exercise price of approximately $11.46 per share, subject to adjustment in accordance with the 1997 Omnibus Plan and the 1999 Omnibus Plan. Upon exercise of an option, priceline.com will be required to make payments on behalf of the option holders for certain payroll related taxes such as Social Security and Medicare. These payroll taxes will appear as a general and administrative expense on priceline.com's income statement and 42 will amount to approximately 1.5% to 2.0% of the difference between the exercise price and the then fair market value of the common stock at the time of exercise. However, upon exercise of outstanding options, priceline.com will be paid the exercise price of the options that are exercised. Priceline.com also will be entitled to an income tax deduction equal to the sum of (1) the difference between the exercise price of the option and the then fair market value of the common stock at the time of exercise and (2) the total amount of payroll related tax payments. As the calculation of the expense is directly dependent upon priceline.com's stock price and the exercise of options is within the sole discretion of the holder of the options, the amount and timing of the expense and the timing of the corresponding income tax deduction are not currently able to be determined and are not within the control of priceline.com. Priceline.com estimates that, in connection with the exercise of outstanding options pursuant to the option exercise program, in the third quarter of 1999 it will (x) record expenses of approximately $1.3 million in respect of such payroll related taxes; (y) increase additional paid-in capital by approximately $944,000 in respect of the exercise price of such options; and (z) increase common stock by approximately $7,700 in respect of the par value of the shares purchased upon exercise of such options. YEAR 2000 READINESS DISCLOSURE PRICELINE.COM'S STATE OF READINESS Priceline.com has defined Year 2000 compliance as follows: Information technology time and date data processes, including, but not limited to, calculating, comparing and sequencing data from, into and between the 20th and 21st centuries contained in its products and services offered through the priceline.com service, will function accurately, continuously and without degradation in performance and without requiring intervention or modification in any manner that will or could adversely affect the performance of such products or the delivery of such services as applicable at any time hereafter. Priceline.com's internal systems include both its information technology systems and non-information technology systems. Priceline.com has initiated an assessment of its proprietary information technology systems, and expects to complete any remediation and testing of all information technology systems during 1999. With respect to information technology systems provided by third-party vendors, priceline.com has sought assurances from such vendors that their technology is Year 2000 compliant. All of priceline.com's material information technology system vendors have replied to inquiry letters sent by priceline.com stating that they either are Year 2000 compliant or expect to be so in a timely manner. Priceline.com is evaluating its non-information technology systems for Year 2000 compliance. It has not, to date, discovered any material Year 2000 issues with respect to its non-information technology systems. Priceline.com is in the process of contacting its material seller participants whose products or services are sold through the priceline.com service to determine if they are Year 2000 compliant. To date, all such seller participants have stated that they are, or expect to be, Year 2000 compliant in a timely manner. Priceline.com's customers are individual Internet users, and, therefore, priceline.com does not have any individual customers who are material to an evaluation of Year 2000 compliance issues. THE COSTS TO ADDRESS YEAR 2000 ISSUES Priceline.com has expensed amounts incurred in connection with Year 2000 compliance since its formation through June 30, 1999. Such amounts have not been material. The additional costs to make any other products or services Year 2000 compliant will be expensed as incurred, but are not expected to be material. 43 Priceline.com is not currently aware of any material operational issues or costs associated with preparing its systems for the Year 2000. Nonetheless, it may experience material unexpected costs caused by undetected errors or defects in the technology used in its systems or because of the failure of a material seller participant to be Year 2000 compliant. RISKS ASSOCIATED WITH YEAR 2000 ISSUES Notwithstanding priceline.com's Year 2000 compliance efforts, the failure of a material system or vendor, including a seller participant in the priceline.com service, or the Internet generally, to be Year 2000 compliant could harm the operation of the priceline.com service or prevent certain products and services being offered through the priceline.com service, or have other unforeseen, adverse consequences to the company. Finally, priceline.com also is subject to external Year 2000-related failures or disruptions that might generally affect industry and commerce, such as utility or transportation company Year 2000 compliance failures and related service interruptions. Moreover, participating sellers in priceline.com services might experience substantial slow-downs in business if consumers avoid products and services such as air travel both before and after January 1, 2000 arising from concerns about reliability and safety because of the Year 2000 issue. All of these factors could have a material adverse effect on its business, financial condition and results of operations. CONTINGENCY PLANS Priceline.com has developed a contingency plan to address situations that it believes would arise if it fails to be Year 2000 compliant. Priceline.com has not developed a contingency plan to address situations that may result if its suppliers are unable to achieve Year 2000 compliance. The cost of developing and implementing such a plan, if necessary, could be material. 44 BUSINESS OVERVIEW Priceline.com has pioneered a unique e-commerce pricing system known as a "demand collection system" that enables consumers to use the Internet to save money on a wide range of products and services while enabling sellers to generate incremental revenue. Using a simple and compelling consumer proposition--"name your price"--priceline.com collects consumer demand, in the form of individual customer offers guaranteed by a credit card, for a particular product or service at a price set by the customer. Priceline.com then either communicates that demand directly to participating sellers or accesses participating sellers' private databases to determine whether it can fulfill the customer's offer on the basis of the pricing information and rules established by the sellers. Consumers agree to hold their offers open for a specified period of time and, once fulfilled, offers cannot be canceled. Priceline.com benefits consumers by enabling them to save money, while at the same time benefitting 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, priceline.com enables sellers to generate incremental revenue without disrupting their existing distribution channels or retail pricing structures. Priceline.com commenced its service on April 6, 1998 with the sale of leisure airline tickets and, during the period from launch through June 30, 1999, collected guaranteed offers for approximately 5.1 million airline tickets, representing approximately $1.1 billion in total consumer demand, resulting in sales of approximately 762,000 airline tickets, representing approximately $165.2 million in revenue. During the six-month period ended June 30, 1999, priceline.com collected guaranteed offers for approximately 1.8 million airline tickets, representing approximately $697.5 million in total consumer demand. This demand resulted in sales of approximately 627,000 airline tickets, representing approximately $134.8 million in revenue. The number of offers that priceline.com accepts is affected by a variety of factors, including the number of reasonable offers received and the level of available inventory. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Overview." Since commencing service, the priceline.com business has grown significantly and the priceline.com service now includes the following products and services: - leisure airline tickets, which now includes six domestic and 16 international airline participants; - new automobiles, which was launched on a test basis in the New York metropolitan area in July 1998; - hotel room reservations, which was launched in October 1998, offers hotel rooms in substantially all major United States markets and includes as participants more than 10 leading national hotel chains; and - home financing services, which was launched in January 1999 with home mortgage services and now also includes home equity loans and refinancing services. Through the innovative use of "adaptive marketing programs," priceline.com also markets customer acquisition programs for third parties. These programs facilitate the completion of a higher percentage of successful transactions through the priceline.com service while generating fee income for the company. Priceline.com intends to continue to leverage the priceline.com brand by expanding its product offerings to include rental cars, cruises, time shares, vacation packages, personal and automobile loans, insurance and other financial services products and by expanding our new car sales service to the entire U.S. market. Priceline.com also is exploring expansion of its core "name your price" business model to other areas of e-commerce, such as retail merchandise and the consumer-to-consumer market. Priceline.com offers products and services that are provided by participating sellers, many of whom are leaders in their industries. Twenty-two domestic and international airlines currently participate in priceline.com's leisure airline ticket service, including Delta, Northwest, Continental, TWA, America West and leading international carriers. Participants in the priceline.com hotel room reservation service include 45 Marriott, Renaissance, Sheraton, Westin and several other nationally recognized hotel chains, as well as several important real estate investment trusts, including Meristar, Patriot and Starwood. Priceline.com does not publicly advertise the names of its seller participants in its airline and hotel programs. Priceline.com's home financing service, which is offered through a joint marketing arrangement with LendingTree, an Internet-based home financing service provider, includes a network of more than 30 participating lending institutions. Priceline.com generates revenues in a variety of ways depending on the product or service sold. With respect to its airline ticket and hotel room reservation services, priceline.com determines whether to fulfill a customer's offer based upon the available fares, rules and inventory that have been provided by participating sellers through their private data bases. Upon completion of a successful transaction, priceline.com recognizes as revenue the customer's named price, net of taxes, and records as the cost of revenue, the fare or rate charged by seller. With respect to priceline.com's automobile and home financing services, a customer's offer is submitted directly to the participating sellers who determine whether to fulfill the offer. With respect to its automobile service, priceline.com earns a fixed fee from both the customer and the seller after the transaction is consummated. With respect to the home financing service, priceline.com receives marketing fees equal to a percentage of the net revenue generated by the service, which is operated in conjunction with LendingTree, Inc. For its adaptive marketing programs, priceline.com earns fees payable by the seller and/or the customer or by its adaptive marketing partner. Priceline.com believes that the priceline.com service already has achieved significant consumer acceptance and widespread brand awareness. Based upon the results of an independent research study conducted for priceline.com, the company believes that as of April 1999, among adult Americans, priceline.com was the second most recognized e-commerce brand among the 20 leading brands included in the survey and one of the most recognized Internet brands among the leading brands included in the survey. Based on the study, priceline.com also believes that, after only one year of operation, 91.1 million (or 46%) of all adult Americans were aware of the priceline.com brand. The study also indicated that awareness of the priceline.com brand increased over 14% since mid-1998. Priceline.com's strong brand awareness has been achieved without any affiliation with an Internet portal company such as Yahoo! or Excite or a proprietary online service such as America Online. Beyond mere name recognition, priceline.com also believes that it enjoys high levels of consumer satisfaction among users of its service who provide powerful word-of-mouth endorsements. In addition, priceline.com has been featured in hundreds of news stories in national publications such as THE NEW YORK TIMES, THE WALL STREET JOURNAL AND USA TODAY. The priceline.com service also has been awarded a four-star rating by YAHOO! INTERNET LIFE magazine as the "most creative way to get a good deal" on leisure airline tickets. Priceline.com believes that priceline.com's unique business model can be applied to a broad range of products and services. Priceline.com believes that this broad applicability of its business model, its first mover advantage, the strength of the priceline.com brand, its network of seller participants, its proprietary software systems and its intellectual property strategies provide it with significant competitive advantages. INDUSTRY BACKGROUND THE GROWTH OF COMMERCE ON THE INTERNET The Internet has emerged as a significant interactive medium for conducting business. International Data Corporation, a market research firm, estimates that the number of Internet users worldwide exceeded 97 million in 1998 and will grow to over 319 million by the end of 2002. International Data Corporation also estimates that annual worldwide commerce over the Internet will increase from approximately $32.0 billion in 1998 to approximately $425.0 billion by 2002. The factors driving this growth include the increasing number of personal computers in homes and offices, the decreasing cost of personal computers, technological innovations providing easier, faster and cheaper access to the Internet, the proliferation of content and services being provided on the Internet and the increasing use of the Internet by businesses and consumers as a medium for conducting business. The increasing use of the Internet as a 46 commercial medium has been accompanied by a diversification in the type of commerce that is conducted on the Internet and a proliferation in the types of products and services available on the Internet. The Internet possesses a number of unique and commercially powerful characteristics that differentiate it from traditional media: users communicate or access information without geographic or temporal limitations; users access dynamic and interactive content on a real-time basis; and users communicate and interact instantaneously with a single individual or a group of individuals at little or no cost. The Internet has created a dynamic and particularly attractive medium for commerce, empowering consumers to gather more comparative purchasing data than is feasible with traditional commerce systems, to shop in ways that can be more convenient for them and to interact with sellers in many new ways. As the Internet has become more accessible and widely used for transactions, it has emerged as a primary business channel alongside the telephone, paper-based communication and face-to-face interaction. LIMITATIONS OF TRADITIONAL PRICING MECHANISMS Under traditional retail pricing methods, sellers typically market products to consumers under brand names at fixed retail prices. Alternatively, prices can be established through auction processes. However, each of these forms of seller-driven commerce has certain significant disadvantages for both sellers and consumers. For example, in the retail pricing model, sellers who discount prices to clear excess inventory, utilize excess capacity or increase sales velocity, risk disruption of their existing distribution channels and damage to their retail pricing structures. They also lose the opportunity to earn incremental revenue from "free-riders," that is, consumers who would have been prepared to pay the undiscounted price for the product or service, but nevertheless obtain the benefit of the discounted price. Moreover, none of these pricing methods allow sellers to consider the flexibility of potential buyers before setting prices. Similarly, consumers are often forced to pay a higher price when the seller is setting a fixed retail price for a product with added features or under a specific brand, which the customer would otherwise have been prepared to forgo for a lower price. Auctions force consumers to compete against each other for the benefit of the seller, which always results in the product being sold on the basis of the highest bid. While the Internet has become a significant medium for conducting business, commerce presently conducted on the Internet is largely based upon traditional pricing methods. Priceline.com believes that the vast information sharing and communications power of the Internet creates an opportunity for significant change in the way commerce or business is conducted. THE PRICELINE.COM SOLUTION Priceline.com has developed a unique pricing system known as a "demand collection system" that uses the information sharing and communications power of the Internet to create a new way of pricing products and services. Priceline.com creates a new balance between the interests of buyers, who are willing to accept trade-offs in order to save money, and sellers, who are prepared to generate incremental revenue by selling products at below retail prices, provided that they can do so without disrupting their existing distribution channels or retail pricing structures. Priceline.com's demand collection system allows consumers to name the price they are prepared to pay when submitting an offer for a particular product or service within a specified range of substitutability. Priceline.com then either communicates such offers to multiple sellers who determine whether to accept the customer's offer or accesses participating sellers' private databases to determine whether it can fulfill the customer's offer on the basis of the pricing information and rules established by the sellers. Consumers agree to hold their offers open for a specified period of time to enable priceline.com to fulfill their offers from inventory provided by participating sellers. Once fulfilled, offers generally cannot be canceled. This system uses the flexibility of buyers to enable sellers to accept a lower price in order to sell excess inventory or capacity or to increase sales velocity. Priceline.com believes that its demand collection system addresses the limitations inherent in traditional pricing mechanisms in a manner that offers substantial benefits to both buyers and sellers. 47 The principal advantages of the priceline.com system include the following: - COST SAVINGS AND PREFERRED METHOD OF PURCHASING FOR CONSUMERS. Priceline.com's demand collection system allows consumers to save money in a simple and compelling way--"name your price." Buyers effectively trade off flexibility about brands, product features and/or sellers in return for prices that are lower than those that can be obtained at that time through traditional retail distribution channels. Priceline.com believes that in many cases, such as purchasing a new car or obtaining a home mortgage, naming your own price over the Internet represents a preferred purchasing method to traditional retail channels, which may involve comparison shopping among a complex array of alternative features, sometimes protracted negotiations and dealings with numerous brokers or sales representatives. Priceline.com also believes that naming your price over the Internet is a preferred purchasing method to auctions, which result in a product being sold on the basis of the highest bid. - INCREMENTAL REVENUE FOR SELLERS. Sellers use priceline.com as a revenue management tool to generate incremental revenue without disrupting their existing distribution channels or retail pricing structures. Priceline.com requires consumers to be flexible with respect to brands, such as a willingness to fly on any major airline; and/or product features, such as a willingness to fly at any time of the day; and/or seller, such as any BMW dealer in a specific geographic area. As a result, sellers' brands are not revealed to customers prior to the consummation of a transaction, thereby protecting their brand integrity. This shielding of brand identity enables sellers to accept offers at discounted prices through priceline.com without cannibalizing their own retail sales by publicly announcing discount prices and without competing against their own distributors. In effect, priceline.com serves as a discreet and insulated channel of distribution. Sellers are further protected by the fact that each transaction is independent and the prices at which offers are accepted are not revealed to subsequent users of the priceline.com service. Priceline.com gives sellers the ability to exercise a greater degree of pricing flexibility without trading high-margin sales for low-margin sales, thereby enabling sellers to expand their total revenues and, in some cases, gain market share at the expense of non-participating competitors. - PROPRIETARY SELLER NETWORKS. Priceline.com assembles proprietary networks of industry leading sellers that represent high quality brands, such as Delta, Northwest, Continental, TWA, America West, Marriott, Renaissance, Sheraton and Westin. By establishing attractive networks of seller participants with reputations for quality, scale and national presence, priceline.com fosters increased participation by both buyers and sellers. Each participant in these unique seller networks is willing to consider and accept consumer offers at prices that are below its retail prices. Moreover, by shielding the seller's brand and not revealing the final selling price to other consumers, priceline.com encourages participating sellers to be aggressive in their pricing. Priceline.com believes that as more and more sellers in an industry join the priceline.com service, other industry participants will want to join the system. - GUARANTEED CONSUMER DEMAND FOR SELLERS. Each customer who makes an offer through priceline.com must guarantee his offer with a major credit card. The guaranteed aspect of the demand is attractive to sellers because they know that priceline.com offers them a confirmed sale whenever they accept a buyer's offer. Sellers can be sure that collected demand represents willing buyers, at each named price, rather than browsing shoppers who have made no commitment to purchase. Priceline.com's database of consumer offers also provides sellers with valuable market information about the precise quantities of latent demand at each price point below their retail prices. - BROAD APPLICATIONS ACROSS MULTIPLE MARKETS. In contrast to many e-commerce companies that are building brands in vertical categories or groups of related categories, priceline.com believes that its e-commerce business model has horizontal application to products and services in a wide range of industries. Priceline.com further believes that the broad applicability of the priceline.com service 48 and the strength of the priceline.com brand afford it the opportunity to obtain substantial economies of scale and offer the potential for priceline.com to become a major new channel of distribution. The breadth of potential applications of the priceline.com business model also is enhanced by various cross-selling opportunities, since priceline.com expects that consumers who successfully complete transactions through priceline.com will return to priceline.com to purchase other products and services. THE PRICELINE.COM GROWTH STRATEGY Priceline.com's objective is to continue to expand the priceline.com business and to establish priceline.com's demand collection system as a leading source for the purchase of products and services on the Internet. The key elements of priceline.com's strategy are as follows: - STRENGTHEN THE PRICELINE.COM BRAND. Priceline.com intends to establish priceline.com as the leading consumer brand for buyer-driven commerce over the Internet. To achieve this objective, priceline.com intends to continue to pursue an aggressive brand development strategy through mass market and targeted advertising and promotions, press coverage and strong word-of-mouth support. While priceline.com believes it is already one of the most recognized e-commerce brands among adult Americans, priceline.com believes that it can expand the public's association with the priceline.com "name your price" proposition to a broad range of products and services. - LEVERAGE THE PRICELINE.COM BRAND OVER NUMEROUS PRODUCTS AND SERVICES. Priceline.com intends to leverage the priceline.com brand across numerous products and services to achieve significant revenue scale and growth. In contrast to most e-commerce businesses that operate in one or two "vertical" markets, priceline.com is a "horizontal" commerce system that can benefit both buyers and sellers in a broad range of industries. Priceline.com's strategy is to make available multiple product and service offerings at a single Web site under a common brand to take advantage of these market opportunities. Over the next two years, priceline.com intends to offer products and services in three sectors of the economy where its demand collection system is particularly well suited. These sectors are: - travel, including leisure airline tickets and hotel rooms, rental cars, "all-inclusives" resorts, cruises and time shares; - financial services, including home mortgages, equity loans and refinancings, credit card balance consolidation and automobile and life insurance; and - automobile sales and related financing. In these sectors, the priceline.com service currently offers leisure airline tickets, hotel rooms, home financings and automobiles. Given the size and scope of these markets, priceline.com believes it can achieve a large revenue base and sustain revenue growth by capturing even a small portion of the excess unsold inventory or capacity in these sectors and by capturing even relatively small amounts of market share from traditional seller-driven channels of retail distribution. - EXPAND THE PRICELINE.COM BUSINESS MODEL. Priceline.com also intends to explore expansion of its core "name your price" business model to other areas of e-commerce. Priceline.com currently is evaluating the licensing of its business model to two new companies. One of these companies is developing a consumer-to-consumer transaction business in which buyers would make conditional purchase offers to acquire goods from other consumers. The other would enable consumers to use the Internet to name the price that they are willing to pay for retail merchandise, which they would pick up from participating retailers. However, priceline.com has not determined the structure of its relationship with these companies, which may include, among other things, licensing of the priceline.com brand and "name your price" business model and investment in such entities. - EXPAND SELLER PARTICIPANT NETWORKS. Priceline.com intends to continue to expand its alliances with major seller participants selected for reputation, quality and national presence to create proprietary 49 seller networks for each of its major products and services. A critical element of the priceline.com business has been priceline.com's ability to demonstrate to its seller participants that priceline.com can generate incremental revenues for sellers without disrupting their existing distribution channels or retail pricing structures. Priceline.com intends to form and maintain alliances with industry leaders by designing its products and services in a way that requires consumers to accept some trade-offs from currently available retail product offerings in return for lower prices. Such trade-offs typically include not knowing the identity of the seller or brand prior to the acceptance of a customer's offer by a seller. - ENHANCE SITE FUNCTIONALITY AND INCREASE CONSUMER USAGE. Priceline.com intends to frequently update and enhance the features of the priceline.com service. Priceline.com continually monitors feedback from consumers and frequently adds new features to further refine and simplify the buying process. Priceline.com also receives offers by telephone and provides customer service by telephone and e-mail to assist consumers in the offer process. By continuing to increase the functionality of the service and enhance the consumer experience, priceline.com believes that it will continue to increase customer usage and loyalty. - EXPAND ADAPTIVE MARKETING PROGRAMS. Priceline.com intends to further develop and expand what it refers to as "adaptive marketing programs." Adaptive marketing programs include two distinct initiatives. "Adaptive promotions" allow consumers to increase the amount of their offers, and thus their likelihood of success, at no additional cost by participating in sponsor promotions during the process of making a priceline.com offer. For example, a customer making an offer to buy an airline ticket can increase the amount of his offer by a stated amount by applying online for a credit card issued by one of priceline.com's strategic sponsors. These promotions have the effect of increasing the percentage of successful offers at no additional cost to the customer, while at the same time enabling priceline.com to earn significant fee income, which it can use to offset the sale of products and services below its unit cost. The second type of adaptive marketing program is referred to as "adaptive cross selling" and utilizes cross selling of multiple products to increase the number of successful transactions. - INCREASE FINANCIAL RETURNS OVER TIME. While it is inherent in the nature of priceline.com's business model that not all offers will be acceptable to sellers, an integral part of priceline.com's strategy is to ensure that a high percentage of reasonable offers get accepted, thereby increasing financial returns while reinforcing the priceline.com service. As consumers have become more familiar with the service, priceline.com has been able to increase the percentage of offers it satisfies and expects this trend to continue. As its revenue base grows, priceline.com intends to increase its financial returns over time. Priceline.com's revenue model for travel services enables it to balance revenue growth against gross profit margins, thereby enhancing its ability to manage a targeted gross margin as a percentage of revenues. Priceline.com initially intends to emphasize revenue growth over profit margins in order to achieve significant revenue scale and to further strengthen the priceline.com brand. However, over time, as its revenue base increases, priceline.com believes it will be able to capture a greater portion of the incremental profit that it generates for participating sellers and thereby increase its profit margins and financial returns. - EXPLORE INTERNATIONAL EXPANSION. Priceline.com believes that the international scope of the Internet and the global demand for the types of products and services that it intends to make available through priceline.com presents opportunities to expand its service internationally. Given the anticipated continued increase in use of the Internet throughout the world, priceline.com intends to explore avenues and strategies for international expansion. It believes that joint ventures and licensing arrangements with international partners are likely to be the preferred methods of international expansion, as they will enable priceline.com to combine its expertise in demand collection systems with its partners' expertise in their local markets. 50 THE PRICELINE.COM BUSINESS MODEL Priceline.com believes that its unique pricing system known as a "demand collection system" is a powerful new business model for conducting commerce on the Internet. The priceline.com business model is designed to allow consumers to save money on a wide range of products and services by trading flexibility regarding brands, product features and/or sellers in return for being able to buy products and services at prices that are lower than those charged through traditional retail channels of distribution. The priceline.com business model motivates sellers to offer products through priceline.com at below their retail prices by enabling them to generate incremental revenue while protecting their existing channels of distribution and retail pricing structures. The priceline.com business model enables the company to earn substantial revenues without charging customers for submitting offers through, or charging sellers for participating in, the priceline.com system. Priceline.com has the flexibility to earn fixed or percentage based fees by serving as an intermediary on the sale of products or services, or to earn the spread between the customer's offer and the cost of a product or service by serving as principal in a transaction. Consumer fees are payable only upon completion of successful transactions. This unique revenue structure enables priceline.com to manage the level of gross margins and, as appropriate, balance revenue growth with margin growth. In addition to its unique revenue structure, the defining elements of the priceline.com business model are the following: - the buyer specifies or accepts a RANGE OF SUBSTITUTABILITY among brands, product features and/or sellers; for example, he agrees to stay at any three-star hotel in a certain area, agrees to fly at any time of the day or agrees to purchase a new car from any factory-authorized dealer; - the buyer NAMES THE PRICE he is prepared to pay for the products or services within the specified range of substitutability; - the buyer GUARANTEES HIS OFFER for a specified time period by securing all or a portion of his potential payment for the product or service with a major credit card; - companies sell products or services at prices below their currently available retail prices using priceline.com as a BRAND SHIELD to protect their retail pricing structures and channels of distribution; - each guaranteed offer can be consummated with products or services from any of a GROUP OF SELLERS; and - offers made through priceline.com are held open for a specified period of time, and CANNOT BE CANCELED by either the seller or the buyer. The priceline.com consumer proposition is simple and compelling: realize immediate savings by using the Internet to name your own price when you are willing to be flexible about brands, product features and/or sellers. A central premise of the priceline.com consumer proposition is that in many product and service categories there are a significant number of consumers for whom brands, product features or sellers are interchangeable, particularly if agreeing to a substitution among brands or sellers will result in saving money. For example, priceline.com believes that many leisure travelers are relatively indifferent about the brand of major airline they fly. Similarly many consumers are indifferent to which financial services company provides them with a credit card or home mortgage. Priceline.com also believes that many consumers prefer not to spend time and effort engaged in an evaluative process among similar products, brands or sellers, which they consider to be substitutable. Finally, priceline.com is appealing to some consumers because it does not charge a customer to submit an offer, and priceline.com's Web site provides convenient access, available 24 hours a day, seven days a week. Priceline.com believes that the collection of large volumes of consumer demand is essential to building networks of multiple sellers. Priceline.com also believes that it is important that all of the demand 51 it collects is GUARANTEED by the buyers, that offers must be held open for a specified time period and that once an offer is accepted it generally cannot be canceled or the purchase price refunded. This approach assures sellers that a customer's offer is bona fide and that once an offer is accepted, the seller will generate an immediate sale, rather than an invitation to further negotiation or comparison shopping. The priceline.com business model is predicated on the assumption that sellers almost invariably have excess inventory or capacity that they would sell at lower prices, if they could do so without either lowering their prices to their retail customers or advertising that lower prices are available. Priceline.com allows sellers to capture demand below their retail "price line," without allowing retail customers who might be willing to pay more to "free ride" down to the lower price. The ability to offer prices below the retail price line generates incremental revenue by accessing buyer segments otherwise priced out of the market and, in certain cases, by capturing market share from nonparticipating competitors. Finally, priceline.com's database of consumer offers benefits sellers by providing them with valuable market information about the precise quantities of latent demand at each price point below their retail prices. Priceline.com believes that its demand collection system is ideally suited to industries characterized by low variable costs relative to total cost, which results in high profit contribution margins and provides sellers with a strong incentive to sell products at prices below their retail prices to generate incremental sales, provided that they can do so without threatening their existing distribution channels or retail pricing structures. Low variable costs frequently exist in industries with expiring or rapidly aging inventory. Priceline.com also believes, however, that its demand collection system will prove to be effective even in industries that are not characterized by rapidly aging inventories and low variable costs because a significant number of consumers will prefer the relative cost savings, ease of use and convenience of priceline.com's "name your price" system to traditional retail distribution channels, and sellers will be attracted to the potential of the priceline.com service to increase sales velocity, which is often a significant factor in the success of businesses in these industries. Priceline.com believes that markets characterized by a large degree of brand, product feature or seller substitutability are substantial and include both those in industries characterized by high profit contribution margins and industries in which many consumers are dissatisfied with traditional retail distribution methods. In the business-to-consumer market, travel, new car sales, financial services and many retail products offer substantial ranges of substitutability in consumers' minds. In the business-to-business market, long distance service, media sales and office supplies are subject to high degrees of product or brand substitutability. In the consumer-to-consumer market, there are often multiple sellers that are ready, willing and able to offer new or nearly new products that consumers consider substitutable. Priceline.com believes that its business model can be applied to each of these markets, thereby providing it with considerable potential for long term growth. PRODUCTS AND SERVICES Priceline.com launched the priceline.com service on April 6, 1998 with the sale of leisure airline tickets. The priceline.com service now includes the sale of new automobiles, hotel room reservations and home financing services. Priceline.com also intends to expand its product offerings over the next two years to include other leisure travel products such as rental cars, cruises, time shares, and vacation packages; automobile and personal insurance and other financial services products; and certain retail products such as computers, home electronics and other consumer products. Priceline.com also intends to explore expansion of its core "name your price" business model to other areas of e-commerce, such as the consumer-to-consumer market. TRAVEL SERVICES LEISURE AIRLINE TICKETS. Priceline.com commenced its service with the sale of leisure airline tickets. The number of airlines participating in priceline.com's airline ticket service has increased substantially 52 since the launch of the business, from an initial group of two domestic airlines and four international airlines, to a total of six domestic airlines and 16 international airlines. Priceline.com also purchases and resells a small percentage of its tickets from airline ticket consolidators. Airlines participate in priceline.com's airline ticket service by making available to priceline.com unpublished fares and, in some cases, dedicated or special inventory. Priceline.com does not publicly advertise the names of airlines participating in its airline ticket service. Consumers can make offers to purchase airline tickets through the priceline.com Web site or the 1-800-Priceline call center. The vast majority of all airline ticket requests are made through priceline.com's Web site. To make an offer, the customer specifies (1) the origin and destination of the trip, (2) the dates on which he wishes to depart and return and (3) the price he is willing to pay, and guarantees the offer with a credit card. Consumers must agree to, among others, the following conditions: - to fly on any major full-service airline, which is defined by the United States Department of Transportation; - to leave at any time of the day on their desired dates of departure and return; - to purchase only round trip economy class tickets between the same two points of departure and return; - to accept up to one stop or connection; - to receive no frequent flier miles or upgrades; and - to accept tickets that cannot be refunded or changed. Consumers are informed that they can increase their chances of obtaining the desired ticket by accepting greater flexibility, such as accepting flights outside of priceline.com's normal flight times or accepting more than one stop or connection. Consumers also are given the opportunity to have their offers increased by a specified dollar amount, and thereby increase the likelihood of success, if they agree to participate in an adaptive promotion during the process of submitting their offers, such as applying for a credit card or subscribing to a magazine. In order to encourage reasonable initial offers, consumers are not permitted to make revised offers for an identical itinerary within seven days of an unsuccessful offer. When priceline.com receives an offer, it determines whether to fulfill the offer based upon the available fares, rules and inventory that have been provided by participating airlines. Such fares and rules are filed by participating airlines in a private database known as SecureRate within the Worldspan central reservation system. As a certified travel agency, priceline.com also has access to the published "tariff" fares of all airlines, including those not participating in the priceline.com service, although priceline.com currently does not sell tickets purchased pursuant to published tariff fares. If a qualifying airfare is identified, a search in Worldspan is initiated to find seat availability on the requested dates of travel. Where more than one seller is able to fulfill the customer's offer, priceline.com awards the business based on an allocation protocol. A customer is notified whether his offer has been accepted within one hour for domestic flights and within twenty-four hours for international flights. If priceline.com is able to obtain an airline ticket within the parameters specified by the customer, the customer's credit card is charged for the amount of the customer's offer, plus applicable taxes and standard processing fees, and the ticket is delivered to the customer by the delivery method specified by the customer. Approximately 94% of domestic tickets issued through priceline.com are electronic tickets. Priceline.com earns the spread, if any, between the customer's offered price and the cost to purchase the ticket from the airline, and the handling fee charge paid by the customer on each ticket. HOTELS. In October 1998, priceline.com launched its second travel service, which allows consumers to name their price for hotel room reservations. Priceline.com's hotel room reservation service currently is 53 available in substantially all major cities and metropolitan areas in the United States. Seller participants in the hotel room reservation service include several of the most significant national hotel chains, including Marriott, Renaissance, Sheraton and Westin, as well as several important real estate investment trusts, including Meristar, Patriot and Starwood, and independent property owners. Hotels participate by filing private discounted rates with related inventory control rules in priceline.com's private database in the Worldspan centralized reservation system for hotel rooms. These rates generally are not available to the general public or to consolidators and other discount distributors who sell to the public. Priceline.com's hotel room reservation service operates in a manner similar to its airline ticket service. Consumers are required to accept certain trade-offs with respect to brands or product features in return for saving money. For example, consumers are required to accept a reservation in any hotel within a specified geographic area within a designated "class" of service (1, 2, 3, 4 or 5-star) and must accept limitations on changes and cancellations. Priceline.com determines the class of service for each participating hotel based upon published industry reports, the amenities available at each property and other factors such as age and decor. As with the airline ticket service, the target market for priceline.com's hotel room reservation service is the leisure travel market. Consumers can make offers for a hotel room reservation through the priceline.com Web site. To make an offer, the customer (1) specifies (a) his dates of stay, (b) the metropolitan area, including geographic zones within that metropolitan area, (c) the class of hotel service and (d) the price he is willing to pay; and (2) guarantees the offer with a credit card. Upon receipt of an offer for a hotel room reservation, priceline.com systematically compares the offer with rates and inventory rules provided by sellers through their reservation systems and determines whether to fulfill the offer based upon available inventory. Within a specified time, which currently is one hour, the customer is notified whether his offer has been accepted. When selling a hotel room reservation, priceline.com earns the spread between the consumer's offer price and the price charged to the company by the hotel. Priceline.com also earns fee income from adaptive promotions that it makes available to consumers during the course of submitting an offer for a hotel room reservation. The dynamics of the hotel industry are similar to those of the airline industry in that both industries are characterized by expiring inventory and low marginal costs so that the sale of any excess inventory provides a significant contribution to profits. As with the airline industry, a significant amount of available inventory in the hotel industry expires unsold. Priceline.com also believes that consumers are willing to trade off brand identity for lower rates with a specified class of hotel service and that such industry dynamics make priceline.com's demand collection system particularly well-suited to the hotel industry. Priceline.com also believes that the hotel room reservation service will create opportunities for cross-selling to leisure travelers who purchase airline tickets through priceline.com. OTHER TRAVEL SERVICES. Priceline.com intends to expand its products and services within the leisure travel industry over the next two years to encompass the rental car, cruise, all-inclusive resort, time share and vacation package segments. FINANCIAL SERVICES PRODUCTS HOME FINANCING SERVICES. Priceline.com introduced its home financing service in January 1999. Priceline.com's financing service allows consumers to name their interest rate for mortgages of a specified term, including purchase money mortgages, refinancings and home equity loans. LendingTree, an Internet based mortgage service provider, is priceline.com's joint marketing partner in connection with its mortgage service. Under priceline.com's agreement with LendingTree, priceline.com is responsible for maintaining the home financing service on the priceline.com Web site and for consumer marketing. LendingTree serves as the back-end processing system, which presents offers received through priceline.com to multiple mortgage lending institutions for consideration. There are currently more than 30 lenders participating in 54 the home financing services through LendingTree. See "--Strategic Alliances--Home Financing Alliances." To obtain a home mortgage, refinancing or home equity loan through the priceline.com service, consumers access the priceline.com Web site and specify the amount of the loan, the term, the interest rate and the points that they are willing to pay. Consumers complete a simplified loan application as part of the process of making an offer. In connection with making an offer, consumers are required to guarantee with a major credit card the payment of a good-faith deposit of $200 that is applied towards closing costs. The good-faith deposit is charged by a lender only when a customer's offer is accepted. Priceline.com does not charge the customer any fees for the use of its home financing services. Priceline.com transmits each offer to LendingTree, which in turn presents the offer to multiple lenders who can either accept the offered terms, or return a counteroffer to the consumer. Priceline.com notifies consumers whether their offer has been accepted within six business hours, between the hours of 8:00 a.m. and 8:00 p.m., Eastern Standard Time. If a customer's offer is not accepted within six business hours, priceline.com notifies the customer if it has received any counter-offers from participating lenders. Participating lenders may submit counter-offers for up to two business days following the customer's offer. Customers may check the status of any counter-offers by accessing the priceline.com Web site. Priceline.com generates revenues with respect to its home financing service in the form of marketing fees paid directly by LendingTree. Priceline.com is exploring the possibility of entering into a joint venture with a subsidiary of a federally chartered thrift institution that would offer to provide mortgage loans through the priceline.com service. Priceline.com currently expects that such joint venture would participate in the priceline.com service along with other mortgage lenders in the LendingTree network. According to industry data published in 1998, approximately $1.1 trillion of home mortgages were entered into in the United States in 1996. Priceline.com believes that consumers are largely indifferent to which mortgage issuer provides their mortgage and seek merely to obtain the lowest cost in the most efficient manner. Moreover, comparison shopping among the hundreds of mortgage lenders can be a frustrating experience for consumers. Priceline.com believes the priceline.com mortgage service will provide consumers with a simple and efficient vehicle for obtaining the interest rate they seek through a preferable purchasing process. For lenders, the priceline.com mortgage service will provide guaranteed demand from consumers who are committed to buy and will submit that demand in a format that can be reviewed and evaluated by the lender with minimal variable costs. OTHER FINANCIAL SERVICES PRODUCTS. Priceline.com intends to expand its products and services within the financial services industry over the next two years to include unsecured personal loans, automobile loans, credit card balance consolidations and automobile and life insurance policies. As with its other products and services, priceline.com intends to expand its financial product services by entering into strategic relationships with leading industry participants. Priceline.com believes its financial product services will have broad demographic appeal among consumers who seek to obtain the most attractive economic terms in the most efficient manner from what they perceive to be substitutable suppliers. NEW CAR SALES Priceline.com introduced its new car sales service on a test basis in the New York metropolitan area in July 1998. Priceline.com utilized the New York market to learn more about automobile sales over the Internet and to develop product features and systems support. In July 1999, priceline.com launched a similar test in the Tampa, Florida market, and expects to expand further in the state of Florida, as well as into the states of California and Michigan during the third quarter of 1999. Based on published industry data, the New York metropolitan area represents approximately 10% of all consumer demand for new automobiles in the United States, while California represents approximately 11% and Florida represents approximately 9%. Additionally, the Detroit metropolitan area provides access to the three largest U.S. auto-makers. Subject to achieving positive results in these markets and receipt of appropriate state 55 regulatory approvals and authorizations necessary to conduct our new car sales service, priceline.com expects to become operational in the 48 contiguous states during the first quarter of 2000. Priceline.com recently entered into a co-marketing agreement with AutoNation, Inc., a leading national automotive retailer. The agreement initially provides priceline.com with access to AutoNation's inventory and dealerships in the Tampa, Florida market and provides for expansion into other markets in the future. Priceline.com's new car sales service accepts offers for every major brand of automobile. To purchase a new car through the priceline.com service, the customer identifies the exact vehicle desired to be purchased or leased, including the make, model and specified options, the geographic area in which the customer is willing to pick up the vehicle and the purchase price or lease price the customer is willing to pay. All sales are made through factory authorized dealers. To help consumers submit reasonable requests, both the manufacturer's suggested retail price and the dealer invoice price for the vehicles and options requested are displayed on the priceline.com Web site. Additionally, priceline.com also supplies an estimated market price, based on recent sales of the selected vehicle. Upon receiving an offer for a new car, priceline.com transmits the customer's offer to factory authorized dealers within the specified geographic radius, without disclosing the identity of the customer. Priceline.com directs the sale to the first dealer that notifies the company that it is willing to accept the customer's offer. Priceline.com then notifies the customer to pick up the vehicle from that dealer and the transaction is closed directly between them. Due to the numerous features and options on a new automobile, the range of product substitutability that consumers will accept is lower in the case of new cars than with airline tickets or hotels. As a result, a dealer that may not be able to precisely fulfill a customer's offer is permitted to make a counteroffer through priceline.com. The counteroffer may specify a different product package or price. The customer is free to accept or reject such a counteroffer. The customer also is permitted to submit an additional offer through priceline.com. Once an offer for a new car is accepted by a dealer, the consumer completes the transaction directly with the dealer and receives the same standard manufacturer's warranty and other terms that are available with respect to any new car purchased at that dealer. When a sale is completed, priceline.com is paid a fee, which is currently $25, from the customer and an additional fee from the auto dealer. If the customer fails to consummate the transaction within 14 business days of being notified that an offer is accepted, the customer is charged a cancellation fee, which is currently $200, half of which is payable to priceline.com with the other half payable to the dealer. Currently, priceline.com does not offer financing arrangements through its new car sales service. However, to assist consumers in determining whether they can afford a particular vehicle, or what purchase price to offer, we provide estimated month payment calculations, a "budget work-sheet" and a financing calculator on our Web site. Priceline.com also allows consumers to request financing from the accepting factory authorized dealer and to condition their offers on obtaining such financing. Priceline.com believes that, for many consumers, purchasing an automobile through priceline.com's new car sales service will be a preferred purchasing method compared to traditional retail channels which often involve protracted negotiations with numerous dealers, some of which may utilize aggressive sales tactics. Priceline.com also believes that many automobile dealers will view the priceline.com service as an attractive way to generate incremental sales through a low cost distribution channel. The priceline.com new cars sales service is differentiated from other Internet car sales services, which serve as lead generators for participating car dealers. Under such services, multiple dealers may contact the customer in response to the customer's inquiry to the Internet service. By contrast, priceline.com's new car sales service does not reveal the identity of the customer to the auto dealer until the dealer has accepted the customer's offer. Furthermore, in contrast to other Internet car sales services, dealers are not required to pay a participation fee to review offers from the priceline.com service. 56 ADAPTIVE MARKETING PROGRAMS Priceline.com has developed adaptive marketing programs to help bridge the gap between consumer offers and seller prices, provide users of the priceline.com service with other desired products, and generate additional revenue for the company. These programs also serve as an integral part of priceline.com's strategy of building customer loyalty. Priceline.com intends to further develop and expand its adaptive marketing programs, which presently include two distinct initiatives. The first, which it refers to as "adaptive promotions," allows consumers to increase the amount of their offers, and thus their likelihood of success, at no additional cost by participating in sponsor promotions during the process of making a priceline.com offer. For example, a customer making an offer to buy one round-trip airline ticket can immediately increase the amount of his offer by $40 by applying online for a First USA credit card. If the customer obtains the requested ticket, he still pays only the amount contained in his original offer, plus applicable taxes and standard processing fees. For example, if a customer makes an offer to purchase a round trip ticket from New York to Chicago for $200 and, in the process of submitting that offer, he applies for a First USA credit card, priceline.com would increase the customer's offer by up to an additional $40 to enable the customer a greater chance of purchasing the ticket. If priceline.com is able to purchase the ticket for $240 or less, the customer would still only have to pay his original offer price of $200, plus applicable taxes and fees. The second type of adaptive marketing program is referred to as "adaptive cross selling" and utilizes cross selling of multiple products to increase the number of successful transactions. For example, a customer whose offer for an airline ticket was slightly below acceptable levels could be offered a second related product such as a hotel room reservation or a rental car day at a combined price that provided an acceptable margin for the sellers of both products and for priceline.com. During 1998 and the first quarter of 1999, our adaptive marketing revenues were derived primarily from fees paid by Capital One Bank for qualifying credit card applications submitted over the priceline.com service in connection with customer offers for airline tickets. Effective May 1, 1999, our relationship with Capital One ended. Since that time, our credit card adaptive marketing program revenues have been attributable to our adaptive marketing relationship with First USA Bank, a leading national credit card issuer. Under the First USA adaptive marketing program, priceline.com enables its customers to increase the amount of their offers by applying online for a First USA credit card and offers other promotions linked to the First USA customer acquisition program. The fee structure of the First USA program is based on different factors than the factors that were applicable under the Capital One program and the First USA program is subject to certain early termination and repricing rights of First USA. Priceline.com also has an adaptive marketing agreement with E*TRADE, under which E*TRADE compensates priceline.com for offering priceline.com customers the opportunity to open an account with E*TRADE while visiting or making an offer on the priceline.com Web site. While the program originally related to priceline.com's initial public offering, it now applies to offers by customers for products and services over the priceline.com service. The E*TRADE adaptive marketing program is currently operated under an oral agreement and may be terminated at any time. Priceline.com recently has entered into adaptive marketing agreements with Sprint Communications Company L.P., Discover Financial Services, Inc. and Earthlink Network, Inc. The Sprint agreement is a short-term agreement under which priceline.com, during a twelve-week test program, will earn fees from Sprint in connection with customer agreeing to switch their long distance telephone service to Sprint. Priceline.com and Sprint are currently in the process of defining the program and the launch date has not yet been determined. We are also evaluating similar programs with other long distance carriers. Under the Discover adaptive marketing program, selected customers will be able to increase the amount of their offers by a specified amount by applying online for a Discover credit card through the priceline.com service. Priceline.com will receive a fee from Discover Financial Services for each qualifying credit card application submitted through the priceline.com service. Priceline.com will also receive a fee 57 for any qualifying upgrade of an established Discover credit card account submitted through the priceline.com service. The Discover adaptive marketing program is expected to be implemented during the third quarter of 1999 and will be offered to selected customers who have already participated, or who have declined participation, in the First USA adaptive marketing program. Under priceline.com's adaptive marketing program with EarthLink Network, Inc., an internet service provider, priceline.com will earn fees when its customers open accounts with EarthLink and upon such accounts being open for a specified period of time. No specific date has been set for the launch of the EarthLink program. In addition, Priceline.com is exploring and has taken steps to expand its adaptive marketing programs into a wide range of other products and services for its customers. See "Risk Factors--We are Dependent on Adaptive Marketing Programs" and "--Strategic Alliances--Adaptive Marketing Alliances." MARKETING AND BRAND AWARENESS Priceline.com has established itself as a leading e-commerce brand through an aggressive marketing and promotion campaign. From inception through June 30, 1999, priceline.com incurred $59.7 million for sales and marketing expense. It intends to continue to pursue an aggressive marketing strategy designed to promote brand awareness and the concept that consumers can save money on a wide range of products and services through priceline.com. Underlying priceline.com's marketing strategy is the company's belief that its target market is all consumers, not just Internet-savvy consumers. Substantially all of such spending has been for radio and newspaper advertising. Priceline.com's campaign features the actor William Shatner as its spokesperson. Priceline.com supplements its paid advertising and promotion with targeted media coverage. Priceline.com has been featured in hundreds of news stories in national publications such as THE NEW YORK TIMES, THE WALL STREET JOURNAL AND USA TODAY, reflecting the intuitive appeal of the priceline.com business model and its strong word-of-mouth support. In addition, priceline.com engages in grass roots marketing such as promotional events on college campuses and co-promotions with popular media such as MTV. Priceline.com believes that the priceline.com service has achieved widespread brand awareness. Based upon the results of an independent research study conducted for priceline.com, the company believes that, as of April 1999, among adult Americans, priceline.com was the second most recognized e-commerce brand among the 20 leading brands included in the survey and one of the most recognized Internet brands among the leading brands included in the survey. Based on the study, priceline.com also believes that, after only one year of operations, 91.1 million (or 46%) of all adult Americans were aware of the priceline.com brand. Priceline.com's strong brand awareness has been achieved without any affiliation with an Internet portal company such as Yahoo! or Excite or a proprietary online service such as America Online. Priceline.com also believes that it enjoys high levels of consumer satisfaction among users of its service who provide powerful word-of-mouth endorsements. STRATEGIC ALLIANCES AIRLINE ALLIANCES AND RELATIONSHIPS Priceline.com has entered into Airline Participation Agreements with six domestic and 16 international airlines. The Airline Participation Agreements do not commit the airlines to provide tickets for any particular routes or at a discount to their retail prices, but outline the terms and conditions under which ticket inventory provided by the airlines may be sold. Such terms and conditions include the following: - the tickets must be non-refundable, non-endorsable and non-changeable; - all travel must be round-trip between the same two points of departure and return, with no stopovers permitted; - the tickets are not eligible for frequent flyer mileage or upgrades; - consumers must agree to accept up to one stop or connection on both their departing and return flights; 58 - consumers must be willing to fly on any participating airline; - consumers must be willing to depart at any time after 6 a.m. and land any time before 10 p.m. on the requested dates; - all offers must be guaranteed with a major credit card; and - consumers are limited in their ability to make multiple offers with respect to the same travel itinerary. The Airline Participation Agreements generally are subject to termination upon 30 days' notice by priceline.com or the airline. While priceline.com's agreement with Delta nominally has a ten-year term, the agreement does not impose any material obligations on Delta. In particular, Delta is not at any time obligated to supply airline tickets to priceline.com and may supply airline tickets to priceline.com's competitors at any time, without offering any airline tickets to priceline.com, or may offer tickets to priceline.com's competitors at more favorable prices than those offered to priceline.com. In addition to the Airline Participation Agreements, priceline.com entered into a related agreement with Delta which provides, among other things, certain incentives designed to encourage Delta to increase its participation in priceline.com's buying service. For example, Delta is entitled to share in revenue generated from airline ticket sales on Delta if priceline.com's gross margin on such sales exceeds approximately 12% in any calendar quarter. In addition, priceline.com is required to use the highest qualifying fare to fulfill ticket requests allocable to Delta, subject to an agreed minimum profit margin to priceline.com. Priceline.com's agreement with Delta, subject to various exceptions, requires Delta's approval of the addition of new carriers to the priceline.com service, restricts the routes for which tickets may be offered by specified carriers through the priceline.com service and imposes limitations on the code share arrangements of specified carriers. Delta also may require the exclusion of specific markets in order for certain other airlines to participate. These provisions could limit priceline.com's ability to expand its airline ticket service. In addition, priceline.com's ability to transfer or license its intellectual property to other travel providers is limited in the manner set forth in the agreement. In connection with the Airline Participation Agreement with Delta, priceline.com also issued a warrant to Delta to purchase up to 18,619,402 shares of common stock at an exercise price of approximately $0.93 per share. The Delta warrant will become exercisable at the earlier of December 31, 2005, or Delta's achievement of certain performance thresholds of ticket sales. Priceline.com also has issued to several participating airlines warrants to purchase an aggregate of 3,187,500 shares of common stock, comprised of warrants to purchase 937,500 shares of common stock at an exercise price of $3.20 per share, warrants to purchase 1,250,000 shares of common stock at an exercise price of $6.40 per share and warrants to purchase 1,000,000 shares of common stock at an exercise price of approximately $97.41 per share. The warrants having an exercise price of $3.20 per share become exercisable on October 28, 1999. With respect to the warrants having an exercise price of $6.40 per share, warrants relating to one-half of the underlying shares become exercisable on December 31, 1999, and warrants relating to the remaining underlying shares become exercisable on December 31, 2000, subject to earlier termination of such warrants in the circumstances identified in the warrant agreement. The warrants having an exercise price of $97.41 per share become exercisable upon the earlier of July 16, 2004 or the airline's achievement of various performance thresholds based upon ticket sales. HOME FINANCING ALLIANCES In connection with priceline.com's home financing service, priceline.com has entered into a joint marketing relationship with LendingTree, an Internet based mortgage service provider. Under this arrangement, priceline.com is responsible for maintaining the mortgage service for the priceline.com Web site and for consumer marketing. LendingTree provides the back-end processing system, which presents the priceline.com offers to multiple participating lending institutions for consideration. Under the terms of the Internet Marketing and Licensing Agreement, effective as of August 1, 1998, between priceline.com and LendingTree, priceline.com receives the majority of the net revenue generated by the mortgage program, and the balance is earned by LendingTree. LendingTree is responsible for 59 providing (1) the substantive mortgage content of the mortgage service for the priceline.com Web site; (2) a network of lenders to participate in the mortgage program; (3) customer service; and (4) the software required to effect a communication system between priceline.com, LendingTree and the participating lenders. LendingTree also is responsible for compliance with all regulations applicable to the mortgage service and products, including the maintenance of requisite broker licenses, registration, approvals and exemptions. The initial term of the agreement began on August 1, 1998, expires one year from the commencement of the priceline.com mortgage service and renews automatically thereafter. The agreement may be terminated by either party after the initial term expires, or immediately in the event that the other party materially breaches the agreement or becomes subject to a bankruptcy proceeding. Priceline.com is exploring the possibility of entering into a joint venture with a subsidiary of a federally chartered thrift institution that would offer to provide mortgage loans through the priceline.com service. Priceline.com currently expects that such joint venture would participate in the priceline.com service along with other mortgage lenders in the LendingTree network. HOTEL ALLIANCES In connection with priceline.com's hotel service, priceline.com has entered into letter agreements with 39 hotel groups, which cover numerous brands and include several of the leading national hotel chains. The agreements generally provide for the hotels to supply priceline.com with competitive net rates for hotel properties included in the priceline.com service. Hotels must be of 2-star quality or higher, with priceline.com to make the final quality determination. These letter agreements do not require the hotels to provide any minimum level of inventory. In most cases, the agreements are cancellable by either party at any time. AUTOMOTIVE ALLIANCE Priceline.com has entered into a co-marketing agreement with AutoNation, Inc., a leading national automotive retailer. Under the terms of the co-marketing agreement, consumer offers for automobiles submitted through the priceline.com service will be offered to AutoNation dealers first. If no AutoNation dealers accept a customer's offer, such offer will be submitted to other dealers in the market. The service is being offered initially in the Tampa and St. Petersburg, Florida markets, with plans to expand to additional markets nationwide. ADAPTIVE MARKETING ALLIANCES During 1998 and the first quarter of 1999, our adaptive marketing revenues were derived primarily from fees paid by Capital One Bank for qualifying credit card applications submitted over the priceline.com service in connection with customer offers for airline tickets. Effective May 1, 1999, our relationship with Capital One ended. Since that time, our credit card adaptive marketing program revenues have been attributable to our adaptive marketing relationship with First USA Bank, a leading national credit card issuer. Under the First USA adaptive marketing program, priceline.com enables its customers to increase the amount of their offers by a specified amount by applying online for a First USA credit card and offers other promotions linked to the First USA customer acquisition program. The fee structure of the First USA program is based on different factors than the factors that were applicable under the Capital One program. Under the First USA program, priceline.com earns fees (1) upon the opening of credit card accounts originated through the priceline.com service, up to a specified maximum amount of five million accounts, subject to reduction under certain circumstances by First USA; (2) upon the activation of credit card accounts acquired for First USA through the priceline.com service and based upon the use of such accounts; and (3) for transfers of balances from other credit cards to First USA credit cards through the priceline.com service. The First USA agreement has a term of five years, subject to certain earlier termination and repricing rights of First USA. For example, subject to priceline.com's rights of renegotiation, First USA has the right to terminate the agreement after one year (and earlier under certain circumstances) if its financial returns under the adaptive marketing program are not at least equivalent to certain agreed upon levels. In 60 addition, a portion of the fees earned under the First USA program is required to be reinvested in program incentives. The full financial statement impact of the shift from the Capital One adaptive marketing program to the First USA adaptive marketing program will not be known until completion of future periods. Priceline.com also has an adaptive marketing agreement with E*TRADE, under which E*TRADE compensates priceline.com for offering priceline.com customers the opportunity to open an account with E*TRADE while visiting or making an offer on the priceline.com Web site. While the program originally related to priceline.com's initial public offering, it now applies to offers by customers for products and services over the priceline.com service. The E*TRADE adaptive marketing program is currently operated under an oral agreement. Priceline.com recently has entered into adaptive marketing agreements with Sprint Communications Company L.P., Discover Financial Services, Inc. and Earthlink Network, Inc. The Sprint agreement is a short-term agreement under which priceline.com, during a twelve-week test program, will earn fees from Sprint in connection with customers agreeing to switch their long distance telephone service to Sprint. Priceline.com and Sprint are currently in the process of defining the program and the launch date has not yet been determined. We are also evaluating similar programs with other long distance carriers. Under the Discover adaptive marketing program, selected customers will be able to increase the amount of their offers by a specified amount by applying online for a Discover credit card through the priceline.com service. Priceline.com will receive a fee from Discover Financial Services for each qualifying credit card application submitted through the priceline.com service. Priceline.com will also receive a fee for any qualifying upgrade of an established Discover credit card account submitted through the priceline.com service. The Discover adaptive marketing program is expected to be implemented during the third quarter of 1999 and will be offered to selected customers who have already participated, or who have declined participation, in the First USA adaptive marketing program. Under priceline.com's adaptive marketing program with EarthLink Network, Inc., an internet service provider, priceline.com will earn fees when its customers open accounts with EarthLink and upon such accounts being open for a specified period of time. No specific date has been set for the launch of the EarthLink program. COMPETITION Priceline.com competes with both online and traditional sellers of the products and services offered on priceline.com. The market for selling products and services over the Internet is new, rapidly evolving and intensely competitive. Current and new competitors can launch new sites at a relatively low cost. In addition, the traditional retail industry for the products and services priceline.com offers is intensely competitive. Priceline.com currently or potentially competes with a variety of companies with respect to each product or service it offers. With respect to travel products, these competitors include: - Internet travel agents such as Travelocity, Preview Travel and Microsoft's Expedia; - traditional travel agencies; - consolidators and wholesalers of airline tickets and other travel products, including online consolidators such as Cheaptickets.com; - individual airlines, hotels, rental car companies, cruise operators and other travel service providers; and - operators of travel industry reservation databases such as Worldspan and Sabre. Priceline.com's current or potential competitors with respect to new automobiles include traditional and online auto dealers, including newly developing auto super stores such as AutoNation, Auto-by-Tel and Microsoft's CarPoint. With respect to financial service products, priceline.com's competitors include: - banks and other financial institutions; 61 - online and traditional mortgage and insurance brokers, including mortgage.com, Quicken Mortgage, E-Loan and iOwn, Inc.; and - insurance companies. While priceline.com faces competition from all of these current or potential competitors, its business and financial position would be particularly at risk if the airlines chose to establish their own buyer-driven commerce system to sell excess inventory. Priceline.com potentially faces competition from a number of large Internet companies and services that have expertise in developing online commerce and in facilitating Internet traffic, including Amazon.com, America Online, Microsoft and Yahoo!, who could choose to compete with priceline.com either directly or indirectly through affiliations with other e-commerce companies. Other large companies with strong brand recognition, technical expertise and experience in Internet commerce could also seek to compete with priceline.com. Competition from these and other sources could have a material adverse effect on priceline.com's business, results of operations and financial condition. Priceline.com believes that the principal competitive factors in its markets are brand recognition, price, Web site accessibility, ability to fulfill offers, customer service, reliability of delivery, ease of use, and technical expertise and capabilities. Many of priceline.com's 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 priceline.com. Some of these competitors may be able to secure products and services on more favorable terms than priceline.com. In addition, many of these competitors may be able to devote significantly greater resources to: - marketing and promotional campaigns; - attracting traffic to their Web sites; - attracting and retaining key employees; and - Web site and systems development. Increased competition could result in reduced operating margins and loss of market share and could damage priceline.com's brand. There can be no assurance that priceline.com will be able to compete successfully against current and future competitors or that competition will not have a material adverse effect on priceline.com's business, results of operations and financial condition. OPERATIONS AND TECHNOLOGY Priceline.com's business is supported by a state of the art systems platform, which was designed with an emphasis on scalability, performance and reliability. Priceline.com's core demand collection and offer processing systems are proprietary to priceline.com. The software platform and architecture are built on server-side Java, C++, and ISO standard SQL scripts integrated with an Oracle relational database system. This internal platform was designed to include open application protocol interfaces that can provide real-time connectivity to vendors in the range of industries in which the priceline.com operates. These include large global inventory systems, such as airline and hotel room reservation systems, for example, the Worldspan central reservation systems; and financial service providers; as well as individual inventory suppliers, such as auto dealers, individual hotels and hard goods merchants. Priceline.com's Internet servers utilize Verisign digital certificates to help it conduct secure communications and transactions. Priceline.com out-sources most of its call center and customer service functions, and uses a real-time interactive voice response system with transfer capabilities to its call centers and customer service centers in Stamford, Connecticut; Columbus, Ohio; and Charlotte, North Carolina. Priceline.com's systems infrastructure, Web and database servers are hosted at Exodus Communications, Inc. in Jersey City, New Jersey, which provides communication lines from multiple providers including UUNet and AT&T, as well as 24-hour monitoring and engineering support. Exodus has its own 62 generator and multiple back-up systems in Jersey City. Priceline.com also maintains an uninterruptible power supply system and generator and redundant servers at its Stamford, Connecticut headquarters to provide service capability if the Exodus site fails. Priceline.com also offers phone service through its toll-free number, 1-800-Priceline, which allows consumers who do not have access to a computer to phone in their orders. In addition, consumers who choose not to transmit their credit card information via the Internet have the option of submitting their credit card information through the phone service. Priceline.com also uses its toll-free number to provide customer service. Because priceline.com is an Internet business, it intends to phase out its telephone ordering and credit card submission services over time and, in the future, will use its toll-free number only to provide customer service. INTELLECTUAL PROPERTY Priceline.com holds a business process patent issued by the United States Patent and Trademark Office which is directed to a unique buyer-driven commerce system. While so-called business process patents are only now becoming widely understood by the general business community, a decision by the Court of Appeals for the Federal Circuit (the highest United States appellate court for patent-related appeals below the United States Supreme Court), recently affirmed the validity of patents covering software-implemented business processes. STATE STREET BANK & TRUST CO. V. SIGNATURE FINANCIAL GROUP, INC. (July 1998). Priceline.com currently holds three issued United States patents, No. 5,794,207, No. 5,797,127 and No. 5,897,260, as well as 25 pending United States patent applications and four pending international patent application. Priceline.com is in the process of filing at least three more patent applications, with an ongoing program for identifying and protecting new inventions. Priceline.com's core business method patent is directed to a unique buyer-driven commerce system using a computer to collect credit card-backed or other financial account-backed conditional purchase offers to present to multiple sellers, receive one or more acceptances or fulfillments of these offers, and use the credit card or other financial account to provide a payment to one or more of the sellers. The pending patent applications are directed to various operational features of the system, as well as to product-specific enhancements. While priceline.com believes that its core buyer-driven commerce patent, together with its pending patent applications, help to protect the priceline.com business, there can be no assurance that (1) the core buyer-driven patent or any other patent can be successfully defended against challenges by third parties; (2) the pending patent applications will result in the issuance of patents; (3) competitors or potential competitors of priceline.com will not devise new methods of competing with the company that are not covered by priceline.com's patent or patent applications; (4) because of variations in the application of our business model to each of our products and services, our core buyer-driven commerce patent may not 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; (5) new prior art will not be discovered which may diminish the value of or invalidate an issued patent; or (6) a third party will not have or obtain one or more patents that prevent priceline.com from practicing features of its business or will require priceline.com to pay for a license to use those features. Priceline.com has been notified that a third party patent applicant has challenged its core patent through an interference action in the United States Patent and Trademark Office. See "--Legal Proceedings." In addition, priceline.com has learned of several Internet travel services that appears to use customer-offer based transaction models. Walker Digital currently owns the assets and intellectual property related to two new areas of e-commerce into which priceline.com may expand its "name your price" business model, one involving consumer-to-consumer sales and the other involving the sale of retail merchandise. Priceline.com may license its brand name and "name your price" business model to two new companies formed to develop these businesses. Walker Digital may contribute assets and intellectual property to these companies in return for an equity interest in these companies. 63 Walker Digital owns the intellectual property rights underlying the technology associated with priceline.com's adaptive marketing programs. Walker Digital has licensed to priceline.com the right to use these intellectual property rights under a perpetual, non-exclusive, royalty-free license agreement. Walker Digital has several pending United States patent applications directed to different aspects of the processes and technology supporting adaptive marketing programs. Priceline.com seeks to protect its copyrights, service marks, trademarks, trade dress and trade secrets through a combination of laws and contractual restrictions, such as confidentiality agreements. For example, priceline.com attempts to register its trademarks and service marks in the United States and internationally. However, effective trademark, service mark, copyright and trade secret protection may not be available in every country in which priceline.com's services are made available online. See "Risk Factors--Our Success Depends on Our Ability to Protect Our Intellectual Property." A third party has sued priceline.com for, among other things, misappropriation of trade secrets. See "Legal Proceedings." Priceline.com currently owns the Internet domain name "priceline.com." Domain names generally are regulated by Internet regulatory bodies. The relationship between regulations governing domain names and laws protecting trademarks and similar proprietary rights is unclear. Priceline.com, therefore, could be unable to prevent third parties from acquiring domain names that infringe or otherwise decrease the value of its trademarks and other proprietary rights. See "Risk Factors--Our Success Depends on Our Ability to Protect Our Intellectual Property." GOVERNMENTAL REGULATION The products and services offered through the priceline.com service are regulated by federal and state governments. TRAVEL SERVICES Priceline.com is subject to the laws and regulations of a number of states governing the offer and/or sale of travel services. For example, priceline.com is registered as a "seller of travel" under the California Seller of Travel Act and is a member of the Airlines Reporting Corporation. In addition, a number of state travel laws and regulations require compliance with specific disclosure, bond and/or other requirements. NEW CAR SALES A number of states have laws and regulations governing the registration and conduct of automobile dealers and brokers. Such laws generally provide that any person receiving direct or indirect compensation for selling automobiles or brokering automobile transactions must register as an automobile broker or dealer. Registration for automobile dealers/brokers may, among other things, require the registrant to maintain a physical office in the applicable state, a dealer lot zoned for automobile sales within the applicable state and/or a franchise agreement with the manufacturers of the automobiles to be sold. With the planned expansion of its new automobile service from the New York metropolitan area to all 48 contiguous states, priceline.com will attempt to register as an automobile broker/dealer in the jurisdictions where registration is required provided that it can reasonably comply with the requirements for registration imposed by each jurisdiction. However, priceline.com may not be able to register in all states. For example, priceline.com will not be able to register in a jurisdiction that requires a dealer zoned lot or a franchise agreement with manufacturers of the automobiles to be sold. Priceline.com will work with the regulators of the various jurisdictions to obtain waivers of such requirements, but it may not be successful in its efforts. In jurisdictions where priceline.com cannot obtain registration, it is possible that state regulatory bodies could take a strict enforcement position and priceline.com may be unable to continue to make its new automobile services available in those jurisdictions. 64 HOME FINANCING SERVICES Most states have laws and regulations governing the registration or licensing and conduct of persons providing mortgage brokerage services. Such laws and regulations also typically require certain consumer protection disclosures, loan solicitation procedures and a variety of other practices throughout the various stages of the mortgage solicitation, application and approval process. In addition to state law, mortgage brokerage services are heavily regulated by federal law. For example, the Real Estate Settlement Procedures Act prohibits the payment and receipt of mortgage loan referral fees. The act, however, does permit persons to be compensated for the fair market value of non-referral services actually rendered. Priceline.com introduced its home financing service in January 1999. LendingTree serves as the back-end processing system, which presents offers received through the priceline.com service to multiple mortgage lending institutions for consideration, for all of priceline.com's home financing services, Priceline.com provides and is responsible for maintaining the home financing service on its Web site and develops and purchases all advertising. LendingTree compensates priceline.com for the fair market value of its non-referral services. Priceline.com believes that offering the priceline.com home mortgage service does not require our registration under or compliance with the mortgage or similar brokerage laws of any jurisdiction. However, it is possible that one or more regulatory authorities could seek to enforce existing laws, or otherwise enact new legislation, requiring priceline.com's registration and compliance and could scrutinize the compensation arrangement between LendingTree and priceline.com under Real Estate Settlement Procedures Act or other federal or state laws. Such action could severely interfere with the conduct of the priceline.com business. LendingTree provides the back-end processing system, which presents offers we receive to multiple mortgage lending institutions for consideration, for the home financing service on priceline.com's Web site and is responsible for maintaining the necessary and appropriate state registrations and licenses associated with LendingTree's mortgage brokerage services. If a federal or state regulatory authority, or an aggrieved customer, should in the future claim that LendingTree has failed to comply fully with applicable federal or state law requirements pertaining to LendingTree's provision of mortgage brokerage services, the priceline.com home mortgage service could be materially and adversely affected and priceline.com may be unable to continue to make its home mortgage services Web site available, either to residents of affected state(s) or on a national basis. Priceline.com is exploring the possibility of acquiring a minority interest in, and licensing the priceline.com name and business model to, a newly formed subsidiary of a federally chartered savings and loan association. This entity may be known as "priceline.mortgage.com" and also may serve as an entity that could accept mortgage applications or mortgage qualification loans. CONSUMER PROTECTION AND RELATED LAWS All of priceline.com's services are subject to federal and state consumer protection laws and regulations prohibiting unfair and deceptive trade practices. Priceline.com also is subject to related "plain language" statutes in place in many jurisdictions, which require the use of simple, easy to read, terms and conditions in contracts with consumers. Although there are very few laws and regulations directly applicable to the protection of consumers in an online environment, it is possible that legislation will be enacted in this area and could cover such topics as permissible online content and user privacy, including the collection, use, retention and transmission of personal information provided by an online user. Furthermore, the growth and demand for online commerce could result in more stringent consumer protection laws that impose additional compliance burdens on online companies. Such consumer protection laws could result in substantial compliance costs and interfere with the conduct and growth of the priceline.com business. 65 BUSINESS QUALIFICATION LAWS Because priceline.com's service is available over the Internet in multiple states, and because it sells to numerous consumers resident in such states, such jurisdictions may claim that priceline.com is required to qualify to do business as a foreign corporation in each such state. Priceline.com is qualified to do business in a limited number of states, and failure by priceline.com to qualify as a foreign corporation in a jurisdiction where it is required to do so could subject priceline.com to taxes and penalties for the failure to so qualify and limit its ability to conduct litigation in such states. INTERNATIONAL EXPANSION Priceline.com intends to explore opportunities for expanding the priceline.com business into international markets. It is possible, however, that the priceline.com demand collection system will not be readily adaptable to regulatory environments of certain foreign jurisdictions. In addition, there are various other risks associated with international expansion. They include language barriers, unexpected changes in regulatory requirements, trade barriers, problems in staffing and operating foreign operations, changes in currency exchange rates, difficulties in enforcing contracts and other legal rights, economic and political instability and problems in collection. LEGAL PROCEEDINGS On January 6, 1999, priceline.com received notice that a third party patent applicant and patent attorney, Thomas G. Woolston, purportedly had filed in December 1998 with the United States Patent and Trademark Office a request to declare an "interference" between a patent application filed by Woolston describing an electronic market for used and collectible goods and priceline.com's core buyer-driven commerce patent. Priceline.com has received a copy of a Petition for Interference from Woolston, the named inventor in at least three United States Patent applications titled "Consignment Nodes," one of which has issued as a patent (U.S. Patent Number: 5,845,265). Priceline.com recently received a notice from the United States Patent and Trademark Office that an undisclosed patent applicant, believed by priceline.com to be Woolston, is seeking to provoke an interference on priceline.com's core buyer-driven commerce patent. Priceline.com currently is awaiting information from the Patent Office regarding whether it will initiate an interference proceeding concerning Woolston's patent application and priceline.com's core buyer-driven commerce patent. An interference is an administrative proceeding instituted in the Patent Office to determine questions of patentability and priority of invention between two or more parties claiming the same patentable invention. There is no statutory period within which the Patent Office must act on an interference request. If an interference is declared and proceeds through a final hearing in the Patent Office, a final judgment is made by the Patent Office as to inventorship. Following such final judgment, appeals could be made in Federal court. While there can be no certainty as to time periods, interference proceedings typically take years to resolve. As a threshold to the initiation of an interference proceeding, Woolston must show that his patent application supports claims that he copied from the priceline.com core buyer-driven commerce patent. In order to make this showing, he would have to prove, among other things, that he invented the subject matter of the priceline.com claims before the inventors of the priceline.com patent. If the Patent Office were to find that Woolston's patent application supported the copied priceline.com claims, it would resolve the interference by awarding inventorship to the party with the earliest proven date of invention. Woolston announced in February 1999 an agreement to license his issued patent and pending patent applications to the owner of a competing Internet travel service. While the interference process is still at an early stage, priceline.com believes that it has meritorious defenses to Woolston's claim, which it intends to pursue vigorously. Among other things, priceline.com believes that the Woolston patent application does not disclose the inventions covered by the priceline.com patent claims. However, it is impossible to predict the outcome of an interference with certainty. While 66 Woolston claims to have an earlier invention date by a period of approximately sixteen months, the final decision as to priority of invention would be made by the Patent Office after considering facts provided by each party during the interference proceeding. If an interference is declared and thereafter resolved in favor of Woolston, such resolution could result in an award of some or all of the disputed patent claims to Woolston. If, following such award, Woolston were successful in a patent infringement action against priceline.com, including prevailing over all defenses available to priceline.com, such as those of non-infringement and invalidity, this could require priceline.com to obtain licenses from Woolston and pay damages from the date such patent issued at a cost which could significantly adversely affect priceline.com's business. If Woolston prevailed in both an interference and an infringement action, then priceline.com could be enjoined from conducting business through the priceline.com service to the extent covered by the patent claims awarded to Woolston. In addition, defense of the interference action may be expensive and may divert management attention away from priceline.com's business. On January 19, 1999, a lawsuit was filed in the United States District Court for the Northern District of California by Marketel International, Inc., a California corporation, under the caption MARKETEL INTERNATIONAL INC. V. PRICELINE.COM ET. AL.,No. C-99-1061 (N.D. CA 1999), against priceline.com, Priceline Travel, Walker Asset Management, Walker Digital, Mr. Jay S. Walker, priceline.com's Founder and Vice Chairman, and Mr. Andre Jaeckle, an individual who made a $1.0 million loan to priceline.com bearing interest at a rate of 6% per year and, in connection with the loan, received warrants, which have subsequently been fully exercised, to purchase 62,500 shares of our common stock. On February 22, 1999, Marketel filed an amended complaint, and March 17, 1999, Marketel filed a second amended complaint. The second amended complaint includes as defendants, Mr. Timothy G. Brier, our Executive Vice President, Travel, Mr. Bruce Schneier, and an individual and consultant to Walker Digital, and Mr. James Jorasch, an individual and employee of Walker Digital, and alleges causes of action for, among other things, misappropriation of trade secrets, breach of contract, conversion, breach of confidential relationship, copyright infringement, fraud, unfair competition, and false advertising, and seeks injunctive relief and damages in an unspecified amount. In its second amended complaint, Marketel alleges, among other things, that the defendants conspired to misappropriate Marketel's business model, which it describes as a buyer-driven electronic marketplace for travel services and its appurtenant techniques, market research, forms, plans and processes, and which an executive of Marketel allegedly provided to Messrs. Walker and Jaeckle in confidence approximately ten years ago. The second amended complaint also alleges that three former Marketel employees are the actual sole inventors or co-inventors of U.S. patent No. 5794207, which was issued on August 11, 1998 with Jay S. Walker, Bruce Schneier and James Jorasch listed as the inventors and which patent has been assigned to priceline.com. Marketel asks that the patent's inventorship be corrected accordingly. Based upon publicly available information, priceline.com believes that Marketel's fax and fee-based business was launched in 1991 and ceased operations seven months later. Priceline.com's Internet-based model was independently developed by Walker Digital and priceline.com, and practiced by priceline.com starting in 1998. Based on publicly available information and Marketel's second amended complaint, priceline.com understands that Marketel operated a fax-based travel information service which offered consumers, travel agents and/or consolidators the opportunity to purchase specially printed forms. These forms, when accompanied by an additional non-refundable fee, allowed prospective ticket buyers to fax to Marketel credit-card guaranteed bids for airline travel at a bid price specified by the buyer. Priceline.com believes that Marketel has not engaged in any regular commercial activities since ceasing operations in 1992. Based upon publicly available information, Marketel reactivated its status as a corporation by satisfying its back-due tax obligations to the State of California shortly after the filing of its complaint. On February 5, 1999, February 10, 1999 and March 31, 1999, the defendants filed their answer, amended answer and answer to second amended complaint, respectively, in which they denied the material allegations of liability in the complaints. Priceline.com and all other defendants strongly dispute the material legal and factual allegations contained in Marketel's second amended complaint and believe that 67 the second amended complaint is without merit. Priceline.com intends to defend vigorously against the action. Since May 28, 1999, there has been a discovery stay in effect, which was caused by the withdrawal of Marketel's counsel. Marketel has retained new counsel, and priceline.com now anticipates moving forward with discovery. Defending the lawsuit may involve significant expense and, due to the inherent uncertainties of litigation, there can be no certainty as to the ultimate outcome. Pursuant to the terms of the indemnification obligations contained in the Purchase and Intercompany Agreement with Walker Digital, Walker Digital has agreed to indemnify priceline.com for damages, liability and legal expenses incurred in connection with the Marketel litigation. From time to time priceline.com 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 the company. Such claims, even if not meritorious, could result in the expenditure of significant financial and managerial resources. EMPLOYEES Currently, priceline.com has 266 full-time employees. In addition, through an Intercompany Agreement with Walker Digital Corporation, priceline.com receives a variety of services, including research and development, patent and other intellectual property services and technical support. Priceline.com also employs independent contractors to support its customer service and system support functions. See "Certain Transactions." Priceline.com has never had a work stoppage and its employees are not represented by any collective bargaining unit. It considers its relations with its employees to be good. Priceline.com's future success will depend, in part, on its ability to continue to attract, integrate, retain and motivate highly qualified technical and managerial personnel, for whom competition is intense. FACILITIES Priceline.com's executive, administrative and operating offices are located in approximately 40,000 square feet of leased office space located in Stamford, Connecticut. Priceline.com is subleasing this office space from Walker Digital on a month-to-month basis. Priceline.com also has guaranteed Walker Digital's obligations under a lease of office space in New York City that is used by both companies. Priceline.com anticipates that it will require additional space within the next 12 months to accommodate its anticipated growth and that suitable office space will be available on commercially reasonable terms. Priceline.com currently is negotiating a lease of new premises in Connecticut. The premises are substantially larger than priceline.com's current premises and, if a lease is signed, priceline.com's rental expense is likely to increase significantly. 68 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS Set forth below is certain information regarding the directors and executive officers of priceline.com as of the date hereof. Service with priceline.com prior to July 1998 was rendered to priceline.com's predecessor, priceline.com LLC.
NAME AGE POSITION - ------------------------------------------------ --- ------------------------------------------------ Richard S. Braddock............................. 57 Chairman and Chief Executive Officer Jay S. Walker................................... 43 Founder and Vice Chairman Daniel H. Schulman.............................. 41 President and Chief Operating Officer and Director Paul E. Francis................................. 44 Chief Financial Officer Ronald V. Rose.................................. 48 Chief Information Officer Timothy G. Brier................................ 51 Executive Vice President, Travel Melissa M. Taub................................. 36 Senior Vice President, General Counsel and Secretary Thomas P. D'Angelo.............................. 39 Vice President, Finance and Controller Paul A. Allaire................................. 60 Director Ralph M. Bahna(a)............................... 56 Director Paul J. Blackney(b)............................. 52 Director William E. Ford(b).............................. 38 Director Marshall Loeb(a)................................ 70 Director N.J. Nicholas, Jr.(a)........................... 59 Director Nancy B. Peretsman(b)........................... 45 Director
- ------------------------ (a) Member of the Compensation Committee. (b) Member of the Audit Committee. RICHARD S. BRADDOCK has served as Chairman of the board of directors and Chief Executive Officer of priceline.com since August 1998. From December 1997 to January 1999, he served as the non-executive Chairman of True North Communications, Inc., an advertising company, and Ion Laser Technology, a laser technology company. From September 1996 to August 1997, he served as a special advisor to General Atlantic Partners, LLC, a private equity fund. Mr. Braddock was a principal of Clayton, Dubilier & Rice, a private equity fund, from June 1994 through September 1995. He also served as Chief Executive Officer of Medco Containment Services during 1993. From 1973 to 1993, Mr. Braddock held a variety of positions at Citicorp and its principal subsidiary, Citibank, N.A., including President and Chief Operating Officer. Mr. Braddock also serves as a director of NewSub Services, Inc.; Amtec, Inc, a semiconductor equipment manufacturer; Eastman Kodak Company, an imaging products company; E*TRADE Group, Inc., a provider of online investing services; and Cadbury Schweppes plc, a global beverage and confectionery manufacturer. JAY S. WALKER is priceline.com's Founder and has served as Vice Chairman of the board of directors of priceline.com since August 1998. From inception through August 1998, he served as Chairman of the board of directors and Chief Executive Officer of priceline.com. Mr. Walker is an entrepreneur and has been actively engaged in the start-up of new enterprises for more than 15 years. Mr. Walker serves as Chairman of the board of directors of Walker Digital Corporation, which he founded in September 1994. In addition, he is the co-founder and non-executive Chairman of NewSub Services, Inc., a direct marketing firm he co-founded in 1992. DANIEL H. SCHULMAN has been the President and Chief Operating Officer of priceline.com since July 1, 1999. He has served as a director of priceline.com since July 15, 1999. From December 1998 to July 1999, 69 Mr. Schulman was President of the AT&T Consumer Markets Division of AT&T Corp., a telecommunications services company, and was appointed to the AT&T Operations Group, the company's most senior executive body. From March 1997 to November 1998, Mr. Schulman was President of AT&T WorldNet(SM) Service. From December 1995 to February 1997, he was Vice President, Business Services Marketing of the AT&T Business Markets Division and from May 1994 to November 1995, Mr. Schulman was Small Business Marketing Vice President of the AT&T Business Markets Division. Mr. Schulman also serves as director of iVillage, an Internet company focused on building an online community of women; the Global Internet Project, an international group committed to the worldwide growth of the Internet; INROADS, an organization providing opportunities for minorities in Fortune 500 companies; and Teach for America, an organization focused on selecting teachers for urban and inner city areas. PAUL E. FRANCIS has been the Chief Financial Officer of priceline.com since its inception. From June 1997 to December 1998, Mr. Francis also was Chief Financial Officer of Walker Digital. From April 1993 to February 1997, Mr. Francis was Executive Vice President--Finance and Administration, Chief Financial Officer and a member of the Board of Directors of Ann Taylor Stores Corporation, a specialty retailer of women's apparel. From 1986 to April 1993, Mr. Francis served in a variety of positions at Merrill Lynch & Co. and certain of its affiliates, including Managing Director in the Investment Banking Division. RONALD V. ROSE has been the Chief Information Officer of priceline.com since March 1999. From September 1995 to March 1999, Mr. Rose served in various capacities with Standard & Poor's, a financial services company, including Chief Technology Officer of Retail Markets. While at Standard & Poor's, Mr. Rose led the development of many Internet initiatives within the Financial Information Services area and chaired the Internet Architecture Council. In 1998, Mr. Rose assisted in creating Xpresso, a leading JAVA financial desktop computer, and from 1991 to 1995, Mr. Rose assisted Bedford Associates, Inc., a technology company, in creating two technology start-up business units focused on telecommunications and technology consulting. TIMOTHY G. BRIER has been an Executive Vice President, Travel of priceline.com since its inception, and the President of Priceline Travel since June 1998. In 1994, Mr. Brier co-founded CAP Systems, a division of NewSub Services, Inc., that provides affinity marketing programs to airlines, and served as its President from 1995 to 1998. From 1990 to 1995, he was Vice President of Marketing for Continental Airlines. From 1988 to 1990, Mr. Brier was Vice President of Marketing Planning for Pan American World Airways and from 1985 to 1988 was Vice President of Marketing for TWA. MELISSA M. TAUB has been Senior Vice President, General Counsel and Secretary of priceline.com since September 1998. Prior to joining priceline.com, Ms. Taub practiced law in the Business Clients Department of Cummings & Lockwood, a law firm with its principal office located in Stamford, Connecticut, serving as a partner from January 1998 to September 1998 and an associate from 1989 to December 1997. THOMAS P. D'ANGELO has been Vice President, Finance and Controller of priceline.com since October 1997. From April 1993 to October 1997, he was Chief Financial Officer of Direct Travel, Inc., a corporate travel agency. Mr. D'Angelo has spent the last 19 years in the travel industry holding various financial management positions with leading travel management companies. PAUL A. ALLAIRE has served as a director of priceline.com since February 1999. Since 1991, he has been the Chairman of the Board of Directors and the Chairman of the Executive Committee of Xerox Corporation, a company offering document processing services and products, and from 1990 to May 1999, he was the Chief Executive Officer of Xerox. Mr. Allaire also serves as a director of various affiliates of Xerox. Mr. Allaire also serves as a director of J.P. Morgan & Co., Inc., a global financial services company; Lucent Technologies Inc., a global communications systems and software company; Sara Lee Corporation, a global consumer packaged goods company; and SmithKline Beecham p.l.c., a healthcare company. 70 Mr. Allaire is a member of the Business Council and is a member of the board of directors of the Council on Foreign Relations, the Ford Foundation, and the Council on Competitiveness. RALPH M. BAHNA has served as a director of priceline.com since July 1998. Since 1992, Mr. Bahna has been the President of Masterworks Development Corp., a company he founded to develop a chain of hotels named Club Quarters-TM-. From 1980 to 1989, Mr. Bahna served as the Chief Executive Officer of Cunard Lines, Ltd., and the Cunard Group of Companies. PAUL J. BLACKNEY has served as a director of priceline.com since July 1998. Mr. Blackney serves as Senior Vice President of Publishing and Federal Business Services for The American Medical Association. Since January 1998, he has been the Chairman of XTRA On-Line Corporation, a business to business desktop booking system. Since September 1993, he has been the Chairman and President of Galileo Japan. From September 1993 to September 1997, Mr. Blackney served as President and Chief Executive Officer of Apollo Travel Services Partnership, an airline central reservation system, and from March 1990 to September 1993, he served as Senior Vice President of Operations at Covia, an airline central reservation system. WILLIAM E. FORD has served as a director of priceline.com since July 31, 1998. He is a Managing Member of General Atlantic Partners, LLC, a private equity firm that invests globally in software services and related information technology companies, where he has served since 1991. Mr. Ford also serves as a director of GT Interactive Software Corp., an interactive entertainment software company; Quintiles Transnational Corp., a provider of full-service contract research, sales, marketing and healthcare policy consulting and health information management services to pharmaceutical, biotechnology, medical device and healthcare industries; LHS Group Inc., a billing solutions company; E*TRADE Group, Inc., an online discount broker; Eclipsys Corporation, a provider of clinical, financial and administrative software solutions to the healthcare industry; and several private information technology companies. He also serves as a director of NewSub Services, Inc. MARSHALL LOEB has served as a director of priceline.com since July 1998. He is the Editor of the COLUMBIA JOURNALISM REVIEW and the author of MARSHALL LOEB'S LIFETIME FINANCIAL STRATEGIES. Mr. Loeb also is the broadcast commentator for the CBS Radio Network "Your Dollars" program. Mr. Loeb is a member of the Board of Overseers for the Stern School of Business at New York University and is the Chairman of the Advisory Board of the Bagehot Fellows Program at Columbia University. From 1994 to 1996, he was a columnist for FORTUNE and from 1986 to 1994, he served as the Managing Editor of FORTUNE magazine. From 1980 to 1984, he also was Managing Editor of MONEY magazine. Mr. Loeb also has served as the Business Editor, Nation Editor and Economics Editor of TIME magazine. N. J. NICHOLAS, JR. has served as a director of priceline.com since July 1998. Mr. Nicholas is a private investor and from 1990 to 1992 was the co-Chief Executive Officer of Time Warner Inc. From 1986 to 1990, he was President of Time Inc. Mr. Nicholas also is a director of BT Capital Partners, an affiliate of Bankers Trust; Boston Scientific Corporation, a developer, manufacturer and marketer of medical devices; and Xerox Corporation, a document processing company. He also serves on the boards of several privately owned companies, including NewSub Services, Inc., and is Chairman of the Advisory Board of the Columbia University Graduate School of Journalism. NANCY B. PERETSMAN has served as a director of priceline.com since February 1999. Since June 1995, she has been a Managing Director and Executive Vice President of Allen & Company Incorporated, an investment bank. Prior to joining Allen & Company Incorporated, Ms. Peretsman had been an investment banker since 1983 at Salomon Brothers Inc, where she was a Managing Director since 1990. She served for fourteen years on the Board of Trustees of Princeton University and is currently an Emerita Trustee. Ms. Peretsman also is Vice Chairman of the board of The New School and serves on the board of Oxygen Media, an Internet and cable television enterprise. Ms. Peretsman also serves on the board of NewSub Services, Inc. 71 BOARD COMMITTEES Priceline.com's board of directors has an Audit Committee and a Compensation Committee. The Audit Committee of the board consists of Messrs. Paul J. Blackney, William E. Ford and Ms. Nancy B. Peretsman. The Audit Committee reviews priceline.com's financial statements and accounting practices, makes recommendations to the board regarding the selection of independent auditors and reviews the results and scope of the audit and other services provided by priceline.com's independent auditors. Mr. Ford is Chairman of the Audit Committee. The Compensation Committee of the board consists of Messrs. Paul A. Allaire, Ralph M. Bahna and N.J. Nicholas, Jr. The Compensation Committee makes recommendations to the board concerning salaries and incentive compensation for priceline.com's officers and employees and administers priceline.com's employee benefit plans. Mr. Nicholas is Chairman of the Compensation Committee. DIRECTOR COMPENSATION Directors who are also employees of priceline.com receive no compensation for serving on the board of directors. With respect to directors who are not employees of priceline.com, priceline.com reimburses such non-employee directors for all travel and other expenses incurred in connection with attending board of directors and committee meetings. Non-employee directors are also eligible to receive stock option grants under the 1997 Omnibus Plan. Pursuant to such plan, Messrs. Bahna, Blackney, Ford, Loeb and Nicholas and Ms. Peretsman received grants of 31,250 options each in December 1998 and Mr. Allaire received a grant of 37,500 options in December 1998. Such options have vested and are exercisable at any time at an exercise price of $3.20 per share, subject to certain restrictions described under "Shares Eligible for Future Sale." COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION None of the members of the Compensation Committee of the board of directors is an officer or employee of priceline.com. No executive officer of priceline.com serves as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving on priceline.com's Compensation Committee. SUMMARY OF COMPENSATION The following table sets forth information concerning compensation earned in the fiscal year ended December 31, 1998, by priceline.com's Chief Executive Officer and its other four most highly compensated executive officers. 72 SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION ------------- NUMBER OF ANNUAL COMPENSATION SECURITIES ----------------------------------- UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) OPTIONS (#) COMPENSATION ($) - -------------------------------------------------- --------- ----------- ----------- ------------- ------------------- Richard S. Braddock(a)............................ 1998 112,500 -- 6,250,000 --(b) Chairman and Chief Executive Officer Jay S. Walker(c).................................. 1998 250,000 -- 1,515,000 -- Vice Chairman and Founder Jesse M. Fink(d).................................. 1998 227,083 -- 2,443,750 1,028(e) Chief Operating Officer Paul E. Francis................................... 1998 225,000(f) -- 1,035,000 413(e) Chief Financial Officer Timothy G. Brier.................................. 1998 177,083 72,917 2,003,125 6,789(e) Executive Vice President, Travel
- ------------------------------ (a) Mr. Braddock commenced serving as Chairman and Chief Executive Officer in August 1998. (b) Excludes the grant to Mr. Braddock in July 1998 of a profits interest with respect to 6,500,000 units in priceline.com's predecessor, priceline.com LLC, which units were converted into 8,125,000 shares of common stock. (c) Mr. Walker served as Chairman and Chief Executive Officer of priceline.com LLC from its formation until its conversion into priceline.com in August 1998, and of priceline.com from its inception until August 1998. (d) Effective June 30, 1999, Mr. Fink resigned from his position as Chief Operating Officer of priceline.com. Mr. Fink is an employee of Walker Digital. (e) Represents life insurance premiums paid and, in the case of Mr. Fink, disability insurance premiums paid for the fiscal year. (f) Includes distributions as a member in priceline.com's predecessor, priceline.com LLC. STOCK OPTIONS The following table sets forth information concerning the grant of stock options to priceline.com's Chief Executive Officer and each of its other four most highly compensated executive officers during the fiscal year ended December 31, 1998. OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS (A) -------------------------------------------------------------------- NUMBER OF % OF TOTAL GRANT DATE SECURITIES OPTIONS GRANTED EXERCISE OR PRESENT UNDERLYING OPTIONS TO EMPLOYEES IN BASE PRICE EXPIRATION VALUE NAME GRANTED (#) FISCAL YEAR ($/SH) DATE ($) (B) - ------------------------------------- ------------------- ------------------- ------------- ----------- ----------- Richard S. Braddock.................. 6,250,000 30.6 0.80 6/1/2008 812,579 Jay S. Walker........................ 1,515,000 7.4 0.80 6/1/2008 196,969 Jesse M. Fink (c).................... 2,443,750 12.0 0.80 6/1/2008 317,718 Paul E. Francis...................... 1,035,000 5.1 0.80 6/1/2008 139,563 Timothy G. Brier..................... 2,003,125 9.8 0.80 6/1/2008 260,431
- ------------------------------ (a) Options become exercisable as follows: (1) with respect to Mr. Braddock: 6,250,000 shares have vested, but are not exercisable until September 26, 1999; (2) with respect to Mr. Walker: (a) 1,382,500 shares are vested, but are not exercisable until September 26, 1999, and (b) the remainder of the shares vest and become exercisable on June 1, 2000; (3) with respect to Mr. Fink: (a) 2,443,750 shares are vested, but are not exercisable until September 26, 1999; (4) with respect to Mr. Francis: (a) 750,000 shares are vested, but are not exercisable until September 26, 1999, and (b) the remainder of the shares vest and become exercisable on June 1, 2000; and (5) with respect to Mr. Brier: (a) 50,000 options have been exercised; (b) 1,512,500 shares are vested, but are not exercisable until September 26, 1999; and (c) the remainder of the shares vest and become exercisable on June 1, 2000. 73 (b) Based on Black-Scholes pricing model, using a discount rate of 6 percent, an expected life of 3 years, no dividends and no volatility. (c) Effective June 30, 1999, Mr. Fink resigned from his position as Chief Operating Officer of priceline.com. Mr. Fink is an employee of Walker Digital. EXERCISE OF OPTIONS AND YEAR-END VALUES The following table sets forth information concerning the exercise of stock options during the fiscal year ended December 31, 1998 by priceline.com's Chief Executive Officer and each of its other four most highly compensated executive officers and the fiscal year-end value of unexercised options. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
VALUE OF NUMBER OF SHARES UNEXERCISED UNDERLYING IN-THE-MONEY UNEXERCISED OPTIONS VALUE OPTIONS AT FY-END (#) AT FY-END ($) (A) SHARES ACQUIRED REALIZED EXERCISABLE/ EXERCISABLE/ NAMES ON EXERCISE (#) ($) UNEXERCISABLE UNEXERCISABLE - -------------------------------------- --------------- ----------- --------------------- ------------------- Richard S. Braddock................... -- -- 0/6,250,000 0/18,750,000 Jay S. Walker......................... -- -- 0/1,515,000 0/4,545,000 Jesse M. Fink (b)..................... -- -- 0/2,443,750 0/7,331,250 Paul E. Francis....................... -- -- 0/1,035,000 0/3,105,000 Timothy G. Brier...................... -- -- 0/2,003,125 0/6,009,375
- ------------------------------ (a) Assumes a fiscal year-end market price of $3.20 per share. (b) Effective June 30, 1999, Mr. Fink resigned from his position as Chief Operating Officer of priceline.com. Mr. Fink is an employee of Walker Digital. STOCK BASED PLANS Pursuant to the priceline.com Incorporated 1997 Omnibus Plan, priceline.com has granted awards of options to certain officers, other employees, consultants and directors of priceline.com. The maximum number of shares of common stock reserved for the grant or settlement of awards under the 1997 Omnibus Plan is 23,875,000, subject to adjustment as provided therein. Of such number, 22,752,886 options covering shares of common stock were outstanding under the 1997 Omnibus Plan as of August 10, 1999. In February 1999, priceline.com established the priceline.com Incorporated 1999 Omnibus Plan, pursuant to which awards will be made to certain officers, other employees, consultants and directors of priceline.com from time to time following the consummation of this offering. The maximum number of shares of common stock reserved for the grant or settlement of awards under the 1999 Omnibus Plan is 9,375,000, subject to adjustment. Of such number, options covering 3,829,505 shares of common stock were outstanding under the 1999 Omnibus Plan as of August 10, 1999. Set forth below is a description of the provisions of the 1999 Omnibus Plan and the provisions of the 1997 Omnibus Plan. The description is only a summary and is qualified in its entirety by the provisions of such plans. Terms not defined herein have the meanings given to such terms in the respective plans. PRICELINE.COM INCORPORATED 1997 OMNIBUS PLAN The 1997 Omnibus Plan was ratified and approved by the board of directors and stockholders of priceline.com and by the Board of Managers and the members of priceline.com LLC in 1997. The 1997 Omnibus Plan is intended to promote the long term financial interests and growth of priceline.com by providing employees, officers, directors and consultants of priceline.com with appropriate incentives and rewards to enter into and continue in the employ of, or their relationship with, the company and to acquire 74 a proprietary interest in the long-term success of the company; and to reward the performance of individual officers, other employees, consultants and directors in fulfilling their responsibilities for long-range achievements. GENERAL The 1997 Omnibus Plan provides for the granting of awards to such officers, other employees, consultants and directors of priceline.com and its affiliates as the compensation committee, which is the committee of the board appointed to administer the 1997 Omnibus Plan, may select from time to time. Awards under the 1997 Omnibus Plan may be made in the form of options to acquire priceline.com common stock. Some of the options granted under the 1997 Omnibus Plan may qualify as "incentive stock options;" as defined in the Internal Revenue Code of 1986, generally referred to as the "Code," and some of the options granted under the 1997 Omnibus Plan will not qualify as incentive stock options. Such options are generally referred to as "non-qualified stock options." Awards under the 1997 Omnibus Plan may also be made in the form of appreciation rights with respect to common stock, which appreciation rights may be granted in tandem with other awards or may be granted independent of other awards, or may be made in the form of restricted stock, phantom stock, stock bonuses or other awards. If any shares subject to an award are forfeited, cancelled, exchanged or surrendered or if an award otherwise terminates or expires without a distribution of shares to the holder of such award, the shares of common stock with respect to such award will, to the extent of any such forfeiture, cancellation, exchange, surrender, termination or expiration, again be available for awards under the 1997 Omnibus Plan. In the event that the compensation committee determines that any dividend or other distribution (whether in the form of cash, common stock, or other property), recapitalization, stock split, reverse split, reorganization, merger, consolidation, spin-off, combination, repurchase, or share exchange, or other similar corporate transaction or event, affects the common stock such that an adjustment is appropriate in order to prevent dilution or enlargement of the rights of holders of awards under the 1997 Omnibus Plan, then the compensation committee will make such equitable changes or adjustments as it deems necessary or appropriate to any or all of (1) the number and kind of shares of common stock or other property (including cash) that may thereafter be issued in connection with awards; (2) the number and kind of shares of common stock or other property (including cash) issued or issuable in respect of outstanding awards; (3) the exercise price, grant price, or purchase price relating to any award; and (4) the maximum number of shares of common stock subject to outstanding awards that may be awarded to any employee during any priceline.com tax year; provided that, with respect to incentive stock options, such adjustment shall be made in accordance with the applicable provisions of the Code. ADMINISTRATION The 1997 Omnibus Plan will be administered by the compensation committee. The compensation committee has the authority in its sole discretion, subject to and not inconsistent with the express provisions of the 1997 Omnibus Plan, to administer the 1997 Omnibus Plan and to exercise all the powers and authorities either specifically granted to it under, or necessary or advisable in the administration of, the 1997 Omnibus Plan, including, without limitation, the authority to grant awards; to determine the persons to whom and the time or times at which awards shall be granted; to determine the type and number of awards to be granted, the number of shares of common stock to which an award may relate and the terms, conditions, restrictions and performance goals relating to any award; to determine whether, to what extent, and under what circumstances an award may be settled, canceled, forfeited, exchanged, or surrendered; to make adjustments in the performance goals in recognition of unusual or non-recurring events affecting priceline.com or the financial statements of priceline.com, to the extent not inconsistent with Section 162(m) of the Code, if applicable, or in response to changes in applicable laws, regulations, or accounting principles; to construe and interpret the 1997 Omnibus Plan and any award; to prescribe, amend and rescind rules and regulations relating to the 1997 Omnibus Plan; to determine the terms and 75 provisions of agreements evidencing awards; and to make all other determinations deemed necessary or advisable for the administration of the 1997 Omnibus Plan. The compensation committee may, in its absolute discretion, without amendment to the 1997 Omnibus Plan, (a) accelerate the date on which any option or stand-alone appreciation right granted under the 1997 Omnibus Plan becomes exercisable, waive or amend the operation of provisions respecting exercise after termination of employment or otherwise adjust any of the terms of such option or stand-alone appreciation right, (b) accelerate the vesting or waive any condition imposed with respect to any restricted stock, phantom stock or other awards and (c) otherwise adjust any of the terms applicable to any award. AWARDS UNDER THE 1997 OMNIBUS PLAN STOCK OPTIONS; STOCK APPRECIATION RIGHTS Unless otherwise determined by the compensation committee, options granted pursuant to the 1997 Omnibus Plan will become exercisable ratably over three years commencing on the first anniversary of the date of grant, but in no event may an option be exercised more than 10 years following the date of its grant. The "option exercise price," which is the purchase price per share payable upon the exercise of an option, will be established by the compensation committee; PROVIDED, HOWEVER, that incentive stock options may not have an exercise price less than the fair market value of a share of common stock on the date of grant. The option exercise price is payable by any one of the following methods or a combination thereof, to the extent permitted by the compensation committee: (1) in cash or by personal check, certified check, bank cashier's check or wire transfer; (2) subject to the approval of the compensation committee, in common stock owned by the participant for at least six months prior to the date of exercise and valued at their fair market value on the effective date of such exercise; or (3) subject to the approval of the compensation committee, by such other provision as the compensation committee may from time to time authorize. The compensation committee also has the authority to specify, at the time of grant or, with respect to non-qualified stock options at or after the time of grant, that a participant shall be granted a new non-qualified stock option, otherwise known as a "reload option," for a number of shares of common stock equal to the number of shares of common stock surrendered by the participant upon exercise of all or a part of an option in the manner described above, subject to the availability of common stock under the 1997 Omnibus Plan at the time of such exercise; PROVIDED, HOWEVER, that no reload option shall be granted to a non-employee director. Reload options shall be subject to such conditions as may be specified by the compensation committee in its discretion, subject to the terms of the 1997 Omnibus Plan. Appreciation rights with respect to priceline.com's common stock may be granted alone or in tandem with options. An appreciation right is a right to be paid an amount in cash for each share of common stock subject to the appreciation right equal to the excess of the fair market value of a share of common stock on the date the appreciation right is exercised over either the fair market value of a share of common stock on the date of grant, in case of a stand-alone appreciation right, or the exercise price of the related stock option, in case of a tandem appreciation right. RESTRICTED STOCK; PHANTOM STOCK A restricted stock award is an award of common stock and a phantom stock award is an award of the right to receive cash or common stock at a future date, in each case, that is subject to such restrictions on transferability and other restrictions, if any, as the compensation committee may impose at the date of grant or thereafter, which restrictions may lapse separately or in combination at such times, under such circumstances, including, without limitation, a specified period of employment or the satisfaction of pre-established performance goals, when granted to executive officers, in such installments, or otherwise, as the compensation committee may determine. The compensation committee may grant such restricted stock or phantom stock to such persons, in such amounts, and subject to such terms and conditions as the 76 compensation committee may determine in its discretion; PROVIDED, HOWEVER, that shares of restricted stock and phantom stock granted to executive officers may vest upon the attainment of performance goals pre-established by the compensation committee, based on one or more of the following criteria: return on total owner equity; earnings per share; pre-tax income or after-tax income; revenue; return on assets; increases in EBITDA; or such other criteria as the stockholders of priceline.com may approve. OTHER AWARDS Upon a determination by the compensation committee, an executive officer may receive awards of shares of common stock. In addition, other awards valued in whole or in part by reference to, or otherwise based on, common stock may be granted either alone or in addition to other awards under the 1997 Omnibus Plan. Subject to the provisions of the 1997 Omnibus Plan, the compensation committee will have the sole and complete authority to determine the persons to whom and the time or times at which such other awards will be granted, the number of shares of common stock to be granted pursuant to such other awards and all other conditions of such other awards. AMENDMENT; TERMINATION The board of directors or the compensation committee may suspend, revise, terminate or amend the 1997 Omnibus Plan at any time; PROVIDED, HOWEVER, that (1) stockholder approval will be obtained if and to the extent required under Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as amended, which is generally referred to as the "Exchange Act," or if and to the extent the board determines that such approval is required for purposes of satisfying Section 162(m) or Section 422 of the Code and (2) no such suspension, revision, termination or amendment may, without the consent of a participant, reduce the participant's rights under any outstanding award. CERTAIN FEDERAL INCOME TAX CONSEQUENCES The following discussion is a brief summary of the principal United States federal income tax consequences under current federal income tax laws relating to awards under the 1997 Omnibus Plan. This summary is not intended to be exhaustive and, among other things, does not describe state, local or foreign income and other tax consequences. NON-QUALIFIED STOCK OPTIONS An optionee will not recognize any taxable income upon the grant of a non-qualified stock option. Priceline.com will not be entitled to a tax deduction with respect to the grant of a non-qualified stock option. Upon exercise of a non-qualified stock option, the excess of the fair market value of the common stock on the exercise date over the option exercise price will be taxable as compensation income to the optionee and will be subject to applicable withholding taxes. Priceline.com will generally be entitled to a tax deduction at such time in the amount of such compensation income. The optionee's tax basis for the common stock received pursuant to the exercise of a non-qualified stock option will equal the sum of the compensation income recognized and the exercise price. In the event of a sale of common stock received upon the exercise of a non-qualified stock option, any appreciation or depreciation after the exercise date generally will be taxed as capital gain or loss. INCENTIVE STOCK OPTIONS An optionee will not recognize any taxable income at the time of grant or timely exercise of an incentive stock option and priceline.com will not be entitled to a tax deduction with respect to such grant or exercise. Exercise of an incentive stock option may, however, give rise to taxable compensation income subject to applicable withholding taxes, and a tax deduction to priceline.com, if the incentive stock option is not exercised on a timely basis (generally, while the optionee is employed by priceline.com or within 77 90 days after termination of employment) or if the optionee subsequently engages in a "disqualifying disposition," as described below. A sale or exchange by an optionee of shares acquired upon the exercise of an incentive stock option more than one year after the transfer of the shares to such optionee and more than two years after the date of grant of the incentive stock option will result in any difference between the net sale proceeds and the exercise price being treated as long-term capital gain or loss to the optionee. If such sale or exchange takes place within two years after the date of grant of the incentive stock option or within one year from the date of transfer of the incentive stock option shares to the optionee, such sale or exchange will generally constitute a "disqualifying disposition" of such shares that will have the following results: any excess of (x) the lesser of (1) the fair market value of the shares at the time of exercise of the incentive stock option and (2) the amount realized on such disqualifying disposition of the shares over (y) the option exercise price of such shares, will be ordinary income to the optionee, subject to applicable withholding taxes, and priceline.com will be entitled to a tax deduction in the amount of such income. Any further gain or loss after the date of exercise generally will qualify as capital gain or loss and will not result in any deduction by priceline.com. APPRECIATION RIGHTS The grant of appreciation rights has no federal income tax consequences at the time of grant. Upon the exercise of appreciation rights, the amount received is generally taxable as ordinary income, and priceline.com is entitled to a corresponding deduction. RESTRICTED STOCK A grantee will not recognize any income upon the receipt of restricted stock unless the holder elects under Section 83(b) of the Code, within thirty days of such receipt, to recognize ordinary income in an amount equal to the fair market value of the restricted stock at the time of receipt, less any amount paid for the shares. If the election is made, the holder will not be allowed a deduction for amounts subsequently required to be returned to priceline.com. If the election is not made, the holder will generally recognize ordinary income, on the date that the restrictions to which the restricted stock are subject are removed, in an amount equal to the fair market value of such shares on such date, less any amount paid for the shares. At the time the holder recognizes ordinary income, priceline.com generally will be entitled to a deduction in the same amount. Generally, upon a sale or other disposition of restricted stock with respect to which the holder has recognized ordinary income, for example, if a Section 83(b) election was previously made or the restrictions were previously removed, the holder will recognize capital gain or loss in an amount equal to the difference between the amount realized on such sale or other disposition and the holder's basis in such shares. PHANTOM STOCK The grant of phantom stock has no federal income tax consequences at the time of grant. Upon the receipt of payment, the amount received is generally taxable as ordinary income, and priceline.com is entitled to a corresponding deduction. OTHER TYPES OF AWARDS The grant of any other stock-based award generally will not result in income for the grantee or in a tax deduction for priceline.com. Upon the settlement of such an award, the grantee will recognize ordinary income equal to the aggregate value of the payment received, and priceline.com generally will be entitled to a tax deduction in the same amount. 78 PRICELINE.COM INCORPORATED 1999 OMNIBUS PLAN In February 1999, priceline.com established the 1999 Omnibus Plan. The 1999 Omnibus Plan is intended to promote the long-term financial interests and growth of priceline.com by providing employees of priceline.com with appropriate incentives and rewards to encourage them to enter into and continue in the employ of the company and to acquire a proprietary interest in the long-term success of the company; and to reward the performance of individual officers, other employees, consultants and directors in fulfilling their responsibilities for long-range achievements. GENERAL The 1999 Omnibus Plan provides for the granting of awards to such officers, other employees, consultants and directors of priceline.com and its affiliates as the compensation committee, which is the committee of the board of directors appointed to administer the Plan may select from time to time. Awards under the 1999 Omnibus Plan may be made in the form of incentive stock options, non-qualified stock options, restricted stock or other awards. The maximum number of shares of common stock reserved for the grant or settlement of awards under the 1999 Omnibus Plan is 9,375,000 subject to adjustment as provided in the 1999 Omnibus Plan. The maximum number of shares of common stock that may be awarded in respect of options, restricted stock and other awards to a single individual in any given year may not exceed 9,375,000, 3,125,000 and 6,250,000, respectively, which amounts are subject to adjustment as described below. Awards (either as options, restricted stock or other awards) will be made in a manner consistent with Section 162(m) of the Code. Shares of common stock acquired upon the exercise or settlement of awards may, in whole or in part, be authorized but unissued shares or shares that shall have been or may be reacquired by priceline.com in the open market, in private transactions or otherwise. If any shares subject to an award are forfeited, cancelled, exchanged or surrendered or if an award otherwise terminates or expires without a distribution of shares to the holder of such award, the shares of common stock with respect to such award will, to the extent of any such forfeiture, cancellation, exchange, surrender, termination or expiration, again be available for awards under the 1999 Omnibus Plan. Except as provided in an agreement evidencing the grant of an award, in the event that the compensation committee determines that any dividend or other distribution (whether in the form of cash, common stock, or other property), recapitalization, stock split, reverse split, reorganization, merger, consolidation, spin-off, combination, repurchase, or share exchange, or other similar corporate transaction or event, affects the common stock such that an adjustment is appropriate in order to prevent dilution or enlargement of the rights of holders of awards under the 1999 Omnibus Plan, then the compensation committee will make such equitable changes or adjustments as it deems necessary or appropriate to any or all of (1) the number and kind of shares of common stock or other property (including cash) that may thereafter be issued in connection with awards, (2) the number and kind of shares of common stock or other property, including cash, issued or issuable in respect of outstanding awards, (3) the exercise price, grant price, or purchase price relating to any award; provided that, with respect to incentive stock options, such adjustment shall be made in accordance with Section 424(h) of the Code, (4) the performance criteria with respect to an award and (5) the individual limitations applicable to awards. ADMINISTRATION The 1999 Omnibus Plan is administered by the compensation committee, the composition of which will at all times satisfy the provisions of Section 162(m) of the Code and Rule 16b-3 promulgated under the Exchange Act. The compensation committee has the authority, in its sole discretion, subject to and not inconsistent with the express provisions of the 1999 Omnibus Plan, to administer, and to exercise all the powers and authorities either specifically granted to it under, the 1999 Omnibus Plan or necessary or 79 advisable in the administration of the 1999 Omnibus Plan, including, without limitation, the authority to grant awards; to determine the persons to whom and the time or times at which awards shall be granted; to determine the type and number of awards to be granted, the number of shares of common stock to which an award may relate and the terms, conditions, restrictions and performance goals relating to any award; to determine whether, to what extent, and under what circumstances an award may be settled, canceled, forfeited, exchanged, or surrendered; to make adjustments in the performance goals in recognition of unusual or non-recurring events affecting priceline.com or the financial statements of priceline.com, to the extent not inconsistent with Section 162(m) of the Code, if applicable, or in response to changes in applicable laws, regulations, or accounting principles; to construe and interpret the 1999 Omnibus Plan and any award; to prescribe, amend and rescind rules and regulations relating to the 1999 Omnibus Plan; to determine the terms and provisions of agreements evidencing awards; and to make all other determinations deemed necessary or advisable for the administration of the 1999 Omnibus Plan. The compensation committee may, in its absolute discretion, without amendment to the 1999 Omnibus Plan, (a) accelerate the date on which any option granted thereunder becomes exercisable, waive or amend the operation of the 1999 Omnibus Plan provisions thereunder respecting exercise after termination of employment or otherwise adjust any of the terms of such option, (b) accelerate the vesting or waive any condition imposed with respect to any restricted stock and (c) otherwise adjust any of the terms applicable to any award. AWARDS UNDER THE 1999 OMNIBUS PLAN STOCK OPTIONS Unless otherwise determined by the compensation committee, options granted pursuant to the 1999 Omnibus Plan become exercisable ratably over three years commencing on the first anniversary of the date of grant. The "option exercise price," which is the purchase price per share payable upon the exercise of an option, will be established by the compensation committee; PROVIDED, HOWEVER, that the option exercise price may be no less than the fair market value of a share of common stock on the date of grant. The option exercise price is payable by any one of the following methods or a combination thereof: (1) in cash or by personal check, certified check, bank cashier's check or wire transfer; (2) subject to the approval of the compensation committee, in stock owned by the participant for at least six months prior to the date of exercise and valued at their fair market value on the effective date of such exercise; or (3) in such other manner as the compensation committee may from time to time authorize. RESTRICTED STOCK The compensation committee may grant restricted shares of common stock to such persons, in such amounts, and subject to such terms and conditions, including the attainment of performance goals, which performance goals may be based upon one or more of the following criteria: pre-tax or after-tax income; operating profit; return on equity, assets, capital or investment; earnings or book value per share; sales or revenues; operating expenses; stock price appreciation; and the implementation or completion of critical projects or processes, as the compensation committee may determine in its discretion. Unless the compensation committee determines otherwise, termination of employment during the restricted period will result in the forfeiture by the participant of all shares still subject to restrictions. OTHER AWARDS Other awards valued in whole or in part by reference to, or otherwise based on, common stock may be granted either alone or in addition to other awards under the 1999 Omnibus Plan. Subject to the provisions of the 1999 Omnibus Plan, the compensation committee has the sole and complete authority to determine the persons to whom and the time or times at which such other awards will be granted, the number of 80 shares of common stock to be granted pursuant to such other awards and all other conditions of such other awards, including the attainment of performance goals. OTHER FEATURES OF THE 1999 OMNIBUS PLAN In the event of a Change in Control, as defined in the 1999 Omnibus Plan, of priceline.com, all outstanding awards will become fully vested and/or immediately exercisable and any restrictions thereon will lapse. The board or the compensation committee may suspend, revise, terminate or amend the 1999 Omnibus Plan at any time; PROVIDED, HOWEVER, that no such action may, without the consent of a participant, reduce the participant's rights under any outstanding award. NEW PLAN BENEFITS Inasmuch as awards under the 1999 Omnibus Plan will be granted at the sole discretion of the compensation committee, it is not possible to determine the awards that will be granted at the time of the offering or during 1999. As of August 10, 1999, options covering 3,829,505 shares of common stock were outstanding under the 1999 Omnibus Plan. See "Option Grants in Last Fiscal Year." CERTAIN FEDERAL INCOME TAX CONSEQUENCES The following discussion is a brief summary of the principal United States Federal income tax consequences under current Federal income tax laws relating to awards under the 1999 Omnibus Plan. This summary is not intended to be exhaustive and, among other things, does not describe state, local or foreign income and other tax consequences. NON-QUALIFIED STOCK OPTIONS An optionee will not recognize any taxable income upon the grant of a non-qualified stock option. Priceline.com will not be entitled to a tax deduction with respect to the grant of a non-qualified stock option. Upon exercise of a non-qualified stock option, the excess of the fair market value of the common stock on the exercise date over the option exercise price will be taxable as compensation income to the optionee and will be subject to applicable withholding taxes. Priceline.com will generally be entitled to a tax deduction at such time in the amount of such compensation income. The optionee's tax basis for the common stock received pursuant to the exercise of a non-qualified stock option will equal the sum of the compensation income recognized and the exercise price. In the event of a sale of common stock received upon the exercise of a non-qualified stock option, any appreciation or depreciation after the exercise date generally will be taxed as capital gain or loss. INCENTIVE STOCK OPTIONS An optionee will not recognize any taxable income at the time of grant or timely exercise of an incentive stock option and priceline.com will not be entitled to a tax deduction with respect to such grant or exercise. Exercise of an incentive stock option may, however, give rise to taxable compensation income subject to applicable withholding taxes, and a tax deduction to priceline.com, if the incentive stock option is not exercised on a timely basis (generally, while the optionee is employed by priceline.com or within 90 days after termination of employment) or if the optionee subsequently engages in a "disqualifying disposition," as described below. A sale or exchange by an optionee of shares acquired upon the exercise of an incentive stock option more than one year after the transfer of the shares to such optionee and more than two years after the date 81 of grant of the incentive stock option will result in any difference between the net sale proceeds and the exercise price being treated as long-term capital gain or loss to the optionee. If such sale or exchange takes place within two years after the date of grant of the incentive stock option or within one year from the date of transfer of the incentive stock option shares to the optionee, such sale or exchange will generally constitute a "disqualifying disposition" of such shares that will have the following results: any excess of (a) the lesser of (i) the fair market value of the shares at the time of exercise of the Incentive Stock Option and (ii) the amount realized on such disqualifying disposition of the shares over (b) the option exercise price of such shares, will be ordinary income to the optionee, subject to applicable withholding taxes, and priceline.com will be entitled to a tax deduction in the amount of such income. Any further gain or loss after the date of exercise generally will qualify as capital gain or loss and will not result in any deduction by priceline.com. RESTRICTED STOCK A grantee will not recognize any income upon the receipt of restricted stock unless the holder elects under Section 83(b) of the Code, within thirty days of such receipt, to recognize ordinary income in an amount equal to the fair market value of the restricted stock at the time of receipt, less any amount paid for the shares. If the election is made, the holder will not be allowed a deduction for amounts subsequently required to be returned to priceline.com. If the election is not made, the holder will generally recognize ordinary income, on the date that the restrictions to which the restricted stock are subject are removed, in an amount equal to the fair market value of such shares on such date, less any amount paid for the shares. At the time the holder recognizes ordinary income, priceline.com generally will be entitled to a deduction in the same amount. Generally, upon a sale or other disposition of restricted stock with respect to which the holder has recognized ordinary income, for example, if a Section 83(b) election was previously made or the restrictions were previously removed, the holder will recognize capital gain or loss in an amount equal to the difference between the amount realized on such sale or other disposition and the holder's basis in such shares. OTHER TYPES OF AWARDS The grant of any other stock-based award generally will not result in income for the grantee or in a tax deduction for priceline.com. Upon the settlement of such an award, the grantee will recognize ordinary income equal to the aggregate value of the payment received, and priceline.com generally will be entitled to a tax deduction in the same amount. EMPLOYMENT ARRANGEMENTS BRADDOCK EMPLOYMENT AGREEMENT. Pursuant to an employment agreement, dated as of August 15, 1998, between priceline.com and Mr. Richard S. Braddock, Mr. Braddock serves as the Chairman and Chief Executive Officer of priceline.com through August 15, 2001. Pursuant to an agreement in principle entered into July 23, 1998, by and between priceline.com and Mr. Braddock in anticipation of entering into the employment agreement, Mr. Braddock received 6,500,000 equity units in priceline.com's predecessor, which have since been converted into 8,125,000 shares of common stock. Mr. Braddock also was granted an option to purchase up to 5,000,000 equity units in priceline.com's predecessor at an exercise price of $1.00 per share, subject to standard anti-dilution adjustments, which has been converted into an option to purchase 6,250,000 shares of common stock at an exercise price of $0.80 per share and which is fully vested. The option is not exercisable until September 26, 1999, upon expiration of the 180 day period following consummation of priceline.com's initial public offering. Under the terms of his employment agreement, Mr. Braddock is entitled to an initial annual base salary of $300,000, subject to annual 82 adjustment, and is eligible to participate in any cash bonus program that may be introduced by priceline.com. In connection with the execution of the employment agreement, Mr. Braddock also received an option to purchase an equity interest in Walker Digital from Walker Digital. SCHULMAN EMPLOYMENT AGREEMENT. Pursuant to an employment agreement, dated as of June 14, 1999, between priceline.com and Mr. Daniel H. Schulman, Mr. Schulman serves as the President and Chief Operating Officer of priceline.com. Under the terms of his employment agreement, Mr. Schulman is entitled to an annual base salary of $300,000, subject to adjustment, and is eligible to participate in any cash bonus program that may be introduced by priceline.com. Priceline.com also granted Mr. Schulman a ten year option to purchase up to 3,000,000 shares of common stock at an exercise price of $76.875 per share, subject to standard anti-dilution adjustments. The option: - currently is vested for 500,000 of such shares; - will vest for an additional 500,000 on December 31, 1999; - will vest for an additional 1,000,000 on December 31, 2000; and - will vest as to the balance of such shares on December 31, 2001, subject in each case, to acceleration or cancellation under certain circumstances in connection with the termination of his employment. In July 1999, priceline.com made a loan to Mr. Schulman in the amount of $6.0 million. The loan bears interest at 5.82% per annum. Interest and principal will be payable in July 2004. Mr. Schulman will be required to make prepayments of principal and accrued interest in an amount equal to 25% of his pre-tax proceeds over $10,000,000 from the exercise of his stock options until June 14, 2004, or unless earlier terminated, at which point any remaining outstanding amounts under the loan will be forgiven by priceline.com. Any remaining outstanding amounts under the loan will also be forgiven by priceline.com in the event of certain changes of control, death, or termination without cause. FINK EMPLOYMENT AGREEMENT. Pursuant to an employment agreement, dated as of January 1, 1998, as amended, between priceline.com, Walker Digital, Mr. Jay S. Walker and Mr. Jesse M. Fink, Mr. Fink served as the Chief Operating Officer of both priceline.com and Walker Digital. Effective June 30, 1999 Mr. Fink resigned as Chief Operating Officer of priceline.com. Under the terms of his employment agreement, Mr. Fink is entitled to an annual base salary of $225,000, subject to annual adjustment, and was eligible to participate in any cash bonus program that may be introduced by priceline.com. Prior to June 30, 1999, payment of Mr. Fink's salary was allocated between priceline.com and Walker Digital as mutually agreed. Since July 1, 1999, Mr. Fink's salary has been paid by Walker Digital. In addition, Mr. Fink was issued 2,700,000 equity units in the priceline.com LLC, which units have since been converted into 3,375,000 shares of common stock. Priceline.com also granted Mr. Fink an option to purchase up to 2,443,750 shares of common stock at an exercise price of $0.80 per share, subject to standard anti-dilution adjustments. The option is fully vested and is not exercisable until September 26, 1999. Under the terms of his employment agreement, Mr. Fink also is entitled to additional compensation from Walker Digital and Mr. Walker. In addition, the employment agreement provides that, upon the mutual agreement of Mr. Fink and Mr. Walker, Mr. Fink may be employed by an entity controlled by Mr. Walker, other than priceline.com or Walker Digital. BRIER EMPLOYMENT AGREEMENT. Pursuant to an employment agreement, dated as of July 23, 1998, as amended, between priceline.com and Mr. Timothy G. Brier, Mr. Brier serves as an Executive Vice President of priceline.com and as the President of Priceline Travel, Inc., through December 31, 2000. Under the terms of his employment agreement, Mr. Brier is entitled to an annual base salary of $250,000, and until April 6, 1999, was entitled to receive cash bonuses based upon the number of airlines and 83 consolidators that participate in the priceline.com service. Under certain circumstances, Mr. Brier may also be entitled to a compensatory bonus that is designed to ensure that his aggregate annual compensation for services rendered to priceline.com and CAP Systems, another entity affiliated with Mr. Walker for which Mr. Brier continues to provide services, equals $625,000. In addition, Mr. Brier was issued 1,200,000 equity units in priceline.com LLC, which have since been converted into 1,500,000 shares of common stock. Priceline.com also granted Mr. Brier an option to purchase up to 2,003,125 shares of common stock at an exercise price of $0.80 per share, subject to standard anti-dilution adjustments, of which 50,000 have been exercised. The option: - currently is vested for 1,512,500 of such shares that are not exercisable until 180 days after the date of this prospectus; and - will become exercisable for the balance of such shares on June 1, 2000, subject, in each case, to acceleration or cancellation under certain circumstances in connection with the termination of Mr. Brier's employment. INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS AND LIMITATION OF LIABILITY Section 145 of the Delaware General Corporation Law authorizes a corporation's board of directors to grant indemnity to directors and officers in terms sufficiently broad to permit such indemnification under certain circumstances for liabilities, including reimbursement for expenses incurred, arising under the Securities Act. As permitted by Delaware law, priceline.com's certificate of incorporation includes a provision that eliminates the personal liability of its directors for monetary damages for breach of fiduciary duty as a director, except for liability (1) for any breach of the director's duty of loyalty to priceline.com or its stockholders; (2) for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law; (3) under Section 174 of the Delaware General Corporation Law regarding unlawful dividends and stock purchases; or (4) for any transaction from which the director derived an improper personal benefit. As permitted by Delaware law, priceline.com's certificate of incorporation, provides that (1) priceline.com is required to indemnify its directors and officers to the fullest extent permitted by Delaware law, subject to certain very limited exceptions; (2) priceline.com is permitted to indemnify its other employees to the extent that it indemnifies its officers and directors, unless otherwise required by law, its certificate of incorporation, its by-laws or agreements; (3) priceline.com is required to advance expenses, as incurred, to its directors and officers in connection with a legal proceeding to the fullest extent permitted by Delaware law, subject to certain very limited exceptions; and (4) the rights conferred in the certificate of incorporation are not exclusive. 84 CERTAIN TRANSACTIONS Priceline.com was founded as a limited liability company in July 1997 and converted to a corporation in July 1998. In connection with this conversion, all equity units issued by priceline.com's predecessor were converted into an equal number of shares of common stock. The following discussion does not distinguish between priceline.com and its predecessor and the common stock and the equity units of priceline.com's predecessor. EQUITY TRANSACTIONS Upon its inception, priceline.com issued to Mr. Jay S. Walker, its Founder, 35,640,211 shares of common stock for services previously rendered. Priceline.com also issued 6,895,833 shares of common stock to Walker Digital, an affiliate of Mr. Walker, in partial consideration for the transfer of certain intellectual property to priceline.com and for the ongoing planning, maintenance and prosecution of the patents related to such rights. Subsequently, priceline.com sold an aggregate of 25,212,955 shares of common stock to Mr. Walker and his affiliates for $0.80 per share, the estimated fair market value of the shares at the time of the sale. Upon its inception, priceline.com issued to several officers of priceline.com an aggregate of 7,350,000 shares of common stock for services previously rendered. Of such shares, 3,375,000 shares were issued to Mr. Jesse M. Fink, 1,500,000 shares were issued to Mr. Timothy G. Brier and 675,000 shares were issued to Paul E. Francis. In October 1997, priceline.com sold 713,470 shares of common stock to Mr. Paul E. Francis, its Chief Financial Officer, for approximately $0.70 per share, the estimated fair market value of the shares at the time of the sale. In February 1998, priceline.com sold 2,854,875 shares of common stock to an affiliate of General Atlantic for approximately $0.70 per share, the estimated fair market value of the shares at the time of the sale. Affiliates of General Atlantic own in excess of 5 percent of the outstanding capital of priceline.com. On July 1, 1998, priceline.com sold 1,250,000 shares of common stock to Mr. Richard S. Braddock, its Chief Executive Officer, for $0.80 per share. In December 1998, priceline.com sold an additional 78,125 shares of common stock to Mr. Braddock for $3.20 per share. The per share purchase price for both transactions represented the estimated fair value of the shares at the time of such transactions. On July 1, 1998, priceline.com sold 312,500 shares of common stock to Mr. Ralph M. Bahna, who is a director of the company, for $0.80 per share, the estimated fair market value of the shares at the time of the sale. On July 1, 1998, priceline.com sold 625,000 shares of common stock to a family trust of Mr. N.J. Nicholas, Jr., who is a director of the company, for $0.80 per share, the estimated fair market value of the shares at the time of the sale. On July 31, 1998, priceline.com sold an aggregate of 17,288,684 shares of preferred stock to two affiliates of General Atlantic for approximately $1.16 per share, the estimated fair market value of the shares at the time of the sale. This preferred stock was automatically convertible into 21,610,855 shares of common stock upon the completion of priceline.com's initial public offering. In October 1998, priceline.com sold 107,758 shares of common stock to Mr. Paul J. Blackney, who is a director of the company, for approximately $0.93 per share, the estimated fair market value of the shares at the time of the purchase. In December 1998, priceline.com sold an aggregate of 13,837,500 shares of preferred stock to a group of investors for $4.00 per share, the estimated fair market value of the shares at the time of the sale. Of such shares, 7,500,000 shares were sold to Vulcan Ventures Incorporated, an aggregate of 1,437,500 shares were sold to affiliates of General Atlantic and 275,000 shares were sold to Allen & Company Incorporated. Vulcan Ventures and affiliates of General Atlantic each own in excess of 5 percent of the capital stock of priceline.com. Ms. Nancy B. Peretsman, who is a director of priceline.com, also is a director and stockholder of Allen & Company. This preferred stock was automatically convertible into 17,296,875 shares of common stock upon the completion of priceline.com's initial public offering. 85 RELATIONSHIP WITH WALKER DIGITAL The priceline.com core buyer driven commerce business model and related intellectual property rights were initially developed by Walker Digital, a technology research and development company that was founded and is controlled by Mr. Walker. In partial consideration for the transfer of such rights and for the ongoing planning, maintenance and prosecution of the patents related to such rights, priceline.com issued Walker Digital 6,895,833 shares of common stock. Priceline.com also granted Walker Digital a perpetual, non-exclusive, royalty-free right and license to use the intellectual property related to the priceline.com service for non-commercial internal research and development purposes. Priceline.com also has the right to purchase at fair market value any intellectual property that is owned and subsequently acquired, developed or discovered by Walker Digital that will provide significant value in the use or commercial exploitation of the priceline.com system. Walker Digital currently owns assets and intellectual property related to two new areas of e-commerce into which priceline.com may expand its "name your price" business model, one involving consumer-to-consumer sales and the other involving the sale of retail merchandise. Priceline.com may license its brand name and "name your price" business model to two new companies formed to develop these businesses. Walker Digital may contribute assets and intellectual property to these companies in return for an equity interest in these companies. Walker Digital owns the intellectual property rights underlying the technology associated with priceline.com's adaptive marketing programs. Walker Digital has licensed to priceline.com the right to use these intellectual property rights under a perpetual, non-exclusive, royalty-free license agreement. Walker Digital has pending several United States patent applications directed to different aspects of the processes and technology supporting priceline.com's adaptive marketing programs. Walker Digital and priceline.com provide each other with a variety of services. The services provided by priceline.com include various management and administrative services, for which priceline.com collects fees from Walker Digital. The services provided by Walker Digital include (1) research and development assistance; (2) patent planning, maintenance and prosecution; and (3) intellectual property services, including technical support. Walker Digital also subleases a portion of its Stamford, Connecticut facilities to priceline.com on a month-to-month basis. Additionally, priceline.com has guaranteed Walker Digital's obligations under a lease of 2,500 square feet for office space in a building in New York City that is used by both companies. The lease provides for annual rental payments of approximately $170,000 plus expenses for a term of five years. Pursuant to the terms of the indemnification obligations contained in the Purchase and Intercompany Agreement, Walker Digital has agreed to indemnify priceline.com for damages, liability and legal expenses incurred in connection with the Marketel litigation. Several of priceline.com's executive officers and other key employees also are directors, officers, employees or stockholders of Walker Digital and either own, or hold an option to purchase, equity securities of Walker Digital. Priceline.com issued a promissory note to Walker Digital for $1,000,000 in June 1998. The promissory note bore interest at a rate of 6% per annum and was due June 30, 1999. The note has been repaid. MERGER OF PRICELINE TRAVEL, INC. INTO PRICELINE.COM Priceline.com's travel agency license was previously held by Priceline Travel, a separate company that was owned by Mr. Walker. As a result, all of priceline.com's airline ticket sales were effected through Priceline Travel. Priceline Travel was merged into priceline.com on March 24, 1999 for nominal consideration. OTHER TRANSACTIONS Priceline.com has implemented an option exercise program that enables its employees who were employed as of June 1, 1999 to sell, during an eleven-day period ending on July 30, 1999, a portion of the shares underlying their options vested on or before June 1, 1999, which otherwise would not have been exercisable until September 26, 1999. Seventy employees, including Ms. Melissa M. Taub and Messrs. Mark 86 Benerofe, Timothy G. Brier and Thomas P. D'Angelo, participated in the option exercise program, pursuant to which 938,540 shares underlying their options were sold in the public market on their behalf through a cashless exercise program administered by Morgan Stanley & Co. Incorporated. After expiration of the eleven-day period, such employees agreed to an extended 180-day lock-up period on the balance of their unsold option shares, representing 7,676,356 in aggregate, that restricts the exercise of their remaining options and sale of the underlying shares until 180 days after the date of this prospectus. Employees who had no options vested as of June 1, 1999 and former employees, directors and consultants were not eligible to participate in the option exercise program. In July 1999, priceline.com made a loan to Mr. Daniel H. Schulman, the new President and Chief Operating Officer of priceline.com in the amount of $6.0 million. The loan bears interest at 5.82% per annum. Interest and principal will be payable in July 2004. Mr. Schulman will be required to make prepayments of principal and accrued interest in an amount equal to 25% of his pre-tax proceeds over $10,000,000 from the exercise of his stock options until June 14, 2004, or unless earlier terminated, at which point any remaining outstanding amounts under the loan will be forgiven by priceline.com. Any remaining outstanding amounts under the loan will also be forgiven by priceline.com in the event of certain changes in control, death or termination without cause. In April 1999, priceline.com made a $3.3 million loan to Mr. Richard S. Braddock for the payment of taxes related to the issuance to Mr. Braddock of 8,125,000 shares of common stock in August 1998. The loan bears interest at 5.28% per annum. Interest is payable annually and principal is payable in January 2004. Priceline.com has entered into compensation arrangements with certain of its directors and officers. See "Management--Summary of Compensation" and "--Stock Based Plans." Priceline.com received a loan in the amount of $1.0 million on July 14, 1998 from Mr. Michael Loeb, a relative of Mr. Marshall Loeb, who is a director of the company, and a loan in the amount of $500,000 on July 17, 1998 from Mr. Francis. The interest rate on each of the loans was 10%. As of the date of this prospectus, both of the loans have been repaid. Priceline.com has granted registration rights to certain stockholders and warrant holders. See "Description of Capital Stock--Registration Rights." In February 1999, priceline.com made a payment of $850,000 to Allen & Company Incorporated for financial advisory services. Ms. Peretsman, who is a director of priceline.com, is a director and stockholder of Allen & Company. Mr. Richard S. Braddock invested as a limited partner of an affiliate of General Atlantic from August 1996 to December 31, 1998 and served as a special advisor to General Atlantic from September 1996 to August 1997. Mr. Braddock, however, did not participate in any of the investments by affiliates of General Atlantic in priceline.com. Messrs. Richard S. Braddock and William E. Ford are members of the board of directors of E*TRADE Group, Inc., which has a co-marketing agreement with priceline.com to establish an adaptive marketing program under which E*TRADE compensates priceline.com for offering priceline.com customers the opportunity to open an account with E*TRADE while visiting or making an offer on the priceline.com Web site. See "Business--Strategic Alliances--Adaptive Marketing Alliances." Priceline.com offers its magazine subscription promotion pursuant to a revenue sharing arrangement with NewSub Services, Inc., a direct marketing firm that is an affiliate of Mr. Jay S. Walker. Under this arrangement, priceline.com shares in a percentage of the revenues generated upon the conversion of priceline.com generated subscriptions to annual subscriptions after a six month free trial period. Affiliates of General Atlantic have invested approximately $59.3 million in NewSub Services. In connection with this offering, priceline.com has agreed to indemnify the selling stockholders, which include various related parties of priceline.com, for liabilities arising under the Securities Act and to pay certain expenses of this offering. 87 PRINCIPAL AND SELLING STOCKHOLDERS The following table sets forth certain information known to priceline.com with respect to beneficial ownership of priceline.com's common stock as of August 10, 1999 by (1) each stockholder known by priceline.com to be the beneficial owner of more than 5% of priceline.com's common stock; (2) each director of priceline.com; (3) priceline.com's Chief Executive Officer and each of its other four most highly compensated executive officers; (4) all executive officers and directors as a group; and (5) the selling stockholders.
SHARES BENEFICIALLY SHARES SHARES BENEFICIALLY OWNED PRIOR TO BEING OWNED AFTER OFFERING(A) SOLD(A) OFFERING(A) -------------------------- ---------- -------------------------- NAME OF BENEFICIAL OWNER NUMBER PERCENT NUMBER NUMBER PERCENT - --------------------------------------------------- ------------- ----------- ---------- ------------- ----------- Jay S. Walker(b)................................... 62,504,373 43.2% -- 62,229,228 42.0% Richard S. Braddock(c)............................. 17,829,125 11.9 202,313 17,625,812 11.5 Timothy G. Brier(d)................................ 3,012,700 2.1 72,832 2,939,868 2.0 Paul E. Francis(e)................................. 2,107,220 1.5 30,000 2,034,388 1.4 Daniel H. Schulman(f).............................. 500,000 * -- 500,000 * Paul A. Allaire(g)................................. 56,200 * -- 56,200 * Ralph M. Bahna(h).................................. 344,750 * -- 344,750 * Paul J. Blackney(i)................................ 140,008 * -- 140,008 * William E. Ford(j)................................. 26,296,353 18.3 -- 25,648,103 17.5 Marshall Loeb(k)................................... 32,250 * -- 32,250 * N. J. Nicholas, Jr.(l)............................. 3,906,250 2.7 -- 3,906,250 2.7 Nancy B. Peretsman(m).............................. 2,906,250 2.0 -- 2,906,250 2.0 Paul Breitenbach(n)................................ 1,591,950 1.1 72,832 1,519,118 1.0 T. Scott Case(o)................................... 2,200,000 1.5 72,832 2,127,168 1.4 Jesse M. Fink(p)................................... 5,805,750 4.0 202,313 5,603,437 3.8 Michael Loeb....................................... 200,000 * 69,648 130,352 * Jim Manzi(q)....................................... 312,500 * 5,862 304,787 * Jonathan Otto...................................... 1,250,000 * 121,387 1,128,613 * General Atlantic Partners, LLC(j).................. 26,296,353 18.3 648,250 25,648,103 17.5 Vulcan Ventures Incorporated(r).................... 9,375,000 6.5 231,406 9,143,594 6.2 Yarmouth Limited Partnership(q).................... 312,500 * 1,851 304,787 * Walker Digital Corporation(b)...................... 62,504,373 43.2 202,313 62,229,228 42.0 Delta Airlines, Inc.(s)............................ 18,619,402 13.0 1,523,329 17,096,073 11.6 Strypemonde Foundation(t).......................... 42,832 * 42,832 -- * All directors and executive officers as a group, including (b)-(m) (15 persons) (u)............... 119,952,445 78.2% 1,198,540 118,680,074 75.6%
- ------------------------ * Represents beneficial ownership of less than one percent. (a) Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Shares of common stock and options or warrants that are currently exercisable or exercisable within 60 days of August 10, 1999 are deemed to be outstanding and to be beneficially owned by the person holding such options for the purpose of computing the percentage ownership of such person, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person. The number of shares being sold excludes any shares that may be sold as a result of the exercise by the underwriters of their over-allotment option, which if exercised, will be allocated pro rata among the selling stockholders. 88 (b) Includes: (1) 7,520,833 shares held by Walker Digital Corporation, of which Mr. Walker is Founder, Chairman and the controlling stockholder, including an aggregate of 228,171 shares as to which Walker Digital has granted options to certain of its employees and consultants; (2) 5,500,000 shares held by The Jay Walker Irrevocable Credit Trust; (3) 1,000 shares held by immediate family member of Mr. Walker, as to which Mr. Walker disclaims beneficial ownership; (4) 48,100,041 shares held by Mr. Walker individually, including an aggregate of 4,534,800 shares as to which Mr. Walker has granted options to certain individuals, of which, options to purchase 72,832 shares will be exercised by Mr. Paul Breitenbach in connection with this offering. Also includes options outstanding to purchase 1,382,500 shares which are vested but not exercisable until September 26, 1999. Excludes 132,500 shares subject to options that are not vested or exercisable within 60 days of August 10, 1999. Shares beneficially owned after this offering reflect the sale of 202,312 shares by Walker Digital Corporation. The address of Walker Digital Corporation is Five High Ridge Park, Stamford, Connecticut 06905. Mr. Walker has agreed to a 180 day lockup with the underwriters in connection with this offering. (c) Includes: (1) 5,000,000 shares held by Richard S. Braddock as Trustee of The Richard S. Braddock 1999 Annuity Trust; and (2) 1,000 shares held by an immediate family member of Mr. Braddock, as to which Mr. Braddock disclaims beneficial ownership. Also includes options outstanding to purchase 6,250,000 shares which are vested but are not exercisable until September 26, 1999. Includes options to purchase 250,000 shares that are currently exercisable for shares owned by Mr. Walker. Mr. Braddock has agreed to a 180 day lockup with the underwriters in connection with this offering. (d) Includes: (1) 500,000 shares held by The Timothy Brier 1998 Grantor Retained Annuity Trust, of which 8,092 shares are being sold in this offering; and (2) 7,700 shares held by immediate family members of Mr. Brier, as to which Mr. Brier disclaims beneficial ownership. Includes options outstanding to purchase 1,512,500 shares which are vested but not exercisable until 180 days after the date of this prospectus. Excludes 440,625 shares subject to options that are not vested or exercisable within 60 days of August 10, 1999. (e) Includes: (1) 62,500 shares held by The Paul E. Francis 1998 Trust, dated April 1, 1998; and (2) 125,000 shares held by The Paul E. Francis 1999 Grantor Retained Annuity Trust. Includes options outstanding to purchase 750,000 shares which are vested but not exercisable until September 26, 1999. Excludes 285,000 shares subject to options that are not vested or exercisable within 60 days of August 10, 1999. Excludes 42,832 shares owned by the Strypemonde Foundation, a charitable foundation established by Mr. Francis and his spouse. Also excludes 15,625 shares held by The Paul E. Francis 1998 Trust, dated December 2, 1998, and 15,625 shares held by The Paul E. Francis 1999 Trust, dated February 26, 1999, which were established by Mr. Francis for unrelated individuals. (f) Includes options outstanding to purchase 500,000 shares which are vested but not exercisable until September 26, 1999. Excludes 2,500,000 shares subject to options that are not vested or exercisable within 60 days of August 10, 1999. (g) Includes options outstanding to purchase 37,500 shares which are vested but not exercisable until September 26, 1999. (h) Includes options outstanding to purchase 31,250 shares which are vested but not exercisable until September 26, 1999. (i) Includes options outstanding to purchase 31,250 shares which are vested but not exercisable until September 26, 1999. (j) Includes 26,265,103 shares held by various General Atlantic entities. In addition, includes options outstanding to purchase 31,250 shares which are vested but not exercisable until September 26, 1999, which options are held by Mr. Ford. Mr. Ford, a director of priceline.com, is a managing member of General Atlantic Partners, LLC and a general partner of certain General Atlantic entities. Mr. Ford disclaims beneficial ownership of the 26,265,103 shares referred to above, except to the extent of his pecuniary interest therein. General Atlantic disclaims beneficial ownership of the 31,250 options 89 referred to above. Shares beneficially owned after this offering reflect the sale of 648,250 shares by various General Atlantic entities. The address of General Atlantic is 3 Pickwick Plaza, Greenwich, Connecticut 06830. The General Atlantic entities have agreed to a 180 day lockup with the underwriters in connection with this offering. (k) Includes: (1) 1,000 shares held by an immediate family member of Mr. Loeb; and (2) options outstanding to purchase 31,250 shares which are vested but not exercisable until September 26, 1999 and which are held by Mr. Loeb's daughter, as to which Mr. Loeb disclaims beneficial ownership. (l) Includes 3,125,000 shares held by Gore Creek Trust, as to which Mr. Nicholas disclaims beneficial ownership. Includes options held by Gore Creek Trust to purchase 750,000 shares that are currently exercisable for shares owned by Mr. Jay S. Walker, as to which Mr. Nicholas disclaims beneficial ownership. Also includes options outstanding to purchase 31,250 shares which are vested but not exercisable until September 26, 1999. (m) Includes: (1) 1,343,750 shares held by Allen & Company Incorporated on its own behalf and on behalf of certain of its officers, directors and employees; (2) options held by Allen & Company Incorporated to purchase 571,875 shares owned by Mr. Jay S. Walker; (3) 959,375 shares held by Ms. Nancy B. Peretsman; and (4) options held by Ms. Peretsman to purchase 31,250 shares, which options are vested but not exercisable until September 26, 1999. Ms. Peretsman, who is a Managing Director and Executive Vice President of Allen & Company Incorporated, disclaims beneficial ownership of the shares and options referred to in clauses (1) and (2) above, except to the extent of her pecuniary interest therein. Allen & Company disclaims beneficial ownership of the shares and options referred to in clauses (3) and (4) above. (n) Includes options outstanding to purchase 450,000 shares which are vested but not exercisable until 180 days after the date of this prospectus. Excludes 250,000 shares subject to options that are not vested or exercisable within 60 days of August 10, 1999. Also includes options held by Mr. Breitenbach to purchase 1,141,950 shares that are owned by Mr. Jay S. Walker which are currently exercisable. Of these options to purchase 1,141,950 shares, Mr. Breitenbach will exercise options to purchase 72,832 shares in connection with his sale in this offering. Excludes options to purchase 570,945 shares from Mr. Walker which are not vested or exercisable within 60 days of August 10, 1999. (o) Includes 500,000 shares held by The T. Scott Case 1998 Grantor Retained Annuity Trust and options outstanding to purchase 700,000 shares which are vested but not exercisable until 180 days after the date of this prospectus. (p) Includes 875,000 shares held by The Jesse Fink 1998 Grantor Retained Annuity Trust and options outstanding to purchase 2,443,750 shares which are vested but not exercisable until September 26, 1999. Mr. Fink has agreed to a 180 day lockup with the underwriters in connection with this offering. (q) Includes: (1) 75,000 shares held by Yarmouth Limited Partnership; and (2) 237,500 shares held by Mr. Manzi. (r) Excludes 156,250 shares held by an officer and director of Vulcan Ventures Incorporated. The address of Vulcan Ventures Incorporated is 110 110th Avenue N.E., Bellevue, Washington 98004-5840. (s) Includes 1,523,329 shares to be issued upon exercise of presently exercisable warrants and sold in this offering and warrants to purchase an aggregate of 17,096,073 shares underlying options that are exercisable upon the achievement of certain performance thresholds. (t) The Strypemonde Foundation is a charitable foundation established by Mr. Francis and his spouse. (u) Includes options outstanding to purchase 10,936,966 shares. Excludes 3,691,458 shares subject to options that are not vested or exercisable within 60 days of August 10, 1999. The address of all directors, officers and other individual stockholders is Five High Ridge Park, Stamford, Connecticut 06905. 90 CERTAIN UNITED STATES FEDERAL TAX CONSEQUENCES TO NON-U.S. INVESTORS INTRODUCTION The following is a summary of certain United States federal tax consequences to non-U.S. investors. In this summary, "non-U.S. investor" means a person or entity other than: - a citizen or resident of the United States; - a corporation, partnership or other entity created or organized in or under the laws of the United States or of any of the States; - an estate, the income of which is subject to United States federal income taxation regardless of its source; or - a trust, the administration of which is subject to the primary supervision of a United States court and the control of all of the substantial decisions of which is within the authority of one or more United States persons. This summary does not address all of the federal tax considerations that may be relevant to a non-U.S. investor in light of its particular circumstances or to non-U.S. investors that may be subject to special treatment under federal tax laws. Furthermore, this summary does not discuss any aspects of state, local or foreign taxation. This summary is based on current provisions of the Internal Revenue Code, Treasury regulations, judicial opinions, published positions of the IRS and other applicable authorities. These authorities are all subject to change, possibly with retroactive effect. Each prospective non-U.S. investor should consult its tax advisor with respect to the tax consequences of investing in the common stock. DIVIDENDS Dividends paid to a non-U.S. investor generally will be subject to withholding of federal income tax at a 30% rate or such lower rate as may be specified by an applicable income tax treaty. However, if the dividend is effectively connected with the conduct of a trade or business of the non-U.S. investor within the United States, the dividend will instead be taxed at ordinary federal income tax rates on a net income basis. Further, if the non-U.S. investor is a corporation, such effectively connected dividend income may also be subject to an additional branch profits tax. SALE OR OTHER DISPOSITION OF COMMON STOCK A non-U.S. investor generally will not be subject to federal income tax on any gain recognized on the sale or other disposition of common stock, except in the following circumstances: (1) The gain will be subject to federal income tax if it is effectively connected with a trade or business of the non-U.S. investor within the United States. (2) The gain will be subject to federal income tax if the non-U.S. investor is an individual who holds the common stock as a capital asset, is present in the United States for 183 or more days in the taxable year of the sale or other disposition, and either the individual has a "tax home" in the United States for federal income tax purposes or the gain is attributable to an office or other fixed place of business maintained by the individual in the United States. (3) The gain may be subject to federal income tax pursuant to federal income tax laws applicable to certain expatriates. (4) The gain may be subject to federal income tax if priceline.com is or has been during certain periods a "United States real property holding corporation" and the non-U.S. investor held, at any time during the five-year period ending on the date of disposition (or, if shorter, the non-U.S. investor's holding period), more than 5 percent of the outstanding common stock. Priceline.com 91 believes that it will not constitute a United States real property holding corporation immediately after the offering and does not expect to become a United States real property holding corporation; however, no assurance can be given in this regard. BACKUP WITHHOLDING AND INFORMATION REPORTING DIVIDENDS. United States backup withholding tax generally will not apply to dividends paid to a non-U.S. investor at an address outside the United States. Priceline.com must report annually to the IRS and to each non-U.S. investor the amount of dividends paid to such investor and the amount, if any, of tax withheld with respect to such dividends. This information may also be made available to the tax authorities in the non-U.S. investor's country of residence. SALE THROUGH A U.S. OFFICE OF A BROKER. Upon the sale or other disposition of common stock by a non-U.S. investor to or through a United States office of a broker, the broker must backup withhold at a rate of 31% and report the sale to the IRS, unless the investor certifies its foreign status under penalties of perjury or otherwise establishes an exemption from backup withholding. SALE THROUGH A FOREIGN OFFICE OF A BROKER. Upon the sale or other disposition of common stock by a non-U.S. investor to or through a foreign office of a United States broker or a foreign broker with certain types of relationships with the United States, the broker is not required to backup withhold. However, the broker must report the sale or other disposition to the IRS unless the broker has documentary evidence in its files that the seller is a non-U.S. investor and certain other conditions are met, or the holder otherwise establishes an exemption. BACKUP WITHHOLDING IS NOT AN ADDITIONAL TAX. Amounts withheld under the backup withholding rules are generally allowable as a refund or credit against the non-U.S. investor's federal income tax liability, if any, provided, that the required information is furnished to the IRS. Final United States Treasury regulations, effective for payments made after December 31, 2000, may affect the procedures to be followed by a non-U.S. investor in establishing such investor's foreign status for purposes of the withholding, backup withholding and information reporting rules. Prospective non-U.S. investors should consult their tax advisors concerning such regulations. FEDERAL ESTATE TAXES Common stock owned or treated as owned by an individual who is not a citizen or "resident" (as specially defined for federal estate tax purposes) of the United States at the time of death, will be included in such individual's gross estate for federal estate tax purposes, unless an applicable estate tax treaty provides otherwise. 92 DESCRIPTION OF CAPITAL STOCK The authorized capital stock of priceline.com consists of 1,000,000,000 shares of common stock, par value $0.008 per share, and 150,000,000 shares of preferred stock, par value $0.01 per share, of priceline.com. Upon completion of this offering, there will be 146,782,296 outstanding shares of common stock, outstanding options to purchase 26,582,391 shares of common stock and outstanding warrants to purchase 20,283,573 shares of common stock. COMMON STOCK Subject to preferences that may apply to shares of preferred stock outstanding at the time, the holders of outstanding shares of common stock are entitled to receive dividends out of assets legally available therefor at such times and in such amounts as the board of directors may from time to time determine. Each stockholder is entitled to one vote for each share of common stock held on all matters submitted to a vote of stockholders. Cumulative voting for the election of directors is not provided for in the priceline.com's certificate of incorporation, which means that the holders of a majority of the shares voted can elect all of the directors then standing for election. The common stock is not entitled to preemptive rights and is not subject to conversion or redemption. Upon the occurrence of a liquidation, dissolution or winding-up, the holders of shares of common stock would be entitled to share ratably in the distribution of all of the company's assets remaining available for distribution after satisfaction of all its liabilities and the payment of the liquidation preference of any outstanding preferred stock. Each outstanding share of common stock is, and all shares of common stock to be outstanding upon completion of this offering will be, fully paid and nonassessable. PREFERRED STOCK The board of directors has the authority, within the limitations and restrictions stated in the certificate of incorporation, to provide by resolution for the issuance of shares of preferred stock, in one or more classes or series, and to fix the rights, preferences, privileges and restrictions thereof, including dividend rights, conversion rights, voting rights, terms of redemption, liquidation preferences and the number of shares constituting any series or the designation of such series. The issuance of preferred stock could have the effect of decreasing the market price of the common stock and could adversely affect the voting and other rights of the holders of common stock. See "Risk Factors--Anti-Takeover Provisions Affecting Us Could Prevent or Delay a Change of Control." OPTIONS As of August 10, 1999, (1) options to purchase a total of 26,582,391 shares of common stock were outstanding; and (2) up to 5,729,069 additional shares of common stock may be subject to options granted in the future under the 1997 Omnibus Plan or the 1999 Omnibus Plan. All of the options contain standard anti-dilution provisions. See "Management--Priceline.com Incorporated 1997 Omnibus Plan," "--Priceline.com Incorporated 1999 Omnibus Plan" and "--Summary of Compensation." WARRANTS As of August 10, 1999, priceline.com had the following outstanding warrants to purchase shares of common stock: (1) a warrant to purchase up to 18,619,402 shares of common stock at an exercise price of approximately $0.93 per share that is held by Delta; and (2) warrants to purchase up to an aggregate of 937,500 shares of common stock at an exercise price of $3.20 per share; (3) 1,250,000 shares of common stock at an exercise price of $6.40 per share, that are held by various airlines; and (4) 1,000,000 shares of common stock at an exercise price of $97.41 per share. All of the warrants contain standard anti-dilution provisions. See "Business--Strategic Alliances." 93 REGISTRATION RIGHTS The holders of an aggregate of 144,983,503 shares of common stock or securities convertible into common stock are entitled to certain registration rights. After the offering, an aggregate of 142,104,432 shares of common stock or securities convertible into common stock will continue to be entitled to registration rights. These rights are provided under the terms of a registration rights agreement between priceline.com and the holders of the registrable securities, who include Mr. Braddock, Mr. Walker, Walker Digital, General Atlantic, Vulcan Ventures Incorporated, other stockholders and several airlines. This agreement provides demand registration rights to the holders of substantially all of the registrable securities. In addition, the holders of all of the registrable securities are entitled under the agreement, subject to certain limitations, to require priceline.com to include their registrable securities in future registration statements the company files. Registration of shares of common stock pursuant to the rights granted in this agreement will result in such shares becoming freely tradeable without restriction under the Securities Act of 1933. All registration expenses incurred in connection with the above registrations will be borne by priceline.com. The sale of shares of common stock by the selling stockholders in this offering is being made pursuant to the "piggyback" registration rights contained in the registration rights agreement. Priceline.com obtained from parties to the registration rights agreement that hold shares (or presently exercisable warrants to purchase shares) of common stock available for sale in this offering a waiver of a 30-day notice period under the agreement and a consent to the assignment of registration rights by Messrs. Jay Walker and Richard Braddock, each of whom chose to sell less than his pro rata number of shares in this offering. Priceline.com did not obtain such waiver and consent from certain other parties to the registration rights agreement (comprised of certain airline participants) because they do not have shares (or presently exercisable warrants to purchase shares) of common stock available for sale in this offering. Priceline.com believes that no damages arise as a result of the failure to obtain such waiver and consent since such airline participants do not have shares (or presently exercisable warrants to purchase shares) of common stock available for sale. Nevertheless, if a disagreement with such airline participants were to arise, priceline.com can not be certain as to the effect, if any, that it could have on its relationship with such airline participants or whether damages or other remedies could be imposed. TRANSFER AGENT AND REGISTRAR The Transfer Agent and Registrar for the common stock is ChaseMellon Shareholder Services, L.L.C. LISTING The common stock is traded on the Nasdaq National Market under the trading symbol "PCLN." 94 SHARES ELIGIBLE FOR FUTURE SALE Future sales of substantial amounts of common stock, including shares issued upon exercise of outstanding options and warrants, in the public market after this offering could adversely affect market prices prevailing from time to time and could impair priceline.com's ability to raise capital through the sale of its equity securities. Sales of substantial amounts of common stock of priceline.com in the public market could adversely affect the prevailing market price and the ability of priceline.com to raise equity capital in the future. Upon completion of this offering, priceline.com will have outstanding 146,782,296 shares of common stock. Of these shares, the 5,500,000 shares of common stock sold in this offering, the 10,000,000 shares of common stock sold in priceline.com's initial public offering and 938,540 shares of common stock eligible to be sold by employees upon exercise of stock options pursuant to the option exercise program will be freely tradeable without restriction under the Securities Act unless purchased by "affiliates" of priceline.com as defined in Rule 144 under the Securities Act. The shares of common stock issuable upon conversion of the % convertible subordinated notes sold in the concurrent note offering will be freely tradeable in a similar manner. In addition, 26,582,391 shares are issuable upon exercise of outstanding options granted under the 1997 Omnibus Plan and the 1999 Omnibus Plan. We have filed a registration statement on Form S-8 covering the shares of common stock issuable under such options. As a result, when the options are exercised, the shares issued will be freely tradeable after September 25, 1999 under the Securities Act unless purchased by "affiliates" of priceline.com as defined in Rule 144 under the Securities Act. The balance of priceline.com's outstanding shares of common stock and the shares of common stock issuable upon exercise of outstanding warrants will be "restricted securities" under the Securities Act, subject to restrictions on the timing, manner and volume of sales of such shares. Each of the selling stockholders and Mr. Jay S. Walker who, after this offering, will own an aggregate of 147,835,331 shares of common stock, including shares issuable upon exercise of options and warrants owned by them, have agreed, subject to limited exceptions, for a period of 180 days after the date of this prospectus that they will not, without the prior written consent of Morgan Stanley & Co. Incorporated, directly or indirectly: - offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend or otherwise transfer or dispose of, directly or indirectly, any shares of common stock or any securities convertible into or exercisable or exchangeable for common stock; - enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the common stock; - as to selling stockholders that are parties to the registration rights agreement, make any demand for, or exercise any right with respect to, the registration of any shares of common stock or any security convertible into or exercisable or exchangeable for common stock; or - file a registration statement, other than, in the case of priceline.com, a registration statement (1) on Form S-8 covering shares of common stock subject to outstanding options or options to be issued under the 1997 Omnibus Plan or the 1999 Omnibus Plan or (2) on any appropriate form in response to demand registration rights under the registration rights agreement. The restrictions described in this paragraph do not apply in certain circumstances, including: - the sale of the shares to the underwriters in this offering; 95 - the issuance of restricted stock awards under priceline.com's existing employee benefit plans or shares of common stock upon the exercise of an option or a warrant or the conversion of a security outstanding on the date of this prospectus; - the grant of options to certain officers, directors, employees or consultants provided such options are not exercisable prior to the end of the lock-up period; - the issuance of warrants (or shares of capital stock upon the exercise of such warrants) to suppliers or other entities providing products or services to priceline.com in connection with entering into certain supply, adaptive marketing or other similar arrangements, provided that the recipients of such warrants or shares agree to be bound by the foregoing provisions; - in the case of each selling stockholder, the sale or other transfers of any shares of common stock by certain of the foregoing persons to any associate of such selling stockholder, as such term is defined in Rule 12b-2 under the Exchange Act, of such person which agrees to be bound by the foregoing provisions; or - the grant of exchange rights and the issuance of our common stock on exercise of such exchange rights, in connection with the development by priceline.com of new lines of business through other entities, PROVIDED THAT no such issuance is permitted prior to 180 days after the date of this prospectus. In addition, holders who will own 3,547,311 shares of common stock after this offering and options to purchase an additional 4,532,504 shares after this offering agreed in connection with our initial public offering to similar restrictions until after September 25, 1999. In connection with the option exercise program, holders of options to purchase 9,676,356 shares of common stock registered on our Form S-8 entered into lock-up agreements restricting the exercise of their options and sale of the underlying shares until 180 days after the date of this prospectus, without our prior written consent. After giving effect to these contractual restrictions and shares that may be issued upon exercise of outstanding options and warrants, we estimate that additional shares of common stock will be available for sale in the public market as follows:
APPROXIMATE NUMBER OF DATE SHARES ELIGIBLE FOR SALE - ----------------------------------------------------------------------------------- ----------------------------- September 26, 1999................................................................. 5,140,000 October through November 1999...................................................... 1,520,000 December 1999 through January 2000................................................. 11,580,000 Thereafter......................................................................... 150,650,000
Since many of these shares were purchased at prices substantially below current market prices, we believe a significant number of these shares will be sold when eligible for resale. In general, under Rule 144 as currently in effect, a person, or persons whose shares are aggregated, who has beneficially owned restricted shares for at least one year, including the holding period of any prior owner except an affiliate, would be entitled to sell within any three-month period a number of shares that does not exceed the greater of (1) 1% of the number of shares of common stock then outstanding, which will equal approximately 1,400,000 shares immediately after this offering, or (2) the average weekly trading volume of the common stock during the four calendar weeks preceding the filing of a Form 144 with respect to such sale. Sales under Rule 144 also are subject to certain manner of sale provisions and notice requirements and to the availability of current public information about priceline.com. Under Rule 144(k), a person who is not deemed to have been an affiliate of priceline.com at any time during the three months preceding a sale, and who has beneficially owned the shares proposed to be sold for at least two years, 96 including the holding period of any prior owner except an affiliate, is entitled to sell such shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144. Rule 701 permits resales of shares in reliance upon Rule 144 but without compliance with certain restrictions of Rule 144. Any employee, officer or director of or consultant to priceline.com who purchased his or her shares pursuant to a written compensatory plan or contract may be entitled to rely on the resale provisions of Rule 701. Rule 701 permits affiliates to sell their Rule 701 shares under Rule 144 without complying with the holding period requirements of Rule 144. Rule 701 further provides that non-affiliates may sell such shares in reliance on Rule 144 without having to comply with the holding period, public information, volume limitation or notice provisions of Rule 144. Upon consummation of this offering and subject to the foregoing lock-up agreements, holders of up to 142,153,503 shares of common stock and securities exercisable for shares of common stock will have certain rights to request the registration of their shares under the Securities Act. Upon the effectiveness of such registration, all shares covered by such registration statement would be freely transferable. Walker Digital also owns directly approximately 5.2% of our outstanding common stock. Walker Digital has established an option plan for its officers and employees that provides for the grant of options to purchase common stock held by Walker Digital. See "Description of Capital Stock--Registration Rights." 97 UNDERWRITERS Under the terms and subject to the conditions contained in an underwriting agreement dated the date of this prospectus, the U.S. underwriters named below for whom Morgan Stanley & Co. Incorporated, Goldman, Sachs & Co., Allen & Company Incorporated, BancBoston Robertson Stephens Inc., Donaldson, Lufkin & Jenrette Securities Corporation and Merrill Lynch, Pierce, Fenner & Smith Incorporated are acting as U.S. representatives, and the international underwriters named below for whom Morgan Stanley & Co. International Limited, Goldman Sachs International, Allen & Company Incorporated, BancBoston Robertson Stephens International Limited, Donaldson, Lufkin & Jenrette International and Merrill Lynch International are acting as international representatives, have severally agreed to purchase an aggregate of 2,000,000 shares of common stock from us and 3,500,000 shares from the selling stockholders. The number of shares of common stock that each underwriter has agreed to purchase is set forth opposite its name below.
NUMBER OF NAME SHARES - ----------------------------------------------------------------------------------------------------- ---------- U.S. Underwriters: Morgan Stanley & Co. Incorporated.................................................................. Goldman, Sachs & Co................................................................................ Allen & Company Incorporated....................................................................... BancBoston Robertson Stephens Inc.................................................................. Donaldson, Lufkin & Jenrette Securities Corporation................................................ Merrill Lynch, Pierce, Fenner & Smith Incorporated............................................................................ ---------- Subtotal......................................................................................... 4,400,000 ---------- International Underwriters: Morgan Stanley & Co. International Limited......................................................... Goldman Sachs International........................................................................ Allen & Company Incorporated....................................................................... BancBoston Robertson Stephens International Limited................................................ Donaldson, Lufkin & Jenrette International......................................................... Merrill Lynch International........................................................................ ---------- Subtotal......................................................................................... 1,100,000 ---------- Total............................................................................................ 5,500,000 ---------- ----------
The U.S. underwriters and the international underwriters are collectively referred to as the "underwriters," and the U.S. representatives and the international representatives are collectively referred to as the "representatives." The underwriters are offering the shares of common stock subject to their acceptance of the shares from priceline.com and the selling stockholders and subject to prior sale. The underwriting agreement provides that the obligations of the several underwriters to pay for and accept delivery of the shares of common stock offered by this prospectus are subject to the approval of certain legal matters by their counsel and to certain other conditions. The underwriters are obligated to take and 98 pay for all of the shares of common stock offered by this prospectus if any such shares are taken. However, the underwriters are not required to take or pay for the shares covered by the underwriters over-allotment option described below. In the agreement between U.S. and international underwriters, sales may be made between U.S. underwriters and international underwriters of any number of shares as may be mutually agreed. The per share price of any shares sold by the underwriters shall be the public offering price listed on the cover page of this prospectus, in United States dollars, less an amount not greater than the per share amount of the concession to dealers described below. The underwriters initially propose to offer part of the shares of common stock directly to the public at the public offering price listed on the cover page of this prospectus and part to certain dealers at a price that represents a concession not in excess of $ a share under the public offering price. Any underwriter may allow, and such dealers may reallow, a concession not in excess of $ a share to other underwriters or to certain dealers. After the initial offering of the shares of common stock, the offering price and other selling terms may from time to time be varied by the representatives. The selling stockholders have granted to the U.S. underwriters an option, exercisable for 30 days from the date of this prospectus, to purchase up to an aggregate of 825,000 additional shares of common stock at the public offering price listed on the cover page of this prospectus, less underwriting discounts and commissions. The U.S. underwriters may exercise this option solely for the purpose of covering overallotments, if any, made in connection with the offering of the shares of common stock offered by this prospectus. To the extent the option is exercised, each U.S. underwriter will become obligated, subject to certain conditions, to purchase about the same percentage of the additional shares of common stock as the number listed next to the U.S. underwriter's name in the preceding table bears to the total number of shares of common stock listed next to the names of all U.S. underwriters in the preceding table. If the U.S. underwriters' option is exercised in full, the total price to the public would be $ , the total underwriters' discounts and commissions would be $ and the total proceeds to the selling stockholders would be $ . Each of priceline.com, the selling stockholders and Mr. Jay S. Walker who, after this offering, will own an aggregate of 147,835,331 shares of common stock, including shares issuable upon exercises of options and warrants owned by them, has agreed, subject to limited exceptions, for a period of 180 days after the date of this prospectus that they will not, without the prior written consent of Morgan Stanley & Co. Incorporated, directly or indirectly: - offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend or otherwise transfer or dispose of, directly or indirectly, any shares of common stock or any securities convertible into or exercisable or exchangeable for common stock; - enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the common stock; - as to selling stockholders that are parties to the registration rights agreement, make any demand for, or exercise any right with respect to, the registration of any shares of common stock or any security convertible into or exercisable or exchangeable for common stock; or - file a registration statement, other than, in the case of priceline.com, a registration statement (1) on Form S-8 covering shares of common stock subject to outstanding options or options to be issued under the 1997 Omnibus Plan or the 1999 Omnibus Plan or (2) on any appropriate form in response to demand registration rights under the registration rights agreement. The restrictions described in this paragraph do not apply in certain circumstances, including: - the sale of the shares to the underwriters in this offering; 99 - the issuance of restricted stock awards under priceline.com's existing employee benefit plans or shares of common stock upon the exercise of an option or a warrant or the conversion of a security outstanding on the date of this prospectus; - the grant of options to certain officers, directors, employees or consultants provided such options are not exercisable prior to the end of the lock-up period; - the issuance of warrants (or shares of capital stock upon the exercise of such warrants) to suppliers or other entities providing products or services to priceline.com in connection with entering into certain supply, adaptive marketing or other similar arrangements, provided that the recipients of such warrants or shares agree to be bound by the foregoing provisions; - in the case of each selling stockholder, the sale or other transfers of any shares of common stock by certain of the foregoing persons to any associate of such selling stockholder, as such term is defined in Rule 12b-2 under the Exchange Act, of such person which agrees to be bound by the foregoing provisions; or - the grant of exchange rights and the issuance of our common stock on exercise of such exchange rights, in connection with the development by priceline.com of new lines of business through other entities, PROVIDED THAT no such issuance is permitted prior to 180 days after the date of this prospectus. In order to facilitate the offering of the common stock, the underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of the common stock. Specifically, the underwriters may over-allot in connection with the offering, creating a short position in the common stock for their own account. In addition, to cover over-allotments or to stabilize the price of the common stock, the underwriters may bid for, and purchase, shares of common stock in the open market. Finally, the underwriting syndicate may reclaim selling concessions allowed to an underwriter or a dealer for distributing the common stock in the offering, if the syndicate repurchases previously distributed common stock in transactions to cover syndicate short positions, in stabilization transactions or otherwise. Any of these activities may stabilize or maintain the market price of the common stock above independent market levels. The underwriters are not required to engage in these activities, and may end any of these activities at any time. Priceline.com, the selling stockholders and the underwriters have agreed to indemnify each other against certain liabilities, including liabilities under the Securities Act. Priceline.com has entered into an adaptive marketing agreement with Discover Financial Services, Inc. Discover Financial Services will pay priceline.com a fee for qualifying credit applications and qualifying credit applications and qualifying upgrades of existing Discover credit card accounts. Discover Financial Services and Morgan Stanley & Co. Incorporated are both wholly owned by Morgan Stanley Dean Witter & Co. 100 LEGAL MATTERS The validity of the issuance of the shares of common stock offered and certain other matters will be passed upon for priceline.com by Skadden, Arps, Slate, Meagher & Flom LLP and Melissa M. Taub, Esq., Senior Vice President, General Counsel and Secretary of priceline.com, and the validity of shares of common stock offered by priceline.com will be passed upon for the underwriters by Davis Polk & Wardwell. EXPERTS The combined financial statements of priceline.com and Priceline Travel, Inc. as of December 31, 1997 and December 31, 1998 (restated) and for the period July 18, 1997 (Inception) to December 31, 1997 and for the year ended December 31, 1998 (restated) included in this prospectus have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report appearing herein and have been so included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. ADDITIONAL INFORMATION Priceline.com has filed with the Securities and Exchange Commission a registration statement on Form S-1 under the Securities Act with respect to the shares of common stock offered hereby. This prospectus does not contain all of the information set forth in the registration statement and the exhibits thereto. For further information with respect to priceline.com and the common stock offered hereby, reference is made to the registration statement and the exhibits thereto. Statements contained in this prospectus regarding the contents of any contract or any other document to which reference is made are not necessarily complete, and, in each instance where a copy of such contract or other document has been filed as an exhibit to the registration statement, reference is made to the copy so filed, each such statement being qualified in all respects by such reference. A copy of the registration statement and the exhibits thereto may be inspected without charge at the Public Reference Room of the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and copies of all or any part of the registration statement may be obtained from the Public Reference Section of the Commission upon the payment of the fees prescribed by the Commission. The public may obtain information on the operation of the Public Reference Room by calling the Commission at 1-800-SEC-0330. The Commission also maintains a Web site (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding registrants, such as priceline.com, that file electronically with the Commission. 101 INDEX TO FINANCIAL STATEMENTS
PAGE --------- INDEPENDENT AUDITORS' REPORT............................................................................... F-2 COMBINED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1997 AND DECEMBER 31, 1998 AND FOR THE PERIOD JULY 18, 1997 (INCEPTION) TO DECEMBER 31, 1997 AND THE YEAR ENDED DECEMBER 31, 1998 (As Restated): Combined Balance Sheets................................................................................ F-3 Combined Statements of Operations...................................................................... F-4 Combined Statements of Changes in Stockholders' Equity................................................. F-5 Combined Statements of Cash Flows...................................................................... F-6 Notes to Combined Financial Statements................................................................. F-7 CONDENSED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998 AND JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 and 1999 (UNAUDITED): Condensed Balance Sheets............................................................................... F-22 Condensed Statements of Operations..................................................................... F-23 Condensed Statement of Changes in Stockholders' Equity................................................. F-24 Condensed Statements of Cash Flows..................................................................... F-25 Notes to Condensed Financial Statements................................................................ F-26
F-1 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders of priceline.com Incorporated and Priceline Travel, Inc. We have audited the accompanying combined balance sheets of priceline.com Incorporated and Priceline Travel, Inc. (collectively the Company) as of December 31, 1997 and 1998 and the related combined statements of operations, changes in stockholders' equity and cash flows for the period July 18, 1997 (Inception) to December 31, 1997 and the year ended December 31, 1998. These combined financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these combined financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the combined financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the combined financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such combined financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 1997 and 1998 and the results of their operations and their cash flows for the period July 18, 1997 to December 31, 1997 and the year ended December 31, 1998 in conformity with generally accepted accounting principles. As discussed in Note 13, the accompanying 1998 financial statements have been restated. /s/ Deloitte & Touche LLP Stamford, Connecticut February 10, 1999 (March 25, 1999 as to Note 12 and March 16, 1999 as to Note 13) F-2 PRICELINE.COM INCORPORATED AND PRICELINE TRAVEL, INC. COMBINED BALANCE SHEETS AS OF DECEMBER 31, 1997 AND 1998
1997 1998 ------------ -------------- AS RESTATED SEE NOTE 13 ASSETS CURRENT ASSETS: Cash and cash equivalents......................................................... $ 16,459 $ 53,593,026 Restricted bank deposit........................................................... -- 511,589 Accounts receivable, net of allowance for uncollectible accounts of $290,823 at December 31, 1998............................................................... -- 4,176,980 Note receivable from stockholder.................................................. 250,000 -- Prepaid expenses and other current assets......................................... -- 1,921,953 ------------ -------------- Total current assets.......................................................... 266,459 60,203,548 PROPERTY AND EQUIPMENT--Net......................................................... 1,180,119 5,926,877 RESTRICTED BANK CERTIFICATE OF DEPOSIT.............................................. -- 168,750 OTHER ASSETS........................................................................ 2,686 273,310 ------------ -------------- TOTAL ASSETS........................................................................ $ 1,449,264 $ 66,572,485 ------------ -------------- ------------ -------------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable.................................................................. $ 899,052 $ 5,268,430 Related party payable............................................................. 1,104,391 32,447 Accrued professional fees......................................................... 266,614 1,766,216 Accrued marketing fees............................................................ -- 1,225,315 Accrued telecommunications expense................................................ 24,354 776,303 Other accrued expenses............................................................ 36,595 490,807 Current portion of capital lease obligations...................................... 21,906 25,033 Other current liabilities......................................................... 302,363 696,997 ------------ -------------- Total current liabilities..................................................... 2,655,275 10,281,548 LONG-TERM DEBT--net................................................................. -- 989,018 CAPITAL LEASE OBLIGATIONS--net of current portion................................... 51,108 26,074 ------------ -------------- Total liabilities................................................................... 2,706,383 11,296,640 COMMITMENTS AND CONTINGENCIES (Note 10) STOCKHOLDERS' EQUITY (DEFICIENCY): Preferred stock................................................................... -- 311,262 Common stock...................................................................... 416,358 748,802 Additional paid-in capital........................................................ 840,005 171,155,186 Accumulated deficit............................................................... (2,513,482) (116,939,405) ------------ -------------- Total stockholders' equity (deficiency)....................................... (1,257,119) 55,275,845 ------------ -------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.......................................... $ 1,449,264 $ 66,572,485 ------------ -------------- ------------ --------------
See notes to combined financial statements. F-3 PRICELINE.COM INCORPORATED AND PRICELINE TRAVEL, INC. COMBINED STATEMENTS OF OPERATIONS FOR THE PERIOD JULY 18, 1997 (INCEPTION) TO DECEMBER 31, 1997 AND THE YEAR ENDED DECEMBER 31, 1998
JULY 18, 1997 (INCEPTION) TO YEAR ENDED DECEMBER 31, DECEMBER 31, 1997 1998 ------------- --------------- AS RESTATED SEE NOTE 13 Revenues.......................................................................... $ -- $ 35,236,860 Cost of revenues: Product costs................................................................... -- 33,495,745 Supplier warrant costs.......................................................... -- 3,029,014 ------------- --------------- Total cost of revenues............................................................ -- 36,524,759 ------------- --------------- Gross profit (loss)............................................................. -- (1,287,899) Expenses: Supplier start-up warrant costs................................................. -- 57,978,678 Sales and marketing............................................................. 441,479 24,388,061 General and administrative...................................................... 1,011,600 18,004,585 Systems and business development................................................ 1,060,091 11,131,650 ------------- --------------- Total expenses.................................................................... 2,513,170 111,502,974 ------------- --------------- Operating loss.................................................................... (2,513,170) (112,790,873) Interest income (expense), net.................................................... (312) 548,374 ------------- --------------- Net loss.......................................................................... (2,513,482) (112,242,499) Accretion on preferred stock...................................................... -- (2,183,424) ------------- --------------- Net loss applicable to common stockholders........................................ $ (2,513,482) $ (114,425,923) ------------- --------------- ------------- --------------- Per share basic and diluted net loss applicable to common stockholders............ $ (0.05) $ (1.41) ------------- --------------- ------------- --------------- Weighted average common shares outstanding........................................ 50,833,756 81,231,425
See notes to combined financial statements. F-4 PRICELINE.COM INCORPORATED AND PRICELINE TRAVEL, INC. COMBINED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE PERIOD JULY 18, 1997 (INCEPTION) TO DECEMBER 31, 1997 AND THE YEAR ENDED DECEMBER 31, 1998
PRICELINE.COM INCORPORATED PRICELINE TRAVEL, INC. COMBINED ------------------------------ --------------------------- ------------- PREFERRED STOCK COMMON STOCK ADDITIONAL COMMON STOCK ADDITIONAL -------------------- -------------------- PAID-IN --------------- PAID-IN ACCUMULATED SHARES AMOUNT SHARES AMOUNT CAPITAL SHARES AMOUNT CAPITAL DEFICIT ---------- -------- ---------- -------- ------------ ------ ------ ---------- ------------- Issuance of common stock and common stock subscriptions..... -- -- 51,669,719 $413,358 $ 836,642 3,000 $3,000 $3,363 -- Net loss............ -- -- -- -- -- -- -- -- $ (2,513,482) ---------- -------- ---------- -------- ------------ ------ ------ ---------- ------------- Balance, December 31, 1997.......... -- -- 51,669,719 413,358 836,642 3,000 3,000 3,363 (2,513,482) Issuance of common stock and common stock subscriptions..... -- -- 41,555,480 332,444 32,662,919 -- -- -- -- Issuance of Series A convertible preferred stock... 17,288,684 $172,887 -- -- 19,827,113 -- -- -- -- Issuance of Series B convertible preferred stock... 13,837,500 138,375 -- -- 54,276,175 -- -- -- -- Accretion on preferred stock as restated.......... -- -- -- -- 2,183,424 -- -- -- (2,183,424) Issuance of options to purchase common stock............. -- -- -- -- 245,063 -- -- -- -- Issuance of warrants to purchase common stock............. -- -- -- -- 61,120,487 -- -- -- -- Net loss as restated.......... -- -- -- -- -- -- -- -- (112,242,499) ---------- -------- ---------- -------- ------------ ------ ------ ---------- ------------- Balance, December 31, 1998 as restated.......... 31,126,184 $311,262 93,225,199 $745,802 $171,151,823 3,000 $3,000 $3,363 $(116,939,405) ---------- -------- ---------- -------- ------------ ------ ------ ---------- ------------- ---------- -------- ---------- -------- ------------ ------ ------ ---------- ------------- TOTAL ------------ Issuance of common stock and common stock subscriptions..... $ 1,256,363 Net loss............ (2,513,482) ------------ Balance, December 31, 1997.......... (1,257,119) Issuance of common stock and common stock subscriptions..... 32,995,363 Issuance of Series A convertible preferred stock... 20,000,000 Issuance of Series B convertible preferred stock... 54,414,550 Accretion on preferred stock as restated.......... -- Issuance of options to purchase common stock............. 245,063 Issuance of warrants to purchase common stock............. 61,120,487 Net loss as restated.......... (112,242,499) ------------ Balance, December 31, 1998 as restated.......... $ 55,275,845 ------------ ------------
See notes to combined financial statements. F-5 PRICELINE.COM INCORPORATED AND PRICELINE TRAVEL, INC. COMBINED STATEMENTS OF CASH FLOWS FOR THE PERIOD JULY 18, 1997 (INCEPTION) TO DECEMBER 31, 1997 AND THE YEAR ENDED DECEMBER 31, 1998
JULY 18, 1997 (INCEPTION) YEAR ENDED TO DECEMBER 31, DECEMBER 31, 1997 1998 --------------- ---------------------- AS RESTATED SEE NOTE 13 OPERATING ACTIVITIES: Net loss................................................................. $ (2,513,482) $ (112,242,499) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization.......................................... 211,996 1,860,096 Provision for uncollectible accounts................................... -- 580,448 Equity based compensation.............................................. -- 67,865,550 Changes in assets and liabilities: Accounts receivable.................................................. -- (4,757,428) Prepaid expenses and other current assets............................ -- (1,921,953) Restricted bank deposit and bank certificate of deposit.............. -- (680,339) Accounts payable and accrued expenses................................ 1,226,615 8,300,456 Other................................................................ 299,677 113,030 --------------- ---------------------- Net cash used in operating activities.............................. (775,194) (40,882,639) --------------- ---------------------- INVESTING ACTIVITIES--Additions to property and equipment................ (1,317,404) (6,606,854) --------------- ---------------------- FINANCING ACTIVITIES: Related party payable.................................................. 1,104,391 (1,071,944) Issuance of long-term debt............................................. -- 1,000,000 Principal payments under capital lease obligations..................... (1,697) (21,907) Issuance of common stock and subscription units........................ 1,006,363 26,495,361 Payment received on stockholder note................................... -- 250,000 Issuance of Series A convertible preferred stock....................... -- 20,000,000 Issuance of Series B convertible preferred stock....................... -- 54,414,550 --------------- ---------------------- Net cash provided by financing activities.......................... 2,109,057 101,066,060 --------------- ---------------------- NET INCREASE IN CASH AND CASH EQUIVALENTS................................ 16,459 53,576,567 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD........................... -- 16,459 --------------- ---------------------- CASH AND CASH EQUIVALENTS, END OF PERIOD................................. $ 16,459 $ 53,593,026 --------------- ---------------------- --------------- ---------------------- SUPPLEMENTAL CASH FLOW INFORMATION: Capital lease obligations.............................................. $ 74,711 $ -- Cash paid during the period for interest............................... 836 60,681
See notes to combined financial statements. F-6 PRICELINE.COM INCORPORATED AND PRICELINE TRAVEL, INC. NOTES TO COMBINED FINANCIAL STATEMENTS 1. BUSINESS DESCRIPTION Priceline.com Incorporated (priceline.com) has pioneered a unique new type of e-commerce known as a demand collection system that enables consumers to use the Internet to save money on a wide range of products and services while enabling sellers to generate incremental revenue. Using a simple and compelling consumer proposition--name your price, priceline.com collects consumer demand, in the form of individual customer offers guaranteed by a credit card, for a particular product or service at a price set by the customer. Priceline.com then either communicates that demand directly to participating sellers or accesses participating sellers' private databases to determine whether the customer's offer can be fulfilled on the basis of the pricing information and rules established by the sellers. Consumers agree to hold their offers open for a specified period of time and once fulfilled, offers cannot be canceled. By requiring consumers to be flexible with respect to brands, sellers and/or product features, priceline.com enables sellers to generate incremental revenue without disrupting their existing distribution channels or retail pricing structures. Priceline.com commenced its service on April 6, 1998 with the sale of leisure airline tickets. During 1997, the Company had been in the development stage. Priceline.com's services were expanded to include the sale of new automobiles, on a test basis, in July 1998, hotel room reservations in October 1998, and home mortgages in January 1999. Priceline.com was founded as a limited liability company (LLC) in July 1997 and converted to a corporation in July 1998. All LLC units and options and warrants to purchase units, were converted in July 1998 to common stock of priceline.com (Common Stock) and options and warrants to purchase Common Stock. For presentation purposes all such LLC units, and options and warrants to purchase units are presented as Common Stock or options and warrants to purchase Common Stock. Priceline Travel, Inc. (Priceline Travel) holds the travel agency license used to effect airline ticket sales. Priceline Travel is wholly owned by the founding stockholder and Vice-Chairman of priceline.com. Priceline.com has a call option to purchase Priceline Travel for nominal consideration. Priceline.com and Priceline Travel are entities under common control, accordingly, the financial statements of the two companies are presented on a combined basis. Priceline Travel will merge into priceline.com during the first quarter of 1999. Priceline.com and Priceline Travel are referred to, collectively, as the Company. Walker Digital Corporation (Walker Digital), a research and development company, developed the priceline.com service and the business model and related intellectual property rights underlying the priceline.com service, the rights for which were transferred to the Company on July 18, 1997. Walker Digital had no operations and no revenues related to the assets transferred to priceline.com. Walker Digital was founded and is controlled by the founding stockholder and Vice Chairman of priceline.com. Walker Digital has also been providing the Company with a variety of services including subleasing office facilities to the Company on a month to month basis. Charges to the Company for such services aggregated $19,813 and $706,160 during the period July 18, 1997 to December 31, 1997 and the year ended December 31, 1998, respectively. Such amounts are included in general and administrative expense. In addition, the Company charged Walker Digital $95,874 and $384,831 for the period July 18, 1997 to December 31, 1997 and the year ended December 31, 1998, respectively, for shared expenses. Such reimbursement has been offset against general and administrative expenses in the accompanying combined statements of operations. Several of the Company's executive offers and other key employees are also officers, employees and/or stockholders of Walker Digital. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF COMBINATION AND BASIS OF PRESENTATION--The combined financial statements for all periods presented include the financial statements of priceline.com and Priceline Travel. The combined financial F-7 PRICELINE.COM INCORPORATED AND PRICELINE TRAVEL, INC. NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) statements have been prepared in accordance with generally accepted accounting principles. All significant intercompany transactions have been eliminated. USE OF ESTIMATES--The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates. FAIR VALUE OF FINANCIAL INSTRUMENTS--The Company's financial instruments, including cash and cash equivalents, restricted bank deposits, accounts receivable-net and accounts payable, are carried at cost which approximates their fair value because of the short-term maturity of these financial instruments. The carrying value of the capital lease obligations and long-term debt approximates fair value because the interest rates on these obligations are comparable to the interest rates that could have been obtained at the date of the balance sheet. CASH AND CASH EQUIVALENTS, RESTRICTED BANK DEPOSITS--The Company invests excess cash primarily in money market accounts, certificates of deposits, and short-term commercial paper. All highly liquid instruments with an original maturity of three months or less are considered cash equivalents. Restricted bank deposits collateralize letters of credit issued in favor of certain airlines. NOTE RECEIVABLE FROM STOCKHOLDER--Represents a note receivable related to the sale of common stock that was subsequently paid on January 9, 1998. PROPERTY AND EQUIPMENT--Property and equipment are stated at historical cost. Depreciation and amortization of property and equipment is computed on a straight-line basis, generally over the estimated useful lives of the assets or, when applicable, the life of the lease, whichever is shorter. Capitalized software costs represent costs paid to third parties and are amortized on a straight-line basis over their estimated useful lives. Maintenance and repairs are charged directly to expense as incurred. INTANGIBLE ASSETS--The Company acquired certain patent rights covering the core buyer-driven commerce system and the method and system for pricing and selling airline ticket options from a Walker Digital affiliate on July 18, 1997 in exchange for 6,895,833 shares of common stock. Since the transfer was between entities under common control, it was recorded at the historical cost of the asset transferred, which was zero. IMPAIRMENT OF LONG-LIVED ASSETS--The Company evaluates the recoverability of its long-lived assets in accordance with Statement of Financial Accounting Standards (SFAS) No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of. SFAS No. 121 requires recognition of impairment of long-lived assets in the event the net book value of such assets exceeds the future undiscounted cash flows attributable to such assets. REVENUES AND COST OF REVENUES--The manner in which revenues are recognized differs depending on the product or service sold through the priceline.com service. With respect to airline ticket or hotel room reservation services, revenues are generated by transactions with customers who make offers to purchase airline tickets and hotel rooms supplied by participating sellers. All offers are guaranteed by a customer credit card. Credit cards are the only form of payment accepted by priceline.com. Revenues and related costs are recognized if, and when, the Company accepts the customer's offer and charges the customer's credit card. Because priceline.com is the merchant of record in these transactions, revenue for these F-8 PRICELINE.COM INCORPORATED AND PRICELINE TRAVEL, INC. NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) services includes the amount billed to the customer, net of certain transportation taxes and fees. Airline and hotel revenues may be supplemented by fees that are paid to the Company by third parties in connection with adaptive marketing programs. With respect to automobile and mortgage services, fees or other payments payable by the seller and/or the customer are recognized as revenue. Because priceline.com acts as an intermediary between the customer and the seller in these transactions, revenue for these products and services is recorded at the amount of the fee received in connection with the transaction, and not on the value of the underlying transaction, when the transaction is completed. Automobile and mortgage services revenues may also include fees from third parties for adaptive marketing programs. Revenues from adaptive marketing programs are earned when customers elect to increase their offering price, and thus the likelihood of a successful transaction, at no additional costs, by participating in a sponsor promotion. Priceline.com earns fee income from the corporate sponsor of each adaptive marketing program based primarily upon customer participation levels. During 1998, the Company generated approximately $4,037,000 of revenues from adaptive marketing programs. All of these adaptive marketing revenues resulted from fees paid to the Company by Capital One Bank in connection with a credit card promotion--see Note 12. Priceline.com expressly permits only credit cards as an acceptable form of payment from its consumers. Consequently, the Company believes that it does not have a significant risk of loss with respect to customer transactions. On rare occasions, the Company provides credit card refunds to individual customers to satisfy disputes and complaints. The Company accrues for expected credit card charge-backs and classifies the resulting expense as an addition to the allowance for doubtful accounts. The Company extends customary payment terms to corporate customers such as automobile dealers and adaptive marketing sponsors. The Company did not experience any uncollectible corporate accounts receivable in 1998. Cost of revenues includes product costs and the pro rata amount of the Delta Warrant earned prior to the December 31, 1998 measurement date based on their performance through that date--see Note 6. SUPPLIER START-UP WARRANT COSTS--Supplier start-up warrant costs includes the value of warrants issued to secure certain airline alliances and relationships including the value of the Delta Warrant net of the amount included in cost of revenues--see Note 6. SALES AND MARKETING--Sales and marketing expenses are comprised primarily of costs of radio and newspaper advertising, costs of the third-party offer-taking call center, credit card processing fees, provisions for customer credit card charge-backs and compensation for the Company's sales and marketing personnel. All sales and marketing costs are expensed as incurred. SYSTEMS AND BUSINESS DEVELOPMENT--Systems and business development expenses are comprised primarily of compensation to the Company's information systems and product development staff and payments to outside contractors, data communications and other expenses associated with operating the Company's Web site, depreciation on computer hardware and licensing fees for computer software. Such costs are expensed as incurred. INTEREST INCOME (EXPENSE), NET--Interest income (expense), net includes interest income of $523 and $633,294 and interest expense of $835 and $84,920 for the period July 18, 1997 to December 31, 1997 and the year ended December 31, 1998, respectively. F-9 PRICELINE.COM INCORPORATED AND PRICELINE TRAVEL, INC. NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) EQUITY-BASED COMPENSATION--The Company accounts for stock-based employee compensation arrangements in accordance with provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and complies with the disclosure provisions of SFAS No. 123, Accounting for Stock-Based Compensation. Under APB Opinion No. 25, compensation expense is based on the difference, if any, on the date of grant, between the fair value of priceline.com's stock and the exercise price. The Company accounts for equity instruments issued to non-employees in accordance with the provisions of SFAS No. 123 and Emerging Issues Task Force ("EITF") Issue No. 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services. All transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable. The measurement date of the fair value of the equity instrument issued is the earlier of the date on which the counterparty's performance is complete or the date on which it is probable that performance will occur. INCOME TAXES--The Company accounts for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes, which requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the temporary difference between the financial statement and tax basis of assets and liabilities using presently enacted tax rates in effect. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. During the period that priceline.com operated as an LLC, it was treated substantially as a partnership for tax purposes and, accordingly, the tax effect of its activities accrued to its members through July 1998. NET LOSS PER SHARE--The Company computes net loss per share in accordance with SFAS No. 128, Earnings Per Share which requires dual presentation of basic earnings per share ("EPS") and diluted EPS. Basic earnings per share is computed using the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed using the weighted average number of common shares and potentially dilutive shares outstanding during the period. Potential common shares consist of the incremental common shares issuable upon conversion of the Series A and Series B Convertible Preferred Stock (using the if-converted method) and shares issuable upon the exercise of stock options and warrants (using the treasury stock method). At December 31, 1998, Series A and Series B Convertible Preferred Stock were convertible into 21,610,854 shares and 17,296,874 shares, respectively, and options and warrants to purchase 42,181,997 shares of Common Stock were outstanding. Outstanding convertible preferred stock, warrants and options could potentially dilute basic earnings per share in the future but have not been included in the computation of diluted net loss per share as the impact would have been antidilutive for the periods presented. BUSINESS RISK--Business risks include the following: Competition--The markets for the products and services offered on the priceline.com service are intensely competitive. The Company competes with both traditional distribution channels and online services. The Company currently or potentially competes with a variety of companies with respect to each product or services offered. The Company potentially faces competition from a number of large online services that have expertise in developing online commerce and in facilitating Internet traffic. Many F-10 PRICELINE.COM INCORPORATED AND PRICELINE TRAVEL, INC. NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) competitors have significant competitive advantages. For example, airlines, hotels and other suppliers also sell their products and services directly to consumers and have established Web sites. Internet directories, search engines and large traditional retailers have significantly greater operating histories, customer bases, technical expertise, brand recognition and/or online commerce experience than the Company. In addition, certain competitors may be able to devote significantly greater resources to furthering their business. Dependence on Airline Industry and Certain Carriers--The Company's near term, and possibly long term, prospects are significantly dependent upon the sale of leisure airline tickets. Sales of leisure airline tickets and revenues derived from related adaptive marketing programs represented essentially all of the Company's revenues for the year ended December 31, 1998. Sales of airline tickets from the Company's three largest airline suppliers accounted for approximately 95% of airline ticket revenue for the year ended December 31, 1998. As a result, currently the Company is substantially dependent upon the continued participation of these three airlines in the priceline.com service in order to maintain and continue to grow its total airline ticket revenues. Significantly reducing the Company's dependence on the airlines is likely to take a long time and there can be no guarantee that the Company will succeed in reducing that dependence. Risks Associated with Brand Development--The Company intends to continue to pursue an aggressive brand-enhancement strategy, which will include mass market and multimedia advertising, promotional programs and public relations activities. To increase awareness of the priceline.com brand and expand it to a wide range of products and services, the Company will need to continue to spend significant amounts on advertising and promotions. These expenditures may not result in a sufficient increase in revenues to cover such advertising and promotions expenses. CONCENTRATION OF CREDIT RISK--Financial instruments which potentially subject the Company to concentrations of credit risk are principally bank deposits and accounts receivable. Cash and cash equivalents and restricted bank deposits are deposited with high credit quality financial institutions. Accounts receivable typically represent credit card purchases and are derived from the revenues earned from customers in the U.S. and are denominated in U.S. dollars. Accounts receivable balances are typically settled through customer credit cards and, as a result, the majority of accounts receivable are collected upon processing of credit card transactions. The Company maintains an allowance for uncollectible accounts based upon the expected collectibility of accounts receivable. During the year ended December 31, 1998, approximately 11% of revenues were generated from one vendor participating in an adaptive marketing program. As of December 31, 1998, amounts due from this vendor represented approximately 54% of accounts receivable. COMPREHENSIVE INCOME--Effective January 1, 1998, the Company adopted SFAS No. 130, Reporting Comprehensive Income. Under SFAS 130 changes in net assets of an entity resulting from transactions and other events and circumstances from non-owner sources are reported in a financial statement for the period in which they are recognized. Because there were no such changes, adoption of SFAS 130 did not impact the combined financial statements of the Company. SEGMENT REPORTING--Effective January 1, 1998, the Company adopted SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information. The Company operates as a single segment and will evaluate additional segment disclosure requirements as it expands its operations. F-11 PRICELINE.COM INCORPORATED AND PRICELINE TRAVEL, INC. NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, Statement of Financial Accounting Standards SFAS No 133 Accounting for Derivative Instruments and Hedging Activities was released. The statement requires the recognition of all derivatives as either assets or liabilities in the balance sheet and the measurement of those instruments at fair value. The accounting for changes in the fair value of a derivative depends on the planned use of the derivative and the resulting designation. The Company is required to implement the statement in the first quarter of fiscal 2000. The Company has not used derivative instruments and believes the impact of adoption of this statement will not have a significant effect on the financial statements. In March 1998, the American Institute of Certified Public Accountants issued Statement of Position (SOP) 98-1, Accounting for Costs of Computer Software Developed or Obtained for Internal Use. This SOP is effective for fiscal years beginning after December 15, 1998. This SOP requires capitalization of certain costs of computer software developed or obtained for internal use. 3. ACCOUNTS RECEIVABLE A summary of the activity in the allowance for uncollectible accounts for the year ended December 31, 1998 is as follows:
AMOUNT ----------- Provision charged to expense..................................................... $ 580,448 Charge offs...................................................................... (289,625) ----------- Balance at end of period......................................................... $ 290,823 ----------- -----------
4. PROPERTY AND EQUIPMENT Property and equipment at December 31, 1997 and 1998 consists of the following:
ESTIMATED USEFUL LIVES (YEARS) 1997 1998 ----------------- ------------ ------------ Computer equipment and software......................................... 3 $ 1,144,263 $ 7,034,088 Office equipment........................................................ 3 89,846 584,034 Furniture and fixtures.................................................. 7 158,006 380,847 ------------ ------------ Total................................................................... 1,392,115 7,998,969 Less accumulated depreciation and amortization.......................... 211,996 2,072,092 ------------ ------------ Property and equipment--net............................................. $ 1,180,119 $ 5,926,877 ------------ ------------ ------------ ------------
Depreciation and amortization expense was $211,996 and $1,860,096 for the period July 18, 1997 to December 31, 1997 and the year ended December 31, 1998, respectively. 5. LONG-TERM DEBT In April 1998, priceline.com issued a promissory note to an investor for $1,000,000. The promissory note bears interest at a rate of 6% per annum and matures on April 15, 2003. In connection with the promissory note, priceline.com issued detachable warrants to purchase 62,500 common shares at $0.80 per F-12 PRICELINE.COM INCORPORATED AND PRICELINE TRAVEL, INC. NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) 5. LONG-TERM DEBT (CONTINUED) share. The portion of the proceeds allocable to the warrant, estimated fair value of $12,795, was accounted for as additional paid-in capital. The fair value of the warrants was determined using an option pricing model. The discount will be recorded as interest expense over the term of the promissory note. At December 31, 1998, the principal balance of the promissory note, net of unamortized discount, was $989,018. 6. STOCKHOLDERS' EQUITY Combined stockholders' equity at December 31, 1997 and 1998 consists of the following:
1997 1998 ------------- --------------- Priceline.com Incorporated: Common stock, $0.008 par value--authorized 300,000,000 shares at December 31, 1997 and 1998 issued and outstanding, 51,669,719 and 93,225,199 shares at December 31, 1997 and 1998, respectively................................................. $ 413,358 $ 745,802 Convertible Preferred Stock, $0.01 par value; authorized 150,000,000 shares: Series A--$1.16 liquidation value; issued and outstanding 17,288,684 shares....... -- 172,887 Series B--$4.00 liquidation value; issued and outstanding, 13,837,500 shares...... -- 138,375 Additional paid-in capital........................................................ 836,642 171,151,823 Priceline Travel, Inc: Common stock, $1 par value--3,000 shares authorized, issued and outstanding....... 3,000 3,000 Additional paid-in capital........................................................ 3,363 3,363 Accumulated deficit............................................................... (2,513,482) (116,939,405) ------------- --------------- Total stockholders' equity (deficiency)........................................... $ (1,257,119) $ 55,275,845 ------------- --------------- ------------- ---------------
On July 18, 1997, priceline.com issued 42,990,211 shares of Common Stock for the initial contributed services of the founders. No compensation expense was recognized for the contributed services as priceline.com was in the earliest phases of development. Such services included conceiving the priceline.com business model, developing business strategies and operating plans, initiating contact with airline suppliers and raising capital. There were no employment agreements related to the services initially contributed and/or the shares issued in respect of such shares. Also, on July 18, 1997, priceline.com issued 6,895,833 shares of Common Stock to Walker Digital in exchange for the transfer by Walker Digital to priceline.com all of the rights, title, and interest in certain patents and patent applications relating to buyer driven commerce. In July 1998, priceline.com also issued 8,125,000 shares of Common Stock, to the Chairman and Chief Executive Officer which resulted in the recognition of a one time charge of $6,500,000 with respect to these shares. The shares were issued as compensation for agreeing to accept the position. In July 1998, pursuant to an agreement between priceline.com and two partnerships affiliated with General Atlantic Partners, LP (collectively GAP), priceline.com sold to GAP a total of 17,288,684 shares of F-13 PRICELINE.COM INCORPORATED AND PRICELINE TRAVEL, INC. NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) 6. STOCKHOLDERS' EQUITY (CONTINUED) Series A Convertible Preferred Stock, par value $0.01 per share (the Series A Preferred Stock) for $20,000,000. In December 1998, priceline.com raised net proceeds of approximately $54,414,550 by completing a private placement of an aggregate of 13,837,500 shares of its Series B Convertible Preferred Stock (the Series B Preferred Stock) with several investors, including GAP and Vulcan Ventures Incorporated. Fees of $850,000 have been paid to a company, in which a director of priceline.com is a director and stockholder, in connection with this transaction. Shares of the Series A and Series B Preferred Stock are automatically convertible, subject to antidilution adjustment, into an equal number of shares of Common Stock upon an initial public offering of the Company. The holders of the Series A and Series B Preferred Stock vote together as a single class with the holders of Common Stock. If the Company has not consummated an initial public offering by December 1999, the conversion price of Series B Preferred Stock will be adjusted to $1.97 per share. Since the Series B Preferred Stock contained this beneficial conversion feature at the date of issue, the Company allocated a portion of the proceeds equal to the value of the feature, $34,650,000, to additional paid-in capital. This amount will be amortized over one year. Amortization will cease if an initial public offering is completed within one year and the Series B Preferred Stock convert at $3.20 per share. The shares of the Series A and Series B Preferred Stock rank senior to the Common Stock with respect to liquidation and equal to the Common Stock with respect to dividends. In April 1998, priceline.com issued warrants to purchase 125,000 shares of Common Stock, at a zero exercise price, to a non-employee in exchange for services rendered to the Company. The estimated fair value of the warrants at the date of grant of $100,000 was based on the value of the equivalent shares as of the grant date, that is 125,000 shares at $0.80 per share, and has been reflected as sales and marketing expense and additional paid-in-capital. In April 1998, priceline.com issued warrants to purchase 62,500 shares of Common Stock at an exercise price of $0.80 per share in conjunction with a promissory note (see Note 5--Long-Term Debt). In August 1998, priceline.com entered into a warrant agreement with Delta Air Lines (Delta) to purchase up to 18,892,603 shares of Common Stock at an exercise price of approximately $0.93 per share (Delta Warrant) for agreeing to participate in the priceline.com service. Vesting was contingent upon achievement of certain predetermined performance thresholds. However, there was no penalty for failure to provide ticket inventory to satisfy these performance thresholds. Accordingly, no expense was recorded when the warrant was issued. On December 31, 1998, the Company amended its agreement with Delta to eliminate the vesting contingencies and fix the number of shares subject to the warrant at 18,619,402. The warrants were immediately vested on the date of grant, in that they are not subject to any forfeiture for any reason. The amended Delta Warrant will become exercisable at the earlier of seven years or over three years upon the achievement of certain performance thresholds. The agreement does not require Delta to make any performance commitments, is non-exclusive and allows Delta to participate in other programs similar to the priceline.com service. Accordingly, the Company recognized approximately $58.7 million of expense based upon the fair value of the warrant on December 31, 1998, of which $3 million is included in cost of revenues-supplier warrant costs and $55.7 million is included in expenses-supplier start-up warrant costs in the accompanying statement of operations. On December 31, 1998, priceline.com issued warrants to purchase 937,500 shares of Common Stock at an exercise price of $3.20 per share to three airlines in recognition of their being among the original F-14 PRICELINE.COM INCORPORATED AND PRICELINE TRAVEL, INC. NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) 6. STOCKHOLDERS' EQUITY (CONTINUED) participants in the priceline.com service. Because there are no requirements as to the nature or length of that participation and the warrants are not subject to forfeiture for any reason, the Company recognized approximately $2.3 million of expense based upon the fair value of the warrants at December 31, 1998, which is included in expenses-supplier start-up warrant costs in the accompanying statement of operations. On January 29, 1999, priceline.com issued warrants to an airline to purchase 1,250,000 shares of Common Stock at an exercise price of $6.40 per share. The warrants become exercisable as follows, 50% on January 29, 2000 and 50% on January 29, 2001. The agreement requires the airline to make available to priceline.com airline ticket inventory on certain specified terms and conditions for two years. If the airline does not provide the specified airline ticket inventory, the unexercised warrants are returnable and in addition, there is a penalty of $1.0 million in the first year and $0.5 million in the second year. The fair value of the warrant of $3.1 million at the grant date was capitalized and will be amortized over the two year period during which services will be provided to the Company. The fair value of the airline warrants was based on a third party valuation using an option pricing model and the following assumptions:
OTHER DELTA AIRLINE WARRANTS WARRANTS ----------- ------------- Stock Price............................................................................. $ 3.20 $ 3.20 Exercise Price.......................................................................... $ 0.93 $ 3.20-$6.40 Term.................................................................................... 7 years 3-4 years Volatility.............................................................................. 132% 132% Risk Free Rate.......................................................................... 4.6% 4.6%
As of December 31, 1998, no warrants had been exercised. 7. STOCK OPTION PLAN Priceline.com has adopted the 1997 Omnibus Plan (the Plan), which provides for grants of options as incentives and rewards to encourage employees, officers, consultants and directors in the long term success of the Company. The Plan provides for grants of options to purchase up to 23,875,000 shares at a purchase price equal to the fair market value on the date of grant. Generally, the options vest over three years from the date of grant. In accounting for the Plan, the Company has elected to follow APB 25 and related interpretations in accounting for its employee stock options. When the exercise price of employee stock options issued under the plan equaled the fair value of the underlying stock on the date of grant, no compensation expense was recorded. Compensation expense was recognized for the fair value of the options granted to non-employees and to the extent fair value of the underlying stock exceeded the exercise price of employee stock options. Compensation expense, included in general and administrative, recognized during the year ended December 31, 1998 aggregated $245,063. F-15 PRICELINE.COM INCORPORATED AND PRICELINE TRAVEL, INC. NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) The following summarizes the transactions pursuant to the Plan:
WEIGHTED AVERAGE RANGE SHARES OPTION PRICE OF SHARE ------------ ------------- ----------- Granted during 1998..................................................... 23,449,219 $ 0.93 $ 0.80-3.20 Forfeited............................................................... (189,374) 0.80 0.80 Cancelled............................................................... (815,625) 0.80 0.80 ------------ Balance at December 31, 1998............................................ 22,444,220 0.94 ------------ ------------ Exercisable at December 31, 1998........................................ None ------------ ------------ Available for grant at December 31, 1998................................ 1,430,780 ------------ ------------
Had compensation costs been determined based upon the fair value at grant date, the Company's pro forma net loss and pro forma net loss per share for the year ended December 31, 1998 would have been reported as follows:
REPORTED PRO FORMA -------------- -------------- Net loss......................................................................... $ 112,242,499 $ 114,613,228 Net loss applicable to common shareholders....................................... 114,425,923 116,796,653 Basic and diluted loss per common share.......................................... 1.41 1.44
The fair value of each option grant was determined on the date of grant using the minimum value method. The weighted average fair value of options granted during 1998 was estimated to be approximately $0.15 on the dates of grant using the minimum value method and the following assumptions: volatility of 0%, risk free interest rate of 6.00% and an expected life of 3 years, respectively. The Plan also provides for the grant of tandem stock appreciation rights, stand-alone stock appreciation rights, phantom stock and other forms of equity based incentive awards which do not reduce the number of shares with respect to which incentive awards may be granted. No such awards were made as of December 31, 1998. In February 1999, priceline.com established the 1999 Omnibus Plan (the 1999 Plan), which provides for grants of options as incentives and rewards to encourage employees, officers, consultants and directors in the long term success of the Company. The Plan provides for grants of options to purchase up to 9,375,000 shares at a purchase price equal to the fair market value on the date of grant. Generally, the options vest over three years from the date of grant. The Plan also provides for the grant of tandem stock appreciation rights, stand-alone stock appreciation rights, phantom stock and other forms of equity based incentive awards which do not reduce the number of shares with respect to which incentive awards may be granted. 8. TAXES INCOME TAXES--Through July 31, 1998, priceline.com operated as a limited liability company and income taxes (benefits) accrued to the members. Accordingly, no income taxes (benefits) were reflected in the accompanying financial statements as of December 31, 1997 and for the period then ended. Since converting from an LLC to a corporation in July 1998, the Company has incurred net operating losses of $22,703,000. This loss will expire if not utilized by December 31, 2018. As of December 31, 1998 a valuation allowance for the full amount of the net deferred tax asset of approximately $37,985,023, resulting from the tax net operating losses and other items was recorded because of the uncertainty regarding its realization. F-16 PRICELINE.COM INCORPORATED AND PRICELINE TRAVEL, INC. NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) 8. TAXES (CONTINUED) The tax effects of temporary differences that give rise to significant portions of deferred tax assets at December 31, 1998 are as follows:
1998 -------------- Equity based compensation..................................................... $ 25,267,265 Net operating loss carryforwards.............................................. 9,347,966 Start-up costs................................................................ 2,988,359 Other......................................................................... 381,433 -------------- Less valuation allowance...................................................... (37,985,023) -------------- Deferred tax asset, net....................................................... $ -- -------------- --------------
The income tax benefit is different from the amount computed using applicable statutory federal rates for the following reasons:
1998 -------------- Income tax benefit at federal statutory rate.................................. $ 39,284,875 Adjustment due to: LLC status through July 31, 1998............................................ (7,089,945) State taxes and other....................................................... 5,790,093 Increase in valuation allowance............................................. (37,985,023) -------------- Income tax benefit............................................................ $ -- -------------- --------------
FEDERAL AIR TRANSPORTATION TAX--Currently, a Federal transportation tax is imposed upon the sale of airline tickets and generally is collected by the airlines selling the tickets. The tax is based upon a percentage of the cost of transportation, which was 9% for periods prior to October 1, 1998 and 8% thereafter. The tax has been calculated based on the amount paid to the airline for a ticket, rather than the price paid by the customer. There is a possibility that current law requires computation of the tax based on the price paid by the customer. Approximately $111,000 in additional taxes relating to the method of calculating the tax has been accrued as of December 31, 1998. 9. OTHER RELATED PARTY TRANSACTIONS The Founder and Vice Chairman of priceline.com also serves as non-executive Chairman of NewSub Services, Inc. (NewSub), a direct marketing company co-founded by him. The Company participates in certain adaptive marketing programs with NewSub. Sales and marketing expense related to these programs totaled $80,799 for the year ended December 31, 1998. There was no such expense in 1997. In June 1998, priceline.com issued a promissory note to a Walker Digital for $1,000,000. The promissory note bore interest at a rate of 6% per annum and was due June 30, 1999. The note has been repaid. 10. COMMITMENTS AND CONTINGENCIES LEGAL PROCEEDINGS--On January 6, 1999, priceline.com received notice that a third party patent applicant and patent attorney, Thomas G. Woolston, purportedly had filed in December 1998 with the United States F-17 PRICELINE.COM INCORPORATED AND PRICELINE TRAVEL, INC. NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) 10. COMMITMENTS AND CONTINGENCIES (CONTINUED) Patent and Trademark Office a request to declare an interference between a patent application filed by Woolston describing an electronic market for used and collectible goods and priceline.com's core buyer-driven commerce patent. Priceline.com has received a copy of a Petition for Interference from Woolston, the named inventor of at least three United States Patent applications titled Consignment Nodes, one of which has issued as a patent. Priceline.com currently is awaiting information from the Patent Office regarding whether it will initiate an interference proceeding concerning Woolston's patent application and priceline.com's core buyer-driven commerce patent. An interference is an administrative proceeding instituted in the Patent Office to determine questions of patentability and priority of invention between two or more parties claiming the same patentable invention. There is no statutory period within which the Patent Office must act on an interference request. If an interference is declared and proceeds through a final hearing in the Patent Office, a final judgment is made by the Patent Office as to inventorship. Following such final judgment, appeals could be made in Federal court. While there can be no certainty as to time periods, interference proceedings typically take years to resolve. As a threshold to the initiation of an interference proceeding, Woolston must show that his patent application supports claims that he copied from the priceline.com core buyer-driven commerce patent. In order to make this showing, he would have to prove, among other things, that he invented the subject matter of the priceline.com claims before the inventors of the priceline.com patent. If the Patent Office were to find that Woolston's patent application supported the copied priceline.com claims, it would resolve the interference by awarding inventorship to the party with the earliest proven date of invention. Woolston recently announced an agreement to license his issued patent and pending patent applications to the owner of an Internet travel service that, according to such announcement, commenced on-line operations in the fourth quarter of 1998 and purports to compete with priceline.com. While the interference process is still at an early stage, priceline.com believes that it has meritorious defenses to Woolston's claim, which it intends to pursue vigorously. Among other things, priceline.com believes that the Woolston patent application does not disclose the inventions covered by the priceline.com patent claims. However, it is impossible to predict the outcome of an interference with certainty. While Woolston claims to have an earlier invention date by a period of approximately sixteen months, the final decision as to priority of invention would be made by the Patent Office after considering facts provided by each party during the interference proceeding. If an interference is declared and thereafter resolved in favor of Woolston, such resolution could result in an award of some or all of the disputed patent claims to Woolston. If, following such award, Woolston were successful in a patent infringement action against priceline.com, including prevailing over all defenses available to priceline.com such as those of non-infringement and invalidity, this could require priceline.com to obtain licenses from Woolston at a cost which could significantly adversely affect priceline.com's business. If Woolston prevailed in both an interference and an infringement action, then priceline.com could be enjoined from conducting business through the priceline.com service to the extent covered by the patent claims awarded to Woolston. In addition, defense of the interference action may be expensive and may divert management attention away from priceline.com's business. On January 19, 1999, Marketel International Inc. (Marketel), a California corporation, filed a lawsuit against priceline.com and Priceline Travel, among others. On February 22, 1999, Marketel filed an amended and supplemental complaint. The amended complaint filed by Marketel alleges causes of action for, among other things, misappropriation of trade secrets, breach of contract, conversion, breach of confidential relationship, copyright infringement, fraud, unfair competition and false advertising, and seeks injunctive relief and damages in an unspecified amount. In its amended complaint, Marketel alleges, F-18 PRICELINE.COM INCORPORATED AND PRICELINE TRAVEL, INC. NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) 10. COMMITMENTS AND CONTINGENCIES (CONTINUED) among other things, that the defendants conspired to misappropriate Marketel's business model, which it describes as a buyer-driven electronic marketplace for travel services and its appurtenant techniques, market research, forms, plans, and processes, which allegedly were provided in confidence approximately ten years ago. The amended complaint also alleges that three former Marketel employees are the actual sole inventors or co-inventors of a patent which was issued on August 11, 1998 and which patent has been assigned to priceline.com. Marketel asks that the patent's inventorship be corrected accordingly. Based upon publicly available information, priceline.com believes that Marketel's fax and fee-based business was launched in 1991 and ceased operations seven months later. Priceline.com's Internet-based model was independently developed by Walker Digital and priceline.com, and practiced by the Company starting in 1998. Based on publicly available information and Marketel's complaint, priceline.com understands that Marketel operated a fax-based travel information service which offered consumers, travel agents and/or consolidators the opportunity to purchase specially printed forms. These forms, when accompanied by an additional non-refundable fee, allowed prospective ticket buyers to fax to Marketel credit-card guaranteed bids for airline travel at a bid price specified by the buyer. The Company believes that Marketel has not engaged in any regular commercial activities since ceasing operations in 1992. Based upon publicly available information, Marketel reactivated its active status as a corporation by satisfying its back-due tax obligations to the State of California shortly after the filing of its complaint. On February 5, and February 10, 1999, the Company filed their answer and amended answer, respectively, to the amended complaint, in which they denied the material allegations of liability in the complaint. Priceline.com and all other defendants strongly dispute the material legal and factual allegations contained in Marketel's amended complaint and believe that the amended complaint is without merit. Priceline.com intends to defend vigorously against the action. Defending the lawsuit may involve significant expense and, due to the inherent uncertainties of litigation, there can be no certainty as to the ultimate outcome. Pursuant to the indemnification obligations contained in the Purchase and Intercompany Services Agreement with Walker Digital, Walker Digital has agreed to indemnify, defend and hold harmless priceline.com for damages, liabilities and legal expenses incurred in connection with the Marketel litigation. 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, and including claims of alleged infringement of third party intellectual property rights by the company. Such claims, even if not meritorious, could result in the expenditure of significant financial and managerial resources. AIRLINE ALLIANCES AND RELATIONSHIPS--Priceline.com has entered into Airline Participation Agreements with eighteen airlines for the supply of airline tickets. The Airline Participation Agreements do not commit the airlines to provide tickets for any particular routes or at a discount to their retail prices, but outline the terms and conditions under which tickets may be sold pursuant to fares, rules and availability that the airlines may provide from time to time. The Airline Participation Agreements are generally subject to termination upon 30 days notice by priceline.com or the airline. EMPLOYMENT CONTRACTS--Priceline.com has entered into employment agreements with certain members of senior management that provide for minimum annual compensation of approximately $2,135,000 in the aggregate. The agreements provide for periods of employment of up to 3 years. Generally, the agreements provide for incentives and bonuses based on the achievement of performance goals, as well as the grant of stock options under the 1997 Omnibus Stock Option Plan. F-19 PRICELINE.COM INCORPORATED AND PRICELINE TRAVEL, INC. NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) 10. COMMITMENTS AND CONTINGENCIES (CONTINUED) CAPITAL LEASES--Priceline.com leases certain machinery and equipment costing $74,711 under a capital lease agreement. Accumulated depreciation on this equipment was $2,075 and $26,979 at December 31, 1997, and December 31, 1998, respectively. These amounts are included in property and equipment in Note 4. Future minimum lease payments, including interest, under the capital lease at December 31, 1998 are as follows:
YEAR ENDING DECEMBER 31, - ------------------------------------------------------------------------------------------------------- 1999................................................................................................... $ 30,389 2000................................................................................................... 30,389 --------- Total minimum lease payments........................................................................... 60,778 Less amounts representing interest..................................................................... 9,671 --------- Present value of future minimum lease payments......................................................... 51,107 Less current portion of obligations.................................................................... 25,033 --------- Obligations under capital leases, net of current portion............................................... $ 26,074 --------- ---------
11. BENEFIT PLAN Priceline.com adopted a defined contribution 401(k) savings plan (the Plan) during 1998 covering all employees who are at least 21 years old and have completed 6 months of service. The Plan allows eligible employees to contribute up to 20% of their eligible earnings, subject to a statutorily prescribed annual limit. The Company may make matching contributions on a discretionary basis to the Plan. All participants are fully vested in their contributions and investment earnings. During the year ended December 31, 1998, the Company did not make any matching contributions to the Plan. 12. SUBSEQUENT EVENTS On March 25, 1999, the Company obtained shareholder approval of a 1.25 for 1 stock split of its common stock and an increase in the authorized shares of its common stock to 1,000,000,000 shares. In conjunction with the stock split the par value of the common stock was reduced from $.01 per share to $.008 per share. All share and per share data have been retroactively adjusted to reflect the stock split. On March 24, 1999, priceline.com exercised its call option to purchase Priceline Travel for nominal consideration and Priceline Travel was merged into priceline.com. On March 3, 1999, Capital One Bank notified the Company of its termination of its adaptive marketing program effective May 1, 1999. 13. RESTATEMENT Subsequent to the issuance of the Company's combined 1998 financial statements, the Company's management determined that the calculation of the fair value of the Delta warrant, other airline warrants and the beneficial conversion feature on the Series B Preferred Stock should be revised. The fair value of the Delta warrant and the other airline warrants has been revised to reflect the change in the volatility assumption from 50% to 132%, eliminate the large block and lack of marketability discounts, and consider F-20 PRICELINE.COM INCORPORATED AND PRICELINE TRAVEL, INC. NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) 13. RESTATEMENT (CONTINUED) the warrant's anti-dilution and exercisability features. As a result, the 1998 combined financial statements have been restated from the amounts previously reported to recognize an additional $22.0 million of expense based upon the revised fair value of the warrants at December 31, 1998, of which $3.0 million is included in the cost of revenues-supplier warrant costs and $19.0 million is included in expenses-supplier start-up warrant costs. In addition, the value of the beneficial conversion feature on the Series B Preferred Stock has been revised to calculate such amount based on 22,500,000 shares. As a result, additional paid-in capital and accumulated deficit have been restated from amounts previously reported to recognize an additional $883,424 of accretion of preferred stock based on the revalued beneficial conversion feature. A summary of the significant effects of the restatement is as follows:
AS PREVIOUSLY REPORTED AS RESTATED -------------- --------------- At December 31, 1998: Additional paid-in capital................................................. $ 148,224,070 $ 171,155,186 Accumulated deficit........................................................ (94,008,289) (116,939,405) For the year ended December 31, 1998: Cost of revenues-supplier warrant costs.................................... -- 3,029,014 Expenses-supplier start-up warrant costs................................... 38,960,000 57,978,678 Net loss................................................................... (90,194,807) (112,242,499) Accretion on preferred stock............................................... (1,300,000) (2,183,424) Net loss applicable to common stockholders................................. (91,494,807) (114,425,923) Per share basic and diluted net loss applicable to common stockholders..... (1.13 (1) (1.41)
- ------------------------ (1) Per share basic and diluted net loss applicable to common stockholders as previously reported has been restated for a 1.25 for one stock split. F-21 PRICELINE.COM INCORPORATED CONDENSED BALANCE SHEETS AS OF DECEMBER 31, 1998 AND JUNE 30, 1999 (UNAUDITED)
DECEMBER 31, JUNE 30, ASSETS 1998 1999 ------------ ------------ CURRENT ASSETS: Cash and cash equivalents.................................... $ 53,593,026 $142,803,134 Short term investments....................................... -- 9,307,474 Accounts receivable, net of allowance for uncollectible accounts of $290,823 and $1,173,243 at December 31, 1998 and June 30, 1999, respectively............................ 4,176,980 22,683,987 Related party receivable..................................... -- 1,383,592 Prepaid expenses and other current assets.................... 2,433,542 7,338,897 ------------ ------------ Total current assets....................................... 60,203,548 183,517,084 PROPERTY AND EQUIPMENT--net.................................... 5,926,877 15,311,214 RELATED PARTY RECEIVABLE....................................... -- 4,374,372 OTHER ASSETS................................................... 442,060 1,592,222 ------------ ------------ TOTAL ASSETS................................................... $ 66,572,485 $204,794,892 ------------ ------------ ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable............................................. $ 5,268,430 $ 26,933,608 Related party payable........................................ 32,447 -- Accrued expenses............................................. 4,258,641 6,403,716 Other current liabilities.................................... 722,030 136,109 ------------ ------------ Total current liabilities.................................. 10,281,548 33,473,433 LONG-TERM DEBT--net............................................ 989,018 -- CAPITAL LEASE OBLIGATIONS--net of current portion.............. 26,074 12,248 ------------ ------------ Total liabilities.............................................. 11,296,640 33,485,681 COMMITMENTS AND CONTINGENCIES (Note 6) STOCKHOLDERS' EQUITY Preferred stock.............................................. 311,262 -- Common stock................................................. 745,802 1,138,564 Additional paid-in capital................................... 171,158,186 326,880,953 Accumulated deficit.......................................... (116,939,405) (156,710,306) ------------ ------------ Total stockholders' equity................................. 55,275,845 171,309,211 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY..................... $ 66,572,485 $204,794,892 ------------ ------------ ------------ ------------
See accompanying notes to condensed financial statements. F-22 PRICELINE.COM INCORPORATED CONDENSED STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1999 (UNAUDITED)
JUNE 30, JUNE 30, 1998 1999 -------------- -------------- Revenues......................................................................... $ 7,021,639 $ 160,974,391 Cost of Revenues: Product costs.................................................................. 7,942,840 144,323,527 Supplier warrant costs......................................................... -- 761,518 -------------- -------------- Total cost of revenues........................................................... 7,942,840 145,085,045 Gross profit (loss)............................................................ (921,201) 15,889,346 -------------- -------------- Expenses: Sales and marketing............................................................ 7,764,477 34,871,086 General and administrative..................................................... 4,798,876 9,169,869 Systems and business development............................................... 5,368,214 5,652,423 -------------- -------------- Total expenses................................................................... 17,931,567 49,693,378 -------------- -------------- Operating loss................................................................... (18,852,768) (33,804,032) Interest income, net............................................................. 162,331 2,387,104 -------------- -------------- Net loss......................................................................... (18,690,437) (31,416,928) Accretion on preferred stock..................................................... -- (8,353,973) -------------- -------------- Net loss applicable to common stockholders....................................... $ (18,690,437) $ (39,770,901) -------------- -------------- -------------- -------------- Per share basic and diluted net loss applicable to common stockholders........... $ (0.27) $ (0.29) -------------- -------------- -------------- -------------- Weighted average common shares outstanding....................................... 69,738,365 137,436,399
See accompanying notes to condensed financial statements. F-23 PRICELINE.COM INCORPORATED CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED)
PREFERRED STOCK COMMON STOCK ADDITIONAL --------------------- --------------------- PAID-IN ACCUMULATED SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL ---------- --------- ---------- --------- ----------- ------------ ----------- Balance, January 1, 1999......... 31,126,184 $ 311,262 93,225,199 $ 745,802 $171,158,186 $(116,939,405) $55,275,845 Conversion of Series A convertible preferred stock.... (17,288,684) (172,887) 21,610,853 172,887 -- -- -- Conversion of Series B convertible preferred stock.... (13,837,500) (138,375) 17,296,875 138,375 -- -- -- Accretion on preferred stock..... -- -- -- -- 8,353,973 (8,353,973) -- Issuance of common stock......... -- -- 10,000,000 80,000 144,274,221 -- 144,354,221 Exercise of warrants............. 187,500 1,500 48,500 -- 50,000 Issuance of warrants to purchase common stock................... -- -- -- -- 3,046,073 -- 3,046,073 Net loss......................... -- -- -- -- -- (31,416,928) (31,416,928) ---------- --------- ---------- --------- ----------- ------------ ----------- Balance, June 30, 1999........... -- $ -- 142,320,427 $1,138,564 $326,880,953 $(156,710,306) $171,309,211 ---------- --------- ---------- --------- ----------- ------------ ----------- ---------- --------- ---------- --------- ----------- ------------ -----------
See accompanying notes to condensed financial statements. F-24 PRICELINE.COM INCORPORATED CONDENSED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1999 (UNAUDITED)
JUNE 30, JUNE 30, 1998 1999 -------------- -------------- OPERATING ACTIVITIES: Net loss......................................................................... $ (18,690,437) $ (31,416,928) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization................................................ 659,544 1,911,678 Provision for uncollectible accounts......................................... 5,829 1,401,372 Supplier warrant costs....................................................... 761,518 Changes in assets and liabilities: Receivables.................................................................. (1,679,081) (19,908,379) Related party receivables.................................................... -- (5,790,411) Prepaid expenses and other current assets.................................... (368,159) (3,382,318) Accounts payable and accrued expenses........................................ 3,315,410 23,703,167 Other........................................................................ (296,447) (1,030,020) -------------- -------------- Net cash used in operating activities...................................... (17,053,341) (33,750,321) INVESTING ACTIVITIES: Additions to property and equipment.......................................... (5,076,153) (11,285,032) Purchases of short-term investments.......................................... -- (9,307,474) -------------- -------------- Net cash used in investing activities...................................... (5,076,153) (20,592,506) FINANCING ACTIVITIES: Issuance of long-term debt................................................... 2,000,000 -- Payment of long-term debt and capital lease obligations...................... (10,587) (1,012,099) Issuance of common stock and subscription units.............................. 23,364,000 144,565,034 Payment received on stockholder note......................................... 250,000 -- -------------- -------------- Net cash provided by financing activities.................................. 25,603,413 143,552,935 NET INCREASE IN CASH AND CASH EQUIVALENTS........................................ 3,473,919 89,210,108 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD................................... 16,459 53,593,026 -------------- -------------- CASH AND CASH EQUIVALENTS, END OF PERIOD......................................... $ 3,490,378 $ 142,803,134 -------------- -------------- -------------- -------------- SUPPLEMENTAL CASH FLOW INFORMATION--Cash paid during the year for interest....... $ 5,232 $ 50,397
See accompanying notes to condensed financial statements. F-25 PRICELINE.COM INCORPORATED NOTES TO CONDENSED FINANCIAL STATEMENTS 1. BUSINESS DESCRIPTION Priceline.com Incorporated ("priceline.com") has pioneered a new type of e-commerce known as a demand collection system that enables consumers to use the Internet to save money on a wide range of products and services while enabling sellers to generate incremental revenue. Priceline.com collects consumer demand, in the form of individual customer offers guaranteed by a credit card for a particular product or service at a price set by the customer. Priceline.com then either communicates that demand directly to participating sellers or accesses participating sellers' private databases to determine whether the customer's offer can be fulfilled on the basis of the pricing information and rules established by the sellers. Consumers agree to hold their offers open for a specified period of time and once fulfilled, offers cannot be cancelled. By requiring consumers to be flexible with respect to brands, sellers and/or product features, priceline.com enables sellers to generate incremental revenue without disrupting their existing distribution channels or retail pricing structures. Priceline Travel, Inc. ("Priceline Travel") previously held the travel agency license used to effect airline ticket sales through the priceline.com service. Priceline Travel was wholly owned by the founding stockholder of priceline.com and on March 24, 1999, Priceline Travel was merged into priceline.com for nominal consideration. The accompanying condensed financial statements include the financial position and results of operations of Priceline Travel for all periods presented. 2. BASIS OF PRESENTATION The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring accruals considered necessary for a fair presentation, have been included in the accompanying unaudited financial statements. Operating results for the six months ended June 30, 1999 are not necessarily indicative of the results that may be expected for the full year ending December 31, 1999. 3. INITIAL PUBLIC OFFERING OF COMMON STOCK On April 1, 1999, priceline.com completed an initial public offering in which it sold 10,000,000 shares of its common stock at a price of $16.00 per share, raising $160.0 million in gross proceeds. Offering proceeds to priceline.com, net of approximately $11.2 million in aggregate underwriters discounts and commissions and $4.4 million in related expenses, were approximately $144.4 million. Simultaneous with the effectiveness on March 29, 1999 of priceline.com's Registration Statement on Form S-1, each outstanding share of priceline.com's Series A and Series B convertible preferred stock was automatically converted into shares of common stock. As of June 30, 1999, approximately 142.3 million shares of common stock were outstanding. 4. NET LOSS PER SHARE Priceline.com computes net loss per share in accordance with Statement of Financial Accounting Standards No. 128, "Earnings Per Share" which requires dual presentation of basic earnings per share ("EPS") and diluted EPS. Basic earnings per share is computed using the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed using the weighted average number F-26 PRICELINE.COM INCORPORATED NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED) 4. NET LOSS PER SHARE (CONTINUED) of common shares and potentially dilutive shares outstanding during the period. The effect of the conversion of the Series A and Series B convertible preferred stock is included in the weighted average number of shares outstanding during the period that commenced on the conversion date, March 29, 1999. The effect of the preferred stock conversion for the period prior to March 29, 1999 has not been included in the computation of diluted net loss per share as the impact would have been antidilutive for the periods presented. Potential common shares consist of the incremental common shares issuable upon the exercise of stock options and warrants. At June 30, 1999, options and warrants to purchase 48,228,959 shares of common stock were outstanding. Outstanding warrants and options could potentially dilute basic earnings per share in the future but have not been included in the computation of diluted net loss per share as the impact would have been antidilutive for the periods presented. Net loss applicable to common stockholders for the six month period ended June 30, 1999 was $39.8 million including a non-recurring, non-cash charge associated with the accretion on the Series B convertible preferred stock that was outstanding during such period of $8.4 million. Based on the weighted average number of 137.4 million shares of common stock outstanding during the six month period ended June 30, 1999, the per share basic and diluted net loss applicable to common stockholders was $0.29. 5. RECENT ACCOUNTING PRONOUNCEMENTS In March 1998, the American Institute of Certified Public Accountants issued Statement of Position ("SOP") 98-1, "Accounting for Costs of Computer Software Developed or Obtained for Internal Use." This SOP requires capitalization of certain costs of computer software developed or obtained for internal use. Priceline.com adopted this SOP on January 1, 1999 and for the six month period ended June 30, 1999, priceline.com capitalized approximately $5.7 million of computer software developed or obtained for internal use. Amortization of such costs aggregated approximately $149,000 during the six month period ended June 30, 1999. 6. COMMITMENTS AND CONTINGENCIES On January 6, 1999, priceline.com received notice that a third party patent applicant and patent attorney, Thomas G. Woolston, purportedly had filed in December 1998 with the United States Patent and Trademark Office a request to declare an "interference" between a patent application filed by Woolston describing an electronic market for used and collectible goods and priceline.com's core buyer-driven commerce patent. Priceline.com has received a copy of a Petition for Interference from Woolston, the named inventor of at least three United States Patent applications titled "Consignment Nodes," one of which has issued as a patent. Priceline.com currently is awaiting information from the Patent Office regarding whether it will initiate an interference proceeding concerning Woolston's patent application and priceline.com's core buyer-driven commerce patent. Woolston recently announced an agreement to license his issued patent and pending patent applications to the owner of a competing Internet travel service. While the interference process is still at an early stage, priceline.com believes that it has meritorious defenses to Woolston's claim, which it intends to pursue vigorously. Among other things, priceline.com believes that the Woolston patent application does not disclose the inventions covered by the priceline.com patent claims. However, it is impossible to predict the outcome of an interference with certainty. While Woolston claims to have an earlier invention date by a period of approximately sixteen months, the final decision as to priority of invention would be made by the Patent Office after considering facts provided by F-27 PRICELINE.COM INCORPORATED NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED) 6. COMMITMENTS AND CONTINGENCIES (CONTINUED) each party during the interference proceeding. If an interference is declared and thereafter resolved in favor of Woolston, such resolution could result in an award of some or all of the disputed patent claims to Woolston. If, following such award, Woolston were successful in a patent infringement action against priceline.com, including prevailing over all defenses available to priceline.com such as those of non-infringement and invalidity, this could require priceline.com to obtain licenses from Woolston at a cost which could significantly adversely affect priceline.com's business. If Woolston prevailed in both an interference and an infringement action, then priceline.com could be enjoined from conducting business through the priceline.com service to the extent covered by the patent claims awarded to Woolston. In addition, defense of the interference action may be expensive and may divert management attention away from priceline.com's business. On January 19, 1999, Marketel International Inc. ("Marketel"), a California corporation, filed a lawsuit against priceline.com and Priceline Travel, among others. On February 22, 1999, Marketel filed an amended and supplemental complaint, and on March 17, 1999, Marketel filed a second amended complaint. The second amended complaint filed by Marketel alleges causes of action for, among other things, misappropriation of trade secrets, breach of contract, conversion, breach of confidential relationship, copyright infringement, fraud, unfair competition and false advertising, and seeks injunctive relief and damages in an unspecified amount. In its second amended complaint, Marketel alleges, among other things, that the defendants conspired to misappropriate Marketel's business model, which it describes as a buyer-driven electronic marketplace for travel services and its appurtenant techniques, market research, forms, plans, and processes, which allegedly were provided in confidence to some of the defendants approximately ten years ago. The second amended complaint also alleges that three former Marketel employees are the actual sole inventors or co-inventors of a patent which was issued on August 11, 1998 and which patent has been assigned to priceline.com. Marketel asks that the patent's inventorship be corrected accordingly. On February 5, 1999, February 10, 1999 and March 31, 1999, the defendants filed their answer, amended answer and answer to the second amended complaint, respectively in which they denied the material allegations of liability in the complaints. Priceline.com and all other defendants strongly dispute the material legal and factual allegations contained in Marketel's second amended complaint and believe that the second amended complaint is without merit. Since May 28, 1999, there has been a discovery stay in effect, which was caused by the withdrawal of Marketel's counsel. Marketel has retained new counsel, and the priceline.com now anticipates moving forward with discovery. Defending the Marketel litigation may involve significant expense and, due to the inherent uncertainties of litigation, there can be no certainty as to the ultimate outcome. Pursuant to the indemnification obligations contained in the Purchase and Intercompany Services Agreement with Walker Digital, Walker Digital has agreed to indemnify, defend and hold harmless priceline.com for damages, liabilities and legal expenses incurred in connection with the Marketel litigation. From time to time priceline.com 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. Such claims, even if not meritorious, could result in the expenditure of significant financial and managerial resources. F-28 PRICELINE.COM INCORPORATED NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED) 7. SUBSEQUENT EVENTS COMMON STOCK AND CONVERTIBLE DEBT OFFERINGS. On July 23, 1999, priceline.com filed a registration statement covering the sale of up to $287.5 million of convertible subordinated notes (including $37.5 million in respect of an underwriters' over-allotment option) and up to 6.325 million shares of common stock (including 825,000 shares in respect of an underwriters' over-allotment option). The common stock offering is to be comprised of 2.0 million shares of common stock to be issued and sold by priceline.com and 3.5 million shares to be sold by certain selling stockholders, plus the sale by the selling stockholders of any additional shares sold upon exercise of the underwriters' over-allotment option. OPTION EXERCISE PROGRAM. On July 19, 1999, an option exercise program was established to enable employees employed as of June 1, 1999 to exercise options and sell shares through a cashless exercise program administered through a broker dealer. Priceline.com employees holding 938,540 options that were vested as of June 1, 1999 were permitted during the period commencing on July 20, 1999 and ending on July 30, 1999, to exercise a portion of their options that otherwise were not exercisable until September 26, 1999 (following expiration of the 180 day initial public offering lock-up period) and to sell the underlying option shares through the program. Any employee who elected to exercise options and sell option shares pursuant to the option exercise program was required to agree to enter into a "lock-up" agreement in a form similar to that signed by selling stockholders in the secondary common stock offering, which prohibits additional option exercises or stock sales prior to 180 days from the completion of the secondary common stock offering. CONTINENTAL AIRLINES AGREEMENTS. Continental Airlines agreed to join the priceline.com service on July 20, 1999 pursuant to the terms of an Airline Participation Agreement with priceline.com. Upon execution of the Airline Participation Agreement, priceline.com issued a warrant to Continental for the purchase of 1 million shares of common stock at an exercise price of $97.41 per share. The warrant will become exercisable upon the earlier of July 2004 or the achievement of certain performance thresholds. However the agreement does not require Continental to make any performance commitments. Priceline.com will incur a non-cash charge of approximately $90 million during the quarter ending September 30, 1999, reflecting the fair value of the Continental warrant at the grant date. F-29 [At the top of the page, a picture of a customer in the middle of the following text: BUYER-DRIVEN COMMERCE] [Four page screen shots with textual descriptions of the four steps involved in making an offer for airline tickets with the heading: airline ticket example... and the following language below the heading: In just four steps, priceline.com customers can name their own price for a leisure airline ticket on a major carrier.] The first page screen shot in the top left with the following caption: Step 1: Tell us where and when.... Enter where you want to go and the dates you want to travel. Choose as many different airports to leave and arrive from as you want--the more the better. The second page screen shot in the top right with the following caption: Step 2: Review the rules.... Priceline.com's airline ticket service is designed for leisure travelers who can be flexible on their flights and routing. The rules are clearly explained on the Web site. The third page screen shot in the bottom left with the following caption: Step 3: Name your price.... Enter the price you want to pay--there are no minimums and no advance purchase restrictions. We encourage customers to shop around first and be reasonable. The fourth page screen shot in the bottom right with the following caption: Step 4: Provide a credit card.... Your credit card is used to guarantee that you'll buy the tickets if priceline.com is successful at getting a major airline to agree to your price. You get a yes or no answer in just one hour! priceline.com(sm) The page is blank except for the following text in the middle of the page: priceline.com(sm) name your own price..and save! THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. PROSPECTUS (SUBJECT TO COMPLETION) ISSUED AUGUST 10, 1999 $250,000,000 [LOGO] % CONVERTIBLE SUBORDINATED NOTES DUE 2006 --------------------- INTEREST PAYABLE ON FEBRUARY 1 AND AUGUST 1 ------------------ HOLDERS MAY CONVERT THE NOTES INTO COMMON STOCK OF PRICELINE.COM AT ANY TIME AT A CONVERSION PRICE OF $ PER SHARE, SUBJECT TO ADJUSTMENT UPON CERTAIN EVENTS. ------------------------ BEGINNING AUGUST 6, 2002, PRICELINE.COM MAY REDEEM ANY OF THE NOTES AT AN INITIAL REDEMPTION PRICE OF % OF THEIR PRINCIPAL AMOUNT PLUS ACCRUED INTEREST. ------------------------ FOR A MORE DETAILED DESCRIPTION OF THE NOTES, SEE "DESCRIPTION OF NOTES" BEGINNING ON PAGE 96. ------------------------ OUR COMMON STOCK IS QUOTED ON THE NASDAQ NATIONAL MARKET UNDER THE SYMBOL "PCLN." ON AUGUST 9, 1999, THE REPORTED LAST SALE PRICE FOR THE COMMON STOCK WAS $70.00 PER SHARE. ------------------------ CONCURRENT WITH THIS OFFERING, PRICELINE.COM IS OFFERING 2,000,000 SHARES OF COMMON STOCK AND SELLING STOCKHOLDERS ARE OFFERING AN ADDITIONAL 3,500,000 SHARES. THE STOCK OFFERING WILL BE MADE PURSUANT TO A SEPARATE PROSPECTUS. CLOSING OF THE STOCK OFFERING IS NOT A CONDITION TO THE CLOSING OF THIS OFFERING. ------------------------ INVESTING IN THE NOTES INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 4. --------------------- PRICE % AND ACCRUED INTEREST, IF ANY ------------------------
UNDERWRITING PRICE TO DISCOUNTS AND PROCEEDS TO PUBLIC COMMISSIONS PRICELINE.COM ------------------ ------------------ ------------------ PER NOTE........................................... % % % TOTAL.............................................. $ $ $
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE NOT APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. PRICELINE.COM HAS GRANTED THE UNDERWRITERS THE RIGHT TO PURCHASE UP TO AN ADDITIONAL $37,500,000 PRINCIPAL AMOUNT OF NOTES TO COVER OVER-ALLOTMENTS. MORGAN STANLEY & CO. INCORPORATED EXPECTS TO DELIVER THE NOTES TO PURCHASERS ON AUGUST , 1999. ------------------------ MORGAN STANLEY DEAN WITTER GOLDMAN, SACHS & CO. ALLEN & COMPANY INCORPORATED BANCBOSTON ROBERTSON STEPHENS DONALDSON, LUFKIN & JENRETTE MERRILL LYNCH & CO. , 1999 DESCRIPTION OF ARTWORK: [At the top of the page, a picture of a person using the Internet in the middle of the following text: BUYER-DRIVEN COMMERCE] [On the right side of the page, a page screen shot of the priceline.com homepage, including a button menu of the various services offered by the priceline.com service. Below the priceline.com homepage, four smaller cascading page screen shots with textual descriptions of the various services offered and steps involved in the priceline.com process; the following captions flow below the smaller cascading screen shots] "Priceline.com's name-your-price process was carefully designed to be fast and easy to use." "In just a few minutes, and at no cost, a consumer can name a guaranteed ready-to-buy price for a flexible range of goods. Priceline.com then searches for a seller who wants the sale." On the left side of the page, the following text: A UNIQUE E-COMMERCE SYSTEM WHERE BUYERS NAME THEIR PRICE, AND PRICELINE.COM "COLLECTS" INCREMENTAL DEMAND FOR SELLERS TO CONSIDER. Priceline.com is a multi-category pricing system which uses a simple and compelling consumer proposition--name your price. Subject to the buyer's agreed range of product flexibility, we find a seller willing to accept the buyer's offer. Buyers get the price they want and sellers get incremental sales. [The button menu of services that the priceline.com service offers is duplicated from the page screen shot of the priceline.com homepage, with each button bearing an icon depicting the textual description on the button: [Icon of an airplane with the text] "Domestic Airline Tickets" [Icon of an airplane with the text] "International Airline Tickets" [Icon of a suitcase with the text] "Hotel Rooms" [Icon of a car with the text] "New Cars (N.Y. Metro)" [Icon of a house with the text] "Home Mortgages" [Icon of a house with the text] "Home Refinancing" [Icon with a house with the dollar sign on it with the text] "Home Equity Loans" Underneath the button menu, the following text: As of July 1999, six consumer services are available through priceline.com. Currently available services are in two broad categories; travel and financial services. Our seventh service, new cars, is being tested in the New York metropolitan area and is priceline.com's first service in the automotive category. priceline.com(SM) priceline.com and the priceline.com logo are service marks of priceline.com Incorporated. The gatefold consists of four sections, each with visual page screen shots and textual descriptions of each of the categories available through the priceline.com service: airline tickets, hotel rooms, home financing or new cars. On right side, top half of the first page of the gatefold, a picture of an airline, with the following heading flowing around it: priceline.com(SM) airline tickets 2 Below the heading, three page screen shots with textual descriptions of the airline tickets services offered by priceline.com with the following caption: "Airline Tickets. . . Priceline.com's inaugural name-your-price service was launched on April 6, 1998. During the second quarter of 1999, priceline.com sold over 440,000 airline tickets." On the left side, top half of the first page of the gatefold, the first two buttons in the button menu of services that the priceline.com service offers are duplicated: [Icon of an airplane with the text] "Domestic Airline Tickets" [Icon of an airplane with the text] "International Airline Tickets" Below the buttons, the following text: AIRLINE TICKETS Name your price for leisure travel on a major airline. . . With priceline.com's airline ticket service, a leisure traveler names his price and dates of travel and agrees to accept non-changeable tickets at any time of the day, on any major airline that agrees to his price. On right side, bottom half of the first page of the gatefold, a picture of a hotel, with the following heading flowing around it: priceline.com(SM) hotel rooms Below the heading, three page screen shots with textual descriptions of the hotel rooms services offered by priceline.com with the following caption: "Hotel Rooms . . . Priceline.com's second travel service was initially launched in October 1998 and was launched nationally in April 1999." On the left side, bottom half of the first page of the gatefold, the third button in the button menu of services that the priceline.com service offers is duplicated: [Icon of a suitcase with the text] "Hotel Rooms" Below the button, the following text: HOTEL ROOMS Name your price for a hotel room in over 1000 U.S. cities. . . With priceline.com's hotel room service, a traveler names his price, quality rating and geographic zone in any of over 1000 U.S. cities. The buyer agrees to stay in any major hotel that accepts his price. priceline.com(SM) On the right side, top half of the second page of the gatefold, a picture of a house, with the following heading flowing around it: priceline.com(SM) home financing Below the heading, three page screen shots with textual descriptions of the home financing services offered by priceline.com with the following caption: "Home Financing. . . Priceline.com introduced three home financing services in the first quarter of 1999. Consumers can name their own interest rate and points on mortgages, home equity loans and home refinancings. 3 On the left side, top half of the second page of the gatefold, the last three buttons in the button menu of services that the priceline.com service offers are duplicated: [Icon of a house with the text] "Home Mortgages" [Icon of a house with the text] "Home Refinancing" [Icon with a house with the dollar sign on it with the text] "Home Equity Loans" Below the buttons, the following text: HOME FINANCING Name your interest rate and points for a mortgage, refinancing or home equity loan. . . With priceline.com's home financing services, the consumer names his interest rate and points for any of three home financing services. Priceline.com works to find a lender who agrees to the consumer's offer. On the right side, bottom half of the second page of the gatefold, a picture of a car, with the following heading flowing around it: priceline.com(SM) new cars Below the heading, three page screen shots with textual descriptions of the new cars services offered by priceline.com with the following caption: "New Cars. . . Priceline.com introduced its new car service in the New York market as a test in the third quarter of 1998. Unlike other Internet services, priceline's service is not a lead-generating system and is open to all factory-authorized dealers with no up-front fees or exclusivity." On the left side, bottom half of the second page of the gatefold, the third button in the button menu of services that the priceline.com service offers is duplicated: [Icon of a car with the text] "New Cars (N.Y. Metro)" Below the button, the following text: NEW CARS Name your price for the exact car you want and let priceline.com get a dealer to agree. . . With priceline.com's new car service, the buyer names his price for the exact car he wants. The buyer never talks to a car salesman until AFTER priceline finds a local factory-authorized dealer who agrees to the buyer's price in writing. priceline.com(SM) 4 TABLE OF CONTENTS
PAGE ----- Prospectus Summary............................. 1 Risk Factors................................... 4 Special Note Regarding Forward-Looking Statements................................... 26 Use of Proceeds................................ 27 Price Range of Common Stock.................... 27 Dividend Policy................................ 27 Capitalization................................. 28 Selected Financial Data........................ 29 Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 30 Business....................................... 45 PAGE ----- Management..................................... 69 Certain Transactions........................... 85 Principal and Selling Stockholders............. 89 Certain United States Federal Income Tax Considerations............................... 92 Description of the Notes....................... 96 Description of Capital Stock................... 107 Shares Eligible for Future Sale................ 109 Underwriters................................... 112 Legal Matters.................................. 115 Experts........................................ 115 Additional Information......................... 115 Index to Financial Statements.................. F-1
Our principal executive offices are located at Five High Ridge Park, Stamford, Connecticut 06905, and our telephone number is (203) 705-3000. Our World Wide Web site is www.priceline.com. The information on our Web site is not incorporated by reference into this prospectus. In this prospectus, the terms "company," "priceline.com," "we," "us" and "our" refer to priceline.com Incorporated and, unless the context otherwise requires, "convertible notes" or "notes" refers to the % convertible subordinated notes due 2006 of priceline.com being offered in this offering and "common stock" refers to the common stock, par value $0.008 per share, of priceline.com. Our financial statements as of and for the periods ended December 31, 1997 and December 31, 1998 (restated) are presented on a combined basis with the financial statements of Priceline Travel, Inc., previously a separate company owned by Mr. Jay S. Walker, our Founder and Vice Chairman. Priceline Travel, which owned our travel agency license, was merged with and into priceline.com as of March 24, 1999. This prospectus includes statistical data regarding our company, the Internet and the industries in which we compete. Such data are based on our records or are taken or derived from information published or prepared by various sources, including International Data Corporation, a provider of market and strategic information for the information technology industry, and a market research organization that we retain from time to time to measure consumer awareness of our brand and services and of other leading Internet brands and their products. You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that which is contained in this prospectus. We are offering to sell shares of common stock and seeking offers to buy shares of common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of the common stock. Unless otherwise indicated, all information in this prospectus (1) reflects a 1.25 for one stock split of our common stock on March 26, 1999 and the conversion of all outstanding shares of our convertible preferred stock into 38,907,728 shares of common stock on March 29, 1999; (2) reflects the consummation of the merger between priceline.com and Priceline Travel, Inc. as of March 24, 1999; and (3) assumes no exercise of the underwriters' over-allotment option in this offering or the concurrent common stock offering. See "Description of Capital Stock." i PROSPECTUS SUMMARY Priceline.com has pioneered a unique e-commerce pricing system known as a "demand collection system" that enables consumers to use the Internet to save money on a wide range of products and services while enabling sellers to generate incremental revenue. Using a simple and compelling consumer proposition--"name your price"--we collect consumer demand, in the form of individual customer offers guaranteed by a credit card, for a particular product or service at a price set by the customer. We then either communicate that demand directly to participating sellers, or access participating sellers' private databases to determine whether we can fulfill the customer's offer on the basis of the pricing information and rules established by the sellers. Consumers agree to hold their offers open for a specified period of time and, once fulfilled, offers cannot be canceled. By requiring consumers to be flexible with respect to brands, sellers and/or product features, we enable sellers to generate incremental revenue without disrupting their existing distribution channels or retail pricing structures. We commenced the priceline.com service on April 6, 1998 with the sale of leisure airline tickets. Since that time, our business has grown significantly and the priceline.com service now includes the following products and services: - leisure airline tickets, provided by six domestic and 16 international airline participants; - new automobiles, which was launched on a test basis in the New York metropolitan area in July 1998; - hotel room reservations, which was launched in October 1998, offers hotel rooms in substantially all major United States markets and includes as participants more than 10 leading national hotel chains; and - home financing services, which was launched in January 1999 with home mortgage services and now also includes home equity loans and refinancing services. Through the innovative use of "adaptive marketing programs," we also market customer acquisition programs for third parties. These programs facilitate the completion of a higher percentage of successful transactions through the priceline.com service while generating fee income for us. We generate revenues in a variety of ways depending on the product or service sold. With respect to our airline ticket and hotel room reservation services, we recognize as revenue the customer's named price, net of taxes, and record as the cost of revenue the fare or rate charged by the seller. With respect to our automobile service, we earn a fixed fee from both the customer and the seller after the transaction is consummated. With respect to our home financing service, we receive marketing fees equal to a percentage of the net revenue generated by the service, which is operated in conjunction with LendingTree, Inc. With respect to our adaptive marketing programs, we recognize as revenue the fees due to us from our adaptive marketing partners. We believe that the priceline.com service already has achieved significant consumer acceptance and widespread brand awareness. During the period from launch through June 30, 1999, we collected guaranteed offers for approximately 5.1 million airline tickets, representing approximately $1.1 billion in total consumer demand. This demand resulted in sales of approximately 762,000 airline tickets, representing approximately $165.2 million in revenue. We intend to continue to leverage the priceline.com brand by expanding our product offerings to include other leisure travel products and other financial services products and by expanding our new car sales service to the entire U.S. market. We also are exploring expansion of our core "name your price" business model to other areas of e-commerce, such as retail merchandise and the consumer-to-consumer market. THE OFFERING Securities Offered............ $250,000,000 aggregate principal amount of % Convertible Subordinated Notes Due 2006 plus an additional $37,500,000 principal amount if the underwriters' over-allotment option is exercised in full. See "Description of Notes." Interest Payment Dates........ February 1 and August 1, commencing February 1, 2000. Conversion.................... The notes will be convertible at the option of the holder at any time into common stock at a conversion price of $ per share, subject to adjustment upon certain events. See "Description of Notes--Conversion of Notes." Subordination................. The notes are subordinated to all existing and future senior indebtedness, as defined in the indenture under which the notes will be issued. As of June 30, 1999, priceline.com had no outstanding indebtedness that would have constituted senior indebtedness. The notes also will be effectively subordinated to the liabilities, including trade payables, and lease obligations and all preferred stock, if any, of any subsidiary of priceline.com. The indenture does not prohibit or limit the amount of indebtedness, including senior indebtedness, that priceline.com or its subsidiaries may incur. See "Description of Notes--Subordination of Notes." Redemption.................... At any time on or after August 6, 2002, the notes will be redeemable on at least 30 but not more than 60 days' notice at the option of priceline.com, in whole or in part, at the redemption prices set forth in "Description of Notes," together with accrued interest. Fundamental Change............ Upon the occurrence of any Fundamental Change, as defined in the indenture, each holder shall have the right, at such holder's option, to require priceline.com to redeem all or any part of such holder's notes in multiples of $1,000 principal amount at a price equal to 100% of the principal amount to be redeemed plus accrued interest. See "Description of Notes--Redemption at Your Option." Use of Proceeds............... For working capital and general corporate purposes. See "Use of Proceeds."
CONCURRENT COMMON STOCK OFFERING Concurrent with this offering, priceline.com and certain of our stockholders are making a public offering of 5,500,000 shares of our common stock, of which priceline.com is selling 2,000,000 shares. The common stock offering will be made pursuant to a separate prospectus. Closing of the common stock offering is not a condition to the closing of this offering. 2 SUMMARY FINANCIAL INFORMATION
JULY 18, 1997 (INCEPTION) YEAR ENDED TO DECEMBER 31, SIX MONTHS DECEMBER 31, 1998 ENDED 1997 RESTATED(A) JUNE 30, 1999 ------------- --------------- --------------- Statement of Operations Data:(b) Revenues.................................................. $ -- $ 35,236,860 $ 160,974,391 Cost of revenues: Product costs........................................... -- 33,495,745 144,323,527 Supplier warrant costs(c)............................... -- 3,029,014 761,518 ------------- --------------- --------------- Total cost of revenues.................................... -- 36,524,759 145,085,045 ------------- --------------- --------------- Gross profit (loss)..................................... -- (1,287,899) 15,889,346 Expenses: Supplier start-up warrant costs(c)...................... -- 57,978,678 -- Sales and marketing..................................... 441,479 24,388,061 34,871,086 General and administrative.............................. 1,011,600 18,004,585(d) 9,169,869 Systems and business development........................ 1,060,091 11,131,650 5,652,423 ------------- --------------- --------------- Total expenses............................................ 2,513,170 111,502,974 49,693,378 ------------- --------------- --------------- Operating loss............................................ (2,513,170) (112,790,873) (33,804,032) Interest income (expense), net............................ (312) 548,374 2,387,104 ------------- --------------- --------------- Net loss.................................................. (2,513,482) (112,242,499) (31,416,928) Accretion on preferred stock(e)........................... -- (2,183,424) (8,353,973) ------------- --------------- --------------- Net loss applicable to common stockholders................ $ (2,513,482) $ (114,425,923) $ (39,770,901) ------------- --------------- --------------- ------------- --------------- --------------- Per share basic and diluted net loss applicable to common shareholders............................................ $ (0.05) $ (1.41) $ (0.29) ------------- --------------- --------------- ------------- --------------- --------------- Weighted average common shares outstanding................ 50,833,756 81,231,425 137,436,399 Deficiency of earnings available to cover fixed charges... (2,513,482) (112,242,499) (31,416,928)
AS OF JUNE 30, 1999 ------------------------------ ACTUAL AS ADJUSTED(F) -------------- -------------- BALANCE SHEET DATA(B): Cash and cash equivalents........................................................ $ 142,803,134 $ 519,389,830 Working capital.................................................................. 150,043,651 526,630,347 Total assets..................................................................... 204,794,892 589,507,254 Total liabilities................................................................ 33,485,681 283,485,681 Total stockholders' equity....................................................... 171,309,211 306,021,573
- ------------------------ (a) As restated, see Note 13 to the 1998 combined financial statements. (b) Presented on a combined basis with Priceline Travel, Inc. as of and for the periods ended December 31, 1997 and December 31, 1998. Priceline Travel, which previously owned our travel agency license, was merged into priceline.com as of March 24, 1999. (c) Represents non-cash charges for warrants issued to certain of our participating airlines. (d) Includes a non-cash charge of $6,500,000 with respect to 8,125,000 shares of common stock issued as executive compensation. (e) Represents amortization of the beneficial conversion feature on the Series B preferred stock that ceased upon conversion of the Series B preferred stock into common stock on March 29, 1999. (f) As adjusted to reflect the receipt by priceline.com of the estimated net proceeds of (x) $241,874,334 from the sale of the notes in this offering (after deducting the estimated offering expenses and underwriting discounts and commissions); (y) $133,295,666 from the sale of the 2,000,000 shares of common stock offered by priceline.com in the concurrent common stock offering (after deducting the estimated offering expenses and underwriting discounts and commissions) based upon an assumed public offering price of $70.00 per share; and (z) $1,416,696 from the exercise of warrants to purchase 1,523,329 shares of common stock by Delta Airlines at an exercise price of $0.93 per share. 3 RISK FACTORS YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISKS BEFORE MAKING AN INVESTMENT DECISION. THE TRADING PRICE OF OUR NOTES AND COMMON STOCK COULD DECLINE DUE TO ANY OF THESE RISKS, AND YOU COULD LOSE ALL OR PART OF YOUR INVESTMENT. YOU ALSO SHOULD REFER TO THE OTHER INFORMATION SET FORTH IN THIS PROSPECTUS, INCLUDING OUR FINANCIAL STATEMENTS AND THE RELATED NOTES THERETO. THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS. THESE STATEMENTS RELATE TO FUTURE EVENTS OR FUTURE FINANCIAL PERFORMANCE. IN SOME CASES, YOU CAN IDENTIFY FORWARD-LOOKING STATEMENTS BY TERMINOLOGY SUCH AS "MAY," "WILL," "SHOULD," "COULD," "EXPECTS," "PLANS," "ANTICIPATES," "BELIEVES," "ESTIMATES," "PREDICTS," "POTENTIAL," OR "CONTINUE" OR THE NEGATIVE OF SUCH TERMS AND OTHER COMPARABLE TERMINOLOGY. THESE STATEMENTS ARE ONLY PREDICTIONS. IN EVALUATING THESE STATEMENTS, YOU SHOULD SPECIFICALLY CONSIDER VARIOUS FACTORS, INCLUDING THE RISKS OUTLINED BELOW. THESE FACTORS MAY CAUSE OUR ACTUAL RESULTS TO DIFFER MATERIALLY FROM ANY FORWARD-LOOKING STATEMENT. SEE "SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS." OUR LIMITED OPERATING HISTORY MAKES EVALUATING OUR BUSINESS DIFFICULT Priceline.com was formed in July 1997 and began operations on April 6, 1998. As a result, we have only a limited operating history on which you can base an evaluation of our business and prospects. Our prospects must be considered in the light of the risks, uncertainties, expenses and difficulties frequently encountered by companies in their early stages of development, particularly companies in new and rapidly evolving markets, such as online commerce, using new and unproven business models. To address these risks and uncertainties, we must, among other things: - attract leading sellers and consumers to the priceline.com service; - maintain and enhance our brand, and expand our product and service offerings; - attract, integrate, retain and motivate qualified personnel; and - adapt to meet changes in our markets and competitive developments. We may not be successful in accomplishing these objectives. WE ARE NOT PROFITABLE AND EXPECT TO CONTINUE TO INCUR LOSSES We have incurred net losses of $88.1 million during the period from July 18, 1997 (inception) through June 30, 1999, before giving effect to $68.6 million of non-cash charges arising from equity issuances to a number of our participating airlines, our chief executive officer and other parties, which resulted in total net losses of $156.7 million for such period. We have not achieved profitability and expect to continue to incur losses for at least the next two years. The principal causes of our losses are likely to continue to be significant brand development costs, marketing and promotion costs and technology and systems development costs. Almost all of our revenues to date have been derived from airline ticket sales, hotel room reservations and related adaptive marketing programs. In order to increase airline, hotel room and adaptive marketing revenues, build a record of successful transactions and enhance the priceline.com brand, we have sold a substantial portion of our airline tickets and hotel room reservations below cost. In addition, as our business model evolves, we have introduced and expect to continue to introduce a number of new products and services. With respect to both current and future product and service offerings, we expect to increase significantly our operating expenses in order to increase our customer base, enhance our brand image and support our growing infrastructure. For us to make a profit, our revenues and gross profit margins will need to increase sufficiently to cover these and other future costs. Otherwise, we may never achieve profitability. 4 WE ARE DEPENDENT ON ADAPTIVE MARKETING PROGRAMS Our adaptive marketing programs permit consumers to increase the amount of their offers at no additional cost by participating in sponsor promotions during the process of making an offer through the priceline.com service. The fees paid to us by sponsors offering the promotions generate significant revenues. Since these fees historically have involved no direct costs, they have had a disproportionately positive impact on our gross profit margins. A significant reduction in consumer acceptance of our adaptive marketing programs, costs that we may incur in connection with adaptive marketing programs, reductions in fees paid to us in connection with such programs or any material decline in such programs could result in a material reduction in our revenues and our gross profit. We may not be able to replace such revenues through other programs or through product sales. During 1998 and the first two quarters of 1999, a substantial majority of our adaptive marketing revenues were derived from fees paid by credit card issuers for qualifying credit card applications submitted over the priceline.com service in connection with customer offers for airline tickets. Through May 1, 1999, almost all of our adaptive marketing revenues were derived from fees related to a credit card adaptive marketing program with Capital One Bank. In May 1999, we replaced Capital One Bank with First USA Bank, a leading national credit card issuer. Since that time, our credit card adaptive marketing program revenues have been attributable to our adaptive marketing relationship with First USA. Both the Capital One and First USA adaptive marketing programs enable our customers to increase the amount of their offers by a specified amount by applying online for a credit card. However, the fee structure of the First USA program is based on different factors than the factors that were applicable under the Capital One program. For example, under the Capital One program we received fees based upon the submission of qualifying applications, while the First USA program ties a portion of our fees to account activation and usage. However, since the First USA program only recently commenced, we have no method of accurately predicting such activation and usage rates. In addition, unlike the Capital One program, a portion of the fees earned under the First USA program is required to be reinvested in program incentives. Accordingly, the First USA program may or may not generate revenues or gross profits comparable to those previously generated under the Capital One program. The First USA agreement has a term of five years, subject to certain earlier termination and repricing rights of First USA. For example, subject to priceline.com's rights of renegotiation, First USA has the right to terminate the agreement after one year (and earlier under certain circumstances) if its financial returns under the adaptive marketing program are not at least equivalent to certain agreed upon levels. The full financial statement impact of the shift from the Capital One adaptive marketing program to the First USA adaptive marketing program will not be known until completion of future periods. In addition to our credit card adaptive marketing program with First USA, we have an adaptive marketing program with E*TRADE for online brokerage services and expect to commence adaptive marketing programs with Discover Financial Services, Inc. for credit cards, Sprint Communications Company L.P. for long distance telecommunications services and Earthlink Network, Inc. for the provision of Internet services. Our adaptive marketing program with E*TRADE is based on an oral agreement which may be terminated at any time and most of our other adaptive marketing programs may be terminated on short notice. We cannot guarantee that any of our adaptive marketing programs will continue beyond their initial terms or, even if continued, that they will be successful. If they are not successful, our gross profit and results of operations could be adversely affected. POTENTIAL FLUCTUATIONS IN OUR FINANCIAL RESULTS MAKES FINANCIAL FORECASTING DIFFICULT We expect our revenues and operating results to vary significantly from quarter to quarter. As a result, quarter to quarter comparisons of our revenues and operating results may not be meaningful. In addition, due to our limited operating history and our new and unproven business model, we cannot predict our 5 future revenues or results of operations accurately. It is likely that in one or more future quarters our operating results will fall below the expectations of securities analysts and investors. If this happens, the trading price of our notes and our common stock would almost certainly be materially and adversely affected. Our business has no backlog and almost all of our revenues for a particular quarter are derived from transactions that are both initiated and completed during that quarter. Our current and future expense levels are based largely on our investment plans and estimates of future revenues and are, to a large extent, fixed. Accordingly, we may be unable to adjust spending in a timely manner to compensate for any unexpected revenue shortfall, and any significant shortfall in revenues relative to our planned expenditures could have an immediate adverse effect on our business and results of operations. Our limited operating history and rapid growth makes it difficult for us to assess the impact of seasonal factors on our business. Nevertheless, we expect our business to be subject to seasonal fluctuations, reflecting a combination of seasonality trends for the products and services offered by the priceline.com service and seasonality patterns affecting Internet use. For example, with regard to our travel products, demand for leisure travel may increase over summer vacations and holiday periods, while Internet usage may decline during the summer months. Our results also may be affected by seasonal fluctuations in the inventory made available to the priceline.com service by participating sellers. Airlines, for example, typically enjoy high demand for tickets through traditional distribution channels for travel during Thanksgiving and the year-end holiday period. As a result, during those periods, airlines may have less excess inventory to offer through the priceline.com service at discounted prices. Our business also may be subject to cyclical variations for the products and services offered; for example, leisure travel and home mortgage financing tend to decrease in economic downturns. WE ARE DEPENDENT ON THE AIRLINE INDUSTRY AND CERTAIN AIRLINES Our near term, and possibly long term, prospects are significantly dependent upon our sale of leisure airline tickets. Sales of leisure airline tickets represented approximately 83.7% of total revenue for the six months ended June 30, 1999. 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. Unforeseen events, such as political instability, regional hostilities, increases in fuel prices, travel-related accidents and unusual weather patterns also may adversely affect the leisure travel industry. As a result, our business also is likely to be affected by those events. Significantly reducing our dependence on the airline and travel industries is likely to take a long time and there can be no guarantee that we will succeed in reducing that dependence. Sales of airline tickets from priceline.com's four largest airline suppliers, exclusive of Continental Airlines, Inc., which joined the priceline.com service in July 1999, accounted for approximately 92.0% of airline ticket revenue for the six months ended June 30, 1999. As a result, currently we are substantially dependent upon the continued participation of these four airlines in the priceline.com service in order to maintain and continue to grow our total airline ticket revenues. We currently have 22 participating airlines. However, our airline participation agreements: - 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; and - generally, can be terminated upon relatively short notice. 6 These agreements also outline the terms and conditions under which ticket inventory provided by the airlines may be sold. Our agreement with Delta, subject to various exceptions, requires Delta's approval of the addition of new carriers to the priceline.com service, restricts the routes for which tickets may be offered by specified carriers through the priceline.com service and imposes limitations on the code share arrangements of specified carriers. Delta also may require the exclusion of specific markets in order for certain other airlines to participate. These provisions could limit our ability to expand our airline ticket service. In addition, our ability to transfer or license our intellectual property to other travel providers is limited in the manner set forth in the agreement. It is possible that, as the priceline.com service grows and becomes a significant channel of distribution for airline tickets and as other carriers seek participation in the priceline.com service, these competitively restrictive provisions of the Delta agreement could raise issues under federal and state antitrust laws. If that happened, either a federal or state government agency or private party could initiate litigation seeking to enjoin us and Delta from enforcing these provisions or seeking to collect treble damages. The outcome of any such litigation would be uncertain. If, however, such a lawsuit resulted in an injunction or subjected us to damages, our business and financial condition could suffer. Due to our dependence on the airline industry, we could be severely affected by changes in that industry, and, in many cases, we will have no control over such changes or their timing. For example, if the Federal Aviation Administration grounded a popular aircraft model, excess seat capacity could be dramatically reduced and, as a result, our source of inventory could be significantly curtailed. In addition, given the concentration of the airline industry, particularly in the domestic market, major airlines that are not participating in the priceline.com service could exert pressure on other airlines not to supply us with tickets. Alternatively, the airlines could attempt to establish their own buyer-driven commerce service or other similar service to compete with us. We also could be materially adversely affected by the bankruptcy, insolvency or other material adverse change in the business or financial condition of one or more of our airline participants. The sale of shares of common stock by the selling stockholders in the concurrent common stock offering is being made pursuant to the "piggyback" registration rights contained in the registration rights agreement. Priceline.com obtained from parties to the registration rights agreement that hold shares (or presently exercisable warrants to purchase shares) of common stock available for sale in the concurrent common stock offering a waiver of a 30-day notice period under the agreement and a consent to the assignment of registration rights by Messrs. Jay Walker and Richard Braddock, each of whom chose to sell less than his pro rata number of shares in the concurrent common stock offering. Priceline.com did not obtain such waiver and consent from certain other parties to the registration rights agreement (comprised of certain airline participants) because they do not have shares (or presently exercisable warrants to purchase shares) of common stock available for sale in the concurrent common stock offering. Priceline.com believes that no damages arise as a result of the failure to obtain such waiver and consent since such airline participants do not have shares (or presently exercisable warrants to purchase shares) of common stock available for sale. Nevertheless, if a disagreement with such airline participants were to arise, priceline.com can not be certain as to the effect, if any, that it could have on its relationship with such airline participants or whether damages or other remedies could be imposed. OUR BUSINESS MODEL IS NOVEL AND UNPROVEN The priceline.com service is based on a novel and unproven business model. We will be successful only if consumers and sellers actively use the priceline.com service. Prior to the launch of the priceline.com service, consumers and sellers had never bought and sold products and services through a demand collection system over the Internet. Therefore, it is impossible to predict the degree to which consumers and sellers will use the priceline.com service. 7 Many of the factors influencing consumers' and sellers' willingness to use the priceline.com service are outside our control. For example, a labor dispute that disrupts airline service or an airline accident could make consumers unwilling to use a service like priceline.com that does not permit the customer to designate the airline on which the customer purchases a ticket. In addition, a breach of security on the Internet, even if we were not involved, could make consumers unwilling to guarantee orders online with a credit card. Consequently, it is possible that consumers and sellers will never utilize the priceline.com service to the degree necessary for us to achieve profitability. WE NEED TO SELL NEW PRODUCTS AND SERVICES We are unlikely to make significant profits unless we make new or complementary products and services and a broader range of existing products and services available through the priceline.com service. We will incur substantial expenses and use significant resources in trying to expand the type and range of the products and services that we offer. However, we may not be able to attract sellers and other participants to provide such products and services or consumers to purchase such products and services through the priceline.com service. In addition, if we launch new products or services and they are not favorably received by consumers, our reputation and the value of the priceline.com brand could be damaged. Almost all of our experience to date is in the travel industry. The travel industry is characterized by "expiring" inventories. For example, if not used by a specific date, an airline ticket or hotel room reservation has no value. The expiring nature of the inventory creates incentives for airlines and hotels to sell seats or room reservations at reduced rates. Because we have only limited experience in selling "non-expiring" inventories on the priceline.com service, such as new cars or financial services, we cannot predict whether the priceline.com business model can be successfully applied to such products and services. TWO NEW BUSINESSES WE ARE EVALUATING MAY NOT BE SUCCESSFUL In addition to broadening the products and services offered through the priceline.com service, we may expand our current "name your price" business model into other areas of e-commerce. We currently are evaluating the licensing of our business model to two new companies. One of these companies is developing a consumer-to-consumer business in which buyers would make conditional purchase offers to acquire goods from other consumers. The other would enable consumers to use the Internet to name the price that they are willing to pay for retail merchandise, which they would pick up from participating retailers. However, we have not determined the structure of our relationship with these companies, which may include, among other things, our licensing of the priceline.com brand and "name your price" business model and investment in such entities. These new businesses may not be launched and, if launched, may not be successful. If these new businesses are not favorably received by consumers, the association of our brand name and business model with these new entities may adversely affect our business and reputation and may dilute the value of our brand name. In addition, to the extent that we may need to invest funds and/or management resources for the development of these entities, our core business may suffer. Expansion of our core business model would expose us to additional risks not currently applicable to our existing operations. For example, expansion into retail products would give rise to operational challenges not applicable to our existing products, such as consumer pick-up arrangements. Moreover, a consumer-to-consumer service would create risks that we do not face currently, such as deceptive or fraudulent activities conducted by users on the Web site. The additional risks associated with an expansion of our core business could have a material adverse effect on our business generally. OUR BRAND MAY NOT ACHIEVE THE BROAD RECOGNITION NECESSARY TO SUCCEED We believe that broader recognition and a favorable consumer perception of the priceline.com brand are essential to our future success. Accordingly, we intend to continue to pursue an aggressive brand- 8 enhancement strategy, which will include mass market and multimedia advertising, promotional programs and public relations activities. These initiatives will involve significant expense. If our brand enhancement strategy is unsuccessful, these expenses may never be recovered and we may be unable to increase future revenues. Successful positioning of the priceline.com brand will largely depend on: - the success of our advertising and promotional efforts; - an increase in the number of successful transactions on the priceline.com service; and - the ability to continue to provide high quality customer service. We believe that consumers currently associate the priceline.com brand primarily with the sale of discount airline tickets. To grow our business, we will need to expand awareness of the priceline.com brand to a wide range of products and services. Sales and marketing expense was $34.9 million during the six months ended June 30, 1999. To increase awareness of the priceline.com brand and expand it to a wide range of products and services, we will need to continue to spend significant amounts on advertising and promotions. These expenditures may not result in a sufficient increase in revenues to cover such advertising and promotions expenses. In addition, even if brand recognition increases, the number of new users or the number of transactions on the priceline.com service may not increase. Also, even if the number of new users increases, those users may not use the priceline.com service on a regular basis. WE FACE POTENTIAL CONFLICTS OF INTEREST RELATING TO WALKER DIGITAL Because of our relationship with Walker Digital and our interlocking directors, officers and stockholders, we are likely to face potential conflicts of interest relating to Walker Digital. The priceline.com service and the business model and related intellectual property rights underlying the priceline.com service were developed in part by executives, employees and/or consultants associated with Walker Digital Corporation, a technology research and development company that was founded and is controlled by Mr. Jay S. Walker, who is the Founder and Vice Chairman of priceline.com. These individuals assigned all of their intellectual property rights relating to the priceline.com service to Walker Digital's affiliate, Walker Asset Management Limited Partnership. Walker Asset Management, subsequently transferred the patent rights relating to the priceline.com service and other related intellectual property rights to us. We, in turn, granted Walker Digital a perpetual, non-exclusive, royalty-free right and license to use certain intellectual property related to the priceline.com service for non-commercial internal research and development purposes. Walker Digital also provides us with, among other things, a right to purchase at fair market value any intellectual property that is in process or has been fully developed and that is owned and subsequently acquired, developed or discovered by Walker Digital or Walker Asset Management that will provide significant value in the use or commercial exploitation of the initially transferred patent and related intellectual property rights. Conflicts of interest may arise from time to time between Walker Digital and us with respect to the potential purchase by us of additional intellectual property rights at fair market value and the pursuit of overlapping corporate opportunities. Walker Digital currently owns assets and intellectual property related to two new areas of e-commerce into which we may expand our "name your price" business model, one involving consumer-to-consumer sales and the other involving the sale of retail merchandise. We may license our brand name and "name your price" business model to two new companies formed to develop these businesses. Walker Digital may contribute assets and intellectual property to these companies in return for an equity interest in these companies. Walker Digital owns the intellectual property rights underlying the technology associated with our adaptive marketing programs. Walker Digital has licensed to priceline.com the right to use these intellectual property rights under a perpetual, non-exclusive, royalty-free license agreement. Walker Digital has pending several United States patent applications directed to different aspects of the processes and technology supporting our adaptive marketing programs. 9 Walker Digital also provides us with various services, including (1) research and development assistance; (2) patent planning, maintenance and prosecution; and (3) other intellectual property services, including technical support. Walker Digital also subleases a portion of its Stamford, Connecticut facilities to us on a month-to-month basis. Priceline.com, in turn, provides Walker Digital with various management and administrative services, for which Priceline.com collects fees from Walker Digital. We also have guaranteed Walker Digital's obligations under a lease whereby it leases office space that is used by both companies. Certain of our executive officers and other key employees also are directors, officers, employees or serve on advisory boards of Walker Digital and either own, or hold an option to purchase, equity securities of Walker Digital. Accordingly, because we have interlocking directors and officers and board level advisors with Walker Digital, there may be inherent conflicts of interest between Walker Digital and us. If a conflict arises between the management decisions of priceline.com and Walker Digital, we could lose valuable management input from our directors and officers who have conflicting obligations. Additionally, many of the options granted to employees and consultants of priceline.com under our 1997 Omnibus Plan entitle holders of such options to continue to vest options for the then current vesting period during which their employment or consulting arrangement with priceline.com terminates if such individuals continue to perform services, throughout the remainder of such vesting period, for another entity controlled by Mr. Jay S. Walker. Consequently, we could lose valuable personnel to an entity controlled by Mr. Walker, while such personnel continue to vest options granted to them by priceline.com for up to one vesting period. We have not adopted any formal plan or arrangement to address these potential conflicts of interest with Walker Digital or other entities controlled by Mr. Walker. We intend to review all related-party transactions and any potential conflicts with Walker Digital and these other entities on a case-by-case basis. Walker Digital owns directly approximately 5.2% of the outstanding common stock of priceline.com. Additionally, Walker Digital has established an option plan for its officers and employees that provides for the grant of options to purchase priceline.com stock owned by Walker Digital. Mr. Jay S. Walker, as the Founder of Walker Digital and as our Founder, has performed an essential role in the establishment and development of the priceline.com service. Mr. Walker also serves as Chairman of Walker Digital and as non-executive Chairman of NewSub Services, Inc., a direct marketing company also co-founded by him. Mr. Walker devotes, and expects to continue to devote, a substantial portion of his time to Walker Digital. Mr. Walker also expects to devote a considerable portion of his time developing and implementing the consumer-to-consumer and retail merchandise Internet businesses. Mr. Walker has not committed to devote any specific percentage of his business time to us. In July 1998, Mr. Richard S. Braddock replaced Mr. Walker as our Chairman and Chief Executive Officer, and in July 1999, Mr. Daniel H. Schulman joined priceline.com as our President and Chief Operating Officer. As a result, Mr. Walker's role with priceline.com has been reduced, and we expect that Mr. Walker will continue to reduce his involvement with us over time. Mr. Walker's skills and experience have benefitted, and continue to benefit, us significantly. Priceline.com could lose valuable management expertise as Mr. Walker further reduces his day-to-day involvement with priceline.com. WE MAY BE UNABLE TO EFFECTIVELY MANAGE OUR RAPID GROWTH We have rapidly and significantly expanded our operations and anticipate that further expansion will be required to realize our growth strategy. Our rapid growth has placed significant demands on our management and other resources which, given our expected future growth rate, is likely to continue. To manage our future growth, we will need to attract, hire and retain highly skilled and motivated officers and employees and improve existing systems and/or implement new systems for: (1) transaction processing; (2) operational and financial management; and (3) training, integrating and managing our growing employee base. 10 IF WE LOSE OUR KEY PERSONNEL OR CANNOT RECRUIT ADDITIONAL PERSONNEL, OUR BUSINESS MAY SUFFER Competition for personnel with experience in Internet commerce is intense. If we do not succeed in attracting new employees or retaining and motivating our current and future employees, our business could suffer significantly. Since our formation in July 1997, we have expanded from 10 to 266 full-time employees as of August 10, 1999. We also have employed many key personnel since our launch in April 1998, including our Chairman and Chief Executive Officer and our President and Chief Operating Officer, and a number of key managerial, marketing, planning, financial, technical and operations personnel. We expect to continue to add additional key personnel in the near future. We do not have "key person" life insurance policies on any of our key personnel. We believe our performance is substantially dependent on: - our ability to retain and motivate our senior management and other key employees; and - our ability to identify, attract, hire, train, retain and motivate other highly skilled technical, managerial, marketing and customer service personnel. CAPACITY CONSTRAINTS AND SYSTEM FAILURES COULD HARM OUR BUSINESS If our systems cannot be expanded to cope with increased demand or fail to perform, we could experience: - 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. We use internally developed systems to operate the priceline.com service, including transaction processing and order management systems that were designed to be scalable. However, if the number of users of the priceline.com service increases substantially, we will need to significantly expand and upgrade our technology, transaction processing systems and network infrastructure. We do not know whether we will be able to accurately project the rate or timing of any such increases, or expand and upgrade our systems and infrastructure to accommodate such increases in a timely manner. Our ability to facilitate transactions successfully and provide high quality customer service also depends on the efficient and uninterrupted operation of our computer and communications hardware systems. The priceline.com service has experienced periodic system interruptions, which we believe will continue to occur from time to time. Our systems and operations also are vulnerable to damage or interruption from human error, natural disasters, power loss, telecommunication failures, break-ins, sabotage, computer viruses, intentional acts of vandalism and similar events. While we currently maintain redundant servers at our Stamford, Connecticut premises to provide limited service during system disruptions at our production site hosted by Exodus Communications, Inc., we do not have fully redundant systems, a formal disaster recovery plan or alternative providers of hosting services. In addition, we do not carry sufficient business interruption insurance to compensate for losses that could occur. Any system failure that causes an interruption in service or decreases the responsiveness of the priceline.com service could impair our reputation, damage our brand name and materially adversely affect our revenues. 11 WE RELY ON THIRD-PARTY SYSTEMS We rely on certain third-party computer systems or third-party service providers, including: - the computerized central reservation systems of the airline and hotel industries to satisfy demand for airline tickets and hotel room reservations; - the computer systems of LendingTree, Inc. to satisfy offers for home financing services; - Exodus Communications to host our systems infrastructure, web and database servers; and - CallTech Communications Incorporated to operate our call center. Any interruption in these third-party services, or a deterioration in their performance, could be disruptive to our business. We currently do not have any contractual arrangement with Exodus Communications and our agreements with CallTech Communications and LendingTree are terminable upon short notice. In the event our arrangement with any of such third parties is terminated, we may not be able to find an alternative source of systems support on a timely basis or on commercially reasonable terms. INTENSE COMPETITION COULD REDUCE OUR MARKET SHARE AND HARM OUR FINANCIAL PERFORMANCE The markets for the products and services offered on the priceline.com service are intensely competitive. We compete with both traditional distribution channels and online services. Increased competition could diminish our ability to become profitable or result in loss of market share and damage the priceline.com brand. 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 agents such as Travelocity, Preview Travel and Microsoft's Expedia; - traditional travel agencies; - consolidators and wholesalers of airline tickets and other travel products, including online consolidators such as Cheaptickets.com; - individual airlines, hotels, rental car companies, cruise operators and other travel service providers; and - operators of travel industry reservation databases such as Worldspan and Sabre. Our current or potential competitors with respect to new automobiles include traditional and online auto dealers, including newly developing auto superstores such as AutoNation, Auto-by-Tel and Microsoft's CarPoint. With respect to financial service products, our competitors include: - banks and other financial institutions; - online and traditional mortgage and insurance brokers, including mortgage.com, Quicken Mortgage, E-Loan and iOwn, Inc.; and - insurance companies. We also potentially face competition from a number of large online services that have expertise in developing online commerce and in facilitating Internet traffic. These potential competitors include Amazon.com, America Online, Microsoft, and Yahoo! who could choose to compete with us either directly or indirectly through affiliations with other e-commerce companies. Other large companies with strong brand recognition, technical expertise and experience in online commerce and direct marketing could also seek to compete in the buyer-driven commerce market. In addition, as we expand our business through the introduction of new products and services, we will face competition from established providers of these products and services. For example, if we expand into the consumer-to-consumer market either directly or through a licensing arrangement, we will face competition from established web site operators such as eBay. 12 Many of our competitors have significant competitive advantages. For example, airlines, hotels, financial institutions and other suppliers also sell their products and services directly to consumers and have established Web sites. Internet directories, search engines and large traditional retailers have significantly greater operating histories, customer bases, technical expertise, brand recognition and/or online commerce experience than us. In addition, certain competitors may be able to devote significantly greater resources than us to: - marketing and promotional campaigns; - attracting traffic to their Web sites; - attracting and retaining key employees; and - Web site and systems development. OUR SUCCESS DEPENDS ON OUR ABILITY TO PROTECT OUR INTELLECTUAL PROPERTY We have developed a comprehensive program for securing and protecting rights in patentable inventions, trademarks, trade secrets and copyrightable materials. If we are not successful in protecting our intellectual property, there could be a material adverse effect on our business. PATENTS We currently hold one issued United States patent directed to a unique Internet-based buyer-driven commerce method and system underlying our business model. We also hold one issued United States patent directed to a method and system for pricing and selling airline ticket options and one issued United States patent directed to methods and systems for generating airline-specified time tickets. In addition, we have pending 25 United States and four international patent applications directed to different aspects of our technology and business processes. We also have instituted an invention development program to identify and protect new inventions and a program for international filing of selected patent applications. Nevertheless, it is possible that: - our core buyer-driven commerce patent and any other issued patents could be successfully challenged by one or more third parties, which could result in our loss of the right to prevent others from exploiting the buyer-driven commerce system claimed in the patent or the inventions claimed in any other issued patents; - because of variations in the application of our business model to each of our products and services, our core buyer-driven commerce patent may not 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; - our ability to practice our core buyer-driven commerce patent through offering one or more of our products or services could be successfully prevented if one or more third parties prevail in an interference action in the U.S. Patent and Trademark Office and thereby obtain priority of invention for the subject matter claimed in our core buyer-driven commerce patent; - newly discovered prior art could diminish the value of or invalidate an issued patent; - our pending patent applications may not result in the issuance of patents; and - current and future competitors could devise new methods of competing with our business that are not covered by our issued patents or patent applications. While our core patent is directed to a unique buyer-driven commerce system and method, it does not necessarily prevent competitors from developing and operating Internet commerce businesses that use customer-offer based business models. It is possible for a competitor to develop and utilize a business model that appears similar to our patented buyer-driven commerce system, but which has sufficient 13 distinctions that it does not fall within the scope of our patent. For example, we are aware of Internet travel services that appear to use customer-offer based transaction models, but based on the information we have obtained to date, may not infringe our patent. Walker Digital currently owns assets and intellectual property related to two new areas of e-commerce into which we may expand our "name your price" business model, one involving consumer-to-consumer sales and the other involving the sale of retail merchandise. We may license our brand name and "name your price" business model to two new companies formed to develop these businesses. Walker Digital may contribute assets and intellectual property to these companies in return for an equity interest in these companies. Walker Digital owns the intellectual property rights underlying the technology associated with our adaptive marketing programs. Walker Digital has licensed to priceline.com the right to use these intellectual property rights under a perpetual, non-exclusive, royalty-free license agreement. Walker Digital has pending several United States patent applications directed to different aspects of the processes and technology supporting adaptive marketing programs. PENDING INTERFERENCE ACTION On January 6, 1999, we received notice that a third party patent applicant and patent attorney, Thomas G. Woolston, purportedly had filed in December 1998 with the United States Patent and Trademark Office a request to declare an "interference" between a patent application filed by Woolston describing an electronic market for used and collectible goods and our core buyer-driven commerce patent. We have received a copy of a Petition for Interference from Woolston, the named inventor in at least three United States Patent applications titled "Consignment Nodes," one of which has issued as a patent (U.S. Patent Number: 5,845,265). We recently received a notice from the United States Patent and Trademark Office that an undisclosed patent applicant, who we believe is Woolston, is seeking to provoke an interference on our core buyer-driven commerce patent. We are awaiting information from the Patent Office regarding whether it will initiate an interference proceeding concerning Woolston's patent application and our core buyer-driven commerce patent. An interference is an administrative proceeding instituted in the Patent Office to determine questions of patentability and priority of invention between two or more parties claiming the same patentable invention. There is no statutory period within which the Patent Office must act on an interference request. If an interference is declared and proceeds through a final hearing in the Patent Office, a final judgment is made by the Patent Office as to inventorship. Following such final judgment, appeals could be made in Federal court. While there can be no certainty as to time periods, interference proceedings typically take years to resolve. As a threshold to the initiation of an interference proceeding, Woolston must show that his patent application supports claims that he copied from our core buyer-driven commerce patent. In order to make this showing, he would have to prove, among other things, that he invented the subject matter of the priceline.com claims before the inventors of our patent. If the Patent Office were to find that Woolston's patent application supported the copied priceline.com claims, it would resolve the interference by awarding inventorship to the party with the earliest proven date of invention. Woolston announced in February 1999 an agreement to license his issued patent and pending patent applications to the owner of a competing Internet travel service. While the interference process is still at an early stage, we believe that we have meritorious defenses to Woolston's claim, which we intend to pursue vigorously. Among other things, we believe that the Woolston patent application does not disclose the inventions covered by the priceline.com patent claims. However, it is impossible to predict the outcome of an interference with certainty. While Woolston claims to have an earlier invention date by a period of approximately sixteen months, the final decision as to priority of invention would be made by the Patent Office after considering facts provided by each party during the interference proceeding. If an interference is declared and thereafter resolved in favor of Woolston, such resolution could result in an award of some or all of the disputed patent claims to 14 Woolston. If, following such award, Woolston were successful in a patent infringement action against us, including prevailing over all defenses available to us, such as those of non-infringement and invalidity, this could require us to obtain licenses from Woolston and pay damages from the date such patent issued at a cost which could significantly adversely affect our business. If Woolston prevailed in both an interference and an infringement action, then we could be enjoined from conducting business through the priceline.com service to the extent covered by the patent claims awarded to Woolston. In addition, defense of the interference action may be expensive and may divert management attention away from our business. TRADEMARKS, COPYRIGHTS AND TRADE SECRETS We regard the protection of our copyrights, service marks, trademarks, trade dress and trade secrets as critical to our future success. We rely on a combination of laws and contractual restrictions, such as confidentiality agreements, to establish and protect our proprietary rights. However, laws and contractual restrictions may not be sufficient to prevent misappropriation of our technology or deter others from developing similar technologies. We also attempt to register our trademarks and service marks in the United States and internationally. However, effective trademark, service mark, copyright and trade secret protection may not be obtainable and/or available in every country in which our services are made available online. PENDING LITIGATION On January 19, 1999, a complaint was filed in the United States District Court for the Northern District of California by Marketel International, Inc., a California corporation, under the caption Marketel International Inc. v. Priceline.com et. al., No. C-99-1061 (N.D. CA 1999), against priceline.com, Priceline Travel, Walker Asset Management, Walker Digital, Mr. Jay S. Walker, our Founder and Vice Chairman, and Mr. Andre Jaeckle, an individual who made a $1.0 million loan to us bearing interest at a rate of 6% per year and, in connection with the loan, received warrants, which have subsequently been fully exercised, to purchase 62,500 shares of our common stock. On February 22, 1999, Marketel filed an amended complaint, and on March 17, 1999, Marketel filed a second amended complaint. The second amended complaint includes as defendants, Mr. Timothy G. Brier, our Executive Vice President, Travel, Mr. Bruce Schneier, an individual and consultant to Walker Digital, and Mr. James Jorasch, an individual and employee of Walker Digital, and alleges causes of action for, among other things, misappropriation of trade secrets, breach of contract, conversion, breach of confidential relationship, copyright infringement, fraud, unfair competition and false advertising, and seeks injunctive relief and damages in an unspecified amount. In its second amended complaint, Marketel alleges, among other things, that the defendants conspired to misappropriate Marketel's business model, which it describes as a buyer-driven electronic marketplace for travel services and its appurtenant techniques, market research, forms, plans and processes, and which an executive of Marketel allegedly provided to Messrs. Walker and Jaeckle in confidence approximately ten years ago. The second amended complaint also alleges that three former Marketel employees are the actual sole inventors or co-inventors of priceline.com's core buyer driven commerce patent (U.S. patent No. 5794207), which was issued on August 11, 1998 with Messrs. Jay S. Walker, Bruce Schneier and James Jorasch listed as the inventors and which patent was assigned to Walker Digital and thereafter assigned to priceline.com. Marketel asks that the patent's inventorship be corrected accordingly. Based upon publicly available information, we believe that Marketel's fax and fee-based business was launched in 1991 and ceased operations seven months later. Our Internet-based model was independently developed at Walker Digital and priceline.com, and practiced by priceline.com starting in 1998. Based on publicly available information and Marketel's second amended complaint, we understand that Marketel operated a fax-based travel information service which offered consumers, travel agents and/or consolidators the opportunity to purchase specially printed forms. These forms, when accompanied by an additional non-refundable fee, allowed prospective ticket buyers to fax to Marketel credit-card guaranteed bids for airline travel at a bid price specified by the buyer. We believe that Marketel has not engaged in any 15 regular commercial activities since ceasing operations in 1992. Based upon publicly available information, Marketel reactivated its status as a corporation by satisfying its back-due tax obligations to the State of California shortly after the filing of the original complaint. On February 5, 1999, February 10, 1999 and March 31, 1999, the defendants filed their answer, amended answer and answer to second amended complaint, respectively, in which they denied the material allegations of liability in the complaints. We and all other defendants strongly dispute the material legal and factual allegations contained in Marketel's second amended complaint and believe that the second amended complaint is without merit. We intend to defend vigorously against the action. Since May 28, 1999, there has been a discovery stay in effect, which was caused by the withdrawal of Marketel's counsel. Marketel has retained new counsel, and we now anticipate moving forward with discovery. Defending the Marketel litigation may involve significant expense and, due to the inherent uncertainties of litigation, there can be no certainty as to the ultimate outcome. Pursuant to the indemnification obligations contained in the Purchase and Intercompany Services Agreement with Walker Digital, Walker Digital has agreed to indemnify, defend and hold priceline.com harmless for damages, liabilities and legal expenses incurred in connection with the Marketel litigation. DOMAIN NAMES We currently hold the Internet domain name "priceline.com," as well as various other related names. Domain names generally are regulated by Internet regulatory bodies. The regulation of domain names in the United States and in foreign countries is subject to change. Regulatory bodies could establish additional top-level domains, appoint additional domain name registrars or modify the requirements for holding domain names. As a result, we may not acquire or maintain the "priceline.com" domain name in all of the countries in which we conduct business. The relationship between regulations governing domain names and laws protecting trademarks and similar proprietary rights is unclear. Therefore, we could be unable to prevent third parties from acquiring domain names that infringe or otherwise decrease the value of our trademarks and other proprietary rights. LICENSES In the future, we may license portions of our intellectual property, including our issued patents, to third parties or to joint ventures or other entities in which we may have an interest. To date, we have granted a small business providing online travel services immunity from suit under our core Internet-based buyer-driven commerce system patent, on the condition that the nature and scope of such business is not significantly changed. If the nature or scope of such immunity were disputed, we would need to institute proceedings to enforce our rights either under the immunity agreement or under the patent. THE SUCCESS OF OUR BUSINESS WILL DEPEND ON CONTINUED GROWTH OF INTERNET COMMERCE The market for the purchase of products and services over the Internet is a new and emerging market. As an Internet commerce business, our future revenues and profits are substantially dependent upon the widespread acceptance and use of the Internet and other online services as a medium for commerce by consumers and sellers. If acceptance and growth of Internet use does not occur, our business and financial performance will suffer. Rapid growth in the use of and interest in the Internet and other online services is a recent phenomenon. This growth may not continue. A sufficiently broad base of consumers may not adopt, or continue to use, the Internet as a medium of commerce. Demand for and market acceptance of recently introduced products and services over the Internet are subject to a high level of uncertainty, and there are few proven products and services. For us to grow, consumers who historically have purchased through traditional means of commerce, such as a travel agent for airline tickets or a branch of a bank for home financings, will need to elect to purchase online products and services. Sellers of products and services will need to adopt or expand use of the Internet as a channel of distribution. 16 The Internet has experienced, and is expected to continue to experience, significant growth in the number of users and amount of traffic. Our success will depend upon the development and maintenance of the Internet's infrastructure to cope with this increased traffic. This will require a reliable network backbone with the necessary speed, data capacity and security, and the timely development of complementary products, such as high-speed modems, for providing reliable Internet access and services. The Internet has experienced a variety of outages and other delays as a result of damage to portions of its infrastructure and could face such outages and delays in the future. Outages and delays are likely to affect the level of Internet usage generally, as well as the processing of transactions on the priceline.com Web site. It is unlikely that the level of orders lost in those circumstances could be made up by increased phone orders. In addition, the Internet could lose its viability due to delays in the development or adoption of new standards to handle increased levels of activity or due to increased government regulation. The adoption of new standards or government regulation may, however, require us to incur substantial compliance costs. WE MAY NOT BE ABLE TO KEEP UP WITH THE 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. YEAR 2000 RISKS MAY HARM OUR BUSINESS The risks posed by Year 2000 issues could adversely affect our business in a number of significant ways. Although we believe that our internally developed systems and technology are Year 2000 compliant, our information technology systems nevertheless could be substantially impaired or cease to operate due to Year 2000 problems. Additionally, we rely on information technology supplied by third parties, and our participating sellers also are heavily dependent on information technology systems and on their own third party vendors' systems. Year 2000 problems experienced by us or any of such third parties could materially adversely affect our business. Additionally, the Internet could face serious disruptions arising from the Year 2000 problem. We are evaluating our internal information technology systems and contacting our information technology suppliers and participating sellers to ascertain their Year 2000 status. However, we cannot guarantee that our own systems will be Year 2000 compliant in a timely manner, that any of our participating sellers or other Web site vendors will be Year 2000 compliant in a timely manner, or that there will not be significant interoperability problems among information technology systems. We also cannot guarantee that consumers will be able to visit our Web site without serious disruptions arising from the Year 2000 problem. Given the pervasive nature of the Year 2000 problem, we cannot guarantee that disruptions in other industries and market segments will not adversely affect our business. Further, the costs related to Year 2000 compliance could be significant. Moreover, participating sellers in priceline.com services could experience substantial slow-downs in business if consumers avoid products and services such as air travel both before and after January 1, 2000 arising from concerns about reliability and safety because of the Year 2000 issue. 17 ONLINE SECURITY BREACHES COULD HARM OUR BUSINESS The secure transmission of confidential information over the Internet is essential in maintaining consumer and supplier confidence in the priceline.com service. Substantial or ongoing security breaches on our system or other Internet-based systems could significantly harm our business. We currently require buyers to guarantee their offers with their credit card, either online or through our toll-free telephone service. We rely on licensed encryption and authentication technology to effect secure transmission of confidential information, including credit card numbers. It is possible that advances in computer capabilities, new discoveries or other developments could result in a compromise or breach of the technology used by us to protect customer transaction data. We incur substantial expense to protect against and remedy security breaches and their consequences. However, we cannot guarantee that our security measures will prevent security breaches. A party that is able to circumvent our security systems could steal proprietary information or cause interruptions in our operations. Security breaches also could damage our reputation and expose us to a risk of loss or litigation and possible liability. Our insurance policies carry low coverage limits, which may not be adequate to reimburse us for losses caused by security breaches. We also face risks associated with security breaches affecting third parties conducting business over the Internet. Consumers generally are concerned with security and privacy on the Internet and any publicized security problems could inhibit the growth of the Internet and, therefore, the priceline.com service as a means of conducting commercial transactions. OUR STOCK PRICE IS HIGHLY VOLATILE The market price of our common stock is highly volatile and is likely to continue to be subject to wide fluctuations in response to factors such as the following, some of which are beyond our control: - quarterly variations in our operating results; - operating results that vary from the expectations of securities analysis and investors; - changes in expectations as to our future financial performance, including financial estimates by securities analysts and investors; - 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; - loss of a major adaptive marketing partner; - announcements by third parties of significant claims or proceedings against us or adverse developments in pending proceedings; - additions or departures of key personnel; - future sales of our common stock; and - stock market price and volume fluctuations. In addition, the trading prices of Internet stocks in general, including ours, have experienced extreme price and volume fluctuations in recent months. These fluctuations often have been unrelated or disproportionate to the operating performance of these companies. The valuations of many Internet stocks, 18 including ours, are extremely high based on conventional valuation standards, such as price to earnings and price to sales ratios. The trading price of our common stock has increased significantly from the initial public offering price. These trading prices and valuations may not be sustained. Any negative change in the public's perception of the prospects of Internet or e-commerce companies could depress our stock price regardless of our results. Other broad market and industry factors may decrease the market price of our common stock, regardless of our operating performance. Market fluctuations, as well as general political and economic conditions, such as a recession or interest rate or currency rate fluctuations, also may decrease the market price of our common stock. In the past, securities class action litigation often has been brought against a company following periods of volatility in the market price of their securities. We may in the future be the target of similar litigation. Securities litigation could result in substantial costs and divert management's attention and resources. SUBSTANTIAL SALES OF COMMON STOCK ELIGIBLE FOR RESALE COULD ADVERSELY AFFECT OUR STOCK PRICE AND THE MARKET PRICE OF OUR NOTES Sales of a substantial number of shares of common stock after this offering 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. Because the notes are convertible into common stock at a fixed conversion price, a decline in the market price of the common stock could cause a decline in the market price of the notes. Upon completion of this offering and the concurrent common stock offering, we will have outstanding 146,782,296 shares of common stock. Of these shares, the 5,500,000 shares of common stock sold in the concurrent common stock offering, the 10,000,000 shares of common stock sold in our initial public offering and the 938,540 shares of common stock sold by employees upon exercise of stock options pursuant to the option exercise program will be freely tradeable without restriction under the Securities Act of 1933, as amended, which is commonly referred to as the "Securities Act," unless purchased by "affiliates" of priceline.com as defined in Rule 144 under the Securities Act. The shares of common stock issuable upon conversion of the notes being sold in this offering will be freely tradeable in a similar manner. In addition, 26,582,391 shares are issuable upon exercise of outstanding option granted under the 1997 Omnibus Plan and the 1999 Omnibus Plan. We have filed a registration statement on Form S-8 covering the shares of common stock issuable upon exercise of such options. As a result, when the options are exercised, the shares issued will be freely tradeable after September 26, 1999 under the Securities Act unless purchased by "affiliates" of priceline.com, as defined in Rule 144 under the Securities Act. The balance of our outstanding shares of common stock and the shares of common stock issuable upon exercise of outstanding warrants will be "restricted securities" under the Securities Act, subject to restrictions on the timing, manner and volume of sales of these shares. Each of the selling stockholders in the concurrent common stock offering and Mr. Jay S. Walker, who, after the offerings, will own an aggregate of 147,835,331 shares of common stock, including shares issuable upon exercise of options and warrants owned by them have agreed, subject to limited exceptions, for a period of 180 days after the date of this prospectus that they will not, without the prior written consent of Morgan Stanley & Co. Incorporated, directly or indirectly, offer to sell, sell, pledge or otherwise dispose of any shares of common stock. In addition, holders who will own 3,547,311 shares of common stock after this offering and options to purchase an additional 4,532,504 shares after this offering agreed in connection with our initial public offering to similar restrictions until after September 25, 1999. In connection with our option exercise program, holders of options to purchase 7,676,356 shares of common stock registered on our Form S-8 entered into lock-up agreements restricting the exercise of their options and sale of the underlying shares until 180 days after the date of this prospectus without our prior written consent. 19 After giving effect to these contractual restrictions, holding periods under Rule 144 and shares that may be issued upon exercise of outstanding options and warrants, we estimate that additional shares of common stock will be available for sale in the public market as follows:
APPROXIMATE NUMBER OF SHARES ELIGIBLE FOR DATE SALE - -------------------------------------------------------------------------------------------------- -------------- September 26, 1999................................................................................ 5,140,000 October through November 1999..................................................................... 1,520,000 December 1999 through January 2000................................................................ 11,580,000 Thereafter........................................................................................ 150,650,000
Since many of these shares were purchased at prices substantially below current market prices, we believe a significant number of these shares will be sold when eligible for resale. Upon consummation of this offering and the concurrent common stock offering and subject to the foregoing lock-up agreements, holders of up to 142,104,432 shares of common stock and securities exercisable for shares of common stock will have various rights to request the registration of their shares under the Securities Act. Of such shares, approximately 10,010,000 shares are not subject to the 180-day lock-up relating to the concurrent public offering. "Demand" registration rights with respect to an aggregate of approximately 5,190,000 shares could be exercised following expiration of the initial public offering lock-up on September 25, 1999, excluding warrants to purchase up to 1,125,000 shares which, by their terms, are not exercisable during the 180-day lock-up period relating to the concurrent public offering. In the event such a demand is made, 3,690,000 additional shares could be registered pursuant to "piggy-back" registration rights. If such rights are exercised in respect of shares that, at that time, are not available for sale publicly pursuant to Rule 144, then such shares could be sold in the public market on dates earlier than the dates as of which such shares are reflected as available for sale in the table above. We believe holders of registration rights are likely to exercise those rights as to some or all of their shares when they are eligible to do so. Upon the effectiveness of such a registration, all shares covered by such registration statement would be freely transferable. If the concurrent common stock offering does not occur, selling stockholders holding an aggregate of 40,553,090 shares of common stock or options and warrants to acquire those shares will not be subject to the 180 day lock-up described above and these shares would also be available for resale after September 25, 1999, upon expiration of the lock up period from priceline.com's initial public offering. Walker Digital also owns directly approximately 5.2% of our outstanding common stock. Walker Digital has established an option plan for its officers and employees that provides for the grant of options to purchase common stock held by Walker Digital. Future sales of our common stock, or the availability of our common stock for sale, could adversely affect the market price for our common stock or our ability to raise capital by offering equity securities. THE NOTES WILL BE SUBORDINATED TO ALL SENIOR DEBT The notes will be unsecured and subordinated in right of payment to all existing and future senior indebtedness of priceline.com. In the event of bankruptcy, liquidation or reorganization of priceline.com or upon acceleration of the notes due to an event of default under the indenture and in certain other events, our assets will be available to pay obligations on the notes only after all senior indebtedness has been paid, and there may not be sufficient assets remaining to pay amounts due on any or all of the notes then outstanding. The notes also will be effectively subordinated to the liabilities, including trade payables, lease obligations and preferred stock, if any, of any subsidiary of priceline.com. The indenture does not prohibit or limit the incurrence of senior indebtedness or the incurrence of other indebtedness and other liabilities by priceline.com or any subsidiary of priceline.com. The incurrence of additional indebtedness 20 and other liabilities by priceline.com or any subsidiary of priceline.com could adversely affect priceline.com's ability to pay its obligations on the notes. As of June 30, 1999, priceline.com had no senior indebtedness outstanding and had no subsidiaries. We anticipate that from time to time priceline.com will incur senior indebtedness and establish or acquire subsidiaries. Any subsidiaries will from time to time incur other additional indebtedness and liabilities. See "Description of Notes--Subordination of Notes." WE MAY BE UNABLE TO REDEEM THE NOTES UPON A FUNDAMENTAL CHANGE We may be unable to redeem the notes when redemption is required. Upon a fundamental change, as defined in the indenture, you may, at your option, require us to redeem all or a portion of your notes. If a fundamental change were to occur, we cannot assure you that we would have sufficient funds to pay the redemption price for all notes tendered by the holders of the notes. Any future credit agreements or other agreements relating to other indebtedness (including senior indebtedness) to which we become a party may contain provisions which would render us in default under such credit facility if a fundamental change were to occur, may also expressly prohibit the repurchase of the notes upon a fundamental change or may provide that a fundamental change constitutes an event of default under that agreement. If a fundamental change occurs at a time when we are prohibited from purchasing or redeeming notes, we could seek the consent of our lenders to the redemption of notes or could attempt to refinance the borrowings that contain such prohibition. If we do not obtain a consent to repay those borrowings, we could not purchase or redeem the notes. Our failure to redeem tendered notes would constitute an event of default under the indenture, which might constitute a default under the terms of our other indebtedness. In such circumstances, or if a fundamental change would constitute an event of default under our senior indebtedness, the subordination provisions of the indenture would restrict payments to the holders of notes. The term "fundamental change" is limited to certain specified transactions and may not include other events that might adversely affect our financial condition. Our obligation to offer to redeem the notes upon a fundamental change would not necessarily afford holders of the notes protection in the event of a highly leveraged transaction, reorganization, merger or similar transaction involving priceline.com. See "Description of Notes--Redemption at Your Option." ABSENCE OF PUBLIC MARKET FOR THE NOTES A public market may not develop for the notes. Prior to this offering there has been no trading market for the notes. Although the underwriters have advised us that they currently intend to make a market in the notes, they are not obligated to do so and may discontinue such market making at any time without notice. In addition, such market making activity will be subject to the limits imposed by the federal securities laws. Accordingly, we cannot assure you that any market for the notes will develop or, if one does develop, that it will be maintained. If an active market for the notes fails to develop or be sustained, the trading price of the notes could be materially adversely affected. WE CANNOT SERVICE THE NOTES FROM OPERATING CASH FLOW We do not generate positive cash flow from operations. Our earnings were insufficient to cover our fixed charges by $112.2 million for the year ended December 31, 1998 and the shortfall was $31.4 million for the six months ended June 30, 1999. We cannot currently meet our debt service requirements or repay the notes at maturity out of cash generated from our operations. As a result, our ability to service the notes and our other debt will depend on our ability to obtain funds from sources other than our operations. Unless the notes are converted or we are able to generate additional cash from our operations, our ability to repay the notes at maturity will depend on our ability to refinance the notes. The indebtedness represented by the notes could: - make it more difficult for us to obtain financing in the future, - limit our flexibility in planning for or reacting to changes in our business, and 21 - make ourselves more vulnerable if our business experiences a downturn. REGULATORY AND LEGAL UNCERTAINTIES COULD HARM OUR BUSINESS The products and services we offer through the priceline.com service are regulated by federal and state governments. Our ability to provide such products and services is and will continue to be affected by such regulations. The implementation of unfavorable regulations or unfavorable interpretations of existing regulations by courts or regulatory bodies, could require us to incur significant compliance costs, cause the development of the affected markets to become impractical and otherwise adversely affect our financial performance. TRAVEL SERVICES We are subject to the laws and regulations of a number of states governing the offer and/or sale of travel services. For example, priceline.com is registered as a "seller of travel" under the California Seller of Travel Act and is a member of the Airlines Reporting Corporation. In addition, a number of state travel laws and regulations require compliance with specific disclosure, bond and/or other requirements. NEW CAR SALES A number of states have laws and regulations governing the registration and conduct of automobile dealers and brokers. Such laws generally provide that any person receiving direct or indirect compensation for selling automobiles or brokering automobile transactions must register as an automobile broker or dealer. Registration for automobile dealers/brokers may, among other things, require the registrant to maintain a physical office in the applicable state, a dealer lot zoned for automobile sales within the applicable state, and/or a franchise agreement with the manufacturers of the automobiles to be sold. With the planned expansion of our new automobile service from the New York metropolitan area to all 48 contiguous states, priceline.com will attempt to register as an automobile broker/dealer in the jurisdictions where registration is required, provided that it can reasonably comply with the requirements for registration imposed by each jurisdiction. However, we may not be able to register in all states. For example, we will not be able to register in a jurisdiction that requires a dealer zoned lot or a franchise agreement with manufacturers of the automobiles to be sold. We will work with the regulators of the various jurisdictions where enforcement officials advise us that registration is required to obtain waivers of such requirements, but we may not be successful in our efforts. In jurisdictions where we cannot obtain registration, it is possible that state regulatory bodies could take a strict enforcement position and we may be unable to continue to make our new automobile services available in those jurisdictions. HOME FINANCING SERVICES Most states have laws and regulations governing the registration or licensing and conduct of persons providing mortgage brokerage services. Such laws and regulations also typically require certain consumer protection disclosures and compliance with loan solicitation procedures and a variety of other practices, throughout the various stages of the mortgage solicitation, application and approval process. In addition to state law, mortgage brokerage services are heavily regulated by federal law. For example, the Real Estate Settlement Procedures Act, prohibits the payment and receipt of mortgage loan referral fees. The act, however, does permit persons to be compensated for the fair market value of non-referral services actually rendered. We introduced our home financing service in January 1999. LendingTree serves as the back-end processing system, which presents offers we receive to multiple mortgage lending institutions for consideration, for all of priceline.com's home financing services. We provide and are responsible for maintaining 22 the home financing service on our Web site and develop and purchase all advertising. LendingTree compensates us for the fair market value of our non-referral services. We believe that offering the home financing service does not require our registration under or compliance with the mortgage or similar brokerage laws of any jurisdiction. However, it is possible that one or more regulatory authorities could seek to enforce existing laws, or otherwise enact new legislation, requiring our registration and compliance and could scrutinize our compensation arrangement with LendingTree under Real Estate Settlement Procedures Act or other federal or state laws. Such action could severely interfere with the conduct of our business. LendingTree provides the back-end processing system, which presents offers we receive to multiple mortgage lending institutions for consideration, for the home financing service on our Web site and is responsible for maintaining the necessary and appropriate state registrations and licenses associated with LendingTree's mortgage brokerage services. If a state or federal regulatory authority, or an aggrieved customer, should in the future claim that LendingTree has failed to comply fully with applicable state or federal law requirements pertaining to LendingTree's provision of mortgage brokerage services, our home financing service could be materially and adversely affected and we may be unable to continue to make our home financing service available. We are exploring the possibility of acquiring a minority interest in, and licensing the priceline.com name and business model to, a newly formed subsidiary of a federally chartered savings and loan association. This entity may be known as "priceline.mortgage.com" and also may serve as an entity that could accept mortgage applications or mortgage qualification loans. CONSUMER PROTECTION AND RELATED LAWS All of our services are subject to federal and state consumer protection laws and regulations prohibiting unfair and deceptive trade practices. We also are subject to related "plain language" statutes in place in many jurisdictions, which require the use of simple, easy to read, terms and conditions in contracts with consumers. Although there are very few laws and regulations directly applicable to the protection of consumers in an online environment, it is possible that legislation will be enacted in this area and could cover such topics as permissible online content and user privacy, including the collection, use, retention and transmission of personal information provided by an online user. Furthermore, the growth and demand for online commerce could result in more stringent consumer protection laws that impose additional compliance burdens on online companies. Such consumer protection laws could result in substantial compliance costs and interfere with the conduct and growth of our business. BUSINESS QUALIFICATION LAWS Because our service is available over the Internet in multiple states, and because we sell to numerous consumers resident in such states, such jurisdictions may claim that we are required to qualify to do business as a foreign corporation in each such state. We are qualified to do business in a limited number of states, and our failure to qualify as a foreign corporation in a jurisdiction where we are required to do so could subject us to taxes and penalties for the failure to so qualify and limit our ability to conduct litigation in such states. INTERNATIONAL EXPANSION We intend to explore opportunities for expanding our business into international markets. It is possible, however, that the priceline.com demand collection system will not be readily adaptable to the regulatory environments of certain foreign jurisdictions. In addition, there are various other risks associated with international expansion. They include language barriers, unexpected changes in regulatory requirements, trade barriers, problems in staffing and operating foreign operations, changes in currency 23 exchange rates, difficulties in enforcing contracts and other legal rights, economic and political instability and problems in collection. OUR BUSINESS IS SUBJECT TO TAX UNCERTAINTIES POTENTIAL FEDERAL AIR TRANSPORTATION TAX LIABILITY A federal air transportation tax is imposed upon the sale of airline tickets and generally is collected by the airlines selling the tickets. The tax is based upon a percentage of the cost of transportation, which was 9% for periods prior to October 1, 1998 and 8% thereafter. Because of the unique pricing structures employed in the priceline.com service, such as the amount paid by the customer for a ticket being different than the amount charged by the airline for the same ticket with the excess payment, if any, going to us as a charge for the use of our proprietary business method, it is not clear how this federal tax should be calculated when sales occur using the priceline.com service. We have been calculating this tax based on the price charged by the airline for a ticket, rather than the price paid by the customer. There is a possibility that current law requires computation of the tax based on the price paid by the customer to us. Due to the uncertainty of how the federal air transportation tax applies to sales of airline tickets using the priceline.com service, we have submitted a written request to the United States Internal Revenue Service seeking a determination of our federal air transportation tax obligations. We recently met with representatives of the Internal Revenue Service to informally discuss our submission. We intend to revise and resubmit our request to address certain factual and legal inquiries raised during our meeting. The actual ruling by the Internal Revenue Service may not be favorable and may require us to collect the federal air transportation tax on the total amount paid by consumers for air travel. If the determination of the Internal Revenue Service is unfavorable, we could owe approximately $766,339 in additional taxes as of June 30, 1999. We have accrued for such potential liability in our condensed balance sheet as of June 30, 1999 and are providing for such potential liability on an ongoing basis. We have agreed to indemnify and hold harmless certain of our participating airlines from any liability with respect to such taxes, as well as to secure the payment of such taxes by a letter of credit. STATE TAXES We file tax returns in such states as required by law based on principles applicable to traditional businesses. In addition, we do not collect sales or other similar taxes in respect of transactions conducted through the priceline.com service (other than the federal air transportation tax referred to above). However, one or more states could seek to impose additional income tax obligations or sales tax collection obligations on out-of-state companies, such as ours, which engage in or facilitate online commerce. A number of proposals have been made at state and local levels that could impose such taxes on the sale of products and services through the Internet or the income derived from such sales. Such proposals, if adopted, could substantially impair the growth of e-commerce and adversely affect our opportunity to become profitable. Legislation limiting the ability of the states to impose taxes on Internet-based transactions recently has been enacted by the United States Congress. However, this legislation, known as the Internet Tax Freedom Act, imposes only a three-year moratorium, which commenced October 1, 1998 and ends on October 21, 2001, on state and local taxes on (1) electronic commerce where such taxes are discriminatory and (2) Internet access unless such taxes were generally imposed and actually enforced prior to October 1, 1998. It is possible that the tax moratorium could fail to be renewed prior to October 21, 2001. Failure to renew this legislation would allow various states to impose taxes on Internet-based commerce. The imposition of such taxes could adversely affect our ability to become profitable. 24 PAYROLL TAXES RELATED TO OPTION EXERCISES We currently have outstanding non-qualified stock options to purchase 26,582,391 shares issued to various employees, consultants and directors pursuant to the 1997 Omnibus Plan and the 1999 Omnibus Plan. The options entitle the holders to purchase common stock at a weighted average exercise price of approximately $11.46 per share, subject to adjustment in accordance with the 1997 Omnibus Plan and the 1999 Omnibus Plan. Upon exercise of an option, we will be required to make payments on behalf of the option holders for certain payroll related taxes such as Social Security and Medicare. These payroll taxes will appear as a general and administrative expense on our statement of operations and will amount to approximately 1.5% to 2.0% of the difference between the exercise price and the then fair market value of the common stock at the time of exercise. However, upon exercise of outstanding options, we will be paid the exercise price of the options that are exercised. We also will be entitled to an income tax deduction equal to the sum of (1) the difference between the exercise price of the option and the then fair market value of the common stock at the time of exercise and (2) the total amount of payroll related tax payments. As the calculation of this expense is directly dependent upon our stock price and the exercise of options is in the sole discretion of the holder of the options, the amount and timing of the expense and the timing of the corresponding income tax deduction are not currently able to be determined and are not within our control. CONCENTRATED CONTROL COULD ADVERSELY AFFECT STOCKHOLDERS Upon consummation of this offering and the concurrent common stock offering, Mr. Jay S. Walker, the Founder and Vice Chairman of priceline.com, and Mr. Richard S. Braddock, Chief Executive Officer of priceline.com, together with their respective affiliates (including, with respect to Mr. Walker, Walker Digital) beneficially own approximately 42.4 and 12.0 percent, of our outstanding common stock, subject to certain adjustments. As a result, if Messrs. Walker and Braddock act together, they will have the ability to control the outcome on all matters requiring stockholder approval, including the election and removal of directors and any merger, consolidation or sale of all or substantially all of our assets, and the ability to control our management and affairs. Such control could discourage others from initiating potential merger, takeover or other change of control transactions. As a result, the market price of our common stock could be adversely affected. WE MAY BE UNABLE TO MEET OUR FUTURE CAPITAL REQUIREMENTS Based on our current operating plan, we anticipate that the net proceeds of our recent initial public offering, this offering and our concurrent common stock offering, together with our available funds, will be sufficient to satisfy our anticipated needs for working capital, capital expenditures and business expansion for at least the next three years. After that time, we may need additional capital. Alternatively, we may need to raise additional funds sooner in order to fund more rapid expansion, to develop new or enhanced services, or to respond to competitive pressures. If we raise additional funds by issuing equity or convertible subordinated debt securities, the percentage ownership of our stockholders will be diluted. Furthermore, any new securities could have rights, preferences and privileges senior to those of the common stock. We currently do not have any commitments for additional financing. We cannot be certain that additional financing will be available when and to the extent required or that, if available, it will be on acceptable terms. If adequate funds are not available on acceptable terms, we may not be able to fund our expansion, develop or enhance our products or services or respond to competitive pressures. ANTI-TAKEOVER PROVISIONS AFFECTING US COULD PREVENT OR DELAY A CHANGE OF CONTROL Provisions of our certificate of incorporation and by-laws and provisions of applicable Delaware law may discourage, delay or prevent a merger or other change of control that a stockholder may consider 25 favorable. Our board of directors has the authority to issue up to 150,000,000 shares of preferred stock par value $0.01 per share, of priceline.com and to determine the price and the terms, including preferences and voting rights, of those shares without stockholder approval. Although we have no current plans to issue additional shares of our preferred stock, any such issuance could: - have the effect of delaying, deferring or preventing a change in control of our company; - discourage bids for our common stock at a premium over the market price; or - adversely affect the market price of, and the voting and other rights of the holders of, our common stock. We are subject to certain Delaware laws that could have the effect of delaying, deterring or preventing a change in control of our company. One of these laws prohibits us from engaging in a business combination with any interested stockholder for a period of three years from the date the person became an interested stockholder, unless certain conditions are met. In addition, certain provisions of our certificate of incorporation and by-laws, and the significant amount of common stock held by our executive officers, directors and affiliates, could together have the effect of discouraging potential takeover attempts or making it more difficult for stockholders to change management. OUR MANAGEMENT HAS BROAD DISCRETION OVER USE OF THE PROCEEDS FROM THIS OFFERING The net proceeds of this offering are estimated to be approximately $241.9 million, and the net proceeds of our sale of 2,000,000 shares of common stock in the concurrent common stock offering are estimated to be approximately $133.3 million, in each case after deducting the underwriting discounts and estimated offering expenses. Our management will retain broad discretion as to the allocation of the proceeds of this offering and the concurrent common stock offering. SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS Some of the statements under "Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business" and elsewhere in this prospectus constitute forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance, or achievements to be materially different from any future results, levels of activity, performance, or achievements expressed or implied by such forward-looking statements. Such factors include, among other things, those listed under "Risk Factors" and elsewhere in this prospectus. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "could," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "potential," or "continue" or the negative of such terms or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of such statements. We are under no duty to update any of the forward-looking statements after the date of this prospectus. 26 USE OF PROCEEDS The net proceeds to priceline.com from the sale of its % convertible subordinated notes in this offering are estimated to be approximately $133.3 million, after deducting estimated offering expenses of $0.6 million and the underwriting discounts and commissions. If the underwriters' over-allotment option is exercised in full, the net proceeds to priceline.com would be approximately $278.3 million, after deducting estimated offering expenses of $0.6 million and the underwriters' discounts and commissions. Priceline.com will not receive any proceeds from the sale of shares of common stock by the selling stockholders in the concurrent common stock offering. The net proceeds to priceline.com from the sale of the 2,000,000 shares of common stock offered by it in the concurrent common stock offering are estimated to be approximately $153.5 million, after deducting estimated offering expenses of $1.5 million and the underwriting discounts and commissions. Priceline.com intends to use the net proceeds, over time, for general corporate purposes, including working capital, funding of anticipated operating losses, expenses associated with our advertising campaigns, brand-name promotions and other marketing efforts, funding of product and service expansion and capital expenditures. Priceline.com also could use a portion of the net proceeds, currently intended for general corporate purposes, to invest in joint ventures or other collaborative arrangements, or to invest in businesses, technologies, products or services. In particular, a portion of the proceeds may be used to make investments in and/or loans to two new business entities with which priceline.com is exploring the possibility of licensing its brand name and "name your price" business model. As of the date of this prospectus, priceline.com cannot specify with certainty the particular uses for the net proceeds to be received upon the consummation of this offering. Accordingly, priceline.com's management will have broad discretion in the application of the net proceeds. Pending such uses, priceline.com intends to invest the net proceeds from this offering in short-term, interest-bearing, investment-grade securities. See "Risk Factors--We May Be Unable to Meet Our Future Capital Requirements" and "Risk Factors--Our Management Has Broad Discretion Over Use of the Proceeds of this Offering." PRICE RANGE OF COMMON STOCK Priceline.com common stock has been quoted on the Nasdaq National Market under the symbol "PCLN" since priceline.com's initial public offering on March 29, 1999. Prior to such time, there was no public market for the common stock of priceline.com. The following table sets forth, for the periods indicated, the high and low closing sales prices per share of the common stock as reported on the Nasdaq National Market:
1999 HIGH LOW - ----------------------------------------------------------------------- ---------- ----------- First Quarter (from March 29, 1999).................................... $ 87 7/8 $ 69 Second Quarter......................................................... 162 3/8 59 7/8 Third Quarter (through August 9, 1999)................................. 112 66 1/4
On August 9, 1999, the last reported sale price for priceline.com common stock on the Nasdaq National Market was $70.00 per share. DIVIDEND POLICY Priceline.com has not declared or paid any cash dividends on its capital stock since its inception and does not expect to pay any cash dividends for the foreseeable future. Priceline.com currently intends to retain future earnings, if any, to finance the expansion of its business. 27 CAPITALIZATION The following table sets forth the capitalization of priceline.com as of June 30, 1999: (1) on an actual basis; (2) as adjusted to reflect the receipt by priceline.com of the estimated net proceeds of (x) $241.9 million from the sale of the notes in this offering, net of underwriting discounts and commissions and estimated offering expenses of $8,125,666, (y) $133.3 million from the sale of the 2,000,000 shares of common stock offered by priceline.com in the concurrent common stock offering, net of underwriting discounts and commissions and estimated offering expenses, based on an assumed public offering price of $70.00 per share; and (3) $1.4 million from the exercise of warrants to purchase 1,523,329 shares of common stock by Delta Airlines at an exercise price of $0.93 per share. This table does not give effect to the exercise of options pursuant to the option exercise program. This table should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements and related notes thereto included elsewhere in this prospectus.
AS OF JUNE 30, 1999 -------------------------------- ACTUAL AS ADJUSTED --------------- --------------- Capital lease obligations--net of current portion.............................. $ 12,248 $ 12,248 % Convertible Subordinated Notes due 2006................................... -- 250,000,000 --------------- --------------- Total debt................................................................... 12,248 250,012,248 Stockholders' equity:(a) Common stock, $0.008 par value--authorized, 1,000,000,000 shares; issued and outstanding, 142,320,427 and 145,843,756 shares, actual and as adjusted, respectively................................................................. 1,138,564 1,166,750 Additional paid-in capital..................................................... 326,880,953 461,565,129 Accumulated deficit............................................................ (156,710,306) (156,710,306) --------------- --------------- Total stockholders' equity................................................... 171,309,211 306,021,573 --------------- --------------- Total capitalization....................................................... $ 171,321,459 $ 556,033,821 --------------- --------------- --------------- ---------------
- ------------------------ (a) Excludes (1) 27,422,057 shares of common stock issuable upon exercise of options outstanding as of June 30, 1999, with a weighted average exercise price of approximately $10.82 per share; (2) 5,827,943 additional shares of common stock reserved for issuance under the 1997 Omnibus Plan and the 1999 Omnibus Plan; (3) 17,096,073 shares of common stock issuable upon exercise of outstanding warrants at an exercise price of approximately $0.93 per share; (4) 937,500 shares of common stock issuable upon exercise of outstanding warrants at an exercise price of $3.20 per share; (5) 1,250,000 shares of common stock issuable upon exercise of outstanding warrants at an exercise price of $6.40 per share; (6) 1,000,000 shares of common stock issuable upon exercise of outstanding warrants at an exercise price of $97.41 per share; and (7) the shares issuable on conversion of the notes being offered in this offering. 28 SELECTED FINANCIAL DATA The following selected financial data should be read in conjunction with the financial statements and related notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this prospectus.
YEAR ENDED JULY 18, 1997 DECEMBER 31, 1998 SIX MONTHS (INCEPTION) TO ----------------- ENDED DECEMBER 31, 1997 JUNE 30, 1999 ----------------- RESTATED(a) -------------- STATEMENT OF OPERATIONS DATA:(b) Revenues................................................... $ -- $ 35,236,860 $ 160,974,391 Cost of revenues: Product costs............................................ -- 33,495,745 144,323,527 Supplier warrant costs(c)................................ -- 3,029,014 761,518 ----------------- ----------------- -------------- Total cost of revenues..................................... -- 36,524,759 145,085,045 ----------------- ----------------- -------------- Gross profit (loss)...................................... -- (1,287,899) 15,889,346 Expenses: Supplier start-up warrant costs(c)....................... -- 57,978,678 -- Sales and marketing...................................... 441,479 24,388,061 34,871,086 General and administrative............................... 1,011,600 18,004,585(d) 9,169,869 Systems and business development......................... 1,060,091 11,131,650 5,652,423 ----------------- ----------------- -------------- Total expenses............................................. 2,513,170 111,502,974 49,693,378 ----------------- ----------------- -------------- Operating loss............................................. (2,513,170) (112,790,873) (33,804,032) Interest income (expense), net............................. (312) 548,374 2,387,104 ----------------- ----------------- -------------- Net loss................................................... (2,513,482) (112,242,499) (31,416,928) Accretion on preferred stock(e)............................ -- (2,183,424) (8,353,973) ----------------- ----------------- -------------- Net loss applicable to common stockholders................. $ (2,513,482) $ (114,425,923) $ (39,770,901) ----------------- ----------------- -------------- ----------------- ----------------- -------------- Per share basic and diluted net loss applicable to common stockholders............................................. $ (0.05) $ (1.41) $ (0.29) ----------------- ----------------- -------------- ----------------- ----------------- -------------- Weighted average common shares outstanding................. 50,833,756 81,231,425 137,436,399 Deficiency of earnings available to cover fixed charges.... (2,513,482) (112,242,499) (31,416,928)
AS OF JUNE 30, 1999 ----------------------------------- ACTUAL AS ADJUSTED(f) -------------- ------------------- BALANCE SHEET DATA: (b) Cash and cash equivalents................................................... $ 142,803,134 $ $519,389,830 Working capital............................................................. 150,043,651 526,630,347 Total assets................................................................ 204,794,892 589,507,254 Long-term debt and capital lease obligation................................. 12,248 250,012,248 Total liabilities........................................................... 33,485,681 283,485,681 Total stockholders' equity.................................................. 171,309,211 306,021,573
- ------------------------ (a) As restated, see Note 13 to the 1998 combined financial statements. (b) Presented on a combined basis with Priceline Travel, Inc. as of and for the periods ended December 31, 1997 and December 31, 1998. Priceline Travel, which previously owned priceline.com's travel agency license, was merged into priceline.com on March 24, 1999. (c) Represents non-cash charges for warrants issued to certain of our participating airlines. (d) Includes a non-cash charge of $6,500,000 with respect to 8,125,000 shares of common stock issued as executive compensation. (e) Represents amortization of the beneficial conversion feature on the Series B preferred stock that ceased upon conversion of the Series B preferred stock into common stock on March 29, 1999. (f) As adjusted to reflect the receipt by priceline.com of the estimated net proceeds of (x) $241,874,334 million from the sale of the notes in this offering (after deducting the estimated offering expenses and underwriting discounts and commissions); (y) $133,295,666 million from the sale of the 2,000,000 shares of common stock offered by priceline.com in the concurrent common stock offering (after deducting the estimated offering expenses and underwriting discounts and commissions), based upon an assumed public offering price of $70.00; and (z) $1,416,696 from the exercise of warrants to purchase 1,523,329 shares of common stock by Delta Airlines at an exercise price of $0.93 per share. 29 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. ACTUAL EVENTS OR RESULTS MAY DIFFER MATERIALLY FROM THOSE INDICATED IN SUCH FORWARD-LOOKING STATEMENTS. SEE "SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS." THE FOLLOWING DISCUSSION OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF PRICELINE.COM ALSO SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS AND RELATED NOTES THERETO INCLUDED ELSEWHERE IN THIS PROSPECTUS. OVERVIEW Priceline.com has pioneered a unique e-commerce pricing system known as a "demand collection system" that enables consumers to use the Internet to save money on a wide range of products and services while enabling sellers to generate incremental revenue. Using a simple and compelling consumer proposition--"name your price"--priceline.com collects consumer demand, in the form of individual customer offers guaranteed by a credit card, for a particular product or service at a price set by the customer. Priceline.com then either communicates that demand directly to participating sellers or accesses participating sellers' private databases to determine whether it can fulfill the customer's offer on the basis of the pricing information and rules established by the sellers. Consumers agree to hold their offers open for a specified period of time and, once fulfilled, offers cannot be canceled. Priceline.com benefits consumers by enabling them to save money, while at the same time benefitting 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, priceline.com enables sellers to generate incremental revenue without disrupting their existing distribution channels or retail pricing structures. Priceline.com was formed in July 1997 and its primary activities during the period prior to launch consisted of recruiting and training employees, developing its business model, implementing systems to support its business model, developing relationships with seller participants and developing the priceline.com brand. Priceline.com commenced operations in April 1998 with the sale of leisure airline tickets. Since that time, priceline.com's business has grown significantly and the priceline.com service now includes the following products and services: - leisure airline tickets, provided by six domestic and 16 international airline participants; - new automobiles, which was launched on a test basis in the New York metropolitan area in July 1998; - hotel room reservations, which was launched in October 1998, offers hotel rooms in substantially all major United States markets and includes as participants more than 10 leading national hotel chains; and - home financing services, which was launched in January 1999 with home mortgage services and now also includes home equity loans and refinancing services. Through the innovative use of "adaptive marketing programs," priceline.com also markets customer acquisition programs for third parties. These programs facilitate the completion of a higher percentage of successful transactions through the priceline.com service while generating fee income for the company. Priceline.com also is exploring expansion of its core "name your price" business model to other areas of e-commerce, such as retail merchandise and the consumer-to-consumer market. The number of full-time employees of priceline.com increased from 10 to 263 during the period from inception to June 30, 1999, and as of August 10, 1999, priceline.com had 266 full-time employees. Priceline.com generates revenues in a variety of ways depending on the product or service sold. With respect to its airline ticket and hotel room reservation services, priceline.com recognizes as revenue the 30 customer's named price, net of taxes, and records as the cost of revenue the fare or rate charged by the seller. With respect to its automobile service, it earns a fixed fee from both the customer and the seller after the transaction is consummated. With respect to its home financing service, it receives marketing fees equal to a percentage of the net revenue generated by the service, which is operated in conjunction with LendingTree, Inc. Priceline.com also generates revenues through adaptive marketing programs with third parties that pay priceline.com fees for marketing their customer acquisition programs. Additionally, priceline.com generates revenues from third party sources, including airline ticket processing fees from consumers and ancillary reservation booking fees from the Worldspan reservation system for priceline.com's booking of airline flight segments and hotel reservations through the Worldspan system. Consumer fees are payable and recognized only upon completion of successful transactions. All offers made through the priceline.com service are guaranteed by a customer credit card and credit cards are the only form of payment accepted by priceline.com. The manner in which and time at which revenues are recognized differs depending on the product or service sold through the priceline.com service. With respect to airline ticket and hotel room reservation services, revenues are generated by transactions with customers who make offers to purchase airline tickets and reserve hotel rooms supplied by participating sellers. Revenues and related costs are recognized if, and when, priceline.com accepts the customer's offer and charges the customer's credit card. Because priceline.com is the merchant of record in these transactions, revenue for these services includes the offer price paid by the customer, net of certain taxes and fees. Airline and hotel revenues also may include fees from third parties for adaptive marketing programs. With respect to automobile services, fees or other payments payable by the seller and/or the customer are recognized as revenue. With respect to home financing services, priceline.com receives no fees from consumers. Priceline.com recognizes revenue from marketing fees paid directly by LendingTree through the operation of its home financing services. Because priceline.com acts as an intermediary between the customer and the seller in auto and home financing transactions, revenues for these products and services is recorded at the amount of the fee received, and not on the value of the underlying transaction, when the transaction is completed. Automobile and home financing services revenues also may include fees from third parties for adaptive marketing programs. When making offers through the priceline.com service, consumers are permitted to make only one offer within a seven day period unless they change some feature of their itinerary, such as the date on which or the airport from which they are willing to fly. In April 1999, priceline.com introduced a new "checkstatus" feature on its Web site that invites consumers whose initial requests are not satisfied to change a feature of their itinerary and resubmit revised offers without having to start the offer submission process over again. Commencing with the second quarter of 1999, priceline.com treats each initial offer and any resubmitted offer made in response to the checkstatus invitation as a single offer for purposes of measuring its offer fulfillment rates. During the period from launch through June 30, 1999, priceline.com collected guaranteed offers for approximately 5.1 million airline tickets, representing approximately $1.1 billion in total consumer demand. This demand resulted in sales of approximately 762,000 airline tickets, representing approximately $165.2 million in revenue. Because the priceline.com system does not set minimum offer thresholds, and consumers are not charged to make offers for airline tickets and other products, it is expected that priceline.com will receive a significant number of unreasonable or fantasy offers. Accordingly, priceline.com also analyzes the percentage of "reasonable" ticket requests that it is able to fill. Priceline.com considers an offer for an airline ticket to be "reasonable" when it is no more than 30% lower than the lowest generally available advance- purchase fare for the same route. Using this standard, the overall percentage of ticket requests considered reasonable for the six-month period ended June 30, 1999 was approximately 55.3%. The 626,860 tickets sold through priceline.com during the six-month period represented approximately 34.7% of the combined reasonable ticket requests for domestic and international flights. For domestic routes where priceline.com's airline participants have strong coverage, that percentage was higher, with approximately 40.0% 31 of all reasonable requests fulfilled for the same six-month period. The percentage of reasonable offers that priceline.com is able to fill can also vary depending on the particular route. The following table sets forth, for the periods presented, data regarding the total percentage of "reasonable" ticket requests fulfilled by priceline.com:
QUARTER ENDED -------------------------------------------------------------- JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, 1998 1998 1998 1999 1999 (1) --------- ------------- ------------ ---------- ---------- Total ticket requests.................................. 492,240 639,089 737,630 1,396,381 1,868,728 "Reasonable" ticket requests........................... 275,186 374,984 425,135 763,600 1,043,227 Tickets sold........................................... 30,678 36,027 68,743 186,521 440,339 "Reasonable" fill rate................................. 11.1% 9.6% 16.2% 24.4% 42.2%
- ------------------------ (1) For this period, due to the introduction of the new "checkstatus" feature, initial offers and any resubmitted offers made in response to this feature were treated as a single offer; comparisons with other periods may not be meaningful as resubmitted offers were considered separate offers in prior periods. Since its inception, priceline.com has incurred net losses in each fiscal quarter. Priceline.com incurred net losses of $88.1 million during the period from July 18, 1997 (inception) through June 30, 1999, before giving effect to $68.6 million of non-cash charges arising from equity issuances to a number of our participating airlines, its chief executive officer and other parties, as more fully described below. As of June 30, 1999, priceline.com had an accumulated deficit of $156.7 million. Priceline.com believes that its continued growth will depend in large part on its ability to continue to promote the priceline.com brand and to apply the priceline.com business model to a wide range of products and services. Accordingly, priceline.com intends to continue to invest heavily in marketing and promotion, technology and personnel. As a result, it expects to incur additional losses for at least the next two years. See "Risk Factors--We Are Not Profitable and Expect to Continue to Incur Losses." In addition, priceline.com's limited operating history makes the prediction of future results of operations difficult, and accordingly, there can be no assurance that it will achieve or sustain revenue growth or profitability. See "Risk Factors--Potential Fluctuations in Our Financial Results Makes Financial Forecasting Difficult." Priceline.com currently has outstanding non-qualified stock options to purchase 26,582,391 shares issued to various employees, consultants and directors pursuant to the 1997 Omnibus Plan and the 1999 Omnibus Plan. The options entitle the holders to purchase common stock at a weighted average exercise price of approximately $11.46 per share, subject to adjustment in accordance with the 1997 Omnibus Plan and the 1999 Omnibus Plan. Upon exercise of an option, priceline.com will be required to make payments on behalf of the option holders for certain payroll related taxes such as Social Security and Medicare. These payroll taxes will appear as a general and administrative expense on priceline.com's statement of operations and will amount to approximately 1.5% to 2.0% of the difference between the exercise price and the then fair market value of the common stock at the time of exercise. However, upon exercise of outstanding options, priceline.com will be paid the exercise price of the options that are exercised. Priceline.com also will be entitled to an income tax deduction equal to the sum of (1) the difference between the exercise price of the option and the then fair market value of the common stock at the time of exercise and (2) the total amount of payroll related tax payments. As the calculation of this expense is directly dependent upon priceline.com's stock price and the exercise of options is in the sole discretion of the holder of the options, the amount and timing of the expense and the timing of the corresponding income tax deduction are not currently able to be determined and are not within priceline.com's control. Priceline.com estimates that, in connection with the exercise of outstanding options pursuant to the option exercise program, in the third quarter of 1999 it will (x) record expenses of approximately $1.3 million in respect of such payroll related taxes; (y) increase additional paid-in capital by approximately $944,000 in 32 respect of the exercise price of such options; and (z) increase common stock by approximately $7,700 in respect of the par value of the shares purchased upon exercise of such options. For the year ended December 31, 1998, priceline.com recorded aggregate non-cash charges of $67.9 million. Of this amount, $6.5 million related to the issuance of 8,125,000 shares of common stock to Mr. Richard S. Braddock, the Chairman and Chief Executive Officer of priceline.com, and $61.1 million related to the issuance of warrants to purchase 19,744,402 shares of common stock, including warrants to purchase 19,556,902 shares of common stock issued to a number of our participating airlines. In August 1998, priceline.com entered into a warrant agreement with Delta to purchase up to 18,892,603 shares of common stock at an exercise price of approximately $0.93 per share. Vesting was contingent upon achievement of certain predetermined performance thresholds. However, there was no penalty for failure to provide ticket inventory to satisfy these performance thresholds. Accordingly, no expense was recorded when the warrant was issued. On December 31, 1998, priceline.com amended its agreement with Delta to eliminate the vesting contingencies and fix the number of shares subject to the warrant at 18,619,402. The amended warrant issued to Delta will become exercisable at the earlier of seven years or upon the achievement of certain performance thresholds. However, the agreement does not require Delta to make any performance commitments, is non-exclusive and allows Delta to participate in other programs similar to the priceline.com service. Included in the non-cash charges described above is approximately $58.7 million reflecting the fair value of the Delta warrant on December 31, 1998. During July 1999, priceline.com issued to Continental Airlines a warrant to purchase common stock that will become exercisable upon the earlier of July 2004 or upon the achievement of certain performance thresholds. However, the agreement does not require Continental to make any performance commitments. Accordingly, priceline.com will incur a non-cash charge of approximately $88.4 million during the quarter ending September 30, 1999 representing the fair value of the warrant on the grant date. Priceline.com's travel agency license was previously held by Priceline Travel, a separate company that was owned by Mr. Jay S. Walker, priceline.com's Founder and Vice Chairman, and all of its airline ticket sales were effected through Priceline Travel, which was merged with and into priceline.com as of March 24, 1999. Accordingly, the financial statements of Priceline Travel as of December 31, 1997 and December 31, 1998 (restated) and for the period July 18, 1997 (Inception) to December 31, 1997 and for the year ended December 31, 1998 (restated) are presented on a combined basis with priceline.com. RESULTS OF OPERATIONS Priceline.com was formed in July 1997, but did not commence operations until April 1998. Accordingly, comparisons with prior periods are not meaningful. SIX MONTHS ENDED JUNE 30, 1999 REVENUES Total revenues for the six months ended June 30, 1999 were $161.0 million. Revenues for the period were comprised primarily of (1) transaction revenues representing the selling price of airline tickets and hotel room reservations; (2) fee income from adaptive marketing programs offered in connection with priceline.com's product offerings; (3) ancillary revenues consisting of Worldspan reservation booking fees and airline ticket processing fees; and (4) fee income from priceline.com's home financing and auto programs. On April 23, 1999, the adaptive marketing program with Capital One ended and priceline.com commenced its credit card adaptive marketing program with First USA. The fee structure of the First USA program is based on different factors and may or may not result in revenues comparable to those under the Capital One program. For example, under the Capital One program priceline.com's fees were based upon the submission of qualifying credit card applications, while the First USA program ties a portion of 33 priceline.com's fees to account activation and usage. Because, to date, there is no meaningful activation and usage experience upon which to draw, priceline.com cannot predict the degree to which revenues ultimately will be recognized under the First USA program. In addition, priceline.com expects that future contributions to adaptive marketing revenues from credit card adaptive marketing programs may decline on a percentage basis, as agreements with new adaptive marketing suppliers are reached and become operative. At the same time, increased transaction activity, particularly associated with airline ticket sales and related processing fees, is likely to provide an increasing portion of revenues. All of these factors are likely to diminish the proportion of priceline.com's revenues provided by its credit card adaptive marketing programs. During the six months ended June 30, 1999, priceline.com also earned revenue from its Customer Affinity Share Purchase Program, the first phase of its adaptive marketing program with E*TRADE. Revenues from this program related specifically to the referral of priceline.com customers to E*TRADE in connection with priceline.com's initial public offering and, therefore, are not recurring. Priceline.com also commenced the second phase of its adaptive marketing program with E*TRADE under which E*TRADE compensates priceline.com for offering priceline.com customers the opportunity to open an account with E*TRADE while visiting or making an offer on the priceline.com Web site. Priceline.com intends to continue to add adaptive marketing programs so that consumers have a variety of programs from which to choose and priceline.com has a diversified source of adaptive marketing revenues. Priceline.com's ancillary revenues for the six month period increased as a result of volume driven increases in Worldspan reservation booking fees and a recently introduced processing fee. Revenues from these sources are linked to airline ticket sales and, accordingly, will increase or decrease in future periods in relation to changes in the volume of airline ticket sales. Worldspan reservation booking fees also are linked to hotel reservations booked through the Worldspan system. COST OF REVENUES AND GROSS PROFIT Cost of revenues for the six months ended June 30, 1999 totaled $145.1 million, consisting of product costs of $144.3 million and supplier warrant costs of $761,518. Product costs were comprised of the cost of airline tickets from priceline.com's suppliers, net of the federal air transportation tax, segment fees and passenger facility charges imposed in connection with the sale of airline tickets. Product costs also included the cost of hotel rooms from priceline.com's suppliers, net of hotel tax. Supplier warrant costs represent a non-cash expense related to the issuance of common stock warrants to one of priceline.com's airline program participants in January 1999. Priceline.com anticipates that it will recognize additional supplier warrant costs in the amount of approximately $381,000 in each of the next six fiscal quarters. Gross profit, which is comprised of revenues less cost of revenues, was $15.9 million for the six months ended June 30, 1999. Gross margin was 9.9% for the period. Excluding the effect of non-cash supplier warrant costs, priceline.com would have had gross profit of $16.7 million and gross margin of 10.3% for the six months ended June 30, 1999. Gross profit and gross margin are affected by the price at which priceline.com causes offers to be fulfilled and by the level of fees generated by adaptive marketing programs. Priceline.com is able to manage the level of gross margins by controlling the price at which it will cause offers to be fulfilled. During the first quarter of 1999, priceline.com chose to sell a substantial number of tickets below its cost in order to increase airline and adaptive marketing revenues, build a record of successful transactions and enhance the priceline.com brand. As a result of the growth of the priceline.com service, priceline.com reduced the percentage of airline tickets that it chose to sell below cost during the second quarter, thereby improving gross margins on airline ticket sales. Because the fees generated by adaptive marketing revenue and ancillary revenues did not involve separate costs, adaptive marketing revenues and ancillary revenues had a disproportionately positive impact on total gross margins and made a very substantial contribution to priceline.com's gross profit for the six months ended June 30, 1999. If our transaction activity continues to grow, priceline.com expects the proportion of its gross profit and gross margin attributable to adaptive marketing revenues to decline. 34 Gross margins for the six months ended June 30, 1999 also were affected by a somewhat lower gross margin in the second quarter of 1999 compared to the first quarter of 1999. See "Quarterly Results of Operations" below. Gross margins for the second quarter of 1999 were affected by a change in revenue mix, resulting from a greater percentage of revenues being attributable to transaction revenues rather than fee based revenues. Fee-based revenues, such as adaptive marketing revenues, ancillary revenues and revenues from financial services and automobiles, have higher margins than transaction revenues, which are derived from the spread between customer offers and the product costs. OPERATING EXPENSES SALES AND MARKETING. Sales and marketing expenses for the six months ended June 30, 1999 totaled $34.9 million, or 21.7% of revenues. Approximately 65.0% of sales and marketing expenses were comprised of advertising and promotion expenses. The remaining expenses consisted primarily of (1) fees payable to a third party service provider that operates priceline.com's call center; (2) credit card processing fees; (3) provisions for customer credit card charge-backs (based upon a percentage reflecting priceline.com's historical experience); and (4) compensation for priceline.com's sales and marketing personnel. GENERAL AND ADMINISTRATIVE. General and administrative expenses for the six months ended June 30, 1999 totaled $9.2 million, or 5.7% of revenues. General and administrative expenses for the period were comprised primarily of compensation for personnel, fees for outside professionals, telecommunications and other overhead costs, including occupancy expense. SYSTEMS AND BUSINESS DEVELOPMENT. Systems and business development expenses for the six months ended June 30, 1999 totaled $5.7 million, or 3.5% of revenues. Systems and business development expenses for the period were comprised primarily of compensation to priceline.com's information technology and product development staff and payments to outside contractors, data communications and other expenses associated with operating priceline.com's Web site and, to a lesser extent, depreciation on computer hardware and licensing fees for computer software. In March 1998, the American Institute of Certified Public Accountants issued Statement of Position ("SOP") 98-1, "Accounting for Costs of Computer Software Developed or Obtained for Internal Use." This SOP requires capitalization of certain costs of computer software developed or obtained for internal use. Priceline.com adopted this SOP on January 1, 1999 and, during the six-month period ended June 30, 1999, priceline.com capitalized approximately $5.7 million of computer software developed or obtained for internal use. Amortization of such costs aggregated approximately $149,000 during the six month period ended June 30, 1999. INTEREST INCOME, NET Interest income, net for the six months ended June 30, 1999 totaled $2.4 million, reflecting approximately $2.5 million of interest income earned by priceline.com on its cash balances, net of interest expense for the period. Cash balances increased during this period due to priceline.com's initial public offering in April 1999. SIX MONTHS ENDED JUNE 30, 1998 Priceline.com commenced its service on April 6, 1998 with the sale of leisure airline tickets. Revenues from the sale of airline tickets during the six month period ended June 30, 1998 were $7.0 million. Cost of revenues during this period exceeded such revenues by approximately $900,000. Priceline.com chose to sell a substantial number of leisure airline tickets below its cost during this period in order to increase airline revenues, build a record of successful transactions and enhance the priceline.com brand. 35 In addition, priceline.com incurred operating expenses of $17.9 million, consisting of sales and marketing expenses of $7.8 million, general and administrative expenses of $4.8 million and systems and business development expenses of $5.4 million. These activities resulted in an operating loss of $18.9 million and, after consideration of interest income, a net loss of $18.7 million for the six month period ended June 30, 1998. YEAR ENDED DECEMBER 31, 1998 RESTATEMENT Subsequent to the issuance of priceline.com's combined 1998 financial statements, priceline.com's management determined that the calculation of the fair value of the Delta warrant, other airline warrants and the beneficial conversion feature on the Series B preferred stock should be revised. The fair value of the Delta warrant and the other airline warrants has been revised to reflect the change in the volatility assumption from 50% to 132%, eliminate the "large block" and lack of marketability discounts, and consider the warrant's anti-dilution and exercisability features. As a result, the 1998 combined financial statements have been restated from the amounts previously reported to recognize an additional $22.0 million of expense based upon the revised fair value of the warrants at December 31, 1998, of which $3.0 million is included in the cost of revenues-supplier warrant costs and $19.0 million is included in expenses-supplier start-up warrant costs. In addition, the value of the beneficial conversion feature on the Series B preferred stock has been revised to calculate such amount based on 22,500,000 shares. As a result, additional paid-in capital and accumulated deficit have been restated from amounts previously reported to recognize an additional $883,424 of accretion of preferred stock based on the revalued beneficial conversion feature. A summary of the significant effects of the restatement is as follows:
AS PREVIOUSLY REPORTED AS RESTATED -------------- --------------- At December 31, 1998: Additional paid-in capital................................................. $ 148,224,070 $ 171,155,186 Accumulated deficit........................................................ (94,008,289) (116,939,405) For the year ended December 31, 1998: Cost of revenues-supplier warrant costs.................................... -- 3,029,014 Expenses-supplier start-up warrant costs................................... 38,960,000 57,978,678 Net loss................................................................... (90,194,807) (112,242,499) Accretion on preferred stock............................................... (1,300,000) (2,183,424) Net loss applicable to common stockholders................................. (91,494,807) (114,425,923) Per share basic and diluted loss applicable to common stockholders......... (1.13 (1) (1.41)
- ------------------------ (1) Per share basic and diluted loss applicable to common stockholders as previously reported has been restated for a 1.25 for one stock split. REVENUES Total revenues for the year ended December 31, 1998 were $35.2 million. Since commencement of operations in April 1998, essentially all revenues consisted of airline ticket sales, hotel room reservations and related adaptive marketing programs. Approximately $4.0 million of total revenues were attributable to adaptive marketing programs, all of which were attributable to priceline.com's third-party credit card marketing program with Capital One Bank. See "--Cost of Revenues and Gross Profit (Loss)." Priceline.com's automobile sales service, which was launched on a test basis in the New York metropolitan area in July 1998, did not contribute materially to revenues during the period. 36 COST OF REVENUES AND GROSS PROFIT (LOSS) Cost of revenues for the year ended December 31, 1998 totaled $36.5 million, consisting of product costs of $33.5 million and supplier warrant costs of $3.0 million. Product costs represent the cost of airline tickets from priceline.com's suppliers, net of the federal air transportation tax, segment fees and passenger facility charges imposed in connection with the sale of airline tickets. Supplier warrant costs represent a non-cash expense related to the pro-rata amount of the Delta warrant earned prior to December 31, 1998, the date on which the Delta warrant was amended. Priceline.com anticipates that it will recognize additional supplier warrant costs in the amount of $1.6 million in each of 1999 and 2000 in connection with additional warrants issued to a participating airline in January 1999. Gross profit (loss), which is comprised of revenues less cost of revenues, was $(1.3) million for the year ended December 31, 1998. Excluding the effect of the non-cash supplier warrant costs, priceline.com would have had gross profit of $1.7 million for the year ended December 31, 1998. Priceline.com is able to manage the level of gross margins by controlling the price at which it will cause offers to be fulfilled. Priceline.com has chosen to sell a substantial number of tickets below its cost in order to increase airline and adaptive marketing revenues, build a record of successful transactions, and enhance the priceline.com brand. Because the fees generated by adaptive marketing programs have historically involved no separate costs, adaptive marketing revenues have had a disproportionately positive impact on priceline.com's total gross margin. The Capital One adaptive marketing program accounted for all of priceline.com's adaptive marketing revenues in 1998. OPERATING EXPENSES SUPPLIER START-UP WARRANT COSTS. Supplier start up warrant costs for the year ended December 31, 1998 totaled $58.0 million, or 164.5% of revenues. Supplier start up warrant costs consist of a non-cash charge representing the fair value of warrants issued to certain participating airlines in the priceline.com service in connection with securing priceline.com's relationship with those airlines. SALES AND MARKETING. Sales and marketing expenses for the year ended December 31, 1998 totaled $24.4 million, or 69.2% of revenues. Approximately 50% of sales and marketing expenses were comprised of radio and newspaper advertising expenses. The balance was comprised of (1) fees payable to a third party service provider, which operates priceline.com's call center, (2) credit card processing fees, (3) provisions for customer credit card charge-backs (based upon a percentage reflecting priceline.com's historical experience), and (4) compensation for priceline.com's sales and marketing personnel. SYSTEMS AND BUSINESS DEVELOPMENT. Systems and business development expenses for the year ended December 31, 1998 totaled $11.1 million, or 31.6% of revenues. Systems and business development expenses are comprised primarily of compensation to priceline.com's information technology and product development staff and payments to outside contractors, data communications and other expenses associated with operating priceline.com's Web site and, to a lesser extent, depreciation on computer hardware and licensing fees for computer software. GENERAL AND ADMINISTRATIVE. General and administrative expenses for the year ended December 31, 1998 totaled $18.0 million or 51.1% of revenues. General and administrative expenses consist primarily of compensation for personnel, fees for outside professionals, telecommunications and other overhead costs, including occupancy expense. Also included is a one-time non-cash charge of $6.5 million relating to the issuance to Mr. Richard S. Braddock of a profits interest with respect to 6.5 million units in priceline.com's predecessor, priceline.com LLC. These units were granted to Mr. Braddock in connection with his employment by priceline.com, and were subsequently converted into 8,125,000 shares of common stock. 37 INTEREST INCOME (EXPENSE), NET Interest income (expense), net for the year ended December 31, 1998 totaled $548,374, reflecting approximately $633,000 of interest income earned by priceline.com on its cash balances, net of interest expense for the period. PERIOD ENDED DECEMBER 31, 1997 During the period from its formation in July 1997 through December 31, 1997, priceline.com was engaged in start-up activities and incurred $2.5 million of operating expenses. These operating expenses primarily consisted of investments in technology and personnel related expenses. No revenues were earned during the period. As of December 31, 1997, priceline.com had a cumulative net loss of $2.5 million. QUARTERLY RESULTS OF OPERATIONS The following table sets forth, for the periods presented, data regarding priceline.com's revenues, cost of revenues and gross profit (loss). Such data has been derived from priceline.com's unaudited financial statements which, in the opinion of priceline.com's management, have been prepared on substantially the same basis as the audited financial statements, subject to normal year end adjustments. The operating results in any quarter are not necessarily indicative of the results that may be expected for any future period.
QUARTER ENDED -------------------------------------------------------------------------- JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, 1998 1998 1998 1999 1999 ------------ ------------- -------------- ------------- -------------- Revenues............................ $ 7,030,913 $ 9,212,820 $ 18,993,127 $ 49,410,542 $ 111,563,849 Cost of revenues: Product costs..................... 7,951,584 8,842,313 16,701,848 43,659,184 100,664,343 Supplier warrant costs............ -0- -0- 3,029,014 380,759 380,759 ------------ ------------- -------------- ------------- -------------- Total cost of revenues............ 7,951,584 8,842,313 19,730,862 44,039,943 101,045,102 ------------ ------------- -------------- ------------- -------------- Gross profit (loss)................. (920,671) 370,507 (737,735) 5,370,599 10,518,747 Adjusted gross profit*............ (920,671) 370,507 2,291,279 5,751,358 10,899,506 Gross margin........................ (13.1)% 4.0% (3.9 )% 10.9% 9.4% Adjusted gross margin*............ (13.1)% 4.0% 12.1% 11.6% 9.8%
- ------------------------ * Adjusted Gross Profit and Adjusted Gross Margin reflect the elimination of non-cash charges associated with the supplier warrants. Revenues increased in each quarter since the commencement of operations in April 1998. The increase in each quarter is due primarily to an increase in airline ticket sales resulting from expanded inventory, improved fill rates and an expanded customer base due to increased market awareness and acceptance of the priceline.com service. In addition to the foregoing, (1) the increase in revenue in the fourth quarter of 1998 is due to the addition of a significant new airline partner and the inclusion for a full quarter of priceline.com's Capital One adaptive marketing program, as well as, to a lesser extent, the introduction of priceline.com's hotel room reservation service in October 1998; and (2) the increase in revenue in the first and second quarters of 1999 is due to increased customer offers, an increased supply of airline seats from our existing airline partners and, to a lesser extent, the national launch of our hotel room reservation service in March 1999. Cost of revenues, which consists of product costs and supplier warrant costs, increased in each quarter of 1998 and the first and second quarters of 1999. Product costs, which are associated primarily with the amounts paid to priceline.com's airline partners for airline tickets, net of federal air transportation tax, 38 segment fees and passenger facility charges imposed in connection with the sale of airline tickets, also increased each quarter in conjunction with increases in total revenue. Supplier warrant costs consist of a non-cash expense related to the pro-rata amount of the Delta warrant earned prior to December 31, 1998, the date on which the Delta warrant agreement was amended. Excluding the effect of the non-cash supplier warrant costs, priceline.com's gross profit would have increased every quarter from the quarter ended June 30, 1998 to the quarter ended June 30, 1999. The decreases in adjusted gross margins for the quarters ended March 31, 1999 and June 30, 1999 were primarily due to the more rapid growth of transaction-based revenues compared to fee-based revenues during those periods. As a result of the differences in growth rates, our revenue mix changed compared to prior periods with a greater percentage of revenues being attributable to transaction revenues rather than fee-based revenues. Fee-based revenues, such as adaptive marketing revenues, ancillary revenues and revenues from financial services and automobiles have higher margins than transaction revenues, which are derived from the spread between customer offers and the product costs. Priceline.com's quarterly operating results will be affected by a variety of factors, many of which are outside its control. Factors that may affect priceline.com's quarterly operating results include: - its ability to increase both consumers' and sellers' use of the priceline.com service; - its ability to attract new sellers of products and services to participate in the priceline.com service; - its ability to expand the products and services offered; - its ability to increase gross margins on products and services sold while still increasing sales; - the fulfillment rate of customers' offers; - the results of its adaptive marketing programs; - the exercise of employee stock options that give rise to social security and medicare payroll taxes; - the announcement or introduction of new sites, services and products by its competitors; - the success of its brand building and marketing campaigns; - price competition in the sale of products and services offered over the priceline.com system; - its ability to upgrade and develop its systems and infrastructure to accommodate growth; - its ability to attract new personnel in a timely and effective manner; - the occurrence of technical difficulties or service interruptions; - the amount and timing of operating costs and capital expenditures relating to expansion of its business, operations and infrastructure; - changes in governmental regulation by federal or local governments; and - general economic conditions and economic conditions specific to the Internet and online commerce industries, as well as the individual industries, for the products and services sold through the priceline.com system. As a result of priceline.com's limited operating history and the emerging nature of the market for online commerce, it is difficult for priceline.com to forecast its revenues or earnings accurately. In addition, priceline.com has no backlog, with virtually all of its revenues for a particular quarter being derived from offers that are made and accepted during that quarter. Priceline.com's current and future expense levels are based largely on its investment plans and estimates of future revenues and are, to a large extent, fixed. Priceline.com may be unable to adjust spending in a timely manner to compensate for any unexpected revenue shortfall. Accordingly, any significant shortfall in revenues relative to priceline.com's 39 planned expenditures would have an immediate adverse effect on its business, results of operations and financial condition. Priceline.com's limited operating history and rapid growth makes it difficult for it to assess the impact of seasonal factors on its business. Nevertheless, priceline.com expects its business to be subject to seasonal fluctuations, reflecting a combination of seasonality trends for the products and services offered by the priceline.com service and seasonality patterns affecting Internet use. For example, with regard to priceline.com's travel products, demand for leisure travel may increase over summer vacations and holiday periods, while Internet usage may decline during the summer months. Priceline.com's results also may be affected by seasonal fluctuations in the inventory made available to the priceline.com service by participating sellers. Airlines, for example, typically enjoy high demand for tickets through traditional distribution channels for travel during Thanksgiving and the year-end holiday period. As a result, during those periods, airlines may have less excess inventory to offer through priceline.com at discounted prices. Priceline.com's business also may be subject to cyclical variations for the products and services offered; for example, leisure travel and home mortgage financing tends to decrease in economic downturns. Due to the foregoing factors, priceline.com's quarterly revenues and operating results are difficult to forecast. Priceline.com believes that period-to-period comparisons of its operating results may not be meaningful and should not be relied upon as an indication of future performance. In addition, it is possible that in one or more future quarters priceline.com's operating results will fall below the expectations of securities analysts and investors. In such event, the trading price of the common stock would almost certainly be materially adversely affected. LIQUIDITY AND CAPITAL RESOURCES Since its inception, priceline.com has financed its operations primarily through the sale of equity securities. Net proceeds from financing activities since inception through June 30, 1999 totaled approximately $246.6 million. Priceline.com's initial equity capital of approximately $27.0 million was provided by Mr. Jay S. Walker, other high net worth individuals and a partnership affiliated with General Atlantic Partners, LLC, a private equity firm that invests worldwide in software and information technology companies. An additional $20.0 million was invested by two partnerships affiliated with General Atlantic in July 1998. On December 8, 1998, priceline.com received approximately $54.4 million in proceeds from the sale of equity securities in a private offering to a group of corporate and institutional investors and high net worth individuals, including two partnerships affiliated with General Atlantic; Vulcan Ventures, Incorporated; Liberty PL, Inc., a wholly owned subsidiary of Liberty Media Corporation; Quantum Industrial Partners LDC, a fund managed by Soros Fund Management, LLC and Allen & Company Incorporated. Allen & Company Incorporated also has served as priceline.com's financial advisor. On April 1, 1999, priceline.com completed its initial public offering in which it sold 10,000,000 shares of its common stock at a price of $16.00 per share, raising $160.0 million in gross proceeds. Offering proceeds to priceline.com, net of approximately $11.2 million in aggregate underwriters discounts and commissions and $4.4 million in related expenses, were approximately $144.4 million. As of June 30, 1999, priceline.com had approximately $142.8 million in cash and cash equivalents. In April 1998, priceline.com received proceeds from a loan of $1.0 million for working capital from a high net worth individual who also was issued a warrant to purchase 62,500 shares of common stock at an exercise price of $0.80 per share. This loan expires on April 15, 2003 and bears interest at a rate of 6.0%. The related warrant has been fully exercised, and as of the date of this prospectus, the loan has been repaid. In April 1999, priceline.com made a $3.3 million loan to Mr. Richard S. Braddock for the payment of taxes related to the issuance to Mr. Braddock of 8,125,000 shares of common stock in August 1998. The loan bears interest at 5.28% per annum. Interest is payable annually and principal is payable in January 2004. 40 In July 1999, priceline.com made a $6.0 million loan to Mr. Daniel H. Schulman, pursuant to the terms of his employment agreement dated June 14, 1999. The loan bears interest annually at 5.82% per annum. Subject to prepayment obligations and to forgiveness in the event of certain changes of control, death, or termination without cause, pursuant to the terms of the loan, accrued interest and principal are payable in July 2004. Concurrent with this offering, priceline.com and certain of its stockholders are making an offering of 5,500,000 shares of common stock, of which priceline.com is offering to sell 2,000,000 shares of common stock. Priceline.com expects the proceeds from the concurrent common stock offering to be approximately $133.3 million (after deducting the estimated offering expenses and underwriting discounts and commissions), based upon an assumed public offering price of $70.00 per share. Net cash used in operating activities was $33.8 million for the six months ended June 30, 1999. Net cash used in operating activities was primarily attributable to net losses. Net cash used in investing activities was $20.6 million for the six months ended June 30, 1999. Net cash used in investing activities was primarily related to purchases of property and equipment. Net cash provided by financing activities was $143.6 million for the six months ended June 30, 1999. Net cash provided by financing activities resulted primarily from priceline.com's initial public offering of 10,000,000 shares of its common stock, for which priceline.com received approximately $149.0 million in cash, net of underwriting discounts and commissions on April 1, 1999. Priceline.com had commitments for capital expenditures as of June 30, 1999 of approximately $1.2 million. Capital expenditures were $11.3 million for the six months ended June 30, 1999, and priceline.com expects such expenditures to be at least $22.0 million for the full year of 1999. As a result of its rapid growth, priceline.com expects to increase capital expenditures for purchased software, internally developed software, computer equipment and leasehold improvements. Priceline.com believes that, based upon its current operating plan, its existing cash and cash equivalents, the net proceeds from its initial public offering, the net proceeds from this offering and its concurrent common stock offering and any cash generated from operations will be sufficient to fund its operating activities, capital expenditures and other obligations through at least the next three years. However, if during that period or thereafter priceline.com is not successful in generating sufficient cash flow from operations or in raising additional capital when required in sufficient amounts and on terms acceptable to priceline.com, these failures could have a material adverse effect on priceline.com's business, results of operations and financial condition. If additional funds are raised through the issuance of equity securities, the percentage ownership of its then-current stockholders would be diluted. MARKET-RELATED RISKS Priceline.com currently has no floating rate indebtedness, holds no derivative instruments and does not earn significant foreign-sourced income. Accordingly, changes in interest rates or currency exchange rates do not generally have a direct effect on priceline.com's financial position. However, changes in currency exchange rates may affect the cost of international airline tickets and international hotel room reservations offered through the priceline.com service, and so indirectly affect consumer demand for such products and priceline.com's revenue. 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. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, Statement of Financial Accounting Standards ("SFAS") No. 133 "Accounting for Derivative Instruments and Hedging Activities" was released. The statement requires the recognition of all derivatives as either assets or liabilities in the balance sheet and the measurement of those instruments at fair value. The accounting for changes in the fair value of a derivative depends on the planned use of the 41 derivative and the resulting designation. Priceline.com is required to implement the statement in the first quarter of fiscal 2001. Priceline.com has not used derivative instruments and believes the impact of adoption of this statement will not have significant effect on its financial statements. TAX MATTERS NET OPERATING LOSS CARRYFORWARDS Through July 31, 1998, priceline.com operated as a limited liability company, and income taxes (benefits) accrued to its members. During the year ended December 31, 1998, priceline.com had a net loss, and since converting from a limited liability company to a corporation in July 1998, it has incurred a tax net operating loss of $54.2 million. Utilization of priceline.com's net operating loss carryforwards, which begin to expire in 2018, may be subject to certain limitations under Section 382 of the Internal Revenue Code of 1986, as amended. Priceline.com has provided a full valuation allowance on the deferred tax asset, consisting primarily of net operating loss carryforwards, because of uncertainty regarding its realization. Priceline.com's accounting for deferred taxes under Statement of Financial Accounting Standards No. 109 involves the evaluation of a number of factors concerning the realizability of its deferred tax assets. In concluding that a full valuation allowance was required, management primarily considered such factors as priceline.com's history of losses from operations and expected future losses. See Notes 2 and 8 of Notes to Combined Financial Statements included elsewhere in this prospectus. FEDERAL AIR TRANSPORTATION TAX ON AIRLINE TICKET SALES A federal air transportation tax is imposed upon the sale of airline tickets and generally is collected by the airlines selling the tickets. The tax is based upon a percentage of the cost of transportation, which was 9% for periods prior to October 1, 1998 and 8% thereafter. Because of the unique pricing structures employed in the priceline.com service, such as the amount paid by the customer for a ticket being different than the amount charged by the airline for the same ticket with the excess payment, if any, going to priceline.com as a charge for the use of its proprietary business method, it is not clear how this federal tax should be calculated when sales occur using the priceline.com service. Priceline.com has been calculating this tax based on the fare paid to the airline for a ticket, rather than the price paid by the customer. There is a possibility that current law requires computation of the tax based on the price paid by the customer to priceline.com. Due to the uncertainty of how the federal air transportation tax applies to sales of airline tickets using the priceline.com service, priceline.com has submitted a written request to the United States Internal Revenue Service seeking a determination of priceline.com's federal air transportation tax obligations. Such determination may not be favorable and may require priceline.com to collect federal air transportation tax on the total amount paid by consumers for air travel. If the determination of the Internal Revenue Service is unfavorable, priceline.com could owe $766,339 in additional taxes as of June 30, 1999. Priceline.com has accrued for such potential liability in its condensed balance sheet as of June 30, 1999 and is providing for such potential liability on an ongoing basis. Priceline.com has agreed to indemnify and hold harmless certain of its participating airlines from any liability with respect to such taxes as well as to secure the payment of such taxes by a letter of credit. NON-QUALIFIED STOCK OPTIONS Priceline.com currently has outstanding non-qualified stock options to purchase 26,582,391 shares issued to various employees, consultants and directors pursuant to the 1997 Omnibus Plan and the 1999 Omnibus Plan. The options entitle holders to purchase common stock at a weighted average exercise price of approximately $11.46 per share, subject to adjustment in accordance with the 1997 Omnibus Plan and the 1999 Omnibus Plan. Upon exercise of an option, priceline.com will be required to make payments on behalf of the option holders for certain payroll related taxes such as Social Security and Medicare. These payroll taxes will appear as a general and administrative expense on priceline.com's income statement and 42 will amount to approximately 1.5% to 2.0% of the difference between the exercise price and the then fair market value of the common stock at the time of exercise. However, upon exercise of outstanding options, priceline.com will be paid the exercise price of the options that are exercised. Priceline.com also will be entitled to an income tax deduction equal to the sum of (1) the difference between the exercise price of the option and the then fair market value of the common stock at the time of exercise and (2) the total amount of payroll related tax payments. As the calculation of the expense is directly dependent upon priceline.com's stock price and the exercise of options is within the sole discretion of the holder of the options, the amount and timing of the expense and the timing of the corresponding income tax deduction are not currently able to be determined and are not within the control of priceline.com. Priceline.com estimates that, in connection with the exercise of outstanding options pursuant to the option exercise program, in the third quarter of 1999 it will (x) record expenses of approximately $1.3 million in respect of such payroll related taxes; (y) increase additional paid-in capital by approximately $944,000 in respect of the exercise price of such options; and (z) increase common stock by approximately $7,700 in respect of the par value of the shares purchased upon exercise of such options. YEAR 2000 READINESS DISCLOSURE PRICELINE.COM'S STATE OF READINESS Priceline.com has defined Year 2000 compliance as follows: Information technology time and date data processes, including, but not limited to, calculating, comparing and sequencing data from, into and between the 20th and 21st centuries contained in its products and services offered through the priceline.com service, will function accurately, continuously and without degradation in performance and without requiring intervention or modification in any manner that will or could adversely affect the performance of such products or the delivery of such services as applicable at any time hereafter. Priceline.com's internal systems include both its information technology systems and non-information technology systems. Priceline.com has initiated an assessment of its proprietary information technology systems, and expects to complete any remediation and testing of all information technology systems during 1999. With respect to information technology systems provided by third-party vendors, priceline.com has sought assurances from such vendors that their technology is Year 2000 compliant. All of priceline.com's material information technology system vendors have replied to inquiry letters sent by priceline.com stating that they either are Year 2000 compliant or expect to be so in a timely manner. Priceline.com is evaluating its non-information technology systems for Year 2000 compliance. It has not, to date, discovered any material Year 2000 issues with respect to its non-information technology systems. Priceline.com is in the process of contacting its material seller participants whose products or services are sold through the priceline.com service to determine if they are Year 2000 compliant. To date, all such seller participants have stated that they are, or expect to be, Year 2000 compliant in a timely manner. Priceline.com's customers are individual Internet users, and, therefore, priceline.com does not have any individual customers who are material to an evaluation of Year 2000 compliance issues. THE COSTS TO ADDRESS YEAR 2000 ISSUES Priceline.com has expensed amounts incurred in connection with Year 2000 compliance since its formation through June 30, 1999. Such amounts have not been material. The additional costs to make any other products or services Year 2000 compliant will be expensed as incurred, but are not expected to be material. 43 Priceline.com is not currently aware of any material operational issues or costs associated with preparing its systems for the Year 2000. Nonetheless, it may experience material unexpected costs caused by undetected errors or defects in the technology used in its systems or because of the failure of a material seller participant to be Year 2000 compliant. RISKS ASSOCIATED WITH YEAR 2000 ISSUES Notwithstanding priceline.com's Year 2000 compliance efforts, the failure of a material system or vendor, including a seller participant in the priceline.com service, or the Internet generally, to be Year 2000 compliant could harm the operation of the priceline.com service or prevent certain products and services being offered through the priceline.com service, or have other unforeseen, adverse consequences to the company. Finally, priceline.com also is subject to external Year 2000-related failures or disruptions that might generally affect industry and commerce, such as utility or transportation company Year 2000 compliance failures and related service interruptions. Moreover, participating sellers in priceline.com services might experience substantial slow-downs in business if consumers avoid products and services such as air travel both before and after January 1, 2000 arising from concerns about reliability and safety because of the Year 2000 issue. All of these factors could have a material adverse effect on its business, financial condition and results of operations. CONTINGENCY PLANS Priceline.com has developed a contingency plan to address situations that it believes would arise if it fails to be Year 2000 compliant. Priceline.com has not developed a contingency plan to address situations that may result if its suppliers are unable to achieve Year 2000 compliance. The cost of developing and implementing such a plan, if necessary, could be material. 44 BUSINESS OVERVIEW Priceline.com has pioneered a unique e-commerce pricing system known as a "demand collection system" that enables consumers to use the Internet to save money on a wide range of products and services while enabling sellers to generate incremental revenue. Using a simple and compelling consumer proposition--"name your price"--priceline.com collects consumer demand, in the form of individual customer offers guaranteed by a credit card, for a particular product or service at a price set by the customer. Priceline.com then either communicates that demand directly to participating sellers or accesses participating sellers' private databases to determine whether it can fulfill the customer's offer on the basis of the pricing information and rules established by the sellers. Consumers agree to hold their offers open for a specified period of time and, once fulfilled, offers cannot be canceled. Priceline.com benefits consumers by enabling them to save money, while at the same time benefitting 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, priceline.com enables sellers to generate incremental revenue without disrupting their existing distribution channels or retail pricing structures. Priceline.com commenced its service on April 6, 1998 with the sale of leisure airline tickets and, during the period from launch through June 30, 1999, collected guaranteed offers for approximately 5.1 million airline tickets, representing approximately $1.1 billion in total consumer demand, resulting in sales of approximately 762,000 airline tickets, representing approximately $165.2 million in revenue. During the six-month period ended June 30, 1999, priceline.com collected guaranteed offers for approximately 1.8 million airline tickets, representing approximately $697.5 million in total consumer demand. This demand resulted in sales of approximately 627,000 airline tickets, representing approximately $134.8 million in revenue. The number of offers that priceline.com accepts is affected by a variety of factors, including the number of reasonable offers received and the level of available inventory. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Overview." Since commencing service, the priceline.com business has grown significantly and the priceline.com service now includes the following products and services: - leisure airline tickets, which now includes six domestic and 16 international airline participants; - new automobiles, which was launched on a test basis in the New York metropolitan area in July 1998; - hotel room reservations, which was launched in October 1998, offers hotel rooms in substantially all major United States markets and includes as participants more than 10 leading national hotel chains; and - home financing services, which was launched in January 1999 with home mortgage services and now also includes home equity loans and refinancing services. Through the innovative use of "adaptive marketing programs," priceline.com also markets customer acquisition programs for third parties. These programs facilitate the completion of a higher percentage of successful transactions through the priceline.com service while generating fee income for the company. Priceline.com intends to continue to leverage the priceline.com brand by expanding its product offerings to include rental cars, cruises, time shares, vacation packages, personal and automobile loans, insurance and other financial services products and by expanding our new car sales service to the entire U.S. market. Priceline.com also is exploring expansion of its core "name your price" business model to other areas of e-commerce, such as retail merchandise and the consumer-to-consumer market. Priceline.com offers products and services that are provided by participating sellers, many of whom are leaders in their industries. Twenty-two domestic and international airlines currently participate in priceline.com's leisure airline ticket service, including Delta, Northwest, Continental, TWA, America West and leading international carriers. Participants in the priceline.com hotel room reservation service include 45 Marriott, Renaissance, Sheraton, Westin and several other nationally recognized hotel chains, as well as several important real estate investment trusts, including Meristar, Patriot and Starwood. Priceline.com does not publicly advertise the names of its seller participants in its airline and hotel programs. Priceline.com's home financing service, which is offered through a joint marketing arrangement with LendingTree, an Internet-based home financing service provider, includes a network of more than 30 participating lending institutions. Priceline.com generates revenues in a variety of ways depending on the product or service sold. With respect to its airline ticket and hotel room reservation services, priceline.com determines whether to fulfill a customer's offer based upon the available fares, rules and inventory that have been provided by participating sellers through their private data bases. Upon completion of a successful transaction, priceline.com recognizes as revenue the customer's named price, net of taxes, and records as the cost of revenue, the fare or rate charged by seller. With respect to priceline.com's automobile and home financing services, a customer's offer is submitted directly to the participating sellers who determine whether to fulfill the offer. With respect to its automobile service, priceline.com earns a fixed fee from both the customer and the seller after the transaction is consummated. With respect to the home financing service, priceline.com receives marketing fees equal to a percentage of the net revenue generated by the service, which is operated in conjunction with LendingTree, Inc. For its adaptive marketing programs, priceline.com earns fees payable by the seller and/or the customer or by its adaptive marketing partner. Priceline.com believes that the priceline.com service already has achieved significant consumer acceptance and widespread brand awareness. Based upon the results of an independent research study conducted for priceline.com, the company believes that as of April 1999, among adult Americans, priceline.com was the second most recognized e-commerce brand among the 20 leading brands included in the survey and one of the most recognized Internet brands among the leading brands included in the survey. Based on the study, priceline.com also believes that, after only one year of operation, 91.1 million (or 46%) of all adult Americans were aware of the priceline.com brand. The study also indicated that awareness of the priceline.com brand increased over 14% since mid-1998. Priceline.com's strong brand awareness has been achieved without any affiliation with an Internet portal company such as Yahoo! or Excite or a proprietary online service such as America Online. Beyond mere name recognition, priceline.com also believes that it enjoys high levels of consumer satisfaction among users of its service who provide powerful word-of-mouth endorsements. In addition, priceline.com has been featured in hundreds of news stories in national publications such as THE NEW YORK TIMES, THE WALL STREET JOURNAL AND USA TODAY. The priceline.com service also has been awarded a four-star rating by YAHOO! INTERNET LIFE magazine as the "most creative way to get a good deal" on leisure airline tickets. Priceline.com believes that priceline.com's unique business model can be applied to a broad range of products and services. Priceline.com believes that this broad applicability of its business model, its first mover advantage, the strength of the priceline.com brand, its network of seller participants, its proprietary software systems and its intellectual property strategies provide it with significant competitive advantages. INDUSTRY BACKGROUND THE GROWTH OF COMMERCE ON THE INTERNET The Internet has emerged as a significant interactive medium for conducting business. International Data Corporation, a market research firm, estimates that the number of Internet users worldwide exceeded 97 million in 1998 and will grow to over 319 million by the end of 2002. International Data Corporation also estimates that annual worldwide commerce over the Internet will increase from approximately $32.0 billion in 1998 to approximately $425.0 billion by 2002. The factors driving this growth include the increasing number of personal computers in homes and offices, the decreasing cost of personal computers, technological innovations providing easier, faster and cheaper access to the Internet, the proliferation of content and services being provided on the Internet and the increasing use of the Internet by businesses and consumers as a medium for conducting business. The increasing use of the Internet as a 46 commercial medium has been accompanied by a diversification in the type of commerce that is conducted on the Internet and a proliferation in the types of products and services available on the Internet. The Internet possesses a number of unique and commercially powerful characteristics that differentiate it from traditional media: users communicate or access information without geographic or temporal limitations; users access dynamic and interactive content on a real-time basis; and users communicate and interact instantaneously with a single individual or a group of individuals at little or no cost. The Internet has created a dynamic and particularly attractive medium for commerce, empowering consumers to gather more comparative purchasing data than is feasible with traditional commerce systems, to shop in ways that can be more convenient for them and to interact with sellers in many new ways. As the Internet has become more accessible and widely used for transactions, it has emerged as a primary business channel alongside the telephone, paper-based communication and face-to-face interaction. LIMITATIONS OF TRADITIONAL PRICING MECHANISMS Under traditional retail pricing methods, sellers typically market products to consumers under brand names at fixed retail prices. Alternatively, prices can be established through auction processes. However, each of these forms of seller-driven commerce has certain significant disadvantages for both sellers and consumers. For example, in the retail pricing model, sellers who discount prices to clear excess inventory, utilize excess capacity or increase sales velocity, risk disruption of their existing distribution channels and damage to their retail pricing structures. They also lose the opportunity to earn incremental revenue from "free-riders," that is, consumers who would have been prepared to pay the undiscounted price for the product or service, but nevertheless obtain the benefit of the discounted price. Moreover, none of these pricing methods allow sellers to consider the flexibility of potential buyers before setting prices. Similarly, consumers are often forced to pay a higher price when the seller is setting a fixed retail price for a product with added features or under a specific brand, which the customer would otherwise have been prepared to forgo for a lower price. Auctions force consumers to compete against each other for the benefit of the seller, which always results in the product being sold on the basis of the highest bid. While the Internet has become a significant medium for conducting business, commerce presently conducted on the Internet is largely based upon traditional pricing methods. Priceline.com believes that the vast information sharing and communications power of the Internet creates an opportunity for significant change in the way commerce or business is conducted. THE PRICELINE.COM SOLUTION Priceline.com has developed a unique pricing system known as a "demand collection system" that uses the information sharing and communications power of the Internet to create a new way of pricing products and services. Priceline.com creates a new balance between the interests of buyers, who are willing to accept trade-offs in order to save money, and sellers, who are prepared to generate incremental revenue by selling products at below retail prices, provided that they can do so without disrupting their existing distribution channels or retail pricing structures. Priceline.com's demand collection system allows consumers to name the price they are prepared to pay when submitting an offer for a particular product or service within a specified range of substitutability. Priceline.com then either communicates such offers to multiple sellers who determine whether to accept the customer's offer or accesses participating sellers' private databases to determine whether it can fulfill the customer's offer on the basis of the pricing information and rules established by the sellers. Consumers agree to hold their offers open for a specified period of time to enable priceline.com to fulfill their offers from inventory provided by participating sellers. Once fulfilled, offers generally cannot be canceled. This system uses the flexibility of buyers to enable sellers to accept a lower price in order to sell excess inventory or capacity or to increase sales velocity. Priceline.com believes that its demand collection system addresses the limitations inherent in traditional pricing mechanisms in a manner that offers substantial benefits to both buyers and sellers. 47 The principal advantages of the priceline.com system include the following: - COST SAVINGS AND PREFERRED METHOD OF PURCHASING FOR CONSUMERS. Priceline.com's demand collection system allows consumers to save money in a simple and compelling way--"name your price." Buyers effectively trade off flexibility about brands, product features and/or sellers in return for prices that are lower than those that can be obtained at that time through traditional retail distribution channels. Priceline.com believes that in many cases, such as purchasing a new car or obtaining a home mortgage, naming your own price over the Internet represents a preferred purchasing method to traditional retail channels, which may involve comparison shopping among a complex array of alternative features, sometimes protracted negotiations and dealings with numerous brokers or sales representatives. Priceline.com also believes that naming your price over the Internet is a preferred purchasing method to auctions, which result in a product being sold on the basis of the highest bid. - INCREMENTAL REVENUE FOR SELLERS. Sellers use priceline.com as a revenue management tool to generate incremental revenue without disrupting their existing distribution channels or retail pricing structures. Priceline.com requires consumers to be flexible with respect to brands, such as a willingness to fly on any major airline; and/or product features, such as a willingness to fly at any time of the day; and/or seller, such as any BMW dealer in a specific geographic area. As a result, sellers' brands are not revealed to customers prior to the consummation of a transaction, thereby protecting their brand integrity. This shielding of brand identity enables sellers to accept offers at discounted prices through priceline.com without cannibalizing their own retail sales by publicly announcing discount prices and without competing against their own distributors. In effect, priceline.com serves as a discreet and insulated channel of distribution. Sellers are further protected by the fact that each transaction is independent and the prices at which offers are accepted are not revealed to subsequent users of the priceline.com service. Priceline.com gives sellers the ability to exercise a greater degree of pricing flexibility without trading high-margin sales for low-margin sales, thereby enabling sellers to expand their total revenues and, in some cases, gain market share at the expense of non-participating competitors. - PROPRIETARY SELLER NETWORKS. Priceline.com assembles proprietary networks of industry leading sellers that represent high quality brands, such as Delta, Northwest, Continental, TWA, America West, Marriott, Renaissance, Sheraton and Westin. By establishing attractive networks of seller participants with reputations for quality, scale and national presence, priceline.com fosters increased participation by both buyers and sellers. Each participant in these unique seller networks is willing to consider and accept consumer offers at prices that are below its retail prices. Moreover, by shielding the seller's brand and not revealing the final selling price to other consumers, priceline.com encourages participating sellers to be aggressive in their pricing. Priceline.com believes that as more and more sellers in an industry join the priceline.com service, other industry participants will want to join the system. - GUARANTEED CONSUMER DEMAND FOR SELLERS. Each customer who makes an offer through priceline.com must guarantee his offer with a major credit card. The guaranteed aspect of the demand is attractive to sellers because they know that priceline.com offers them a confirmed sale whenever they accept a buyer's offer. Sellers can be sure that collected demand represents willing buyers, at each named price, rather than browsing shoppers who have made no commitment to purchase. Priceline.com's database of consumer offers also provides sellers with valuable market information about the precise quantities of latent demand at each price point below their retail prices. - BROAD APPLICATIONS ACROSS MULTIPLE MARKETS. In contrast to many e-commerce companies that are building brands in vertical categories or groups of related categories, priceline.com believes that its e-commerce business model has horizontal application to products and services in a wide range of industries. Priceline.com further believes that the broad applicability of the priceline.com service 48 and the strength of the priceline.com brand afford it the opportunity to obtain substantial economies of scale and offer the potential for priceline.com to become a major new channel of distribution. The breadth of potential applications of the priceline.com business model also is enhanced by various cross-selling opportunities, since priceline.com expects that consumers who successfully complete transactions through priceline.com will return to priceline.com to purchase other products and services. THE PRICELINE.COM GROWTH STRATEGY Priceline.com's objective is to continue to expand the priceline.com business and to establish priceline.com's demand collection system as a leading source for the purchase of products and services on the Internet. The key elements of priceline.com's strategy are as follows: - STRENGTHEN THE PRICELINE.COM BRAND. Priceline.com intends to establish priceline.com as the leading consumer brand for buyer-driven commerce over the Internet. To achieve this objective, priceline.com intends to continue to pursue an aggressive brand development strategy through mass market and targeted advertising and promotions, press coverage and strong word-of-mouth support. While priceline.com believes it is already one of the most recognized e-commerce brands among adult Americans, priceline.com believes that it can expand the public's association with the priceline.com "name your price" proposition to a broad range of products and services. - LEVERAGE THE PRICELINE.COM BRAND OVER NUMEROUS PRODUCTS AND SERVICES. Priceline.com intends to leverage the priceline.com brand across numerous products and services to achieve significant revenue scale and growth. In contrast to most e-commerce businesses that operate in one or two "vertical" markets, priceline.com is a "horizontal" commerce system that can benefit both buyers and sellers in a broad range of industries. Priceline.com's strategy is to make available multiple product and service offerings at a single Web site under a common brand to take advantage of these market opportunities. Over the next two years, priceline.com intends to offer products and services in three sectors of the economy where its demand collection system is particularly well suited. These sectors are: - travel, including leisure airline tickets and hotel rooms, rental cars, "all-inclusives" resorts, cruises and time shares; - financial services, including home mortgages, equity loans and refinancings, credit card balance consolidation and automobile and life insurance; and - automobile sales and related financing. In these sectors, the priceline.com service currently offers leisure airline tickets, hotel rooms, home financings and automobiles. Given the size and scope of these markets, priceline.com believes it can achieve a large revenue base and sustain revenue growth by capturing even a small portion of the excess unsold inventory or capacity in these sectors and by capturing even relatively small amounts of market share from traditional seller-driven channels of retail distribution. - EXPAND THE PRICELINE.COM BUSINESS MODEL. Priceline.com also intends to explore expansion of its core "name your price" business model to other areas of e-commerce. Priceline.com currently is evaluating the licensing of its business model to two new companies. One of these companies is developing a consumer-to-consumer transaction business in which buyers would make conditional purchase offers to acquire goods from other consumers. The other would enable consumers to use the Internet to name the price that they are willing to pay for retail merchandise, which they would pick up from participating retailers. However, priceline.com has not determined the structure of its relationship with these companies, which may include, among other things, licensing of the priceline.com brand and "name your price" business model and investment in such entities. - EXPAND SELLER PARTICIPANT NETWORKS. Priceline.com intends to continue to expand its alliances with major seller participants selected for reputation, quality and national presence to create proprietary 49 seller networks for each of its major products and services. A critical element of the priceline.com business has been priceline.com's ability to demonstrate to its seller participants that priceline.com can generate incremental revenues for sellers without disrupting their existing distribution channels or retail pricing structures. Priceline.com intends to form and maintain alliances with industry leaders by designing its products and services in a way that requires consumers to accept some trade-offs from currently available retail product offerings in return for lower prices. Such trade-offs typically include not knowing the identity of the seller or brand prior to the acceptance of a customer's offer by a seller. - ENHANCE SITE FUNCTIONALITY AND INCREASE CONSUMER USAGE. Priceline.com intends to frequently update and enhance the features of the priceline.com service. Priceline.com continually monitors feedback from consumers and frequently adds new features to further refine and simplify the buying process. Priceline.com also receives offers by telephone and provides customer service by telephone and e-mail to assist consumers in the offer process. By continuing to increase the functionality of the service and enhance the consumer experience, priceline.com believes that it will continue to increase customer usage and loyalty. - EXPAND ADAPTIVE MARKETING PROGRAMS. Priceline.com intends to further develop and expand what it refers to as "adaptive marketing programs." Adaptive marketing programs include two distinct initiatives. "Adaptive promotions" allow consumers to increase the amount of their offers, and thus their likelihood of success, at no additional cost by participating in sponsor promotions during the process of making a priceline.com offer. For example, a customer making an offer to buy an airline ticket can increase the amount of his offer by a stated amount by applying online for a credit card issued by one of priceline.com's strategic sponsors. These promotions have the effect of increasing the percentage of successful offers at no additional cost to the customer, while at the same time enabling priceline.com to earn significant fee income, which it can use to offset the sale of products and services below its unit cost. The second type of adaptive marketing program is referred to as "adaptive cross selling" and utilizes cross selling of multiple products to increase the number of successful transactions. - INCREASE FINANCIAL RETURNS OVER TIME. While it is inherent in the nature of priceline.com's business model that not all offers will be acceptable to sellers, an integral part of priceline.com's strategy is to ensure that a high percentage of reasonable offers get accepted, thereby increasing financial returns while reinforcing the priceline.com service. As consumers have become more familiar with the service, priceline.com has been able to increase the percentage of offers it satisfies and expects this trend to continue. As its revenue base grows, priceline.com intends to increase its financial returns over time. Priceline.com's revenue model for travel services enables it to balance revenue growth against gross profit margins, thereby enhancing its ability to manage a targeted gross margin as a percentage of revenues. Priceline.com initially intends to emphasize revenue growth over profit margins in order to achieve significant revenue scale and to further strengthen the priceline.com brand. However, over time, as its revenue base increases, priceline.com believes it will be able to capture a greater portion of the incremental profit that it generates for participating sellers and thereby increase its profit margins and financial returns. - EXPLORE INTERNATIONAL EXPANSION. Priceline.com believes that the international scope of the Internet and the global demand for the types of products and services that it intends to make available through priceline.com presents opportunities to expand its service internationally. Given the anticipated continued increase in use of the Internet throughout the world, priceline.com intends to explore avenues and strategies for international expansion. It believes that joint ventures and licensing arrangements with international partners are likely to be the preferred methods of international expansion, as they will enable priceline.com to combine its expertise in demand collection systems with its partners' expertise in their local markets. 50 THE PRICELINE.COM BUSINESS MODEL Priceline.com believes that its unique pricing system known as a "demand collection system" is a powerful new business model for conducting commerce on the Internet. The priceline.com business model is designed to allow consumers to save money on a wide range of products and services by trading flexibility regarding brands, product features and/or sellers in return for being able to buy products and services at prices that are lower than those charged through traditional retail channels of distribution. The priceline.com business model motivates sellers to offer products through priceline.com at below their retail prices by enabling them to generate incremental revenue while protecting their existing channels of distribution and retail pricing structures. The priceline.com business model enables the company to earn substantial revenues without charging customers for submitting offers through, or charging sellers for participating in, the priceline.com system. Priceline.com has the flexibility to earn fixed or percentage based fees by serving as an intermediary on the sale of products or services, or to earn the spread between the customer's offer and the cost of a product or service by serving as principal in a transaction. Consumer fees are payable only upon completion of successful transactions. This unique revenue structure enables priceline.com to manage the level of gross margins and, as appropriate, balance revenue growth with margin growth. In addition to its unique revenue structure, the defining elements of the priceline.com business model are the following: - the buyer specifies or accepts a RANGE OF SUBSTITUTABILITY among brands, product features and/or sellers; for example, he agrees to stay at any three-star hotel in a certain area, agrees to fly at any time of the day or agrees to purchase a new car from any factory-authorized dealer; - the buyer NAMES THE PRICE he is prepared to pay for the products or services within the specified range of substitutability; - the buyer GUARANTEES HIS OFFER for a specified time period by securing all or a portion of his potential payment for the product or service with a major credit card; - companies sell products or services at prices below their currently available retail prices using priceline.com as a BRAND SHIELD to protect their retail pricing structures and channels of distribution; - each guaranteed offer can be consummated with products or services from any of a GROUP OF SELLERS; and - offers made through priceline.com are held open for a specified period of time, and CANNOT BE CANCELED by either the seller or the buyer. The priceline.com consumer proposition is simple and compelling: realize immediate savings by using the Internet to name your own price when you are willing to be flexible about brands, product features and/or sellers. A central premise of the priceline.com consumer proposition is that in many product and service categories there are a significant number of consumers for whom brands, product features or sellers are interchangeable, particularly if agreeing to a substitution among brands or sellers will result in saving money. For example, priceline.com believes that many leisure travelers are relatively indifferent about the brand of major airline they fly. Similarly many consumers are indifferent to which financial services company provides them with a credit card or home mortgage. Priceline.com also believes that many consumers prefer not to spend time and effort engaged in an evaluative process among similar products, brands or sellers, which they consider to be substitutable. Finally, priceline.com is appealing to some consumers because it does not charge a customer to submit an offer, and priceline.com's Web site provides convenient access, available 24 hours a day, seven days a week. Priceline.com believes that the collection of large volumes of consumer demand is essential to building networks of multiple sellers. Priceline.com also believes that it is important that all of the demand 51 it collects is GUARANTEED by the buyers, that offers must be held open for a specified time period and that once an offer is accepted it generally cannot be canceled or the purchase price refunded. This approach assures sellers that a customer's offer is bona fide and that once an offer is accepted, the seller will generate an immediate sale, rather than an invitation to further negotiation or comparison shopping. The priceline.com business model is predicated on the assumption that sellers almost invariably have excess inventory or capacity that they would sell at lower prices, if they could do so without either lowering their prices to their retail customers or advertising that lower prices are available. Priceline.com allows sellers to capture demand below their retail "price line," without allowing retail customers who might be willing to pay more to "free ride" down to the lower price. The ability to offer prices below the retail price line generates incremental revenue by accessing buyer segments otherwise priced out of the market and, in certain cases, by capturing market share from nonparticipating competitors. Finally, priceline.com's database of consumer offers benefits sellers by providing them with valuable market information about the precise quantities of latent demand at each price point below their retail prices. Priceline.com believes that its demand collection system is ideally suited to industries characterized by low variable costs relative to total cost, which results in high profit contribution margins and provides sellers with a strong incentive to sell products at prices below their retail prices to generate incremental sales, provided that they can do so without threatening their existing distribution channels or retail pricing structures. Low variable costs frequently exist in industries with expiring or rapidly aging inventory. Priceline.com also believes, however, that its demand collection system will prove to be effective even in industries that are not characterized by rapidly aging inventories and low variable costs because a significant number of consumers will prefer the relative cost savings, ease of use and convenience of priceline.com's "name your price" system to traditional retail distribution channels, and sellers will be attracted to the potential of the priceline.com service to increase sales velocity, which is often a significant factor in the success of businesses in these industries. Priceline.com believes that markets characterized by a large degree of brand, product feature or seller substitutability are substantial and include both those in industries characterized by high profit contribution margins and industries in which many consumers are dissatisfied with traditional retail distribution methods. In the business-to-consumer market, travel, new car sales, financial services and many retail products offer substantial ranges of substitutability in consumers' minds. In the business-to-business market, long distance service, media sales and office supplies are subject to high degrees of product or brand substitutability. In the consumer-to-consumer market, there are often multiple sellers that are ready, willing and able to offer new or nearly new products that consumers consider substitutable. Priceline.com believes that its business model can be applied to each of these markets, thereby providing it with considerable potential for long term growth. PRODUCTS AND SERVICES Priceline.com launched the priceline.com service on April 6, 1998 with the sale of leisure airline tickets. The priceline.com service now includes the sale of new automobiles, hotel room reservations and home financing services. Priceline.com also intends to expand its product offerings over the next two years to include other leisure travel products such as rental cars, cruises, time shares, and vacation packages; automobile and personal insurance and other financial services products; and certain retail products such as computers, home electronics and other consumer products. Priceline.com also intends to explore expansion of its core "name your price" business model to other areas of e-commerce, such as the consumer-to-consumer market. TRAVEL SERVICES LEISURE AIRLINE TICKETS. Priceline.com commenced its service with the sale of leisure airline tickets. The number of airlines participating in priceline.com's airline ticket service has increased substantially 52 since the launch of the business, from an initial group of two domestic airlines and four international airlines, to a total of six domestic airlines and 16 international airlines. Priceline.com also purchases and resells a small percentage of its tickets from airline ticket consolidators. Airlines participate in priceline.com's airline ticket service by making available to priceline.com unpublished fares and, in some cases, dedicated or special inventory. Priceline.com does not publicly advertise the names of airlines participating in its airline ticket service. Consumers can make offers to purchase airline tickets through the priceline.com Web site or the 1-800-Priceline call center. The vast majority of all airline ticket requests are made through priceline.com's Web site. To make an offer, the customer specifies (1) the origin and destination of the trip, (2) the dates on which he wishes to depart and return and (3) the price he is willing to pay, and guarantees the offer with a credit card. Consumers must agree to, among others, the following conditions: - to fly on any major full-service airline, which is defined by the United States Department of Transportation; - to leave at any time of the day on their desired dates of departure and return; - to purchase only round trip economy class tickets between the same two points of departure and return; - to accept up to one stop or connection; - to receive no frequent flier miles or upgrades; and - to accept tickets that cannot be refunded or changed. Consumers are informed that they can increase their chances of obtaining the desired ticket by accepting greater flexibility, such as accepting flights outside of priceline.com's normal flight times or accepting more than one stop or connection. Consumers also are given the opportunity to have their offers increased by a specified dollar amount, and thereby increase the likelihood of success, if they agree to participate in an adaptive promotion during the process of submitting their offers, such as applying for a credit card or subscribing to a magazine. In order to encourage reasonable initial offers, consumers are not permitted to make revised offers for an identical itinerary within seven days of an unsuccessful offer. When priceline.com receives an offer, it determines whether to fulfill the offer based upon the available fares, rules and inventory that have been provided by participating airlines. Such fares and rules are filed by participating airlines in a private database known as SecureRate within the Worldspan central reservation system. As a certified travel agency, priceline.com also has access to the published "tariff" fares of all airlines, including those not participating in the priceline.com service, although priceline.com currently does not sell tickets purchased pursuant to published tariff fares. If a qualifying airfare is identified, a search in Worldspan is initiated to find seat availability on the requested dates of travel. Where more than one seller is able to fulfill the customer's offer, priceline.com awards the business based on an allocation protocol. A customer is notified whether his offer has been accepted within one hour for domestic flights and within twenty-four hours for international flights. If priceline.com is able to obtain an airline ticket within the parameters specified by the customer, the customer's credit card is charged for the amount of the customer's offer, plus applicable taxes and standard processing fees, and the ticket is delivered to the customer by the delivery method specified by the customer. Approximately 94% of domestic tickets issued through priceline.com are electronic tickets. Priceline.com earns the spread, if any, between the customer's offered price and the cost to purchase the ticket from the airline, and the handling fee charge paid by the customer on each ticket. HOTELS. In October 1998, priceline.com launched its second travel service, which allows consumers to name their price for hotel room reservations. Priceline.com's hotel room reservation service currently is 53 available in substantially all major cities and metropolitan areas in the United States. Seller participants in the hotel room reservation service include several of the most significant national hotel chains, including Marriott, Renaissance, Sheraton and Westin, as well as several important real estate investment trusts, including Meristar, Patriot and Starwood, and independent property owners. Hotels participate by filing private discounted rates with related inventory control rules in priceline.com's private database in the Worldspan centralized reservation system for hotel rooms. These rates generally are not available to the general public or to consolidators and other discount distributors who sell to the public. Priceline.com's hotel room reservation service operates in a manner similar to its airline ticket service. Consumers are required to accept certain trade-offs with respect to brands or product features in return for saving money. For example, consumers are required to accept a reservation in any hotel within a specified geographic area within a designated "class" of service (1, 2, 3, 4 or 5-star) and must accept limitations on changes and cancellations. Priceline.com determines the class of service for each participating hotel based upon published industry reports, the amenities available at each property and other factors such as age and decor. As with the airline ticket service, the target market for priceline.com's hotel room reservation service is the leisure travel market. Consumers can make offers for a hotel room reservation through the priceline.com Web site. To make an offer, the customer (1) specifies (a) his dates of stay, (b) the metropolitan area, including geographic zones within that metropolitan area, (c) the class of hotel service and (d) the price he is willing to pay; and (2) guarantees the offer with a credit card. Upon receipt of an offer for a hotel room reservation, priceline.com systematically compares the offer with rates and inventory rules provided by sellers through their reservation systems and determines whether to fulfill the offer based upon available inventory. Within a specified time, which currently is one hour, the customer is notified whether his offer has been accepted. When selling a hotel room reservation, priceline.com earns the spread between the consumer's offer price and the price charged to the company by the hotel. Priceline.com also earns fee income from adaptive promotions that it makes available to consumers during the course of submitting an offer for a hotel room reservation. The dynamics of the hotel industry are similar to those of the airline industry in that both industries are characterized by expiring inventory and low marginal costs so that the sale of any excess inventory provides a significant contribution to profits. As with the airline industry, a significant amount of available inventory in the hotel industry expires unsold. Priceline.com also believes that consumers are willing to trade off brand identity for lower rates with a specified class of hotel service and that such industry dynamics make priceline.com's demand collection system particularly well-suited to the hotel industry. Priceline.com also believes that the hotel room reservation service will create opportunities for cross-selling to leisure travelers who purchase airline tickets through priceline.com. OTHER TRAVEL SERVICES. Priceline.com intends to expand its products and services within the leisure travel industry over the next two years to encompass the rental car, cruise, all-inclusive resort, time share and vacation package segments. FINANCIAL SERVICES PRODUCTS HOME FINANCING SERVICES. Priceline.com introduced its home financing service in January 1999. Priceline.com's financing service allows consumers to name their interest rate for mortgages of a specified term, including purchase money mortgages, refinancings and home equity loans. LendingTree, an Internet based mortgage service provider, is priceline.com's joint marketing partner in connection with its mortgage service. Under priceline.com's agreement with LendingTree, priceline.com is responsible for maintaining the home financing service on the priceline.com Web site and for consumer marketing. LendingTree serves as the back-end processing system, which presents offers received through priceline.com to multiple mortgage lending institutions for consideration. There are currently more than 30 lenders participating in 54 the home financing services through LendingTree. See "--Strategic Alliances--Home Financing Alliances." To obtain a home mortgage, refinancing a home equity loan through the priceline.com service, consumers access the priceline.com Web site and specify the amount of the loan, the term, the interest rate and the points that they are willing to pay. Consumers complete a simplified loan application as part of the process of making an offer. In connection with making an offer, consumers are required to guarantee with a major credit card the payment of a good-faith deposit of $200 that is applied towards closing costs. The good-faith deposit is charged by a lender only when a customer's offer is accepted. Priceline.com does not charge the customer any fees for the use of its home financing services. Priceline.com transmits each offer to LendingTree, which in turn presents the offer to multiple lenders who can either accept the offered terms, or return a counteroffer to the consumer. Priceline.com notifies consumers whether their offer has been accepted within six business hours, between the hours of 8:00 a.m. and 8:00 p.m., Eastern Standard Time. If a customer's offer is not accepted within six business hours, priceline.com notifies the customer if it has received any counter-offers from participating lenders. Participating lenders may submit counter-offers for up to two business days following the customer's offer. Customers may check the status of any counter-offers by accessing the priceline.com Web site. Priceline.com generates revenues with respect to its home financing service in the form of marketing fees paid directly by LendingTree. Priceline.com is exploring the possibility of entering into a joint venture with a subsidiary of a federally chartered thrift institution that would offer to provide mortgage loans through the priceline.com service. Priceline.com currently expects that such joint venture would participate in the priceline.com service along with other mortgage lenders in the LendingTree network. According to industry data published in 1998, approximately $1.1 trillion of home mortgages were entered into in the United States in 1996. Priceline.com believes that consumers are largely indifferent to which mortgage issuer provides their mortgage and seek merely to obtain the lowest cost in the most efficient manner. Moreover, comparison shopping among the hundreds of mortgage lenders can be a frustrating experience for consumers. Priceline.com believes the priceline.com mortgage service will provide consumers with a simple and efficient vehicle for obtaining the interest rate they seek through a preferable purchasing process. For lenders, the priceline.com mortgage service will provide guaranteed demand from consumers who are committed to buy and will submit that demand in a format that can be reviewed and evaluated by the lender with minimal variable costs. OTHER FINANCIAL SERVICES PRODUCTS. Priceline.com intends to expand its products and services within the financial services industry over the next two years to include unsecured personal loans, automobile loans, credit card balance consolidations and automobile and life insurance policies. As with its other products and services, priceline.com intends to expand its financial product services by entering into strategic relationships with leading industry participants. Priceline.com believes its financial product services will have broad demographic appeal among consumers who seek to obtain the most attractive economic terms in the most efficient manner from what they perceive to be substitutable suppliers. NEW CAR SALES Priceline.com introduced its new car sales service on a test basis in the New York metropolitan area in July 1998. Priceline.com utilized the New York market to learn more about automobile sales over the Internet and to develop product features and systems support. In July 1999, priceline.com launched a similar test in the Tampa, Florida market and expects to expand further in the state of Florida, as well as into the states of California and Michigan during the third quarter of 1999. Based on published industry data, the New York metropolitan area represents approximately 10% of all consumer demand for new automobiles in the United States, while California represents approximately 11% and Florida represents approximately 9%. Additionally, the Detroit metropolitan area provides access to the three largest U.S. auto-makers. Subject to achieving positive results in these markets and receipt of appropriate state 55 regulatory approvals and authorizations necessary to conduct our new car sales service, priceline.com expects to become operational in the 48 contiguous states during the first quarter of 2000. Priceline.com recently entered into a co-marketing agreement with AutoNation, Inc., a leading national automotive retailer. The agreement initially provides priceline.com with access to AutoNation's inventory and dealerships in the Tampa, Florida market and provides for expansion into other markets in the future. Priceline.com's new car sales service accepts offers for every major brand of automobile. To purchase a new car through the priceline.com service, the customer identifies the exact vehicle desired to be purchased or leased, including the make, model and specified options, the geographic area in which the customer is willing to pick up the vehicle and the purchase price or lease price the customer is willing to pay. All sales are made through factory authorized dealers. To help consumers submit reasonable requests, both the manufacturer's suggested retail price and the dealer invoice price for the vehicles and options requested are displayed on the priceline.com Web site. Additionally, priceline.com also supplies an estimated market price, based on recent sales of the selected vehicle. Upon receiving an offer for a new car, priceline.com transmits the customer's offer to factory authorized dealers within the specified geographic radius, without disclosing the identity of the customer. Priceline.com directs the sale to the first dealer that notifies the company that it is willing to accept the customer's offer. Priceline.com then notifies the customer to pick up the vehicle from that dealer and the transaction is closed directly between them. Due to the numerous features and options on a new automobile, the range of product substitutability that consumers will accept is lower in the case of new cars than with airline tickets or hotels. As a result, a dealer that may not be able to precisely fulfill a customer's offer is permitted to make a counteroffer through priceline.com. The counteroffer may specify a different product package or price. The customer is free to accept or reject such a counteroffer. The customer also is permitted to submit an additional offer through priceline.com. Once an offer for a new car is accepted by a dealer, the consumer completes the transaction directly with the dealer and receives the same standard manufacturer's warranty and other terms that are available with respect to any new car purchased at that dealer. When a sale is completed, priceline.com is paid a fee, which is currently $25, from the customer and an additional fee from the auto dealer. If the customer fails to consummate the transaction within 14 business days of being notified that an offer is accepted, the customer is charged a cancellation fee, which is currently $200, half of which is payable to priceline.com with the other half payable to the dealer. Currently, priceline.com does not offer financing arrangements through its new car sales service. However, to assist consumers in determining whether they can afford a particular vehicle, or what purchase price to offer, we provide estimated month payment calculations, a "budget work-sheet" and a financing calculator on our Web site. Priceline.com also allows consumers to request financing from the accepting factory authorized dealer and to condition their offers on obtaining such financing. Priceline.com believes that, for many consumers, purchasing an automobile through priceline.com's new car sales service will be a preferred purchasing method compared to traditional retail channels which often involve protracted negotiations with numerous dealers, some of which may utilize aggressive sales tactics. Priceline.com also believes that many automobile dealers will view the priceline.com service as an attractive way to generate incremental sales through a low cost distribution channel. The priceline.com new cars sales service is differentiated from other Internet car sales services, which serve as lead generators for participating car dealers. Under such services, multiple dealers may contact the customer in response to the customer's inquiry to the Internet service. By contrast, priceline.com's new car sales service does not reveal the identity of the customer to the auto dealer until the dealer has accepted the customer's offer. Furthermore, in contrast to other Internet car sales services, dealers are not required to pay a participation fee to review offers from the priceline.com service. 56 ADAPTIVE MARKETING PROGRAMS Priceline.com has developed adaptive marketing programs to help bridge the gap between consumer offers and seller prices, provide users of the priceline.com service with other desired products, and generate additional revenue for the company. These programs also serve as an integral part of priceline.com's strategy of building customer loyalty. Priceline.com intends to further develop and expand its adaptive marketing programs, which presently include two distinct initiatives. The first, which it refers to as "adaptive promotions," allows consumers to increase the amount of their offers, and thus their likelihood of success, at no additional cost by participating in sponsor promotions during the process of making a priceline.com offer. For example, a customer making an offer to buy one round-trip airline ticket can immediately increase the amount of his offer by $40 by applying online for a First USA credit card. If the customer obtains the requested ticket, he still pays only the amount contained in his original offer, plus applicable taxes and standard processing fees. For example, if a customer makes an offer to purchase a round trip ticket from New York to Chicago for $200 and, in the process of submitting that offer, he applies for a First USA credit card, priceline.com would increase the customer's offer by up to an additional $40 to enable the customer a greater chance of purchasing the ticket. If priceline.com is able to purchase the ticket for $240 or less, the customer would still only have to pay his original offer price of $200, plus applicable taxes and fees. The second type of adaptive marketing program is referred to as "adaptive cross selling" and utilizes cross selling of multiple products to increase the number of successful transactions. For example, a customer whose offer for an airline ticket was slightly below acceptable levels could be offered a second related product such as a hotel room reservation or a rental car day at a combined price that provided an acceptable margin for the sellers of both products and for priceline.com. During 1998 and the first quarter of 1999, our adaptive marketing revenues were derived primarily from fees paid by Capital One Bank for qualifying credit card applications submitted over the priceline.com service in connection with customer offers for airline tickets. Effective May 1, 1999, our relationship with Capital One ended. Since that time, our credit card adaptive marketing program revenues have been attributable to our adaptive marketing relationship with First USA Bank, a leading national credit card issuer. Under the First USA adaptive marketing program, priceline.com enables its customers to increase the amount of their offers by applying online for a First USA credit card and offers other promotions linked to the First USA customer acquisition program. The fee structure of the First USA program is based on different factors than the factors that were applicable under the Capital One program and the First USA program is subject to certain early termination and repricing rights of First USA. Priceline.com also has an adaptive marketing agreement with E*TRADE, under which E*TRADE compensates priceline.com for offering priceline.com customers the opportunity to open an account with E*TRADE while visiting or making an offer on the priceline.com Web site. While the program originally related to priceline.com's initial public offering, it now applies to offers by customers for products and services over the priceline.com service. The E*TRADE adaptive marketing program is currently operated under an oral agreement and may be terminated at any time. Priceline.com recently has entered into adaptive marketing agreements with Sprint Communications Company L.P., Discover Financial Services, Inc. and Earthlink Network, Inc. The Sprint agreement is a short-term agreement under which priceline.com, during a twelve-week test program, will earn fees from Sprint in connection with customer agreeing to switch their long distance telephone service to Sprint. Priceline.com and Sprint are currently in the process of defining the program and the launch date has not yet been determined. We are also evaluating similar programs with other long distance carriers. Under the Discover adaptive marketing program, selected customers will be able to increase the amount of their offers by a specified amount by applying online for a Discover credit card through the priceline.com service. Priceline.com will receive a fee from Discover Financial Services for each qualifying credit card application submitted through the priceline.com service. Priceline.com will also receive a fee 57 for any qualifying upgrade of an established Discover credit card account submitted through the priceline.com service. The Discover adaptive marketing program is expected to be implemented during the third quarter of 1999 and will be offered to selected customers who have already participated, or who have declined participation, in the First USA adaptive marketing program. Under priceline.com's adaptive marketing program with EarthLink Network, Inc., an internet service provider, priceline.com will earn fees when its customers open accounts with EarthLink and upon such accounts being open for a specified period of time. No specific date has been set for the launch of the EarthLink program. In addition, Priceline.com is exploring and has taken steps to expand its adaptive marketing programs into a wide range of other products and services for its customers. See "Risk Factors--We are Dependent on Adaptive Marketing Programs" and "--Strategic Alliances--Adaptive Marketing Alliances." MARKETING AND BRAND AWARENESS Priceline.com has established itself as a leading e-commerce brand through an aggressive marketing and promotion campaign. From inception through June 30, 1999, priceline.com incurred $59.7 million for sales and marketing expense. It intends to continue to pursue an aggressive marketing strategy designed to promote brand awareness and the concept that consumers can save money on a wide range of products and services through priceline.com. Underlying priceline.com's marketing strategy is the company's belief that its target market is all consumers, not just Internet-savvy consumers. Substantially all of such spending has been for radio and newspaper advertising. Priceline.com's campaign features the actor William Shatner as its spokesperson. Priceline.com supplements its paid advertising and promotion with targeted media coverage. Priceline.com has been featured in hundreds of news stories in national publications such as THE NEW YORK TIMES, THE WALL STREET JOURNAL AND USA TODAY, reflecting the intuitive appeal of the priceline.com business model and its strong word-of-mouth support. In addition, priceline.com engages in grass roots marketing such as promotional events on college campuses and co-promotions with popular media such as MTV. Priceline.com believes that the priceline.com service has achieved widespread brand awareness. Based upon the results of an independent research study conducted for priceline.com, the company believes that, as of April 1999, among adult Americans, priceline.com was the second most recognized e-commerce brand among the 20 leading brands included in the survey and one of the most recognized Internet brands among the leading brands included in the survey. Based on the study, priceline.com also believes that, after only one year of operations, 91.1 million (or 46%) of all adult Americans were aware of the priceline.com brand. Priceline.com's strong brand awareness has been achieved without any affiliation with an Internet portal company such as Yahoo! or Excite or a proprietary online service such as America Online. Priceline.com also believes that it enjoys high levels of consumer satisfaction among users of its service who provide powerful word-of-mouth endorsements. STRATEGIC ALLIANCES AIRLINE ALLIANCES AND RELATIONSHIPS Priceline.com has entered into Airline Participation Agreements with six domestic and 16 international airlines. The Airline Participation Agreements do not commit the airlines to provide tickets for any particular routes or at a discount to their retail prices, but outline the terms and conditions under which ticket inventory provided by the airlines may be sold. Such terms and conditions include the following: - the tickets must be non-refundable, non-endorsable and non-changeable; - all travel must be round-trip between the same two points of departure and return, with no stopovers permitted; - the tickets are not eligible for frequent flyer mileage or upgrades; - consumers must agree to accept up to one stop or connection on both their departing and return flights; 58 - consumers must be willing to fly on any participating airline; - consumers must be willing to depart at any time after 6 a.m. and land any time before 10 p.m. on the requested dates; - all offers must be guaranteed with a major credit card; and - consumers are limited in their ability to make multiple offers with respect to the same travel itinerary. The Airline Participation Agreements generally are subject to termination upon 30 days' notice by priceline.com or the airline. While priceline.com's agreement with Delta nominally has a ten-year term, the agreement does not impose any material obligations on Delta. In particular, Delta is not at any time obligated to supply airline tickets to priceline.com and may supply airline tickets to priceline.com's competitors at any time, without offering any airline tickets to priceline.com, or may offer tickets to priceline.com's competitors at more favorable prices than those offered to priceline.com. In addition to the Airline Participation Agreements, priceline.com entered into a related agreement with Delta which provides, among other things, certain incentives designed to encourage Delta to increase its participation in priceline.com's buying service. For example, Delta is entitled to share in revenue generated from airline ticket sales on Delta if priceline.com's gross margin on such sales exceeds approximately 12% in any calendar quarter. In addition, priceline.com is required to use the highest qualifying fare to fulfill ticket requests allocable to Delta, subject to an agreed minimum profit margin to priceline.com. Priceline.com's agreement with Delta, subject to various exceptions, requires Delta's approval of the addition of new carriers to the priceline.com service, restricts the routes for which tickets may be offered by specified carriers through the priceline.com service and imposes limitations on the code share arrangements of specified carriers. Delta also may require the exclusion of specific markets in order for certain other airlines to participate. These provisions could limit priceline.com's ability to expand its airline ticket service. In addition, priceline.com's ability to transfer or license its intellectual property to other travel providers is limited in the manner set forth in the agreement. In connection with the Airline Participation Agreement with Delta, priceline.com also issued a warrant to Delta to purchase up to 18,619,402 shares of common stock at an exercise price of approximately $0.93 per share. The Delta warrant will become exercisable at the earlier of December 31, 2005, or Delta's achievement of certain performance thresholds of ticket sales. Priceline.com also has issued to several participating airlines warrants to purchase an aggregate of 3,187,500 shares of common stock, comprised of warrants to purchase 937,500 shares of common stock at an exercise price of $3.20 per share, warrants to purchase 1,250,000 shares of common stock at an exercise price of $6.40 per share and warrants to purchase 1,000,000 shares of common stock at an exercise price of approximately $97.41 per share. The warrants having an exercise price of $3.20 per share become exercisable on October 28, 1999. With respect to the warrants having an exercise price of $6.40 per share, warrants relating to one-half of the underlying shares become exercisable on December 31, 1999, and warrants relating to the remaining underlying shares become exercisable on December 31, 2000, subject to earlier termination of such warrants in the circumstances identified in the warrant agreement. The warrants having an exercise price of $97.41 per share become exercisable upon the earlier of July 16, 2004 or the airline's achievement of various performance thresholds based upon ticket sales. HOME FINANCING ALLIANCES In connection with priceline.com's home financing service, priceline.com has entered into a joint marketing relationship with LendingTree, an Internet based mortgage service provider. Under this arrangement, priceline.com is responsible for maintaining the mortgage service for the priceline.com Web site and for consumer marketing. LendingTree provides the back-end processing system, which presents the priceline.com offers to multiple participating lending institutions for consideration. Under the terms of the Internet Marketing and Licensing Agreement, effective as of August 1, 1998, between priceline.com and LendingTree, priceline.com receives the majority of the net revenue generated by the mortgage program, and the balance is earned by LendingTree. LendingTree is responsible for 59 providing (1) the substantive mortgage content of the mortgage service for the priceline.com Web site; (2) a network of lenders to participate in the mortgage program; (3) customer service; and (4) the software required to effect a communication system between priceline.com, LendingTree and the participating lenders. LendingTree also is responsible for compliance with all regulations applicable to the mortgage service and products, including the maintenance of requisite broker licenses, registration, approvals and exemptions. The initial term of the agreement began on August 1, 1998, expires one year from the commencement of the priceline.com mortgage service and renews automatically thereafter. The agreement may be terminated by either party after the initial term expires, or immediately in the event that the other party materially breaches the agreement or becomes subject to a bankruptcy proceeding. Priceline.com is exploring the possibility of entering into a joint venture with a subsidiary of a federally chartered thrift institution that would offer to provide mortgage loans through the priceline.com service. Priceline.com currently expects that such joint venture would participate in the priceline.com service along with other mortgage lenders in the LendingTree network. HOTEL ALLIANCES In connection with priceline.com's hotel service, priceline.com has entered into letter agreements with 39 hotel groups, which cover numerous brands and include several of the leading national hotel chains. The agreements generally provide for the hotels to supply priceline.com with competitive net rates for hotel properties included in the priceline.com service. Hotels must be of 2-star quality or higher, with priceline.com to make the final quality determination. These letter agreements do not require the hotels to provide any minimum level of inventory. In most cases, the agreements are cancellable by either party at any time. AUTOMOTIVE ALLIANCE Priceline.com has entered into a co-marketing agreement with AutoNation, Inc., a leading national automotive retailer. Under the terms of the co-marketing agreement, consumer offers for automobiles submitted through the priceline.com service will be offered to AutoNation dealers first. If no AutoNation dealers accept a customer's offer, such offer will be submitted to other dealers in the market. The service is being offered initially in the Tampa and St. Petersburg, Florida markets, with plans to expand to additional markets nationwide. ADAPTIVE MARKETING ALLIANCES During 1998 and the first quarter of 1999, our adaptive marketing revenues were derived primarily from fees paid by Capital One Bank for qualifying credit card applications submitted over the priceline.com service in connection with customer offers for airline tickets. Effective May 1, 1999, our relationship with Capital One ended. Since that time, our credit card adaptive marketing program revenues have been attributable to our adaptive marketing relationship with First USA Bank, a leading national credit card issuer. Under the First USA adaptive marketing program, priceline.com enables its customers to increase the amount of their offers by a specified amount by applying online for a First USA credit card and offers other promotions linked to the First USA customer acquisition program. The fee structure of the First USA program is based on different factors than the factors that were applicable under the Capital One program. Under the First USA program, priceline.com earns fees (1) upon the opening of credit card accounts originated through the priceline.com service, up to a specified maximum amount of five million accounts, subject to reduction under certain circumstances by First USA; (2) upon the activation of credit card accounts acquired for First USA through the priceline.com service and based upon the use of such accounts; and (3) for transfers of balances from other credit cards to First USA credit cards through the priceline.com service. The First USA agreement has a term of five years, subject to certain earlier termination and repricing rights of First USA. For example, subject to priceline.com's rights of renegotiation, First USA has the right to terminate the agreement after one year (and earlier under certain circumstances) if its financial returns under the adaptive marketing program are not at least equivalent to certain agreed upon levels. In 60 addition, a portion of the fees earned under the First USA program is required to be reinvested in program incentives. The full financial statement impact of the shift from the Capital One adaptive marketing program to the First USA adaptive marketing program will not be known until completion of future periods. Priceline.com also has an adaptive marketing agreement with E*TRADE, under which E*TRADE compensates priceline.com for offering priceline.com customers the opportunity to open an account with E*TRADE while visiting or making an offer on the priceline.com Web site. While the program originally related to priceline.com's initial public offering, it now applies to offers by customers for products and services over the priceline.com service. The E*TRADE adaptive marketing program is currently operated under an oral agreement. Priceline.com recently has entered into adaptive marketing agreements with Sprint Communications Company L.P., Discover Financial Services, Inc. and Earthlink Network, Inc. The Sprint agreement is a short-term agreement under which priceline.com, during a twelve-week test program, will earn fees from Sprint in connection with customers agreeing to switch their long distance telephone service to Sprint. Priceline.com and Sprint are currently in the process of defining the program and the launch date has not yet been determined. We are also evaluating similar programs with other long distance carriers. Under the Discover adaptive marketing program, selected customers will be able to increase the amount of their offers by a specified amount by applying online for a Discover credit card through the priceline.com service. Priceline.com will receive a fee from Discover Financial Services for each qualifying credit card application submitted through the priceline.com service. Priceline.com will also receive a fee for any qualifying upgrade of an established Discover credit card account submitted through the priceline.com service. The Discover adaptive marketing program is expected to be implemented during the third quarter of 1999 and will be offered to selected customers who have already participated, or who have declined participation, in the First USA adaptive marketing program. Under priceline.com's adaptive marketing program with EarthLink Network, Inc., an internet service provider, priceline.com will earn fees when its customers open accounts with EarthLink and upon such accounts being open for a specified period of time. No specific date has been set for the launch of the EarthLink program. COMPETITION Priceline.com competes with both online and traditional sellers of the products and services offered on priceline.com. The market for selling products and services over the Internet is new, rapidly evolving and intensely competitive. Current and new competitors can launch new sites at a relatively low cost. In addition, the traditional retail industry for the products and services priceline.com offers is intensely competitive. Priceline.com currently or potentially competes with a variety of companies with respect to each product or service it offers. With respect to travel products, these competitors include: - Internet travel agents such as Travelocity, Preview Travel and Microsoft's Expedia; - traditional travel agencies; - consolidators and wholesalers of airline tickets and other travel products, including online consolidators such as Cheaptickets.com; - individual airlines, hotels, rental car companies, cruise operators and other travel service providers; and - operators of travel industry reservation databases such as Worldspan and Sabre. Priceline.com's current or potential competitors with respect to new automobiles include traditional and online auto dealers, including newly developing auto super stores such as AutoNation, Auto-by-Tel and Microsoft's CarPoint. With respect to financial service products, priceline.com's competitors include: - banks and other financial institutions; 61 - online and traditional mortgage and insurance brokers, including mortgage.com, Quicken Mortgage, E-Loan and iOwn, Inc.; and - insurance companies. While priceline.com faces competition from all of these current or potential competitors, its business and financial position would be particularly at risk if the airlines chose to establish their own buyer-driven commerce system to sell excess inventory. Priceline.com potentially faces competition from a number of large Internet companies and services that have expertise in developing online commerce and in facilitating Internet traffic, including Amazon.com, America Online, Microsoft and Yahoo!, who could choose to compete with priceline.com either directly or indirectly through affiliations with other e-commerce companies. Other large companies with strong brand recognition, technical expertise and experience in Internet commerce could also seek to compete with priceline.com. Competition from these and other sources could have a material adverse effect on priceline.com's business, results of operations and financial condition. Priceline.com believes that the principal competitive factors in its markets are brand recognition, price, Web site accessibility, ability to fulfill offers, customer service, reliability of delivery, ease of use, and technical expertise and capabilities. Many of priceline.com's 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 priceline.com. Some of these competitors may be able to secure products and services on more favorable terms than priceline.com. In addition, many of these competitors may be able to devote significantly greater resources to: - marketing and promotional campaigns; - attracting traffic to their Web sites; - attracting and retaining key employees; and - Web site and systems development. Increased competition could result in reduced operating margins and loss of market share and could damage priceline.com's brand. There can be no assurance that priceline.com will be able to compete successfully against current and future competitors or that competition will not have a material adverse effect on priceline.com's business, results of operations and financial condition. OPERATIONS AND TECHNOLOGY Priceline.com's business is supported by a state of the art systems platform, which was designed with an emphasis on scalability, performance and reliability. Priceline.com's core demand collection and offer processing systems are proprietary to priceline.com. The software platform and architecture are built on server-side Java, C++, and ISO standard SQL scripts integrated with an Oracle relational database system. This internal platform was designed to include open application protocol interfaces that can provide real-time connectivity to vendors in the range of industries in which the priceline.com operates. These include large global inventory systems, such as airline and hotel room reservation systems, for example, the Worldspan central reservation systems; and financial service providers; as well as individual inventory suppliers, such as auto dealers, individual hotels and hard goods merchants. Priceline.com's Internet servers utilize Verisign digital certificates to help it conduct secure communications and transactions. Priceline.com out-sources most of its call center and customer service functions, and uses a real-time interactive voice response system with transfer capabilities to its call centers and customer service centers in Stamford, Connecticut; Columbus, Ohio; and Charlotte, North Carolina. Priceline.com's systems infrastructure, Web and database servers are hosted at Exodus Communications, Inc. in Jersey City, New Jersey, which provides communication lines from multiple providers including UUNet and AT&T, as well as 24-hour monitoring and engineering support. Exodus has its own generator and multiple back-up systems in Jersey City. Priceline.com also maintains an uninterruptible 62 power supply system and generator and redundant servers at its Stamford, Connecticut headquarters to provide service capability if the Exodus site fails. Priceline.com also offers phone service through its toll-free number, 1-800-Priceline, which allows consumers who do not have access to a computer to phone in their orders. In addition, consumers who choose not to transmit their credit card information via the Internet have the option of submitting their credit card information through the phone service. Priceline.com also uses its toll-free number to provide customer service. Because priceline.com is an Internet business, it intends to phase out its telephone ordering and credit card submission services over time and, in the future, will use its toll-free number only to provide customer service. INTELLECTUAL PROPERTY Priceline.com holds a business process patent issued by the United States Patent and Trademark Office which is directed to a unique buyer-driven commerce system. While so-called business process patents are only now becoming widely understood by the general business community, a decision by the Court of Appeals for the Federal Circuit (the highest United States appellate court for patent-related appeals below the United States Supreme Court), recently affirmed the validity of patents covering software-implemented business processes. STATE STREET BANK & TRUST CO. V. SIGNATURE FINANCIAL GROUP, INC. (July 1998). Priceline.com currently holds three issued United States patents, No. 5,794,207, No. 5,797,127 and No. 5,897,260, as well as 25 pending United States patent applications and four pending international patent application. Priceline.com is in the process of filing at least three more patent applications, with an ongoing program for identifying and protecting new inventions. Priceline.com's core business method patent is directed to a unique buyer-driven commerce system using a computer to collect credit card-backed or other financial account-backed conditional purchase offers to present to multiple sellers, receive one or more acceptances or fulfillments of these offers, and use the credit card or other financial account to provide a payment to one or more of the sellers. The pending patent applications are directed to various operational features of the system, as well as to product-specific enhancements. While priceline.com believes that its core buyer-driven commerce patent, together with its pending patent applications, help to protect the priceline.com business, there can be no assurance that (1) the core buyer-driven patent or any other patent can be successfully defended against challenges by third parties; (2) the pending patent applications will result in the issuance of patents; (3) competitors or potential competitors of priceline.com will not devise new methods of competing with the company that are not covered by priceline.com's patent or patent applications; (4) because of variations in the application of our business model to each of our products and services, our core buyer-driven commerce patent may not 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; (5) new prior art will not be discovered which may diminish the value of or invalidate an issued patent; or (6) a third party will not have or obtain one or more patents that prevent priceline.com from practicing features of its business or will require priceline.com to pay for a license to use those features. Priceline.com has been notified that a third party patent applicant has challenged its core patent through an interference action in the United States Patent and Trademark Office. See "--Legal Proceedings." In addition, priceline.com has learned of several Internet travel services that appears to use customer-offer based transaction models. Walker Digital currently owns the assets and intellectual property related to two new areas of e-commerce into which priceline.com may expand its "name your price" business model, one involving consumer-to-consumer sales and the other involving the sale of retail merchandise. Priceline.com may license its brand name and "name your price" business model to two new companies formed to develop these businesses. Walker Digital may contribute assets and intellectual property to these companies in return for an equity interest in these companies. 63 Walker Digital owns the intellectual property rights underlying the technology associated with priceline.com's adaptive marketing programs. Walker Digital has licensed to priceline.com the right to use these intellectual property rights under a perpetual, non-exclusive, royalty-free license agreement. Walker Digital has several pending United States patent applications directed to different aspects of the processes and technology supporting adaptive marketing programs. Priceline.com seeks to protect its copyrights, service marks, trademarks, trade dress and trade secrets through a combination of laws and contractual restrictions, such as confidentiality agreements. For example, priceline.com attempts to register its trademarks and service marks in the United States and internationally. However, effective trademark, service mark, copyright and trade secret protection may not be available in every country in which priceline.com's services are made available online. See "Risk Factors--Our Success Depends on Our Ability to Protect Our Intellectual Property." A third party has sued priceline.com for, among other things, misappropriation of trade secrets. See "Legal Proceedings." Priceline.com currently owns the Internet domain name "priceline.com." Domain names generally are regulated by Internet regulatory bodies. The relationship between regulations governing domain names and laws protecting trademarks and similar proprietary rights is unclear. Priceline.com, therefore, could be unable to prevent third parties from acquiring domain names that infringe or otherwise decrease the value of its trademarks and other proprietary rights. See "Risk Factors--Our Success Depends on Our Ability to Protect Our Intellectual Property." GOVERNMENTAL REGULATION The products and services offered through the priceline.com service are regulated by federal and state governments. TRAVEL SERVICES Priceline.com is subject to the laws and regulations of a number of states governing the offer and/or sale of travel services. For example, priceline.com is registered as a "seller of travel" under the California Seller of Travel Act and is a member of the Airlines Reporting Corporation. In addition, a number of state travel laws and regulations require compliance with specific disclosure, bond and/or other requirements. NEW CAR SALES A number of states have laws and regulations governing the registration and conduct of automobile dealers and brokers. Such laws generally provide that any person receiving direct or indirect compensation for selling automobiles or brokering automobile transactions must register as an automobile broker or dealer. Registration for automobile dealers/brokers may, among other things, require the registrant to maintain a physical office in the applicable state, a dealer lot zoned for automobile sales within the applicable state and/or a franchise agreement with the manufacturers of the automobiles to be sold. With the planned expansion of its new automobile service from the New York metropolitan area to all 48 contiguous states, priceline.com will attempt to register as an automobile broker/dealer in the jurisdictions where registration is required provided that it can reasonably comply with the requirements for registration imposed by each jurisdiction. However, priceline.com may not be able to register in all states. For example, priceline.com will not be able to register in a jurisdiction that requires a dealer zoned lot or a franchise agreement with manufacturers of the automobiles to be sold. Priceline.com will work with the regulators of the various jurisdictions to obtain waivers of such requirements, but it may not be successful in its efforts. In jurisdictions where priceline.com cannot obtain registration, it is possible that state regulatory bodies could take a strict enforcement position and priceline.com may be unable to continue to make its new automobile services available in those jurisdictions. 64 HOME FINANCING SERVICES Most states have laws and regulations governing the registration or licensing and conduct of persons providing mortgage brokerage services. Such laws and regulations also typically require certain consumer protection disclosures, loan solicitation procedures and a variety of other practices throughout the various stages of the mortgage solicitation, application and approval process. In addition to state law, mortgage brokerage services are heavily regulated by federal law. For example, the Real Estate Settlement Procedures Act prohibits the payment and receipt of mortgage loan referral fees. The act, however, does permit persons to be compensated for the fair market value of non-referral services actually rendered. Priceline.com introduced its home financing service in January 1999. LendingTree serves as the back-end processing system, which presents offers received through the priceline.com service to multiple mortgage lending institutions for consideration, for all of priceline.com's home financing services, Priceline.com provides and is responsible for maintaining the home financing service on its Web site and develops and purchases all advertising. LendingTree compensates priceline.com for the fair market value of its non-referral services. Priceline.com believes that offering the priceline.com home mortgage service does not require our registration under or compliance with the mortgage or similar brokerage laws of any jurisdiction. However, it is possible that one or more regulatory authorities could seek to enforce existing laws, or otherwise enact new legislation, requiring priceline.com's registration and compliance and could scrutinize the compensation arrangement between LendingTree and priceline.com under Real Estate Settlement Procedures Act or other federal or state laws. Such action could severely interfere with the conduct of the priceline.com business. LendingTree provides the back-end processing system, which presents offers we receive to multiple mortgage lending institutions for consideration, for the home financing service on priceline.com's Web site and is responsible for maintaining the necessary and appropriate state registrations and licenses associated with LendingTree's mortgage brokerage services. If a federal or state regulatory authority, or an aggrieved customer, should in the future claim that LendingTree has failed to comply fully with applicable federal or state law requirements pertaining to LendingTree's provision of mortgage brokerage services, the priceline.com home mortgage service could be materially and adversely affected and priceline.com may be unable to continue to make its home mortgage services Web site available, either to residents of affected state(s) or on a national basis. Priceline.com is exploring the possibility of acquiring a minority interest in, and licensing the priceline.com name and business model to, a newly formed subsidiary of a federally chartered savings and loan association. This entity may be known as "priceline.mortgage.com" and also may serve as an entity that could accept mortgage applications or mortgage qualification loans. CONSUMER PROTECTION AND RELATED LAWS All of priceline.com's services are subject to federal and state consumer protection laws and regulations prohibiting unfair and deceptive trade practices. Priceline.com also is subject to related "plain language" statutes in place in many jurisdictions, which require the use of simple, easy to read, terms and conditions in contracts with consumers. Although there are very few laws and regulations directly applicable to the protection of consumers in an online environment, it is possible that legislation will be enacted in this area and could cover such topics as permissible online content and user privacy, including the collection, use, retention and transmission of personal information provided by an online user. Furthermore, the growth and demand for online commerce could result in more stringent consumer protection laws that impose additional compliance burdens on online companies. Such consumer protection laws could result in substantial compliance costs and interfere with the conduct and growth of the priceline.com business. 65 BUSINESS QUALIFICATION LAWS Because priceline.com's service is available over the Internet in multiple states, and because it sells to numerous consumers resident in such states, such jurisdictions may claim that priceline.com is required to qualify to do business as a foreign corporation in each such state. Priceline.com is qualified to do business in a limited number of states, and failure by priceline.com to qualify as a foreign corporation in a jurisdiction where it is required to do so could subject priceline.com to taxes and penalties for the failure to so qualify and limit its ability to conduct litigation in such states. INTERNATIONAL EXPANSION Priceline.com intends to explore opportunities for expanding the priceline.com business into international markets. It is possible, however, that the priceline.com demand collection system will not be readily adaptable to regulatory environments of certain foreign jurisdictions. In addition, there are various other risks associated with international expansion. They include language barriers, unexpected changes in regulatory requirements, trade barriers, problems in staffing and operating foreign operations, changes in currency exchange rates, difficulties in enforcing contracts and other legal rights, economic and political instability and problems in collection. LEGAL PROCEEDINGS On January 6, 1999, priceline.com received notice that a third party patent applicant and patent attorney, Thomas G. Woolston, purportedly had filed in December 1998 with the United States Patent and Trademark Office a request to declare an "interference" between a patent application filed by Woolston describing an electronic market for used and collectible goods and priceline.com's core buyer-driven commerce patent. Priceline.com has received a copy of a Petition for Interference from Woolston, the named inventor in at least three United States Patent applications titled "Consignment Nodes," one of which has issued as a patent (U.S. Patent Number: 5,845,265). Priceline.com recently received a notice from the United States Patent and Trademark Office that an undisclosed patent applicant, believed by priceline.com to be Woolston, is seeking to provoke an interference on priceline.com's core buyer-driven commerce patent. Priceline.com currently is awaiting information from the Patent Office regarding whether it will initiate an interference proceeding concerning Woolston's patent application and priceline.com's core buyer-driven commerce patent. An interference is an administrative proceeding instituted in the Patent Office to determine questions of patentability and priority of invention between two or more parties claiming the same patentable invention. There is no statutory period within which the Patent Office must act on an interference request. If an interference is declared and proceeds through a final hearing in the Patent Office, a final judgment is made by the Patent Office as to inventorship. Following such final judgment, appeals could be made in Federal court. While there can be no certainty as to time periods, interference proceedings typically take years to resolve. As a threshold to the initiation of an interference proceeding, Woolston must show that his patent application supports claims that he copied from the priceline.com core buyer-driven commerce patent. In order to make this showing, he would have to prove, among other things, that he invented the subject matter of the priceline.com claims before the inventors of the priceline.com patent. If the Patent Office were to find that Woolston's patent application supported the copied priceline.com claims, it would resolve the interference by awarding inventorship to the party with the earliest proven date of invention. Woolston announced in February 1999 an agreement to license his issued patent and pending patent applications to the owner of a competing Internet travel service. While the interference process is still at an early stage, priceline.com believes that it has meritorious defenses to Woolston's claim, which it intends to pursue vigorously. Among other things, priceline.com believes that the Woolston patent application does not disclose the inventions covered by the priceline.com patent claims. However, it is impossible to predict the outcome of an interference with certainty. While 66 Woolston claims to have an earlier invention date by a period of approximately sixteen months, the final decision as to priority of invention would be made by the Patent Office after considering facts provided by each party during the interference proceeding. If an interference is declared and thereafter resolved in favor of Woolston, such resolution could result in an award of some or all of the disputed patent claims to Woolston. If, following such award, Woolston were successful in a patent infringement action against priceline.com, including prevailing over all defenses available to priceline.com, such as those of non-infringement and invalidity, this could require priceline.com to obtain licenses from Woolston and pay damages from the date such patent issued at a cost which could significantly adversely affect priceline.com's business. If Woolston prevailed in both an interference and an infringement action, then priceline.com could be enjoined from conducting business through the priceline.com service to the extent covered by the patent claims awarded to Woolston. In addition, defense of the interference action may be expensive and may divert management attention away from priceline.com's business. On January 19, 1999, a lawsuit was filed in the United States District Court for the Northern District of California by Marketel International, Inc., a California corporation, under the caption MARKETEL INTERNATIONAL INC. V. PRICELINE.COM ET. AL.,No. C-99-1061 (N.D. CA 1999), against priceline.com, Priceline Travel, Walker Asset Management, Walker Digital, Mr. Jay S. Walker, priceline.com's Founder and Vice Chairman, and Mr. Andre Jaeckle, an individual who made a $1.0 million loan to priceline.com bearing interest at a rate of 6% per year and, in connection with the loan, received warrants, which have subsequently been fully exercised, to purchase 62,500 shares of our common stock. On February 22, 1999, Marketel filed an amended complaint, and March 17, 1999, Marketel filed a second amended complaint. The second amended complaint includes as defendants, Mr. Timothy G. Brier, our Executive Vice President, Travel, Mr. Bruce Schneier, and an individual and consultant to Walker Digital, and Mr. James Jorasch, an individual and employee of Walker Digital, and alleges causes of action for, among other things, misappropriation of trade secrets, breach of contract, conversion, breach of confidential relationship, copyright infringement, fraud, unfair competition, and false advertising, and seeks injunctive relief and damages in an unspecified amount. In its second amended complaint, Marketel alleges, among other things, that the defendants conspired to misappropriate Marketel's business model, which it describes as a buyer-driven electronic marketplace for travel services and its appurtenant techniques, market research, forms, plans and processes, and which an executive of Marketel allegedly provided to Messrs. Walker and Jaeckle in confidence approximately ten years ago. The second amended complaint also alleges that three former Marketel employees are the actual sole inventors or co-inventors of U.S. patent No. 5794207, which was issued on August 11, 1998 with Jay S. Walker, Bruce Schneier and James Jorasch listed as the inventors and which patent has been assigned to priceline.com. Marketel asks that the patent's inventorship be corrected accordingly. Based upon publicly available information, priceline.com believes that Marketel's fax and fee-based business was launched in 1991 and ceased operations seven months later. Priceline.com's Internet-based model was independently developed by Walker Digital and priceline.com, and practiced by priceline.com starting in 1998. Based on publicly available information and Marketel's second amended complaint, priceline.com understands that Marketel operated a fax-based travel information service which offered consumers, travel agents and/or consolidators the opportunity to purchase specially printed forms. These forms, when accompanied by an additional non-refundable fee, allowed prospective ticket buyers to fax to Marketel credit-card guaranteed bids for airline travel at a bid price specified by the buyer. Priceline.com believes that Marketel has not engaged in any regular commercial activities since ceasing operations in 1992. Based upon publicly available information, Marketel reactivated its status as a corporation by satisfying its back-due tax obligations to the State of California shortly after the filing of its complaint. On February 5, 1999, February 10, 1999 and March 31, 1999, the defendants filed their answer, amended answer and answer to second amended complaint, respectively, in which they denied the material allegations of liability in the complaints. Priceline.com and all other defendants strongly dispute the material legal and factual allegations contained in Marketel's second amended complaint and believe that 67 the second amended complaint is without merit. Priceline.com intends to defend vigorously against the action. Since May 28, 1999, there has been a discovery stay in effect, which was caused by the withdrawal of Marketel's counsel. Marketel has retained new counsel, and priceline.com now anticipates moving forward with discovery. Defending the lawsuit may involve significant expense and, due to the inherent uncertainties of litigation, there can be no certainty as to the ultimate outcome. Pursuant to the terms of the indemnification obligations contained in the Purchase and Intercompany Agreement with Walker Digital, Walker Digital has agreed to indemnify priceline.com for damages, liability and legal expenses incurred in connection with the Marketel litigation. From time to time priceline.com 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 the company. Such claims, even if not meritorious, could result in the expenditure of significant financial and managerial resources. EMPLOYEES Currently, priceline.com has 266 full-time employees. In addition, through an Intercompany Agreement with Walker Digital Corporation, priceline.com receives a variety of services, including research and development, patent and other intellectual property services and technical support. Priceline.com also employs independent contractors to support its customer service and system support functions. See "Certain Transactions." Priceline.com has never had a work stoppage and its employees are not represented by any collective bargaining unit. It considers its relations with its employees to be good. Priceline.com's future success will depend, in part, on its ability to continue to attract, integrate, retain and motivate highly qualified technical and managerial personnel, for whom competition is intense. FACILITIES Priceline.com's executive, administrative and operating offices are located in approximately 40,000 square feet of leased office space located in Stamford, Connecticut. Priceline.com is subleasing this office space from Walker Digital on a month-to-month basis. Priceline.com also has guaranteed Walker Digital's obligations under a lease of office space in New York City that is used by both companies. Priceline.com anticipates that it will require additional space within the next 12 months to accommodate its anticipated growth and that suitable office space will be available on commercially reasonable terms. Priceline.com currently is negotiating a lease of new premises in Connecticut. The premises are substantially larger than priceline.com's current premises and, if a lease is signed, priceline.com's rental expense is likely to increase significantly. 68 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS Set forth below is certain information regarding the directors and executive officers of priceline.com as of the date hereof. Service with priceline.com prior to July 1998 was rendered to priceline.com's predecessor, priceline.com LLC.
NAME AGE POSITION - ------------------------------------------------ --- ------------------------------------------------ Richard S. Braddock............................. 57 Chairman and Chief Executive Officer Jay S. Walker................................... 43 Founder and Vice Chairman Daniel H. Schulman.............................. 41 President and Chief Operating Officer and Director Paul E. Francis................................. 44 Chief Financial Officer Ronald V. Rose.................................. 48 Chief Information Officer Timothy G. Brier................................ 51 Executive Vice President, Travel Melissa M. Taub................................. 36 Senior Vice President, General Counsel and Secretary Thomas P. D'Angelo.............................. 39 Vice President, Finance and Controller Paul A. Allaire................................. 60 Director Ralph M. Bahna(a)............................... 56 Director Paul J. Blackney(b)............................. 52 Director William E. Ford(b).............................. 38 Director Marshall Loeb(a)................................ 70 Director N.J. Nicholas, Jr.(a)........................... 59 Director Nancy B. Peretsman(b)........................... 45 Director
- ------------------------ (a) Member of the Compensation Committee. (b) Member of the Audit Committee. RICHARD S. BRADDOCK has served as Chairman of the board of directors and Chief Executive Officer of priceline.com since August 1998. From December 1997 to January 1999, he served as the non-executive Chairman of True North Communications, Inc., an advertising company, and Ion Laser Technology, a laser technology company. From September 1996 to August 1997, he served as a special advisor to General Atlantic Partners, LLC, a private equity fund. Mr. Braddock was a principal of Clayton, Dubilier & Rice, a private equity fund, from June 1994 through September 1995. He also served as Chief Executive Officer of Medco Containment Services during 1993. From 1973 to 1993, Mr. Braddock held a variety of positions at Citicorp and its principal subsidiary, Citibank, N.A., including President and Chief Operating Officer. Mr. Braddock also serves as a director of NewSub Services, Inc.; Amtec, Inc, a semiconductor equipment manufacturer; Eastman Kodak Company, an imaging products company; E*TRADE Group, Inc., a provider of online investing services; and Cadbury Schweppes plc, a global beverage and confectionery manufacturer. JAY S. WALKER is priceline.com's Founder and has served as Vice Chairman of the board of directors of priceline.com since August 1998. From inception through August 1998, he served as Chairman of the board of directors and Chief Executive Officer of priceline.com. Mr. Walker is an entrepreneur and has been actively engaged in the start-up of new enterprises for more than 15 years. Mr. Walker serves as Chairman of the board of directors of Walker Digital Corporation, which he founded in September 1994. In addition, he is the co-founder and non-executive Chairman of NewSub Services, Inc., a direct marketing firm he co-founded in 1992. DANIEL H. SCHULMAN has been the President and Chief Operating Officer of priceline.com since July 1, 1999. He has served as a director of priceline.com since July 15, 1999. From December 1998 to July 1999, 69 Mr. Schulman was President of the AT&T Consumer Markets Division of AT&T Corp., a telecommunications services company, and was appointed to the AT&T Operations Group, the company's most senior executive body. From March 1997 to November 1998, Mr. Schulman was President of AT&T WorldNet(SM) Service. From December 1995 to February 1997, he was Vice President, Business Services Marketing of the AT&T Business Markets Division and from May 1994 to November 1995, Mr. Schulman was Small Business Marketing Vice President of the AT&T Business Markets Division. Mr. Schulman also serves as director of iVillage, an Internet company focused on building an online community of women; the Global Internet Project, an international group committed to the worldwide growth of the Internet; INROADS, an organization providing opportunities for minorities in Fortune 500 companies; and Teach for America, an organization focused on selecting teachers for urban and inner city areas. PAUL E. FRANCIS has been the Chief Financial Officer of priceline.com since its inception. From June 1997 to December 1998, Mr. Francis also was Chief Financial Officer of Walker Digital. From April 1993 to February 1997, Mr. Francis was Executive Vice President--Finance and Administration, Chief Financial Officer and a member of the Board of Directors of Ann Taylor Stores Corporation, a specialty retailer of women's apparel. From 1986 to April 1993, Mr. Francis served in a variety of positions at Merrill Lynch & Co. and certain of its affiliates, including Managing Director in the Investment Banking Division. RONALD V. ROSE has been the Chief Information Officer of priceline.com since March 1999. From September 1995 to March 1999, Mr. Rose served in various capacities with Standard & Poor's, a financial services company, including Chief Technology Officer of Retail Markets. While at Standard & Poor's, Mr. Rose led the development of many Internet initiatives within the Financial Information Services area and chaired the Internet Architecture Council. In 1998, Mr. Rose assisted in creating Xpresso, a leading JAVA financial desktop computer, and from 1991 to 1995, Mr. Rose assisted Bedford Associates, Inc., a technology company, in creating two technology start-up business units focused on telecommunications and technology consulting. TIMOTHY G. BRIER has been an Executive Vice President, Travel of priceline.com since its inception, and the President of Priceline Travel since June 1998. In 1994, Mr. Brier co-founded CAP Systems, a division of NewSub Services, Inc., that provides affinity marketing programs to airlines, and served as its President from 1995 to 1998. From 1990 to 1995, he was Vice President of Marketing for Continental Airlines. From 1988 to 1990, Mr. Brier was Vice President of Marketing Planning for Pan American World Airways and from 1985 to 1988 was Vice President of Marketing for TWA. MELISSA M. TAUB has been Senior Vice President, General Counsel and Secretary of priceline.com since September 1998. Prior to joining priceline.com, Ms. Taub practiced law in the Business Clients Department of Cummings & Lockwood, a law firm with its principal office located in Stamford, Connecticut, serving as a partner from January 1998 to September 1998 and an associate from 1989 to December 1997. THOMAS P. D'ANGELO has been Vice President, Finance and Controller of priceline.com since October 1997. From April 1993 to October 1997, he was Chief Financial Officer of Direct Travel, Inc., a corporate travel agency. Mr. D'Angelo has spent the last 19 years in the travel industry holding various financial management positions with leading travel management companies. PAUL A. ALLAIRE has served as a director of priceline.com since February 1999. Since 1991, he has been the Chairman of the Board of Directors and the Chairman of the Executive Committee of Xerox Corporation, a company offering document processing services and products, and from 1990 to May 1999, he was the Chief Executive Officer of Xerox. Mr. Allaire also serves as a director of various affiliates of Xerox. Mr. Allaire also serves as a director of J.P. Morgan & Co., Inc., a global financial services company; Lucent Technologies Inc., a global communications systems and software company; Sara Lee Corporation, a global consumer packaged goods company; and SmithKline Beecham p.l.c., a healthcare company. 70 Mr. Allaire is a member of the Business Council and is a member of the board of directors of the Council on Foreign Relations, the Ford Foundation, and the Council on Competitiveness. RALPH M. BAHNA has served as a director of priceline.com since July 1998. Since 1992, Mr. Bahna has been the President of Masterworks Development Corp., a company he founded to develop a chain of hotels named Club Quarters-TM-. From 1980 to 1989, Mr. Bahna served as the Chief Executive Officer of Cunard Lines, Ltd., and the Cunard Group of Companies. PAUL J. BLACKNEY has served as a director of priceline.com since July 1998. Mr. Blackney serves as Senior Vice President of Publishing and Federal Business Services for The American Medical Association. Since January 1998, he has been the Chairman of XTRA On-Line Corporation, a business to business desktop booking system. Since September 1993, he has been the Chairman and President of Galileo Japan. From September 1993 to September 1997, Mr. Blackney served as President and Chief Executive Officer of Apollo Travel Services Partnership, an airline central reservation system, and from March 1990 to September 1993, he served as Senior Vice President of Operations at Covia, an airline central reservation system. WILLIAM E. FORD has served as a director of priceline.com since July 31, 1998. He is a Managing Member of General Atlantic Partners, LLC, a private equity firm that invests globally in software services and related information technology companies, where he has served since 1991. Mr. Ford also serves as a director of GT Interactive Software Corp., an interactive entertainment software company; Quintiles Transnational Corp., a provider of full-service contract research, sales, marketing and healthcare policy consulting and health information management services to pharmaceutical, biotechnology, medical device and healthcare industries; LHS Group Inc., a billing solutions company; E*TRADE Group, Inc., an online discount broker; Eclipsys Corporation, a provider of clinical, financial and administrative software solutions to the healthcare industry; and several private information technology companies. He also serves as a director of NewSub Services, Inc. MARSHALL LOEB has served as a director of priceline.com since July 1998. He is the Editor of the COLUMBIA JOURNALISM REVIEW and the author of MARSHALL LOEB'S LIFETIME FINANCIAL STRATEGIES. Mr. Loeb also is the broadcast commentator for the CBS Radio Network "Your Dollars" program. Mr. Loeb is a member of the Board of Overseers for the Stern School of Business at New York University and is the Chairman of the Advisory Board of the Bagehot Fellows Program at Columbia University. From 1994 to 1996, he was a columnist for FORTUNE and from 1986 to 1994, he served as the Managing Editor of FORTUNE magazine. From 1980 to 1984, he also was Managing Editor of MONEY magazine. Mr. Loeb also has served as the Business Editor, Nation Editor and Economics Editor of TIME magazine. N. J. NICHOLAS, JR. has served as a director of priceline.com since July 1998. Mr. Nicholas is a private investor and from 1990 to 1992 was the co-Chief Executive Officer of Time Warner Inc. From 1986 to 1990, he was President of Time Inc. Mr. Nicholas also is a director of BT Capital Partners, an affiliate of Bankers Trust; Boston Scientific Corporation, a developer, manufacturer and marketer of medical devices; and Xerox Corporation, a document processing company. He also serves on the boards of several privately owned companies, including NewSub Services, Inc., and is Chairman of the Advisory Board of the Columbia University Graduate School of Journalism. NANCY B. PERETSMAN has served as a director of priceline.com since February 1999. Since June 1995, she has been a Managing Director and Executive Vice President of Allen & Company Incorporated, an investment bank. Prior to joining Allen & Company Incorporated, Ms. Peretsman had been an investment banker since 1983 at Salomon Brothers Inc, where she was a Managing Director since 1990. She served for fourteen years on the Board of Trustees of Princeton University and is currently an Emerita Trustee. Ms. Peretsman also is Vice Chairman of the board of The New School and serves on the board of Oxygen Media, an Internet and cable television enterprise. Ms. Peretsman also serves on the board of NewSub Services, Inc. 71 BOARD COMMITTEES Priceline.com's board of directors has an Audit Committee and a Compensation Committee. The Audit Committee of the board consists of Messrs. Paul J. Blackney, William E. Ford and Ms. Nancy B. Peretsman. The Audit Committee reviews priceline.com's financial statements and accounting practices, makes recommendations to the board regarding the selection of independent auditors and reviews the results and scope of the audit and other services provided by priceline.com's independent auditors. Mr. Ford is Chairman of the Audit Committee. The Compensation Committee of the board consists of Messrs. Paul A. Allaire, Ralph M. Bahna and N.J. Nicholas, Jr. The Compensation Committee makes recommendations to the board concerning salaries and incentive compensation for priceline.com's officers and employees and administers priceline.com's employee benefit plans. Mr. Nicholas is Chairman of the Compensation Committee. DIRECTOR COMPENSATION Directors who are also employees of priceline.com receive no compensation for serving on the board of directors. With respect to directors who are not employees of priceline.com, priceline.com reimburses such non-employee directors for all travel and other expenses incurred in connection with attending board of directors and committee meetings. Non-employee directors are also eligible to receive stock option grants under the 1997 Omnibus Plan. Pursuant to such plan, Messrs. Bahna, Blackney, Ford, Loeb and Nicholas and Ms. Peretsman received grants of 31,250 options each in December 1998 and Mr. Allaire received a grant of 37,500 options in December 1998. Such options have vested and are exercisable at any time at an exercise price of $3.20 per share, subject to certain restrictions described under "Shares Eligible for Future Sale." COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION None of the members of the Compensation Committee of the board of directors is an officer or employee of priceline.com. No executive officer of priceline.com serves as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving on priceline.com's Compensation Committee. SUMMARY OF COMPENSATION The following table sets forth information concerning compensation earned in the fiscal year ended December 31, 1998, by priceline.com's Chief Executive Officer and its other four most highly compensated executive officers. 72 SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION ------------- NUMBER OF ANNUAL COMPENSATION SECURITIES ----------------------------------- UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) OPTIONS (#) COMPENSATION ($) - -------------------------------------------------- --------- ----------- ----------- ------------- ------------------- Richard S. Braddock(a)............................ 1998 112,500 -- 6,250,000 --(b) Chairman and Chief Executive Officer Jay S. Walker(c).................................. 1998 250,000 -- 1,515,000 -- Vice Chairman and Founder Jesse M. Fink(d).................................. 1998 227,083 -- 2,443,750 1,028(e) Chief Operating Officer Paul E. Francis................................... 1998 225,000(f) -- 1,035,000 413(e) Chief Financial Officer Timothy G. Brier.................................. 1998 177,083 72,917 2,003,125 6,789(e) Executive Vice President, Travel
- ------------------------------ (a) Mr. Braddock commenced serving as Chairman and Chief Executive Officer in August 1998. (b) Excludes the grant to Mr. Braddock in July 1998 of a profits interest with respect to 6,500,000 units in priceline.com's predecessor, priceline.com LLC, which units were converted into 8,125,000 shares of common stock. (c) Mr. Walker served as Chairman and Chief Executive Officer of priceline.com LLC from its formation until its conversion into priceline.com in August 1998, and of priceline.com from its inception until August 1998. (d) Effective June 30, 1999, Mr. Fink resigned from his position as Chief Operating Officer of priceline.com. Mr Fink is an employee of Walker Digital. (e) Represents life insurance premiums paid and, in the case of Mr. Fink, disability insurance premiums paid for the fiscal year. (f) Includes distributions as a member in priceline.com's predecessor, priceline.com LLC. STOCK OPTIONS The following table sets forth information concerning the grant of stock options to priceline.com's Chief Executive Officer and each of its other four most highly compensated executive officers during the fiscal year ended December 31, 1998. OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS (A) -------------------------------------------------------------------- NUMBER OF % OF TOTAL GRANT DATE SECURITIES OPTIONS GRANTED EXERCISE OR PRESENT UNDERLYING OPTIONS TO EMPLOYEES IN BASE PRICE EXPIRATION VALUE NAME GRANTED (#) FISCAL YEAR ($/SH) DATE ($) (B) - ------------------------------------- ------------------- ------------------- ------------- ----------- ----------- Richard S. Braddock.................. 6,250,000 30.6 0.80 6/1/2008 812,579 Jay S. Walker........................ 1,515,000 7.4 0.80 6/1/2008 196,969 Jesse M. Fink (c).................... 2,443,750 12.0 0.80 6/1/2008 317,718 Paul E. Francis...................... 1,035,000 5.1 0.80 6/1/2008 139,563 Timothy G. Brier..................... 2,003,125 9.8 0.80 6/1/2008 260,431
- ------------------------------ (a) Options become exercisable as follows: (1) with respect to Mr. Braddock: 6,250,000 shares have vested, but are not exercisable until September 26, 1999; (2) with respect to Mr. Walker: (a) 1,382,500 shares are vested, but are not exercisable until September 26, 1999, and (b) the remainder of the shares vest and become exercisable on June 1, 2000; (3) with respect to Mr. Fink: 2,443,750 shares are vested, but are not exercisable until September 26, 1999; (4) with respect to Mr. Francis: (a) 750,000 shares are vested, but are not exercisable until September 26, 1999, and (b) the remainder of the shares vest and become exercisable on June 1, 2000; and (5) with respect to Mr. Brier: (a) 50,000 options have been exercised; (b) 1,512,500 shares are vested, but are not exercisable until September 26, 1999; and (c) the remainder of the shares vest and become exercisable on June 1, 2000. 73 (b) Based on Black-Scholes pricing model, using a discount rate of 6 percent, an expected life of 3 years, no dividends and no volatility. (c) Effective June 30, 1999, Mr. Fink resigned from his position as Chief Operating Officer of priceline.com. Mr. Fink is an employee of Walker Digital. EXERCISE OF OPTIONS AND YEAR-END VALUES The following table sets forth information concerning the exercise of stock options during the fiscal year ended December 31, 1998 by priceline.com's Chief Executive Officer and each of its other four most highly compensated executive officers and the fiscal year-end value of unexercised options. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
VALUE OF NUMBER OF SHARES UNEXERCISED UNDERLYING IN-THE-MONEY UNEXERCISED OPTIONS VALUE OPTIONS AT FY-END (#) AT FY-END ($) (A) SHARES ACQUIRED REALIZED EXERCISABLE/ EXERCISABLE/ NAMES ON EXERCISE (#) ($) UNEXERCISABLE UNEXERCISABLE - -------------------------------------- --------------- ----------- --------------------- ------------------- Richard S. Braddock................... -- -- 0/6,250,000 0/18,750,000 Jay S. Walker......................... -- -- 0/1,515,000 0/4,545,000 Jesse M. Fink (b)..................... -- -- 0/2,443,750 0/7,331,250 Paul E. Francis....................... -- -- 0/1,035,000 0/3,105,000 Timothy G. Brier...................... -- -- 0/2,003,125 0/6,009,375
- ------------------------------ (a) Assumes a fiscal year-end market price of $3.20 per share. (b) Effective June 30, 1999, Mr. Fink resigned from his position as Chief Operating Officer of priceline.com. Mr. Fink is an employee of Walker Digital. STOCK BASED PLANS Pursuant to the priceline.com Incorporated 1997 Omnibus Plan, priceline.com has granted awards of options to certain officers, other employees, consultants and directors of priceline.com. The maximum number of shares of common stock reserved for the grant or settlement of awards under the 1997 Omnibus Plan is 23,875,000, subject to adjustment as provided therein. Of such number, 22,752,886 options covering shares of common stock were outstanding under the 1997 Omnibus Plan as of August 10, 1999. In February 1999, priceline.com established the priceline.com Incorporated 1999 Omnibus Plan, pursuant to which awards will be made to certain officers, other employees, consultants and directors of priceline.com from time to time following the consummation of this offering. The maximum number of shares of common stock reserved for the grant or settlement of awards under the 1999 Omnibus Plan is 9,375,000, subject to adjustment. Of such number, options covering 3,829,505 shares of common stock were outstanding under the 1999 Omnibus Plan as of August 10, 1999. Set forth below is a description of the provisions of the 1999 Omnibus Plan and the provisions of the 1997 Omnibus Plan. The description is only a summary and is qualified in its entirety by the provisions of such plans. Terms not defined herein have the meanings given to such terms in the respective plans. PRICELINE.COM INCORPORATED 1997 OMNIBUS PLAN The 1997 Omnibus Plan was ratified and approved by the board of directors and stockholders of priceline.com and by the Board of Managers and the members of priceline.com LLC in 1997. The 1997 Omnibus Plan is intended to promote the long term financial interests and growth of priceline.com by providing employees, officers, directors and consultants of priceline.com with appropriate incentives and rewards to enter into and continue in the employ of, or their relationship with, the company and to acquire a proprietary interest in the long-term success of the company; and to reward the performance of 74 individual officers, other employees, consultants and directors in fulfilling their responsibilities for long-range achievements. GENERAL The 1997 Omnibus Plan provides for the granting of awards to such officers, other employees, consultants and directors of priceline.com and its affiliates as the compensation committee, which is the committee of the board appointed to administer the 1997 Omnibus Plan, may select from time to time. Awards under the 1997 Omnibus Plan may be made in the form of options to acquire priceline.com common stock. Some of the options granted under the 1997 Omnibus Plan may qualify as "incentive stock options;" as defined in the Internal Revenue Code of 1986, generally referred to as the "Code," and some of the options granted under the 1997 Omnibus Plan will not qualify as incentive stock options. Such options are generally referred to as "non-qualified stock options." Awards under the 1997 Omnibus Plan may also be made in the form of appreciation rights with respect to common stock, which appreciation rights may be granted in tandem with other awards or may be granted independent of other awards, or may be made in the form of restricted stock, phantom stock, stock bonuses or other awards. If any shares subject to an award are forfeited, cancelled, exchanged or surrendered or if an award otherwise terminates or expires without a distribution of shares to the holder of such award, the shares of common stock with respect to such award will, to the extent of any such forfeiture, cancellation, exchange, surrender, termination or expiration, again be available for awards under the 1997 Omnibus Plan. In the event that the compensation committee determines that any dividend or other distribution (whether in the form of cash, common stock, or other property), recapitalization, stock split, reverse split, reorganization, merger, consolidation, spin-off, combination, repurchase, or share exchange, or other similar corporate transaction or event, affects the common stock such that an adjustment is appropriate in order to prevent dilution or enlargement of the rights of holders of awards under the 1997 Omnibus Plan, then the compensation committee will make such equitable changes or adjustments as it deems necessary or appropriate to any or all of (1) the number and kind of shares of common stock or other property (including cash) that may thereafter be issued in connection with awards; (2) the number and kind of shares of common stock or other property (including cash) issued or issuable in respect of outstanding awards; (3) the exercise price, grant price, or purchase price relating to any award; and (4) the maximum number of shares of common stock subject to outstanding awards that may be awarded to any employee during any priceline.com tax year; provided that, with respect to incentive stock options, such adjustment shall be made in accordance with the applicable provisions of the Code. ADMINISTRATION The 1997 Omnibus Plan will be administered by the compensation committee. The compensation committee has the authority in its sole discretion, subject to and not inconsistent with the express provisions of the 1997 Omnibus Plan, to administer the 1997 Omnibus Plan and to exercise all the powers and authorities either specifically granted to it under, or necessary or advisable in the administration of, the 1997 Omnibus Plan, including, without limitation, the authority to grant awards; to determine the persons to whom and the time or times at which awards shall be granted; to determine the type and number of awards to be granted, the number of shares of common stock to which an award may relate and the terms, conditions, restrictions and performance goals relating to any award; to determine whether, to what extent, and under what circumstances an award may be settled, canceled, forfeited, exchanged, or surrendered; to make adjustments in the performance goals in recognition of unusual or non-recurring events affecting priceline.com or the financial statements of priceline.com, to the extent not inconsistent with Section 162(m) of the Code, if applicable, or in response to changes in applicable laws, regulations, or accounting principles; to construe and interpret the 1997 Omnibus Plan and any award; to prescribe, amend and rescind rules and regulations relating to the 1997 Omnibus Plan; to determine the terms and 75 provisions of agreements evidencing awards; and to make all other determinations deemed necessary or advisable for the administration of the 1997 Omnibus Plan. The compensation committee may, in its absolute discretion, without amendment to the 1997 Omnibus Plan, (a) accelerate the date on which any option or stand-alone appreciation right granted under the 1997 Omnibus Plan becomes exercisable, waive or amend the operation of provisions respecting exercise after termination of employment or otherwise adjust any of the terms of such option or stand-alone appreciation right, (b) accelerate the vesting or waive any condition imposed with respect to any restricted stock, phantom stock or other awards and (c) otherwise adjust any of the terms applicable to any award. AWARDS UNDER THE 1997 OMNIBUS PLAN STOCK OPTIONS; STOCK APPRECIATION RIGHTS Unless otherwise determined by the compensation committee, options granted pursuant to the 1997 Omnibus Plan will become exercisable ratably over three years commencing on the first anniversary of the date of grant, but in no event may an option be exercised more than 10 years following the date of its grant. The "option exercise price," which is the purchase price per share payable upon the exercise of an option, will be established by the compensation committee; PROVIDED, HOWEVER, that incentive stock options may not have an exercise price less than the fair market value of a share of common stock on the date of grant. The option exercise price is payable by any one of the following methods or a combination thereof, to the extent permitted by the compensation committee: (1) in cash or by personal check, certified check, bank cashier's check or wire transfer; (2) subject to the approval of the compensation committee, in common stock owned by the participant for at least six months prior to the date of exercise and valued at their fair market value on the effective date of such exercise; or (3) subject to the approval of the compensation committee, by such other provision as the compensation committee may from time to time authorize. The compensation committee also has the authority to specify, at the time of grant or, with respect to non-qualified stock options at or after the time of grant, that a participant shall be granted a new non-qualified stock option, otherwise known as a "reload option," for a number of shares of common stock equal to the number of shares of common stock surrendered by the participant upon exercise of all or a part of an option in the manner described above, subject to the availability of common stock under the 1997 Omnibus Plan at the time of such exercise; PROVIDED, HOWEVER, that no reload option shall be granted to a non-employee director. Reload options shall be subject to such conditions as may be specified by the compensation committee in its discretion, subject to the terms of the 1997 Omnibus Plan. Appreciation rights with respect to priceline.com's common stock may be granted alone or in tandem with options. An appreciation right is a right to be paid an amount in cash for each share of common stock subject to the appreciation right equal to the excess of the fair market value of a share of common stock on the date the appreciation right is exercised over either the fair market value of a share of common stock on the date of grant, in case of a stand-alone appreciation right, or the exercise price of the related stock option, in case of a tandem appreciation right. RESTRICTED STOCK; PHANTOM STOCK A restricted stock award is an award of common stock and a phantom stock award is an award of the right to receive cash or common stock at a future date, in each case, that is subject to such restrictions on transferability and other restrictions, if any, as the compensation committee may impose at the date of grant or thereafter, which restrictions may lapse separately or in combination at such times, under such circumstances, including, without limitation, a specified period of employment or the satisfaction of pre-established performance goals, when granted to executive officers, in such installments, or otherwise, as the compensation committee may determine. The compensation committee may grant such restricted stock or phantom stock to such persons, in such amounts, and subject to such terms and conditions as the 76 compensation committee may determine in its discretion; PROVIDED, HOWEVER, that shares of restricted stock and phantom stock granted to executive officers may vest upon the attainment of performance goals pre-established by the compensation committee, based on one or more of the following criteria: return on total owner equity; earnings per share; pre-tax income or after-tax income; revenue; return on assets; increases in EBITDA; or such other criteria as the stockholders of priceline.com may approve. OTHER AWARDS Upon a determination by the compensation committee, an executive officer may receive awards of shares of common stock. In addition, other awards valued in whole or in part by reference to, or otherwise based on, common stock may be granted either alone or in addition to other awards under the 1997 Omnibus Plan. Subject to the provisions of the 1997 Omnibus Plan, the compensation committee will have the sole and complete authority to determine the persons to whom and the time or times at which such other awards will be granted, the number of shares of common stock to be granted pursuant to such other awards and all other conditions of such other awards. AMENDMENT; TERMINATION The board of directors or the compensation committee may suspend, revise, terminate or amend the 1997 Omnibus Plan at any time; PROVIDED, HOWEVER, that (1) stockholder approval will be obtained if and to the extent required under Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as amended, which is generally referred to as the "Exchange Act," or if and to the extent the board determines that such approval is required for purposes of satisfying Section 162(m) or Section 422 of the Code and (2) no such suspension, revision, termination or amendment may, without the consent of a participant, reduce the participant's rights under any outstanding award. CERTAIN FEDERAL INCOME TAX CONSEQUENCES The following discussion is a brief summary of the principal United States federal income tax consequences under current federal income tax laws relating to awards under the 1997 Omnibus Plan. This summary is not intended to be exhaustive and, among other things, does not describe state, local or foreign income and other tax consequences. NON-QUALIFIED STOCK OPTIONS An optionee will not recognize any taxable income upon the grant of a non-qualified stock option. Priceline.com will not be entitled to a tax deduction with respect to the grant of a non-qualified stock option. Upon exercise of a non-qualified stock option, the excess of the fair market value of the common stock on the exercise date over the option exercise price will be taxable as compensation income to the optionee and will be subject to applicable withholding taxes. Priceline.com will generally be entitled to a tax deduction at such time in the amount of such compensation income. The optionee's tax basis for the common stock received pursuant to the exercise of a non-qualified stock option will equal the sum of the compensation income recognized and the exercise price. In the event of a sale of common stock received upon the exercise of a non-qualified stock option, any appreciation or depreciation after the exercise date generally will be taxed as capital gain or loss. INCENTIVE STOCK OPTIONS An optionee will not recognize any taxable income at the time of grant or timely exercise of an incentive stock option and priceline.com will not be entitled to a tax deduction with respect to such grant or exercise. Exercise of an incentive stock option may, however, give rise to taxable compensation income subject to applicable withholding taxes, and a tax deduction to priceline.com, if the incentive stock option is not exercised on a timely basis (generally, while the optionee is employed by priceline.com or within 77 90 days after termination of employment) or if the optionee subsequently engages in a "disqualifying disposition," as described below. A sale or exchange by an optionee of shares acquired upon the exercise of an incentive stock option more than one year after the transfer of the shares to such optionee and more than two years after the date of grant of the incentive stock option will result in any difference between the net sale proceeds and the exercise price being treated as long-term capital gain or loss to the optionee. If such sale or exchange takes place within two years after the date of grant of the incentive stock option or within one year from the date of transfer of the incentive stock option shares to the optionee, such sale or exchange will generally constitute a "disqualifying disposition" of such shares that will have the following results: any excess of (x) the lesser of (1) the fair market value of the shares at the time of exercise of the incentive stock option and (2) the amount realized on such disqualifying disposition of the shares over (y) the option exercise price of such shares, will be ordinary income to the optionee, subject to applicable withholding taxes, and priceline.com will be entitled to a tax deduction in the amount of such income. Any further gain or loss after the date of exercise generally will qualify as capital gain or loss and will not result in any deduction by priceline.com. APPRECIATION RIGHTS The grant of appreciation rights has no federal income tax consequences at the time of grant. Upon the exercise of appreciation rights, the amount received is generally taxable as ordinary income, and priceline.com is entitled to a corresponding deduction. RESTRICTED STOCK A grantee will not recognize any income upon the receipt of restricted stock unless the holder elects under Section 83(b) of the Code, within thirty days of such receipt, to recognize ordinary income in an amount equal to the fair market value of the restricted stock at the time of receipt, less any amount paid for the shares. If the election is made, the holder will not be allowed a deduction for amounts subsequently required to be returned to priceline.com. If the election is not made, the holder will generally recognize ordinary income, on the date that the restrictions to which the restricted stock are subject are removed, in an amount equal to the fair market value of such shares on such date, less any amount paid for the shares. At the time the holder recognizes ordinary income, priceline.com generally will be entitled to a deduction in the same amount. Generally, upon a sale or other disposition of restricted stock with respect to which the holder has recognized ordinary income, for example, if a Section 83(b) election was previously made or the restrictions were previously removed, the holder will recognize capital gain or loss in an amount equal to the difference between the amount realized on such sale or other disposition and the holder's basis in such shares. PHANTOM STOCK The grant of phantom stock has no federal income tax consequences at the time of grant. Upon the receipt of payment, the amount received is generally taxable as ordinary income, and priceline.com is entitled to a corresponding deduction. OTHER TYPES OF AWARDS The grant of any other stock-based award generally will not result in income for the grantee or in a tax deduction for priceline.com. Upon the settlement of such an award, the grantee will recognize ordinary income equal to the aggregate value of the payment received, and priceline.com generally will be entitled to a tax deduction in the same amount. 78 PRICELINE.COM INCORPORATED 1999 OMNIBUS PLAN In February 1999, priceline.com established the 1999 Omnibus Plan. The 1999 Omnibus Plan is intended to promote the long-term financial interests and growth of priceline.com by providing employees of priceline.com with appropriate incentives and rewards to encourage them to enter into and continue in the employ of the company and to acquire a proprietary interest in the long-term success of the company; and to reward the performance of individual officers, other employees, consultants and directors in fulfilling their responsibilities for long-range achievements. GENERAL The 1999 Omnibus Plan provides for the granting of awards to such officers, other employees, consultants and directors of priceline.com and its affiliates as the compensation committee, which is the committee of the board of directors appointed to administer the Plan may select from time to time. Awards under the 1999 Omnibus Plan may be made in the form of incentive stock options, non-qualified stock options, restricted stock or other awards. The maximum number of shares of common stock reserved for the grant or settlement of awards under the 1999 Omnibus Plan is 9,375,000 subject to adjustment as provided in the 1999 Omnibus Plan. The maximum number of shares of common stock that may be awarded in respect of options, restricted stock and other awards to a single individual in any given year may not exceed 9,375,000, 3,125,000 and 6,250,000, respectively, which amounts are subject to adjustment as described below. Awards (either as options, restricted stock or other awards) will be made in a manner consistent with Section 162(m) of the Code. Shares of common stock acquired upon the exercise or settlement of awards may, in whole or in part, be authorized but unissued shares or shares that shall have been or may be reacquired by priceline.com in the open market, in private transactions or otherwise. If any shares subject to an award are forfeited, cancelled, exchanged or surrendered or if an award otherwise terminates or expires without a distribution of shares to the holder of such award, the shares of common stock with respect to such award will, to the extent of any such forfeiture, cancellation, exchange, surrender, termination or expiration, again be available for awards under the 1999 Omnibus Plan. Except as provided in an agreement evidencing the grant of an award, in the event that the compensation committee determines that any dividend or other distribution (whether in the form of cash, common stock, or other property), recapitalization, stock split, reverse split, reorganization, merger, consolidation, spin-off, combination, repurchase, or share exchange, or other similar corporate transaction or event, affects the common stock such that an adjustment is appropriate in order to prevent dilution or enlargement of the rights of holders of awards under the 1999 Omnibus Plan, then the compensation committee will make such equitable changes or adjustments as it deems necessary or appropriate to any or all of (1) the number and kind of shares of common stock or other property (including cash) that may thereafter be issued in connection with awards, (2) the number and kind of shares of common stock or other property, including cash, issued or issuable in respect of outstanding awards, (3) the exercise price, grant price, or purchase price relating to any award; provided that, with respect to incentive stock options, such adjustment shall be made in accordance with Section 424(h) of the Code, (4) the performance criteria with respect to an award and (5) the individual limitations applicable to awards. ADMINISTRATION The 1999 Omnibus Plan is administered by the compensation committee, the composition of which will at all times satisfy the provisions of Section 162(m) of the Code and Rule 16b-3 promulgated under the Exchange Act. The compensation committee has the authority, in its sole discretion, subject to and not inconsistent with the express provisions of the 1999 Omnibus Plan, to administer, and to exercise all the powers and authorities either specifically granted to it under, the 1999 Omnibus Plan or necessary or 79 advisable in the administration of the 1999 Omnibus Plan, including, without limitation, the authority to grant awards; to determine the persons to whom and the time or times at which awards shall be granted; to determine the type and number of awards to be granted, the number of shares of common stock to which an award may relate and the terms, conditions, restrictions and performance goals relating to any award; to determine whether, to what extent, and under what circumstances an award may be settled, canceled, forfeited, exchanged, or surrendered; to make adjustments in the performance goals in recognition of unusual or non-recurring events affecting priceline.com or the financial statements of priceline.com, to the extent not inconsistent with Section 162(m) of the Code, if applicable, or in response to changes in applicable laws, regulations, or accounting principles; to construe and interpret the 1999 Omnibus Plan and any award; to prescribe, amend and rescind rules and regulations relating to the 1999 Omnibus Plan; to determine the terms and provisions of agreements evidencing awards; and to make all other determinations deemed necessary or advisable for the administration of the 1999 Omnibus Plan. The compensation committee may, in its absolute discretion, without amendment to the 1999 Omnibus Plan, (a) accelerate the date on which any option granted thereunder becomes exercisable, waive or amend the operation of the 1999 Omnibus Plan provisions thereunder respecting exercise after termination of employment or otherwise adjust any of the terms of such option, (b) accelerate the vesting or waive any condition imposed with respect to any restricted stock and (c) otherwise adjust any of the terms applicable to any award. AWARDS UNDER THE 1999 OMNIBUS PLAN STOCK OPTIONS Unless otherwise determined by the compensation committee, options granted pursuant to the 1999 Omnibus Plan become exercisable ratably over three years commencing on the first anniversary of the date of grant. The "option exercise price," which is the purchase price per share payable upon the exercise of an option, will be established by the compensation committee; PROVIDED, HOWEVER, that the option exercise price may be no less than the fair market value of a share of common stock on the date of grant. The option exercise price is payable by any one of the following methods or a combination thereof: (1) in cash or by personal check, certified check, bank cashier's check or wire transfer; (2) subject to the approval of the compensation committee, in stock owned by the participant for at least six months prior to the date of exercise and valued at their fair market value on the effective date of such exercise; or (3) in such other manner as the compensation committee may from time to time authorize. RESTRICTED STOCK The compensation committee may grant restricted shares of common stock to such persons, in such amounts, and subject to such terms and conditions, including the attainment of performance goals, which performance goals may be based upon one or more of the following criteria: pre-tax or after-tax income; operating profit; return on equity, assets, capital or investment; earnings or book value per share; sales or revenues; operating expenses; stock price appreciation; and the implementation or completion of critical projects or processes, as the compensation committee may determine in its discretion. Unless the compensation committee determines otherwise, termination of employment during the restricted period will result in the forfeiture by the participant of all shares still subject to restrictions. OTHER AWARDS Other awards valued in whole or in part by reference to, or otherwise based on, common stock may be granted either alone or in addition to other awards under the 1999 Omnibus Plan. Subject to the provisions of the 1999 Omnibus Plan, the compensation committee has the sole and complete authority to determine the persons to whom and the time or times at which such other awards will be granted, the number of 80 shares of common stock to be granted pursuant to such other awards and all other conditions of such other awards, including the attainment of performance goals. OTHER FEATURES OF THE 1999 OMNIBUS PLAN In the event of a Change in Control, as defined in the 1999 Omnibus Plan, of priceline.com, all outstanding awards will become fully vested and/or immediately exercisable and any restrictions thereon will lapse. The board or the compensation committee may suspend, revise, terminate or amend the 1999 Omnibus Plan at any time; PROVIDED, HOWEVER, that no such action may, without the consent of a participant, reduce the participant's rights under any outstanding award. NEW PLAN BENEFITS Inasmuch as awards under the 1999 Omnibus Plan will be granted at the sole discretion of the compensation committee, it is not possible to determine the awards that will be granted at the time of the offering or during 1999. As of August 10, 1999, options covering 3,829,505 shares of common stock were outstanding under the 1999 Omnibus Plan. See "Option Grants in Last Fiscal Year." CERTAIN FEDERAL INCOME TAX CONSEQUENCES The following discussion is a brief summary of the principal United States Federal income tax consequences under current Federal income tax laws relating to awards under the 1999 Omnibus Plan. This summary is not intended to be exhaustive and, among other things, does not describe state, local or foreign income and other tax consequences. NON-QUALIFIED STOCK OPTIONS An optionee will not recognize any taxable income upon the grant of a non-qualified stock option. Priceline.com will not be entitled to a tax deduction with respect to the grant of a non-qualified stock option. Upon exercise of a non-qualified stock option, the excess of the fair market value of the common stock on the exercise date over the option exercise price will be taxable as compensation income to the optionee and will be subject to applicable withholding taxes. Priceline.com will generally be entitled to a tax deduction at such time in the amount of such compensation income. The optionee's tax basis for the common stock received pursuant to the exercise of a non-qualified stock option will equal the sum of the compensation income recognized and the exercise price. In the event of a sale of common stock received upon the exercise of a non-qualified stock option, any appreciation or depreciation after the exercise date generally will be taxed as capital gain or loss. INCENTIVE STOCK OPTIONS An optionee will not recognize any taxable income at the time of grant or timely exercise of an incentive stock option and priceline.com will not be entitled to a tax deduction with respect to such grant or exercise. Exercise of an incentive stock option may, however, give rise to taxable compensation income subject to applicable withholding taxes, and a tax deduction to priceline.com, if the incentive stock option is not exercised on a timely basis (generally, while the optionee is employed by priceline.com or within 90 days after termination of employment) or if the optionee subsequently engages in a "disqualifying disposition," as described below. A sale or exchange by an optionee of shares acquired upon the exercise of an incentive stock option more than one year after the transfer of the shares to such optionee and more than two years after the date 81 of grant of the incentive stock option will result in any difference between the net sale proceeds and the exercise price being treated as long-term capital gain or loss to the optionee. If such sale or exchange takes place within two years after the date of grant of the incentive stock option or within one year from the date of transfer of the incentive stock option shares to the optionee, such sale or exchange will generally constitute a "disqualifying disposition" of such shares that will have the following results: any excess of (a) the lesser of (i) the fair market value of the shares at the time of exercise of the Incentive Stock Option and (ii) the amount realized on such disqualifying disposition of the shares over (b) the option exercise price of such shares, will be ordinary income to the optionee, subject to applicable withholding taxes, and priceline.com will be entitled to a tax deduction in the amount of such income. Any further gain or loss after the date of exercise generally will qualify as capital gain or loss and will not result in any deduction by priceline.com. RESTRICTED STOCK A grantee will not recognize any income upon the receipt of restricted stock unless the holder elects under Section 83(b) of the Code, within thirty days of such receipt, to recognize ordinary income in an amount equal to the fair market value of the restricted stock at the time of receipt, less any amount paid for the shares. If the election is made, the holder will not be allowed a deduction for amounts subsequently required to be returned to priceline.com. If the election is not made, the holder will generally recognize ordinary income, on the date that the restrictions to which the restricted stock are subject are removed, in an amount equal to the fair market value of such shares on such date, less any amount paid for the shares. At the time the holder recognizes ordinary income, priceline.com generally will be entitled to a deduction in the same amount. Generally, upon a sale or other disposition of restricted stock with respect to which the holder has recognized ordinary income, for example, if a Section 83(b) election was previously made or the restrictions were previously removed, the holder will recognize capital gain or loss in an amount equal to the difference between the amount realized on such sale or other disposition and the holder's basis in such shares. OTHER TYPES OF AWARDS The grant of any other stock-based award generally will not result in income for the grantee or in a tax deduction for priceline.com. Upon the settlement of such an award, the grantee will recognize ordinary income equal to the aggregate value of the payment received, and priceline.com generally will be entitled to a tax deduction in the same amount. EMPLOYMENT ARRANGEMENTS BRADDOCK EMPLOYMENT AGREEMENT. Pursuant to an employment agreement, dated as of August 15, 1998, between priceline.com and Mr. Richard S. Braddock, Mr. Braddock serves as the Chairman and Chief Executive Officer of priceline.com through August 15, 2001. Pursuant to an agreement in principle entered into July 23, 1998, by and between priceline.com and Mr. Braddock in anticipation of entering into the employment agreement, Mr. Braddock received 6,500,000 equity units in priceline.com's predecessor, which have since been converted into 8,125,000 shares of common stock. Mr. Braddock also was granted an option to purchase up to 5,000,000 equity units in priceline.com's predecessor at an exercise price of $1.00 per share, subject to standard anti-dilution adjustments, which has been converted into an option to purchase 6,250,000 shares of common stock at an exercise price of $0.80 per share and which is fully vested. The option is not exercisable until September 26, 1999, upon expiration of the 180 day period following consummation of priceline.com's initial public offering. Under the terms of his employment agreement, Mr. Braddock is entitled to an initial annual base salary of $300,000, subject to annual 82 adjustment, and is eligible to participate in any cash bonus program that may be introduced by priceline.com. In connection with the execution of the employment agreement, Mr. Braddock also received an option to purchase an equity interest in Walker Digital from Walker Digital. SCHULMAN EMPLOYMENT AGREEMENT. Pursuant to an employment agreement, dated as of June 14, 1999, between priceline.com and Mr. Daniel H. Schulman, Mr. Schulman serves as the President and Chief Operating Officer of priceline.com. Under the terms of his employment agreement, Mr. Schulman is entitled to an annual base salary of $300,000, subject to adjustment, and is eligible to participate in any cash bonus program that may be introduced by priceline.com. Priceline.com also granted Mr. Schulman a ten year option to purchase up to 3,000,000 shares of common stock at an exercise price of $76.875 per share, subject to standard anti-dilution adjustments. The option: - currently is vested for 500,000 of such shares; - will vest for an additional 500,000 on December 31, 1999; - will vest for an additional 1,000,000 on December 31, 2000; and - will vest as to the balance of such shares on December 31, 2001, subject in each case, to acceleration or cancellation under certain circumstances in connection with the termination of his employment. In July 1999, priceline.com made a loan to Mr. Schulman in the amount of $6.0 million. The loan bears interest at 5.82% per annum. Interest and principal will be payable in July 2004. Mr. Schulman will be required to make prepayments of principal and accrued interest in an amount equal to 25% of his pre-tax proceeds over $10,000,000 from the exercise of his stock options until June 14, 2004, or unless earlier terminated, at which point any remaining outstanding amounts under the loan will be forgiven by priceline.com. Any remaining outstanding amounts under the loan will also be forgiven by priceline.com in the event of certain changes of control, death, or termination without cause. FINK EMPLOYMENT AGREEMENT. Pursuant to an employment agreement, dated as of January 1, 1998, as amended, between priceline.com, Walker Digital, Mr. Jay S. Walker and Mr. Jesse M. Fink, Mr. Fink served as the Chief Operating Officer of both priceline.com and Walker Digital. Effective June 30, 1999 Mr. Fink resigned as Chief Operating Officer of priceline.com. Under the terms of his employment agreement, Mr. Fink is entitled to an annual base salary of $225,000, subject to annual adjustment, and was eligible to participate in any cash bonus program that may be introduced by priceline.com. Prior to June 30, 1999, payment of Mr. Fink's salary was allocated between priceline.com and Walker Digital as mutually agreed. Since July 1, 1999, Mr. Fink's salary has been paid by Walker Digital. In addition, Mr. Fink was issued 2,700,000 equity units in the priceline.com LLC, which units have since been converted into 3,375,000 shares of common stock. Priceline.com also granted Mr. Fink an option to purchase up to 2,443,750 shares of common stock at an exercise price of $0.80 per share, subject to standard anti-dilution adjustments. The option is fully vested and is not exercisable until September 26, 1999. Under the terms of his employment agreement, Mr. Fink also is entitled to additional compensation from Walker Digital and Mr. Walker. In addition, the employment agreement provides that, upon the mutual agreement of Mr. Fink and Mr. Walker, Mr. Fink may be employed by an entity controlled by Mr. Walker, other than priceline.com or Walker Digital. BRIER EMPLOYMENT AGREEMENT. Pursuant to an employment agreement, dated as of July 23, 1998, as amended, between priceline.com and Mr. Timothy G. Brier, Mr. Brier serves as an Executive Vice President of priceline.com and as the President of Priceline Travel, Inc., through December 31, 2000. Under the terms of his employment agreement, Mr. Brier is entitled to an annual base salary of $250,000, and until April 6, 1999, was entitled to receive cash bonuses based upon the number of airlines and 83 consolidators that participate in the priceline.com service. Under certain circumstances, Mr. Brier may also be entitled to a compensatory bonus that is designed to ensure that his aggregate annual compensation for services rendered to priceline.com and CAP Systems, another entity affiliated with Mr. Walker for which Mr. Brier continues to provide services, equals $625,000. In addition, Mr. Brier was issued 1,200,000 equity units in priceline.com LLC, which have since been converted into 1,500,000 shares of common stock. Priceline.com also granted Mr. Brier an option to purchase up to 2,003,125 shares of common stock at an exercise price of $0.80 per share, subject to standard anti-dilution adjustments, of which 50,000 have been exercised. The option: - currently is vested for 1,512,500 of such shares that are not exercisable until 180 days after the date of this prospectus; and - will become exercisable for the balance of such shares on June 1, 2000, subject, in each case, to acceleration or cancellation under certain circumstances in connection with the termination of Mr. Brier's employment. INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS AND LIMITATION OF LIABILITY Section 145 of the Delaware General Corporation Law authorizes a corporation's board of directors to grant indemnity to directors and officers in terms sufficiently broad to permit such indemnification under certain circumstances for liabilities, including reimbursement for expenses incurred, arising under the Securities Act. As permitted by Delaware law, priceline.com's certificate of incorporation includes a provision that eliminates the personal liability of its directors for monetary damages for breach of fiduciary duty as a director, except for liability (1) for any breach of the director's duty of loyalty to priceline.com or its stockholders; (2) for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law; (3) under Section 174 of the Delaware General Corporation Law regarding unlawful dividends and stock purchases; or (4) for any transaction from which the director derived an improper personal benefit. As permitted by Delaware law, priceline.com's certificate of incorporation, provides that (1) priceline.com is required to indemnify its directors and officers to the fullest extent permitted by Delaware law, subject to certain very limited exceptions; (2) priceline.com is permitted to indemnify its other employees to the extent that it indemnifies its officers and directors, unless otherwise required by law, its certificate of incorporation, its by-laws or agreements; (3) priceline.com is required to advance expenses, as incurred, to its directors and officers in connection with a legal proceeding to the fullest extent permitted by Delaware law, subject to certain very limited exceptions; and (4) the rights conferred in the certificate of incorporation are not exclusive. 84 CERTAIN TRANSACTIONS Priceline.com was founded as a limited liability company in July 1997 and converted to a corporation in July 1998. In connection with this conversion, all equity units issued by priceline.com's predecessor were converted into an equal number of shares of common stock. The following discussion does not distinguish between priceline.com and its predecessor and the common stock and the equity units of priceline.com's predecessor. EQUITY TRANSACTIONS Upon its inception, priceline.com issued to Mr. Jay S. Walker, its Founder, 35,640,211 shares of common stock for services previously rendered. Priceline.com also issued 6,895,833 shares of common stock to Walker Digital, an affiliate of Mr. Walker, in partial consideration for the transfer of certain intellectual property to priceline.com and for the ongoing planning, maintenance and prosecution of the patents related to such rights. Subsequently, priceline.com sold an aggregate of 25,212,955 shares of common stock to Mr. Walker and his affiliates for $0.80 per share, the estimated fair market value of the shares at the time of the sale. Upon its inception, priceline.com issued to several officers of priceline.com an aggregate of 7,350,000 shares of common stock for services previously rendered. Of such shares, 3,375,000 shares were issued to Mr. Jesse M. Fink, 1,500,000 shares were issued to Mr. Timothy G. Brier and 675,000 shares were issued to Paul E. Francis. In October 1997, priceline.com sold 713,470 shares of common stock to Mr. Paul E. Francis, its Chief Financial Officer, for approximately $0.70 per share, the estimated fair market value of the shares at the time of the sale. In February 1998, priceline.com sold 2,854,875 shares of common stock to an affiliate of General Atlantic for approximately $0.70 per share, the estimated fair market value of the shares at the time of the sale. Affiliates of General Atlantic own in excess of 5 percent of the outstanding capital of priceline.com. On July 1, 1998, priceline.com sold 1,250,000 shares of common stock to Mr. Richard S. Braddock, its Chief Executive Officer, for $0.80 per share. In December 1998, priceline.com sold an additional 78,125 shares of common stock to Mr. Braddock for $3.20 per share. The per share purchase price for both transactions represented the estimated fair value of the shares at the time of such transactions. On July 1, 1998, priceline.com sold 312,500 shares of common stock to Mr. Ralph M. Bahna, who is a director of the company, for $0.80 per share, the estimated fair market value of the shares at the time of the sale. On July 1, 1998, priceline.com sold 625,000 shares of common stock to a family trust of Mr. N.J. Nicholas, Jr., who is a director of the company, for $0.80 per share, the estimated fair market value of the shares at the time of the sale. On July 31, 1998, priceline.com sold an aggregate of 17,288,684 shares of preferred stock to two affiliates of General Atlantic for approximately $1.16 per share, the estimated fair market value of the shares at the time of the sale. This preferred stock was automatically convertible into 21,610,855 shares of common stock upon the completion of priceline.com's initial public offering. In October 1998, priceline.com sold 107,758 shares of common stock to Mr. Paul J. Blackney, who is a director of the company, for approximately $0.93 per share, the estimated fair market value of the shares at the time of the purchase. In December 1998, priceline.com sold an aggregate of 13,837,500 shares of preferred stock to a group of investors for $4.00 per share, the estimated fair market value of the shares at the time of the sale. Of such shares, 7,500,000 shares were sold to Vulcan Ventures Incorporated, an aggregate of 1,437,500 shares 85 were sold to affiliates of General Atlantic and 275,000 shares were sold to Allen & Company Incorporated. Vulcan Ventures and affiliates of General Atlantic each own in excess of 5 percent of the capital stock of priceline.com. Ms. Nancy B. Peretsman, who is a director of priceline.com, also is a director and stockholder of Allen & Company. This preferred stock was automatically convertible into 17,296,875 shares of common stock upon the completion of priceline.com's initial public offering. RELATIONSHIP WITH WALKER DIGITAL The priceline.com core buyer driven commerce business model and related intellectual property rights were initially developed by Walker Digital, a technology research and development company that was founded and is controlled by Mr. Walker. In partial consideration for the transfer of such rights and for the ongoing planning, maintenance and prosecution of the patents related to such rights, priceline.com issued Walker Digital 6,895,833 shares of common stock. Priceline.com also granted Walker Digital a perpetual, non-exclusive, royalty-free right and license to use the intellectual property related to the priceline.com service for non-commercial internal research and development purposes. Priceline.com also has the right to purchase at fair market value any intellectual property that is owned and subsequently acquired, developed or discovered by Walker Digital that will provide significant value in the use or commercial exploitation of the priceline.com system. Walker Digital currently owns assets and intellectual property related to two new areas of e-commerce into which priceline.com may expand its "name your price" business model, one involving consumer-to-consumer sales and the other involving the sale of retail merchandise. Priceline.com may license its brand name and "name your price" business model to two new companies formed to develop these businesses. Walker Digital may contribute assets and intellectual property to these companies in return for an equity interest in these companies. Walker Digital owns the intellectual property rights underlying the technology associated with priceline.com's adaptive marketing programs. Walker Digital has licensed to priceline.com the right to use these intellectual property rights under a perpetual, non-exclusive, royalty-free license agreement. Walker Digital has pending several United States patent applications directed to different aspects of the processes and technology supporting priceline.com's adaptive marketing programs. Walker Digital and priceline.com provide each other with a variety of services. The services provided by priceline.com include various management and administrative services, for which priceline.com collects fees from Walker Digital. The services provided by Walker Digital include (1) research and development assistance; (2) patent planning, maintenance and prosecution; and (3) intellectual property services, including technical support. Walker Digital also subleases a portion of its Stamford, Connecticut facilities to priceline.com on a month-to-month basis. Additionally, priceline.com has guaranteed Walker Digital's obligations under a lease of 2,500 square feet for office space in a building in New York City that is used by both companies. The lease provides for annual rental payments of approximately $170,000 plus expenses for a term of five years. Pursuant to the terms of the indemnification obligations contained in the Purchase and Intercompany Agreement, Walker Digital has agreed to indemnify priceline.com for damages, liability and legal expenses incurred in connection with the Marketel litigation. Several of priceline.com's executive officers and other key employees also are directors, officers, employees or stockholders of Walker Digital and either own, or hold an option to purchase, equity securities of Walker Digital. Priceline.com issued a promissory note to Walker Digital for $1,000,000 in June 1998. The promissory note bore interest at a rate of 6% per annum and was due June 30, 1999. The note has been repaid. 86 MERGER OF PRICELINE TRAVEL, INC. INTO PRICELINE.COM Priceline.com's travel agency license was previously held by Priceline Travel, a separate company that was owned by Mr. Walker. As a result, all of priceline.com's airline ticket sales were effected through Priceline Travel. Priceline Travel was merged into priceline.com on March 24, 1999 for nominal consideration. OTHER TRANSACTIONS Priceline.com has implemented an option exercise program that enables its employees who were employed as of June 1, 1999 to sell, during an eleven-day period ending on July 30, 1999, a portion of the shares underlying their options vested on or before June 1, 1999, which otherwise would not have been exercisable until September 26, 1999. Seventy employees, including Ms. Melissa M. Taub and Messrs. Mark Benerofe, Timothy G. Brier and Thomas P. D'Angelo, participated in the option exercise program, pursuant to which 938,540 shares underlying their options were sold in the public market on their behalf through a cashless exercise program administered by Morgan Stanley & Co. Incorporated. After expiration of the eleven-day period, such employees agreed to an extended 180-day lock-up period on the balance of their unsold option shares, representing 7,676,356 in aggregate, that restricts the exercise of their remaining options and sale of the underlying shares until 180 days after the date of this prospectus. Employees who had no options vested as of June 1, 1999 and former employees, directors and consultants were not eligible to participate in the option exercise program. In July 1999, priceline.com made a loan to Mr. Daniel H. Schulman, the new President and Chief Operating Officer of priceline.com in the amount of $6.0 million. The loan bears interest at 5.82% per annum. Interest and principal will be payable in July 2004. Mr. Schulman will be required to make prepayments of principal and accrued interest in an amount equal to 25% of his pre-tax proceeds over $10,000,000 from the exercise of his stock options until June 14, 2004, or unless earlier terminated, at which point any remaining outstanding amounts under the loan will be forgiven by priceline.com. Any remaining outstanding amounts under the loan will also be forgiven by priceline.com in the event of certain changes in control, death or termination without cause. In April 1999, priceline.com made a $3.3 million loan to Mr. Richard S. Braddock for the payment of taxes related to the issuance to Mr. Braddock of 8,125,000 shares of common stock in August 1998. The loan bears interest at 5.28% per annum. Interest is payable annually and principal is payable in January 2004. Priceline.com has entered into compensation arrangements with certain of its directors and officers. See "Management--Summary of Compensation" and "--Stock Based Plans." Priceline.com received a loan in the amount of $1.0 million on July 14, 1998 from Mr. Michael Loeb, a relative of Mr. Marshall Loeb, who is a director of the company, and a loan in the amount of $500,000 on July 17, 1998 from Mr. Francis. The interest rate on each of the loans was 10%. As of the date of this prospectus, both of the loans have been repaid. Priceline.com has granted registration rights to certain stockholders and warrant holders. See "Description of Capital Stock--Registration Rights." In February 1999, priceline.com made a payment of $850,000 to Allen & Company Incorporated for financial advisory services. Ms. Peretsman, who is a director of priceline.com, is a director and stockholder of Allen & Company. Mr. Richard S. Braddock invested as a limited partner of an affiliate of General Atlantic from August 1996 to December 31, 1998 and served as a special advisor to General Atlantic from September 1996 to August 1997. Mr. Braddock, however, did not participate in any of the investments by affiliates of General Atlantic in priceline.com. 87 Messrs. Richard S. Braddock and William E. Ford are members of the board of directors of E*TRADE Group, Inc., which has a co-marketing agreement with priceline.com to establish an adaptive marketing program under which E*TRADE compensates priceline.com for offering priceline.com customers the opportunity to open an account with E*TRADE while visiting or making an offer on the priceline.com Web site. See "Business--Strategic Alliances--Adaptive Marketing Alliances." Priceline.com offers its magazine subscription promotion pursuant to a revenue sharing arrangement with NewSub Services, Inc., a direct marketing firm that is an affiliate of Mr. Jay S. Walker. Under this arrangement, priceline.com shares in a percentage of the revenues generated upon the conversion of priceline.com generated subscriptions to annual subscriptions after a six month free trial period. Affiliates of General Atlantic have invested approximately $59.3 million in NewSub Services. In connection with this offering, priceline.com has agreed to indemnify the selling stockholders, which include various related parties of priceline.com, for liabilities arising under the Securities Act and to pay certain expenses of this offering. In connection with the concurrent common stock offering, priceline.com has agreed to indemnify the selling stockholders, which include various related parties of priceline.com, for liabilities under the Securities Act and to pay certain expenses of such offering. 88 PRINCIPAL AND SELLING STOCKHOLDERS The following table sets forth certain information known to priceline.com with respect to beneficial ownership of priceline.com's common stock as of August 10, 1999 by (1) each stockholder known by priceline.com to be the beneficial owner of more than 5% of priceline.com's common stock; (2) each director of priceline.com; (3) priceline.com's Chief Executive Officer and each of its other four most highly compensated executive officers; (4) all executive officers and directors as a group; and (5) the selling stockholders in the concurrent common stock offering.
SHARES BENEFICIALLY SHARES SHARES BENEFICIALLY OWNED PRIOR TO BEING OWNED AFTER OFFERING(A) SOLD(A) OFFERING(A) -------------------------- ---------- -------------------------- NAME OF BENEFICIAL OWNER NUMBER PERCENT NUMBER NUMBER PERCENT - -------------------------------------------------- ------------- ----------- ---------- ------------- ----------- Jay S. Walker(b).................................. 62,504,373 43.2% -- 62,229,228 42.0% Richard S. Braddock(c)............................ 17,829,125 11.9 202,313 17,625,812 11.5 Timothy G. Brier(d)............................... 3,012,700 2.1 72,832 2,939,868 2.0 Paul E. Francis(e)................................ 2,107,220 1.5 30,000 2,034,388 1.4 Daniel H. Schulman(f)............................. 500,000 * -- 500,000 * Paul A. Allaire(g)................................ 56,200 * -- 56,200 * Ralph M. Bahna(h)................................. 344,750 * -- 344,750 * Paul J. Blackney(i)............................... 140,008 * -- 140,008 * William E. Ford(j)................................ 26,296,353 18.3 -- 25,648,103 17.5 Marshall Loeb(k).................................. 32,250 * -- 32,250 * N. J. Nicholas, Jr.(l)............................ 3,906,250 2.7 -- 3,906,250 2.7 Nancy B. Peretsman(m)............................. 2,906,250 2.0 -- 2,906,250 2.0 Paul Breitenbach(n)............................... 1,591,950 1.1 72,832 1,519,118 1.0 T. Scott Case(o).................................. 2,200,000 1.5 72,832 2,127,168 1.4 Jesse M. Fink(p).................................. 5,805,750 4.0 202,313 5,603,437 3.8 Michael Loeb...................................... 200,000 * 69,648 130,352 * Jim Manzi(q)...................................... 312,500 * 5,862 304,787 * Jonathan Otto..................................... 1,250,000 * 121,387 1,128,613 * General Atlantic Partners, LLC(j)................. 26,296,353 18.3 648,250 25,648,103 17.5 Vulcan Ventures Incorporated(r)................... 9,375,000 6.5 231,406 9,143,594 6.2 Yarmouth Limited Partnership(q)................... 312,500 * 1,851 304,787 * Walker Digital Corporation(b)..................... 62,504,373 43.2 202,313 62,229,228 42.0 Delta Airlines, Inc.(s)........................... 18,619,402 13.0 1,523,329 17,096,073 11.6 Strypemonde Foundation(t)......................... 42,832 * 42,832 -- * All directors and executive officers as a group, including (b)-(m) (15 persons) (u).............. 119,952,445 78.2% 1,198,540 118,680,074 75.6%
- ------------------------ * Represents beneficial ownership of less than one percent. (a) Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Shares of common stock and options or warrants that are currently exercisable or exercisable within 60 days of August 10, 1999 are deemed to be outstanding and to be beneficially owned by the person holding such options for the purpose of computing the percentage ownership of such person, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person. The number of shares being sold excludes any shares that may be sold as a result of the exercise by the underwriters of their over-allotment option, which if exercised, will be allocated pro rata among the selling stockholders. 89 (b) Includes: (1) 7,520,833 shares held by Walker Digital Corporation, of which Mr. Walker is Founder, Chairman and the controlling stockholder, including an aggregate of 228,171 shares as to which Walker Digital has granted options to certain of its employees and consultants; (2) 5,500,000 shares held by The Jay Walker Irrevocable Credit Trust; (3) 1,000 shares held by an immediate family member of Mr. Walker, as to which Mr. Walker disclaims beneficial ownership; (4) 48,100,041 shares held by Mr. Walker individually, including an aggregate of 4,534,800 shares as to which Mr. Walker has granted options to certain individuals, of which, options to purchase 72,832 shares to be exercised by Mr. Paul Breitenbach in connection with this offering. Also includes options outstanding to purchase 1,382,500 shares which are vested but not exercisable until September 26, 1999. Excludes 132,500 shares subject to options that are not vested or exercisable within 60 days of August 10, 1999. Shares beneficially owned after the concurrent common stock offering reflect the sale of 202,312 shares by Walker Digital Corporation. The address of Walker Digital Corporation is Five High Ridge Park, Stamford, Connecticut 06905. Mr. Walker has agreed to a 180 day lockup with the underwriters in connection with the concurrent common stock offering. (c) Includes: (1) 5,000,000 shares held by Richard S. Braddock as Trustee of The Richard S. Braddock 1999 Annuity Trust; and (2) 1,000 shares held by an immediate family member of Mr. Braddock, as to which Mr. Braddock disclaims beneficial ownership. Also includes options outstanding to purchase 6,250,000 shares which are vested but are not exercisable until September 26, 1999. Includes options to purchase 250,000 shares that are currently exercisable for shares owned by Mr. Walker. Mr. Braddock has agreed to a 180 day lockup with the underwriters in connection with the concurrent common stock offering. (d) Includes: (1) 500,000 shares held by The Timothy Brier 1998 Grantor Retained Annuity Trust, of which 8,092 shares are being sold in the concurrent common stock offering; and (2) 7,700 shares held by immediate family members of Mr. Brier, as to which Mr. Brier disclaims beneficial ownership. Includes options outstanding to purchase 1,512,500 shares which are vested but not exercisable until 180 days after the date of this prospectus. Excludes 440,625 shares subject to options that are not vested or exercisable within 60 days of August 10, 1999. (e) Includes: (1) 62,500 shares held by The Paul E. Francis 1998 Trust, dated April 1, 1998; and (2) 125,000 shares held by The Paul E. Francis 1999 Grantor Retained Annuity Trust. Includes options outstanding to purchase 750,000 shares which are vested but not exercisable until September 26, 1999. Excludes 285,000 shares subject to options that are not vested or exercisable within 60 days of August 10, 1999. Excludes 42,832 shares owned by the Strypemonde Foundation, a charitable foundation established by Mr. Francis and his spouse. Also excludes 15,625 shares held by The Paul E. Francis 1998 Trust, dated December 2, 1998, and 15,625 shares held by The Paul E. Francis 1999 Trust, dated February 26, 1999, which were established by Mr. Francis for unrelated individuals. (f) Includes options outstanding to purchase 500,000 shares which are vested but not exercisable until September 26, 1999. Excludes 2,500,000 shares subject to options that are not vested or exercisable within 60 days of August 10, 1999. (g) Includes options outstanding to purchase 37,500 shares which are vested but not exercisable until September 26, 1999. (h) Includes options outstanding to purchase 31,250 shares which are vested but not exercisable until September 26, 1999. (i) Includes options outstanding to purchase 31,250 shares which are vested but not exercisable until September 26, 1999. (j) Includes 26,265,103 shares held by various General Atlantic entities. In addition, includes options outstanding to purchase 31,250 shares which are vested but not exercisable until September 26, 1999, which options are held by Mr. Ford. Mr. Ford, a director of priceline.com, is a managing member of General Atlantic Partners, LLC and a general partner of certain General Atlantic entities. Mr. Ford disclaims beneficial ownership of the 26,265,103 shares referred to above, except to the extent of his 90 pecuniary interest therein. General Atlantic disclaims beneficial ownership of the 31,250 options referred to above. Shares beneficially owned after the concurrent common stock offering reflect the sale of 648,250 shares by various General Atlantic entities. The address of General Atlantic is 3 Pickwick Plaza, Greenwich, Connecticut 06830. The General Atlantic entities have agreed to a 180 day lockup with the underwriters in connection with the concurrent common stock offering. (k) Includes: (1) 1,000 shares held by an immediate family member of Mr. Loeb; and (2) options outstanding to purchase 31,250 shares which are vested but not exercisable until September 26, 1999 and which are held by Mr. Loeb's daughter, as to which Mr. Loeb disclaims beneficial ownership. (l) Includes 3,125,000 shares held by Gore Creek Trust, as to which Mr. Nicholas disclaims beneficial ownership. Includes options held by Gore Creek Trust to purchase 750,000 shares that are currently exercisable for shares owned by Mr. Jay S. Walker, as to which Mr. Nicholas disclaims beneficial ownership. Also includes options outstanding to purchase 31,250 shares which are vested but not exercisable until September 26, 1999. (m) Includes: (1) 1,343,750 shares held by Allen & Company Incorporated on its own behalf and on behalf of certain of its officers, directors and employees; (2) options held by Allen & Company Incorporated to purchase 571,875 shares owned by Mr. Jay S. Walker; (3) 959,375 shares held by Ms. Nancy B. Peretsman; and (4) options held by Ms. Peretsman to purchase 31,250 shares, which options are vested but not exercisable until September 26, 1999. Ms. Peretsman, who is a Managing Director and Executive Vice President of Allen & Company Incorporated, disclaims beneficial ownership of the shares and options referred to in clauses (1) and (2) above, except to the extent of her pecuniary interest therein. Allen & Company disclaims beneficial ownership of the shares and options referred to in clauses (3) and (4) above. (n) Includes options outstanding to purchase 450,000 shares which are vested but not exercisable until 180 days after the date of this prospectus. Excludes 250,000 shares subject to options that are not vested or exercisable within 60 days of August 10, 1999. Also includes options held by Mr. Breitenbach to purchase 1,141,950 shares that are owned by Mr. Jay S. Walker which are currently exercisable. Of these options to purchase 1,141,950 shares, Mr. Breitenbach will exercise options to purchase 72,832 shares in connection with his sale in this offering. Excludes options to purchase 570,945 shares from Mr. Walker which are not vested or exercisable within 60 days of August 10, 1999. (o) Includes 500,000 shares held by The T. Scott Case 1998 Grantor Retained Annuity Trust and options outstanding to purchase 700,000 shares which are vested but not exercisable until 180 days after the date of this prospectus. (p) Includes 875,000 shares held by The Jesse Fink 1998 Grantor Retained Annuity Trust and options outstanding to purchase 2,443,750 shares which are vested but not exercisable until September 26, 1999. Mr. Fink has agreed to a 180 day lockup with the underwriters in connection with the concurrent common stock offering. (q) Includes: (1) 75,000 shares held by Yarmouth Limited Partnership; and (2) 237,500 shares held by Mr. Manzi. (r) Excludes 156,250 shares held by an officer and director of Vulcan Ventures Incorporated. The address of Vulcan Ventures Incorporated is 110 110th Avenue N.E., Bellevue, Washington 98004-5840. (s) Includes 1,523,329 shares to be issued upon exercise of presently exercisable warrants and sold in the concurrent common stock offering and warrants to purchase an aggregate of 17,096,073 shares underlying options that are exercisable upon the achievement of certain performance thresholds. (t) The Strypemonde Foundation is a charitable foundation established by Mr. Francis and his spouse. (u) Includes options outstanding to purchase 10,936,966 shares. Excludes 3,691,458 shares subject to options that are not vested or exercisable within 60 days of August 10, 1999. The address of all directors, officers and other individual stockholders is Five High Ridge Park, Stamford, Connecticut 06905. 91 CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS The following is a summary of certain United States federal income tax consequences of the purchase, ownership and disposition of the notes and common stock (into which notes may be converted) by an initial purchaser of the notes. This summary is based upon existing United States federal income tax law, which is subject to change, possibly retroactively. This summary does not address all aspects of United States federal income taxation which may be important to particular holders in light of their individual investment circumstances, such as notes held by investors subject to special tax rules (e.g., financial institutions, insurance companies, regulated investment companies, real estate investment trusts, broker-dealers, and tax-exempt organizations), persons that will hold the notes as part of a straddle, hedge, or synthetic security transaction for United States federal income tax purposes or persons that have a functional currency other than the United States dollar, all of whom may be subject to tax rules that differ significantly from those summarized below. In addition, this summary does not discuss any state or local income or other tax considerations. This summary assumes that investors will hold their notes and common stock (into which notes may be converted) as "capital assets" (generally, property held for investment) for United States federal income tax purposes. Prospective investors are urged to consult their tax advisors regarding the United States federal, state, local and foreign income and other tax consequences of the purchase, ownership and disposition of the notes. For purposes of this summary, "U.S. holder" means (i) a citizen or resident of the United States, (ii) a corporation, partnership or other entity created or organized in or under the laws of the United States or any political subdivision thereof, (iii) an estate, the income of which is subject to United States federal income taxation regardless of its source, or (iv) a trust, the administration of which is subject to the primary supervision of a court within the United States and which has one or more United States persons with authority to control all substantial decisions. "Non-U.S. holder" means a holder that is not a U.S. holder. U.S. HOLDERS TAXATION OF INTEREST Interest paid on the notes will be included in the gross income of a U.S. holder as ordinary income at the time it is received or accrued, in accordance with such holder's regular method of accounting for U.S. federal income tax purposes. SALE, EXCHANGE OR REDEMPTION OF THE NOTES Upon the sale, exchange (other than a conversion) or redemption of a note, a U.S. holder generally will recognize capital gain or loss equal to the difference between (i) the amount of cash proceeds and the fair market value of any property received on the sale, exchange or redemption (except to the extent such amount is attributable to accrued interest not previously included in income, which will be taxable as ordinary income, or is attributable to accrued interest that was previously included in income, which amount may be received without generating further income) and (ii) such holder's adjusted tax basis in the note. A U.S. holder's adjusted tax basis in a note generally will equal the cost of the note to such holder. Such capital gain or loss will be long-term capital gain or loss if the U.S. holder's holding period in the note is more than one year at the time of sale, exchange or redemption. CONVERSION OF THE NOTES A U.S. holder generally will not recognize any income, gain or loss upon conversion of a note into common stock except to the extent that any common stock received is considered attributable to accrued interest not previously included in income (which will be taxable as ordinary income) or with respect to cash received in lieu of a fractional share of common stock. A U. S. holder's tax basis in common stock received on a conversion of a note will be the same as such holder's adjusted tax basis in the note at the 92 time of conversion (reduced by any basis allocable to a fractional share interest). The holding period for common stock received on conversion generally will include the holding period of the note converted. However, a U.S. holder's tax basis in shares of common stock received, if any, attributable to accrued interest generally will equal the amount of such accrued interest included in income, and the holding period for such shares shall begin on the date following the date of conversion. Cash received in lieu of a fractional share of common stock upon conversion will be treated as a payment in exchange for the fractional share of common stock. Accordingly, the receipt of cash in lieu of a fractional share of common stock generally will result in capital gain or loss (measured by the difference between the cash received for the fractional share and the holder's adjusted tax basis in the fractional share). DIVIDENDS Distributions, if any, received in respect of common stock after a conversion generally will be included in the income of a U.S. holder as ordinary dividend income to the extent of priceline.com's current or accumulated earnings and profits. Distributions in excess of priceline.com's current and accumulated earnings and profits will be treated as a return of capital to the extent of the U.S. holder's basis in its common stock and thereafter as capital gain. U.S. holders of convertible debt instruments such as the notes may, in certain circumstances, be deemed to have received constructive distributions where the conversion price of such instruments is adjusted. Adjustments to the conversion price made pursuant to a bona fide reasonable adjustment formula which has the effect of preventing the dilution of the interest of the holders of the debt instruments, however, will generally not be considered to result in a constructive distribution of stock. Certain of the possible adjustments provided in the notes (including, without limitation, adjustments in respect of taxable dividends to shareholders of priceline.com) will not qualify as being pursuant to a bona fide reasonable adjustment formula. If such adjustments are made, the U.S. holders of notes will be deemed to have received constructive distributions taxable as dividends to the extent of priceline.com's current and accumulated earnings and profits even though they have not received any cash or property as a result of such adjustments. In certain circumstances the failure to provide for such an adjustment may result in taxable dividend income to the U.S. holders of common stock. SALE, EXCHANGE OR OTHER DISPOSITION OF COMMON STOCK Upon the sale, exchange or other disposition of common stock, a U.S. holder generally will recognize capital gain or loss equal to the difference between (i) the amount of cash and the fair market value of any property received upon the sale or exchange and (ii) such U.S. holder's adjusted tax basis in the common stock. Such capital gain or loss will be long-term capital gain or loss if the U.S. holder's holding period in common stock is more than one year at the time of the sale or exchange. A U.S. holder's tax basis and holding period in common stock received upon conversion of a note are determined as discussed above under "CONVERSION OF THE NOTES." NON-U.S. HOLDERS PAYMENTS OF PRINCIPAL OR INTEREST Payments of principal or interest on the notes by priceline.com or any paying agent to a beneficial owner of a note that is a non-U.S. holder will not be subject to U.S. withholding tax, provided that, in the case of interest: - such non-U.S. holder does not own, actually or constructively, 10% or more of the total combined voting power of all classes of stock of priceline.com entitled to vote; 93 - such non-U.S. holder is not a controlled foreign corporation with respect to which priceline.com is a related person for U.S. federal income tax purposes; - such non-U.S. holder is not a bank which has invested in the notes as an extension of credit in the ordinary course of its trade or business; and - the certification requirements of section 871(h) or 881(c) of the Internal Revenue Code of 1986, as amended (the "Code") are satisfied as described below under the heading "OWNER STATEMENT REQUIREMENT." GAIN REALIZED ON SALE, EXCHANGE OR OTHER DISPOSITION OF NOTES OR COMMON STOCK A non-U.S. holder of a note or common stock will not be subject to U.S. federal income tax on gain realized on the sale, exchange or other disposition of such note or common stock except in the following circumstances: - The gain will be subject to federal income tax if it is effectively connected with a trade or business of the non-U.S. holder within the United States. - The gain will be subject to federal income tax if the non-U.S. holder is an individual who holds the note or common stock as a capital asset, is present in the United States for 183 or more days in the taxable year of the sale or other disposition, and either the individual has a "tax home" in the United States for federal income tax purposes or the gain is attributable to an office or other fixed place of business maintained by the individual in the United States. - The gain may be subject to federal income tax pursuant to federal income tax laws applicable to certain expatriates. - The gain may be subject to federal income tax if priceline.com is or has been during certain periods a "United States real property holding corporation" and the non-U.S. holder held, at any time during the five-year period ending on the date of disposition (or, if shorter, the non-U.S. holder's holding period), more than 5 percent of the outstanding common stock. Priceline.com believes that it will not constitute a United States real property holding corporation immediately after the offering and does not expect to become a United States real property holding corporation; however, no assurance can be given in this regard. DIVIDENDS Dividends on common stock after conversion generally will be subject to U.S. withholding tax at a 30% rate except where an applicable tax treaty provides for the reduction or elimination of such withholding tax. OWNER STATEMENT REQUIREMENT Sections 871(h) and 881(c) of the Code require that either the beneficial owner of a note or a securities clearing organization, bank or other financial institution that holds customers' securities in the ordinary course of its trade or business (a "Financial Institution") and that holds a note on behalf of such owner file a statement with priceline.com or its agent to the effect that the beneficial owner is not a United States person in order to avoid withholding of United States federal income tax. Under current regulations, this requirement will be satisfied if priceline.com or its agent receives: - a statement (an "Owner's Statement") from the beneficial owner of a note in which such owner certifies, under penalties of perjury, that such owner is not a United States person and provides such owner's name and address; or 94 - a statement from the Financial Institution holding the note on behalf of the beneficial owner in which the Financial Institution certifies, under penalties of perjury, that it has received the Owner's Statement together with a copy of the Owner's Statement. The beneficial owner must inform priceline.com or its agent (or, in the case of a statement described in the second bullet point above, the Financial Institution) within 30 days of any change in information on the Owner's Statement. BACKUP WITHHOLDING AND INFORMATION REPORTING PAYMENTS OF INTEREST Current United States federal income tax law provides that in the case of payments of interest to non-U.S. holders, the 31% backup withholding tax will not apply to payments made outside the United States by priceline.com or a paying agent on a note if an Owner's Statement is received or an exemption has otherwise been established; provided in each case that priceline.com or the paying agent, as the case may be, does not have actual knowledge that the payee is a United States person. DIVIDENDS Dividends on common stock paid to non-U.S. holders that are subject to U.S. withholding tax, as described above, generally will be exempt from U.S. backup withholding tax but will be subject to certain information reporting requirements. PROCEEDS OF A SALE, EXCHANGE OR OTHER DISPOSITION OF NOTES OR COMMON STOCK Under current Treasury Regulations, payments of the proceeds of the sale, exchange or other disposition of a note or common stock to or through a foreign office of a broker will not be subject to backup withholding but will be subject to information reporting if the broker is a United States person, a controlled foreign corporation for United States federal income tax purposes, or a foreign person 50% or more of whose gross income is from a United States trade or business for a specified three-year period, unless the broker has in its records documentary evidence that the beneficial owner is not a United States person and certain other conditions are met or the non-U.S. holder otherwise establishes an exemption. Payment of the proceeds of a sale to or through the United States office of a broker is subject to backup withholding and information reporting unless the holder certifies its non-United States person status under penalties of perjury or otherwise establishes an exemption. NEW FINAL REGULATIONS Recently, the Treasury Department has promulgated final regulations (the "Final Regulations") regarding the withholding and information reporting rules discussed above. In general, the Final Regulations do not significantly alter the substantive withholding and information reporting requirements but unify current certification procedures and forms and clarify reliance standards. Under the Final Regulations, special rules apply which permit the shifting of primary responsibility for withholding to certain financial intermediaries acting on behalf of beneficial owners. The Final Regulations are generally effective for payments made after December 31, 2000, subject to certain transition rules. 95 DESCRIPTION OF NOTES We will issue the notes under an indenture between priceline.com Incorporated, and Wilmington Trust Company, as trustee. We have filed the form of the indenture as an exhibit to the registration statement. A copy of the indenture will also be available at the office of the trustee. We have summarized portions of the indenture below. The summary is not complete. We urge you to read the indenture because it defines your rights as a holder of the notes. In this section, "priceline.com," "our company," "we" and "us" each refers only to priceline.com Incorporated and not to any of its subsidiaries. GENERAL The notes are unsecured general obligations of priceline.com subordinate in right of payment to Senior Indebtedness, as defined below under "--Subordination of Notes," of priceline.com and convertible into common stock as described below. The notes will be limited to $287,500,000 aggregate principal amount, including $37,500,000 that may be issued upon exercise of the underwriters' over-allotment option. The notes will mature on August 1, 2006 unless earlier redeemed by priceline.com or at your option upon a Fundamental Change as defined below or converted to common stock in accordance with their terms. The indenture does not contain any financial covenants or restrictions on the payment of dividends, the incurrence of Senior Indebtedness or the issuance or repurchase of securities by priceline.com. The indenture contains no covenants or other provisions to protect holders of the notes in the event of a highly leveraged transaction or a change in control, except to the extent described below under "--Redemption at Your Option." The notes will bear interest at the annual rate of % from August , 1999. We will pay interest on February 1 and August 1 of each year, commencing on February 1, 2000 to holders of record at the close of business on the preceding January 15 and July 15. Interest may, at our option, be paid either (1) by check mailed to the address of the person entitled to receive it as it appears in the note register or (2) by transfer to an account maintained by such person located in the U.S. if such person has notified us of the details of such account at least 7 days prior to a scheduled interest payment date; PROVIDED that payments to The Depository Trust Company, New York, New York will be made by wire transfer of immediately available funds to the account of The Depository Trust Company or its nominee. Interest will be computed on the basis of a 360-day year composed of twelve 30-day months. We will maintain an office in the Borough of Manhattan, the City of New York where we will pay the principal and premium, if any, on the notes and you may present the notes for conversion, registration of transfer and exchange. FORM, DENOMINATION AND REGISTRATION We will issue the notes in fully registered form, without coupons, in denominations of $1,000 principal amount and $1,000 multiples. GLOBAL NOTE, BOOK-ENTRY FORM. The notes will be represented by one or more global notes, which will be deposited with, or on behalf of, The Depository Trust Company, also known as DTC, and registered in the name of Cede & Co. as DTC's nominee. A global note may be transferred, in whole or in part, only to another nominee of DTC or to a successor of DTC or its nominee. You may hold your interests in a global note directly through DTC if you are a participant in DTC, or indirectly through organizations which are participants in DTC. Transfers between DTC participants will be effected in the ordinary way in accordance with DTC rules. The laws of some states require that some 96 investors must take physical delivery of securities in definitive form. Consequently, the ability to transfer beneficial interests in a global note to such persons may be limited. If you are not a DTC participant, you may beneficially own interests in a global note held by DTC only through DTC participants, or banks, brokers, dealers, trust companies and other parties that clear through or maintain a custodial relationship with a DTC participant, either directly or indirectly. So long as Cede & Co., as the nominee of DTC, is the registered owner of a global note, Cede for all purposes will be considered the sole holder of the global note. Except as provided below, owners of beneficial interests in a global note will not be entitled to have certificates registered in their names, will not receive or be entitled to receive physical delivery of certificates in definitive registered form, and will not be considered the holders of the global note. We will pay interest on and the redemption price of a global note to Cede by wire transfer of immediately available funds on each interest payment date or the redemption date, as the case may be. Neither priceline.com, the trustee nor any paying agent will have any responsibility or liability for any aspect of the records relating to or payments made on account of beneficial ownership interests in any global note or for maintaining, supervising or reviewing any records relating to such beneficial ownership interests. We have been informed by DTC that, with respect to any payment of interest on, or the redemption price of, any global note, DTC's practice is to credit the accounts of DTC participants on the payment date with payments in amounts proportionate to their respective beneficial interests in the principal amount represented by a global note as shown on the records of DTC, unless DTC has reason to believe that it will not receive payment on such payment date. Payments by DTC participants to owners of beneficial interests in the principal amount represented by a global note held through such participants will be the responsibility of such participants, as is now the case with securities held for the accounts of customers registered in "street name." Because you cannot hold a physical certificate representing your interest in a global note and because DTC can only act on behalf of DTC participants, your ability to pledge such interest to persons or entities that do not participate in the DTC system, or otherwise take actions in respect of such interest, may be affected by the absence of a physical certificate representing your interest in a global note. Neither priceline.com, the trustee nor any registrar, paying agent or conversion agent under the indenture will have any responsibility for the performance by DTC or its participants or indirect participants of their obligations under the rules and procedures governing their operations. DTC has advised priceline.com that it will take any action permitted to be taken by a holder of notes, including, without limitation, the presentation of notes for exchange as described below, only at the direction of one or more participants to whose account with DTC interests in a global note are credited, and only in respect of the principal amount of the notes represented by a global note as to which such participant or participants has or have given such direction. DTC has advised us that it is a limited purpose trust company organized under the laws of the State of New York, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the Uniform Commercial Code and a "clearing agency" registered pursuant to the provisions of Section 17A of the Exchange Act. DTC was created to hold securities for its participants and to facilitate the clearance and settlement of securities transactions between participants through electronic book-entry changes to the accounts of its participants, thereby eliminating the need for physical movement of certificates. Participants include securities brokers and dealers, banks, trust companies and clearing corporations and may include other organizations such as the underwriters. Some of DTC's participants or their representatives, together with other entities, own DTC. Indirect access to the DTC system is available to others such as banks, brokers, dealers and trust companies that clear through, or maintain a custodial relationship with, a participant, either directly or indirectly. 97 Although DTC has agreed to the foregoing procedures in order to facilitate transfers of interests in global notes among participants, it is under no obligation to perform or continue to perform such procedures, and such procedures may be discontinued at any time. CERTIFICATED NOTES. If DTC or any successor depositary for the global notes is at any time unwilling or unable to continue as depositary and a successor depositary is not appointed by us within ninety days, we will issue notes in definitive registered form in exchange for any global notes. In addition, we may at any time and in our sole discretion determine not to have the notes represented by global notes and issue notes in definitive registered form in exchange for the global notes. CONVERSION OF NOTES You may convert your notes into common stock at any time after the date of original issuance of the notes through the close of business on the final maturity date of the notes, unless earlier redeemed by priceline.com or at your option upon a Fundamental Change. You may convert the principal amount of any notes, in whole or in part, only in denominations of $1,000 or $1,000 multiples at the conversion price, subject to adjustment as described below. Except as described below, no payment or other adjustment will be made for accrued interest on conversion of any notes or for dividends on any common stock issued upon conversion of any notes. If any note is converted during the period from, but excluding, a record date for an interest payment date, to that interest payment date, then unless that note has been called for redemption on a redemption date which occurs during such period (in which case we shall not be required to pay interest on such interest payment with respect to such note), the notes must be accompanied by funds equal to the interest payable on that interest payment date on the principal amount so converted; PROVIDED that no such payment need be made to the extent any overdue interest shall exist at the time of conversion with respect to such note. We are not required to issue fractional shares of common stock upon conversion of notes and, instead, will pay a cash adjustment based upon the market price of common stock on the last business day prior to the date of conversion. In the case of notes called for redemption, conversion rights will expire at the close of business on the business day preceding the day fixed for redemption unless we default in the payment of the redemption price. You may convert a note which you have elected to be redeemed upon a Fundamental Change, as defined below, only if you withdraw your election to redeem in accordance with the terms of the indenture. The initial conversion price of $ per share of common stock is subject to adjustment upon the following events, as set forth in the indenture: (1) the issuance of common stock as a dividend or distribution on the common stock; (2) the issuance to all holders of common stock of rights or warrants to purchase common stock at less than the then current market price of the common stock; (3) subdivisions and combinations of the common stock; (4) the distribution to all holders of common stock of capital stock, other than common stock, or evidences of indebtedness of priceline.com or of assets (including securities, but excluding common stock and those rights, warrants, dividends and distributions referred to in (1), (2) or (3) above or those paid in cash); (5) distributions consisting of cash, excluding: (a) any quarterly cash dividend on the common stock to the extent that the aggregate cash dividend per share of common stock in any quarter does not exceed the greater of: - the amount per share of common stock of the next preceding quarterly cash dividend on the common stock to the extent that such preceding quarterly dividend did not require an adjustment of the conversion price pursuant to this clause (5), adjusted to reflect subdivisions or combinations of the common stock, and 98 - 3.75% of the average of the last reported sale price of the common stock during the ten trading days immediately prior to the date of declaration of such dividend, and (b) any dividend or distribution in connection with the liquidation, dissolution or winding up of priceline.com. If an adjustment is required to be made as set forth in this clause (5) as a result of a distribution that is a quarterly dividend, such adjustment would be based upon the amount by which such distribution exceeds the amount of the quarterly cash dividend permitted to be excluded pursuant to this clause (5). If an adjustment is required to be made as set forth in this clause (5) as a result of a distribution that is not a quarterly dividend, such adjustment would be based upon the full amount of the distribution; (6) payment relating to a tender offer or exchange offer by priceline.com or any subsidiary of priceline.com for common stock of priceline.com to the extent that the cash and value of any other consideration included in such payment per share of common stock exceeds the average of the market price per share of common stock on the three trading days immediately succeeding the last date on which tenders or exchanges may be made pursuant to such tender or exchange offer; and (7) payment relating to a tender offer or exchange offer by a person other than priceline.com or any subsidiary of priceline.com for common stock of priceline.com in which, as of the closing date of the offer, the Board of Directors is not recommending rejection of the offer. This adjustment will only be made if the tender offer or exchange offer is for an amount that increases the offeror's ownership of common stock to more than 25% of the total shares of common stock outstanding, and if the cash and value of any other consideration included in such payment per share of common stock exceeds the average of the market price per share of common stock on the three trading days immediately succeeding the last date on which tenders or exchanges may be made pursuant to such tender or exchange offer. This adjustment will generally not be made, however, if, as of the closing of the offer, the offering documents with respect to the offer disclose a plan or an intention to cause priceline.com to consolidate or merge, or a sell all or substantially all of its assets or if the next succeeding paragraph applies. In the case of (1) any reclassification of the common stock or (2) a consolidation, merger or combination involving priceline.com or a sale or conveyance to another person of the property and assets of priceline.com as an entirety or substantially as an entirety, in each case as a result of which holders of common stock shall be entitled to receive stock, other securities, other property or assets, including cash, with respect to or in exchange for such common stock, the holders of the notes then outstanding will generally be entitled after the reclassification, consolidation, merger, combination, sale or conveyance to convert such notes into the kind and amount of shares of stock, other securities or other property or assets, including cash, which they would have owned or been entitled to receive upon the reclassification, consolidation, merger, combination, sale or conveyance had such notes been converted into common stock immediately prior to such reclassification, consolidation, merger, combination, sale or conveyance assuming that a holder of notes would not have exercised any rights of election as to the stock, other securities or other property or assets, including cash, receivable in connection with such transaction. The indenture will provide that if we implement a stockholders' rights plan, the rights plan must provide that, subject to customary exceptions, upon conversion of the notes you will receive, in addition to the common stock issuable upon conversion, an appropriate number of rights whether or not such rights have separated from the common stock at the time of such conversion. The indenture will also provide that if rights, warrants or options expire unexercised, the conversion price shall be readjusted to take into account the actual number of those warrants, rights or options which were exercised. 99 To convert a note, a holder must (1) complete and manually sign the conversion notice on the back of the note (or complete and manually sign a facsimile thereof) and deliver such notice to the conversion agent (initially the trustee) at the office maintained by the conversion agent for such purpose, (2) surrender the note to the conversion agent, (3) if required, furnish appropriate endorsements and transfer documents, and (4) if required, pay all transfer or similar taxes. Pursuant to the indenture, the date on which all of the foregoing requirements have been satisfied is the conversion date If we make a taxable distribution to holders of common stock or in certain other circumstances requiring an adjustment to the conversion price, the holders of notes may, in certain circumstances, be deemed to have received a distribution subject to U.S. income tax as a dividend; in certain other circumstances, the absence of such an adjustment may result in a taxable dividend to the holders of common stock. See "Certain United States Federal Income Tax Considerations" below. We may, from time to time and to the extent permitted by law, reduce the conversion price by any amount for any period of at least 20 days, in which case we shall give at least 15 days' notice of such reduction, if our Board of Directors has made a determination that such reduction would be in the best interests of priceline.com, which determination shall be conclusive. We may, at our option, make such reductions in the conversion price, in addition to those set forth above, as our Board of Directors deems advisable to avoid or diminish any income tax to holders of common stock resulting from any subdivision of stock, dividend or distribution of stock or securities convertible into or exchangeable for stock, or rights to acquire stock or securities convertible into or exchangeable for stock, or from any event treated as such for income tax purposes. See "Certain United States Federal Income Tax Considerations." No adjustment in the conversion price will be required unless such adjustment would require a change of at least 1% in the conversion price then in effect; PROVIDED that any adjustment that would otherwise be required to be made shall be carried forward and taken into account in any subsequent adjustment. Except as stated above, the conversion price will not be adjusted. OPTIONAL REDEMPTION BY PRICELINE.COM The notes are not entitled to any sinking fund. At any time on or after August 6, 2002, priceline.com may redeem the notes on at least 30 and not more than 60 days' notice as a whole or, from time to time, in part at the following prices, expressed as a percentage of the principal amount, together with accrued interest to, but excluding, the date fixed for redemption:
PERIOD REDEMPTION PRICE - ---------------------------------------------------------------------------- ------------------- Beginning August 6, 2002 and ending July 31, 2003........................... % 12-month period beginning August 1: 2003................................................................ % 2004................................................................ % 2005................................................................ %
and 100% at and following August 1, 2006, PROVIDED that if the redemption date is an interest payment date, then the interest payable on such date shall be paid to the holder of record of the notes on the relevant record date. We will give notice of any redemption by mail and by publishing the notice in Bloomberg Business News, DowJones News and Reuters Financial Report in New York City. If less than all of the outstanding notes are to be redeemed, the trustee shall select the notes to be redeemed in principal amounts of $1,000 or $1,000 multiples by lot, PRO RATA or by another method the trustee considers fair and appropriate. If a portion of a holder's notes is selected for partial redemption and such holder converts a portion of such notes, the converted portion shall be deemed to be of the portion selected for redemption. 100 We may not give notice of any redemption of notes if a default in payment of principal, premium or interest on the notes or any other event of default under the indenture has occurred and is continuing, unless all defaults are cured at the time of redemption. REDEMPTION AT YOUR OPTION If a "Fundamental Change," as such term is defined below, occurs at any time prior to August 1, 2006, each holder of notes shall have the right, at the holder's option, to require priceline.com to redeem any or all of such holder's notes on the date (the "Repurchase Date") that is 30 days after the date of our notice of such Fundamental Change. The notes will be redeemable in $1,000 multiples of the principal amount. We shall redeem such notes at a price equal to 100% of the principal amount to be redeemed plus accrued interest on the redeemed notes to, but excluding, the Repurchase Date; PROVIDED that, if such Repurchase Date is an interest payment date, then the interest payable on such date shall be paid to the holder of record of the notes on the relevant record date. We will mail to all holders of record of the notes a notice of the occurrence of a Fundamental Change and of the redemption right arising as a result of the Fundamental Change on or before the tenth day after the occurrence of such Fundamental Change. We are also required to deliver to the trustee a copy of such notice. To exercise the redemption right, a holder of notes must deliver, on or before the close of business on the 30th day after the date of our notice of a Fundamental Change (the "Fundamental Change Expiration Time"), written notice of the holder's exercise of such right, together with the notes to be so redeemed, duly endorsed for transfer, to us or an agent designated by us for such purpose. Payment for notes surrendered for redemption, and not withdrawn, prior to the Fundamental Change Expiration Time will be made promptly following the Repurchase Date. The term "Fundamental Change" means the occurrence of any transaction or event in connection with which all or substantially all of the outstanding common stock shall be exchanged for, converted into, acquired for or constitute the right to receive, consideration which is not all or substantially all equity securities listed, or, upon consummation of or immediately following such transaction or event, which will be listed, on a U.S. national securities exchange or approved for quotation on the Nasdaq National Market or any similar U.S. system of automated dissemination of quotations of securities prices, whether by means of an exchange offer, liquidation, tender offer, consolidation, merger, combination, reclassification, recapitalization or otherwise. We will comply with the provisions of Rule 13e-4 and any other tender offer rules under the Securities Exchange Act of 1934 to the extent then applicable in connection with the redemption rights of the holders of notes in the event of a Fundamental Change. The redemption rights of the holders of notes upon a Fundamental Change could discourage a potential acquiror of priceline.com. The term "Fundamental Change" is limited to the specified transactions and may not include other events that might adversely affect our financial condition, nor would the requirement that we offer to redeem the notes upon a Fundamental Change necessarily afford the holders of the notes protection in the event of a highly leveraged transaction, reorganization, merger or similar transaction involving priceline.com. If a Fundamental Change were to occur, we cannot assure you that we will have sufficient funds to pay the redemption price for all the notes tendered by the holders. In addition, any credit agreements or other agreements relating to other indebtedness to which we are or become a party may contain restrictions or prohibitions on our ability to redeem notes or may provide that a Fundamental Change constitutes an event of default under such agreement. If a Fundamental Change occurs at a time when we are prohibited from redeeming the notes, we could seek the consent of our then lenders to the redemption of the notes or could attempt to refinance the borrowings that contain such prohibition. If we do not obtain such a consent or repay such borrowings, we would remain prohibited from redeeming the notes. In that case, our failure to redeem tendered notes would constitute an event of default under the indenture, and may constitute a 101 default under the terms of other indebtedness that we may enter into from time to time. In these circumstances or if the occurrence of a Fundamental Change itself constitutes an event of default under Senior Indebtedness, the subordination provisions in the indenture would restrict or prohibit payments to the holders of notes. SUBORDINATION OF NOTES The payment of the principal of, premium, if any, interest on and all other amounts payable under the notes is subordinated, to the extent provided in the indenture, to the prior payment in full of all Senior Indebtedness. This subordination will not prevent the occurrence of any default or event of default under the indenture. The notes are also effectively subordinated to all indebtedness and other liabilities, including trade payables and lease obligations and all preferred stock, if any, of our subsidiaries. Upon any distribution of assets of priceline.com upon: (1) any dissolution, winding up, bankruptcy, insolvency, liquidation, reorganization, receivership or similar proceeding relating to priceline.com or its property, (2) an assignment for the benefit of creditors or (3) any marshaling of the assets or liabilities of priceline.com, the holders of Senior Indebtedness will be entitled to receive payment in full, in cash or other payment satisfactory to the holders of Senior Indebtedness, of all obligations due in respect of such Senior Indebtedness before the holders of the notes will be entitled to receive any payment of the principal, premium, if any, interest, or any other amounts payable in respect of the notes. Until all obligations with respect to Senior Indebtedness are paid in full in cash or other payment satisfactory to the holders of Senior Indebtedness, any payment on the notes to which the holders of notes would be entitled shall be made to the holders of Senior Indebtedness. By reason of the subordination, if any of the events described above occur, holders of Senior Indebtedness may receive more, ratably, and the holders of notes may receive less, ratably, than the other creditors of priceline.com. In the event of any acceleration of the notes because of an event of default under the indenture, the holders of any Senior Indebtedness then outstanding would be entitled to payment in full in cash or other payment satisfactory to the holders of Senior Indebtedness of all obligations in respect of such Senior Indebtedness before the holders of the notes are entitled to receive any payment or distribution on the notes. The indenture will require that we promptly notify holders of Senior Indebtedness if payment of the notes is accelerated because of an event of default under the indenture. Priceline.com may not pay the notes until five days after such holders or trustee(s) of Senior Indebtedness receive notice of such acceleration and, thereafter, may pay the notes only if the subordination provisions of the Indenture otherwise permit payment at that time. We also may not make any payment upon the notes, including upon redemption, if: (1) a default in the payment of the principal of, premium, if any, interest, rent or any other obligations in respect of Senior Indebtedness occurs and is continuing beyond any applicable period of grace; or (2) any other default occurs and is continuing with respect to Senior Indebtedness (as defined below) that permits holders of Senior Indebtedness as to which the default relates to accelerate its maturity and either (1) such default is the subject of judicial proceedings; or (2) the trustee receives a notice of such default, also referred to as a payment blockage notice, from us or any other person permitted to give such notice under the indenture. Payments on the notes may and shall be resumed (a) in case of a payment default, upon the date on which such default is cured or waived or ceases to exist and (b) in case of a non-payment default, the 102 earlier of the date on which such nonpayment default is cured or waived or ceases to exist or 179 days after the date on which the applicable payment blockage notice is received. Notwithstanding the foregoing, only one payment blockage notice with respect to the same event of default or any other events of default existing and known to the person giving such notice at the time of such notice on the same issue of Senior Indebtedness may be given during any period of 360 consecutive days unless such event of default or such other events of default have been cured or waived for a period of not less than 90 consecutive days. No new payment blockage period may be commenced by the holders of Senior Indebtedness during any period of 360 consecutive days unless all events of default which triggered the preceding payment blockage period have been cured or waived. If notwithstanding the foregoing, the trustee or any holder of the notes receives any payment or distribution of assets of priceline.com of any kind in contravention of any of the subordination provisions of the indenture, whether in cash, property, securities or otherwise, including, without limitation, by way of set-off or otherwise, in respect of the notes before all Senior Indebtedness is paid in full in cash or other payment satisfactory to holders of Senior Indebtedness, then such payment or distribution will be held by the recipient in trust for the benefit of holders of Senior Indebtedness or their representatives to the extent necessary to make payment in full in cash or payment satisfactory to the holders of Senior Indebtedness of all Senior Indebtedness remaining unpaid, after giving effect to any concurrent payment or distribution to or for the holders of Senior Indebtedness. The term "Senior Indebtedness" means the principal of, premium, if any, interest (including all interest, at or above the rate specified in the governing instrument, accruing subsequent to the commencement of any bankruptcy, reorganization or similar proceeding, whether or not a claim for post-petition interest is allowable as a claim in any such proceeding), rent, liquidated damages and other obligations payable on or in connection with, and all fees, costs, expenses and other amounts accrued or due on or in connection with, Indebtedness (as defined below) of priceline.com, whether outstanding on the date of the indenture or thereafter created, incurred, assumed, guaranteed or in effect guaranteed by us, including all deferrals, renewals, extensions, refinancings or refundings of, or amendments, modifications or supplements to, the foregoing, unless in the case of any particular Indebtedness the instrument creating or evidencing the same or the assumption or guarantee thereof expressly provides that such Indebtedness shall not be senior in right of payment to the notes or expressly provides that such Indebtedness is PARI PASSU with or junior to the notes. Notwithstanding the foregoing, the term Senior Indebtedness shall not include Indebtedness of priceline.com to any of its subsidiaries, a majority of the voting stock of which is owned, directly or indirectly, by priceline.com. The term "Indebtedness" means, with respect to any person, and without duplication: (a) all indebtedness, obligations and other liabilities, contingent or otherwise, of such person for borrowed money (including obligations of such person in respect of overdrafts, foreign exchange contracts, currency exchange or similar agreements, interest rate protection, hedging or similar agreements, and any loans or advances from banks, whether or not evidenced by notes or similar instruments) or evidenced by bonds, debentures, notes or similar instruments (whether or not the recourse of the lender is to the whole of the assets of such person or to only a portion thereof), other than any account payable or other accrued current liability or obligation, in each case incurred in the ordinary course of business in connection with the obtaining of materials or services, (b) all reimbursement obligations and other liabilities, contingent or otherwise, of such person with respect to letters of credit, bank guarantees or bankers' acceptances, (c) all obligations and liabilities, contingent or otherwise, in respect of leases of such person required, in conformity with generally accepted accounting principles, to be accounted for as capitalized lease obligations on the balance sheet of such person and all obligations and other liabilities, contingent or otherwise, under any lease or related document, including, without 103 limitation, the balance deferred and unpaid of any purchase price of any property and a purchase agreement, in connection with the lease of real property which provides that such person is contractually obligated to purchase or cause a third party to purchase the leased property and thereby guarantee a minimum residual value of the leased property to the lessor and the obligations of such person under such lease or related document to purchase or to cause a third party to purchase such leased property, (d) all obligations of such person, contingent or otherwise, with respect to an interest rate or other swap, cap or collar agreement or other similar instrument or agreement or foreign currency hedge, exchange, purchase or similar instrument or agreement, (e) all direct or indirect guaranties or similar agreements by such person in respect of, and obligations or liabilities, contingent or otherwise, of such person to purchase or otherwise acquire or otherwise assure a creditor against loss in respect of, indebtedness, obligations or liabilities of another person of the kind described in clauses (a) through (d), (f) any indebtedness or other obligations described in clauses (a) through (d) secured by any mortgage, pledge, lien or other encumbrance existing on property which is owned or held by such person, regardless of whether the indebtedness or other obligation secured thereby shall have been assumed by such person, and (g) any and all deferrals, renewals, extensions, refinancings and refundings of, or amendments, modifications or supplements to, any indebtedness, obligation or liability of the kind described in clauses (a) through (f). As of June 30, 1999, we had approximately $-0- million of Indebtedness outstanding that would have constituted Senior Indebtedness and we had no subsidiaries. The indenture will not limit the amount of additional indebtedness, including Senior Indebtedness, which we can create, incur, assume or guarantee, nor will the indenture limit the amount of indebtedness or other liabilities that a subsidiary of priceline.com, if any, can create, incur, assume or guarantee. We are obligated to pay reasonable compensation to the trustee and to indemnify the trustee against certain losses, liabilities or expenses incurred by it in connection with its duties relating to the notes. The trustee's claims for such payments will generally be senior to those of the holders of the notes in respect of all funds collected or held by the trustee. EVENTS OF DEFAULT; NOTICE AND WAIVER An event of default is defined in the indenture as: (1) a default in payment of the principal amount of the notes at maturity or otherwise; (2) default for 30 days in payment of any installment of interest on the notes; (3) the failure of priceline.com, continuing for 60 days after notice, to observe or perform any other covenants in the indenture; or (4) the bankruptcy, insolvency or reorganization of priceline.com. The indenture provides that the trustee may withhold notice to the holders of the notes of any default (except in payment of principal or premium, if any, or interest with respect to the notes) if the trustee considers it in the interest of the holders of the notes to do so. The indenture provides that if an event of default shall have occurred and be continuing, the trustee or the holders of at least 25% in principal amount of the notes then outstanding may declare the principal of, premium, if any, and accrued interest on the notes to be due and payable immediately. In the case of certain events of bankruptcy or insolvency of priceline.com, the principal of, premium, if any, and accrued 104 interest on the notes shall automatically become and be immediately due and payable. However, if we cure all defaults (except the nonpayment of principal of, premium, if any, and interest on any of the notes which shall have become due by acceleration) and certain other conditions are met, with certain exceptions, such declaration may be canceled and past defaults may be waived by the holders of a majority of the principal amount of the notes then outstanding. The indenture provides that any payment of principal, premium, if any, or interest that is not made when due (whether or not such payment is permitted to be made under the subordination provisions described above) will accrue interest, to the extent legally permissible, at the annual rate otherwise applicable to the notes from the date on which such payment was required under the terms of the indenture until the date of payment. The holders of a majority in principal amount of the notes then outstanding have the right to direct the time, method and place of conducting any proceeding for any remedy available to the trustee, subject to certain limitations specified in the indenture. The indenture provides that no holder of the notes may pursue any remedy under the indenture, except for a default in the payment of principal, premium, if any (including upon redemption), or interest on the notes, unless such holder shall have previously given to the trustee written notice of a continuing event of default, and the holders of at a majority in principal amount of the outstanding notes shall have made a written request, and offered reasonable indemnity, to the trustee to pursue the remedy, and the trustee shall not have received from the holders of a majority in principal amount of the outstanding notes a direction inconsistent with such request and shall have failed to comply with such request within 60 days after receipt of such request. MODIFICATION OF THE INDENTURE The indenture contains provisions permitting priceline.com and the trustee, with the consent of the holders of a majority in principal amount of the notes at the time outstanding, to modify the indenture or any supplemental indenture or the rights of the holders of the notes, except that no such modification shall: - extend the fixed maturity of any note, - reduce the rate or extend the time for payment of interest on the notes, - reduce the principal amount of the notes or premium, if any, on the notes, - reduce any amount payable upon redemption of the notes, - change the obligation of priceline.com to redeem any note upon the happening of any Fundamental Change in a manner adverse to the holders of the notes, - impair the right of a holder to institute suit for the payment of the notes, - change the currency in which the notes are payable, - impair the right to convert the notes into common stock subject to the terms set forth in the indenture, or - modify the provisions of the indenture with respect to the subordination of the notes in a manner adverse to the holders of the notes in any material respect, without the consent of each holder of a note so affected or reduce the percentage of notes whose holders are required to consent to any modification of the indenture or any supplemental indenture, in each case without the consent of the holders of all of the notes then outstanding. The indenture also provides for certain modifications of its terms without the consent of the holders of the notes. 105 NO RECOURSE AGAINST OTHERS The Indenture provides that no director, officer, employee or stockholder of priceline.com shall have any liability for any obligations of priceline.com under the notes or the Indenture or for any claim based on, in respect of or by reason of such obligations or their creation. INFORMATION CONCERNING THE TRUSTEE We have appointed Wilmington Trust Company, as trustee under the indenture and paying agent, conversion agent, note registrar and custodian with regard to the notes. The trustee or its affiliates may from time to time in the future provide banking and other services to us in the ordinary course of their business. The indenture contains certain limitations on the rights of the trustee, should it or any of its affiliates become a creditor of priceline.com, to obtain payment of claims in certain cases or to realize on certain property received in respect of any such claim as security or otherwise. The trustee and its affiliates will be permitted to engage in other transactions with priceline.com; PROVIDED if it or any such affiliate continues to have any conflicting interest as defined in the indenture and a default occurs with respect to the notes, the trustee must eliminate such conflict or resign. RATING OF NOTES We believe it is likely that one or more rating agencies may rate the notes. There can be no assurance as to whether any such agency or agencies will rate the notes or, if they do, what rating or ratings they will assign to the notes. If one or more rating agencies assign the notes a rating lower than that expected by investors, such event could have a material adverse effect on the market price of the notes and our common stock. 106 DESCRIPTION OF CAPITAL STOCK The authorized capital stock of priceline.com consists of 1,000,000,000 shares of common stock, par value $0.008 per share, and 150,000,000 shares of preferred stock, par value $0.01 per share, of priceline.com. Upon completion of the concurrent common stock offering, there will be 146,782,296 outstanding shares of common stock, outstanding options to purchase 26,582,391 shares of common stock and outstanding warrants to purchase 20,283,573 shares of common stock. COMMON STOCK Subject to preferences that may apply to shares of preferred stock outstanding at the time, the holders of outstanding shares of common stock are entitled to receive dividends out of assets legally available therefor at such times and in such amounts as the board of directors may from time to time determine. Each stockholder is entitled to one vote for each share of common stock held on all matters submitted to a vote of stockholders. Cumulative voting for the election of directors is not provided for in the priceline.com's certificate of incorporation, which means that the holders of a majority of the shares voted can elect all of the directors then standing for election. The common stock is not entitled to preemptive rights and is not subject to conversion or redemption. Upon the occurrence of a liquidation, dissolution or winding-up, the holders of shares of common stock would be entitled to share ratably in the distribution of all of the company's assets remaining available for distribution after satisfaction of all its liabilities and the payment of the liquidation preference of any outstanding preferred stock. Each outstanding share of common stock is, and all shares of common stock to be outstanding upon completion of this offering will be, fully paid and nonassessable. PREFERRED STOCK The board of directors has the authority, within the limitations and restrictions stated in the certificate of incorporation, to provide by resolution for the issuance of shares of preferred stock, in one or more classes or series, and to fix the rights, preferences, privileges and restrictions thereof, including dividend rights, conversion rights, voting rights, terms of redemption, liquidation preferences and the number of shares constituting any series or the designation of such series. The issuance of preferred stock could have the effect of decreasing the market price of the common stock and could adversely affect the voting and other rights of the holders of common stock. See "Risk Factors--Anti-Takeover Provisions Affecting Us Could Prevent or Delay a Change of Control." OPTIONS As of August 10, 1999, (1) options to purchase a total of 26,582,391 shares of common stock were outstanding; and (2) up to 5,729,069 additional shares of common stock may be subject to options granted in the future under the 1997 Omnibus Plan or the 1999 Omnibus Plan. All of the options contain standard anti-dilution provisions. See "Management--Priceline.com Incorporated 1997 Omnibus Plan," "--Priceline.com Incorporated 1999 Omnibus Plan" and "--Summary of Compensation." WARRANTS As of August 10, 1999, priceline.com had the following outstanding warrants to purchase shares of common stock: (1) a warrant to purchase up to 18,619,402 shares of common stock at an exercise price of approximately $0.93 per share that is held by Delta; (2) warrants to purchase up to an aggregate of 937,500 shares of common stock at an exercise price of $3.20 per share; (3) 1,250,000 shares of common stock at an exercise price of $6.40 per share, that are held by various airlines; and (4) 1,000,000 shares of common stock at an exercise price of $97.41 per share. All of the warrants contain standard anti-dilution provisions. See "Business--Strategic Alliances." 107 REGISTRATION RIGHTS The holders of an aggregate of 144,983,503 shares of common stock or securities convertible into common stock are entitled to certain registration rights. After the offering, an aggregate of 142,104,432 shares of common stock or securities convertible into common stock will continue to be entitled to registration rights. These rights are provided under the terms of a registration rights agreement between priceline.com and the holders of the registrable securities, who include Mr. Braddock, Mr. Walker, Walker Digital, General Atlantic, Vulcan Ventures Incorporated, other stockholders and several airlines. This agreement provides demand registration rights to the holders of substantially all of the registrable securities. In addition, the holders of all of the registrable securities are entitled under the agreement, subject to certain limitations, to require priceline.com to include their registrable securities in future registration statements the company files. Registration of shares of common stock pursuant to the rights granted in this agreement will result in such shares becoming freely tradeable without restriction under the Securities Act of 1933. All registration expenses incurred in connection with the above registrations will be borne by priceline.com. The sale of shares of common stock by the selling stockholders in the concurrent common stock offering is being made pursuant to the "piggyback" registration rights contained in the registration rights agreement. Priceline.com obtained from parties to the registration rights agreement that hold shares (or presently exercisable warrants to purchase shares) of common stock available for sale in the concurrent common stock offering a waiver of a 30-day notice period under the agreement and a consent to the assignment of registration rights by Messrs. Jay Walker and Richard Braddock, each of whom chose to sell less than his pro rata number of shares in the concurrent common stock offering. Priceline.com did not obtain such waiver and consent from certain other parties to the registration rights agreement (comprised of certain airline participants) because they do not have shares (or presently exercisable warrants to purchase shares) of common stock available for sale in the concurrent common stock offering. Priceline.com believes that no damages arise as a result of the failure to obtain such waiver and consent since such airline participants do not have shares (or presently exercisable warrants to purchase shares) of common stock available for sale. Nevertheless, if a disagreement with such airline participants were to arise, priceline.com can not be certain as to the effect, if any, that it could have on its relationship with such airline participants or whether damages or other remedies could be imposed. TRANSFER AGENT AND REGISTRAR The Transfer Agent and Registrar for the common stock is ChaseMellon Shareholder Services, L.L.C. LISTING The common stock is traded on the Nasdaq National Market under the trading symbol "PCLN." 108 SHARES ELIGIBLE FOR FUTURE SALE Future sales of substantial amounts of common stock, including shares issued upon exercise of outstanding options and warrants, in the public market after this offering could adversely affect market prices prevailing from time to time and could impair priceline.com's ability to raise capital through the sale of its equity securities. Sales of substantial amounts of common stock of priceline.com in the public market could adversely affect the prevailing market price and the ability of priceline.com to raise equity capital in the future. Upon completion of this offering and the concurrent common stock offering, priceline.com will have outstanding 146,782,296 shares of common stock. Of these shares, the 5,500,000 shares of common stock sold in the concurrent common stock offering, the 10,000,000 shares of common stock sold in priceline.com's initial public offering and the 938,540 shares of common stock eligible to be sold by employees upon exercise of stock options pursuant to the option exercise program will be freely tradeable without restriction under the Securities Act unless purchased by "affiliates" of priceline.com as defined in Rule 144 under the Securities Act. The shares of common stock issuable upon conversion of the notes being offered in this offering will be freely tradeable in a similar manner. In addition, 26,582,391 shares are issuable upon exercise of outstanding options granted under the 1997 Omnibus Plan and the 1999 Omnibus Plan. Priceline.com has filed a registration statement on Form S-8 covering the shares of common stock issuable under such options. As a result, when the options are exercised, the shares issued will be freely tradeable after September 25, 1999 under the Securities Act unless purchased by "affiliates" of priceline.com as defined in Rule 144 under the Securities Act. The balance of priceline.com's outstanding shares of common stock and the shares of common stock issuable upon exercise of outstanding warrants will be "restricted securities" under the Securities Act, subject to restrictions on the timing, manner and volume of sales of such shares. Each of the selling stockholders in the concurrent common stock offering and Mr. Jay S. Walker, who, after the offerings, will own an aggregate of 147,835,331 shares of common stock, including shares issuable upon exercise of options and warrants owned by them, have agreed, subject to limited exceptions, for a period of 180 days after the date of this prospectus that they will not, without the prior written consent of Morgan Stanley & Co. Incorporated, directly or indirectly: - offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend or otherwise transfer or dispose of, directly or indirectly, any shares of common stock or any securities convertible into or exercisable or exchangeable for common stock; - enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the common stock; - as to selling stockholders that are parties to the registration rights agreement, make any demand for, or exercise any right with respect to, the registration of any shares of common stock or any security convertible into or exercisable or exchangeable for common stock; or - file a registration statement, other than, in the case of priceline.com, a registration statement (1) on Form S-8 covering shares of common stock subject to outstanding options or options to be issued under the 1997 Omnibus Plan or the 1999 Omnibus Plan or (2) on any appropriate form in response to demand registration rights under the registration rights agreement. The restrictions described in this paragraph do not apply in certain circumstances, including: - the sale of the shares to the underwriters in the concurrent common stock offering; - the issuance of restricted stock awards under priceline.com's existing employee benefit plans or shares of common stock upon the exercise of an option or a warrant or the conversion of a security outstanding on the date of this prospectus; 109 - the grant of options to certain officers, directors, employees or consultants provided such options are not exercisable prior to the end of the lock-up period; - the issuance of warrants (or shares of capital stock upon the exercise of such warrants) to suppliers or other entities providing products or services to priceline.com in connection with entering into certain supply, adaptive marketing or other similar arrangements, provided that the recipients of such warrants or shares agree to be bound by the foregoing provisions; - in the case of each selling stockholder, the sale or other transfer of any shares of common stock by certain of the foregoing persons to any associate of such selling stockholder, as such term is defined in Rule 12b-2 under the Exchange Act, of such person which agrees to be bound by the foregoing provisions; or - the grant of exchange rights and the issuance of our common stock on exercise of such exchange rights, in connection with the development by priceline.com of new lines of business through other entities, PROVIDED THAT no such issuance is permitted prior to 180 days after the date of this prospectus. In addition, holders who will own 3,547,311 shares of common stock after this offering and options to purchase an additional 4,532,504 shares after this offering agreed in connection with our initial public offering to similar restrictions until after September 25, 1999. In connection with the option exercise program, holders of options to purchase 9,676,356 shares of common stock registered on our Form S-8 entered into lock-up agreements restricting the exercise of their options and sale of the underlying shares until 180 days after the date of this prospectus, without the prior written consent of priceline.com. After giving effect to these contractual restrictions and shares that may be issued upon exercise of outstanding options and warrants, we estimate that additional shares of common stock will be available for sale in the public market as follows:
APPROXIMATE NUMBER OF SHARES ELIGIBLE FOR DATE SALE - ----------------------------------------------------------------------------------------- ----------------------- September 26, 1999....................................................................... 5,140,000 October through November 1999............................................................ 1,520,000 December 1999 through January 2000....................................................... 11,580,000 Thereafter............................................................................... 150,650,000
Since many of these shares were purchased at prices substantially below current market prices, we believe a significant number of these shares will be sold when eligible for resale. In general, under Rule 144 as currently in effect, a person, or persons whose shares are aggregated, who has beneficially owned restricted shares for at least one year, including the holding period of any prior owner except an affiliate, would be entitled to sell within any three-month period a number of shares that does not exceed the greater of (1) 1% of the number of shares of common stock then outstanding, which will equal approximately 1,400,000 shares immediately after this offering, or (2) the average weekly trading volume of the common stock during the four calendar weeks preceding the filing of a Form 144 with respect to such sale. Sales under Rule 144 also are subject to certain manner of sale provisions and notice requirements and to the availability of current public information about priceline.com. Under Rule 144(k), a person who is not deemed to have been an affiliate of priceline.com at any time during the three months preceding a sale, and who has beneficially owned the shares proposed to be sold for at least two years, including the holding period of any prior owner except an affiliate, is entitled to sell such shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144. Rule 701 permits resales of shares in reliance upon Rule 144 but without compliance with certain restrictions of Rule 144. Any employee, officer or director of or consultant to priceline.com who purchased his or her shares pursuant to a written compensatory plan or contract may be entitled to rely on the resale provisions of Rule 701. Rule 701 permits affiliates to sell their Rule 701 shares under Rule 144 without 110 complying with the holding period requirements of Rule 144. Rule 701 further provides that non-affiliates may sell such shares in reliance on Rule 144 without having to comply with the holding period, public information, volume limitation or notice provisions of Rule 144. Upon consummation of this offering and the concurrent common stock offering and subject to the foregoing lock-up agreements, holders of up to 142,153,503 shares of common stock and securities exercisable for shares of common stock will have certain rights to request the registration of their shares under the Securities Act. Upon the effectiveness of such registration, all shares covered by such registration statement would be freely transferable. Walker Digital also owns directly approximately 5.2% of our outstanding common stock. Walker Digital has established an option plan for its officers and employees that provides for the grant of options to purchase common stock held by Walker Digital. See "Description of Capital Stock--Registration Rights." 111 UNDERWRITERS Under the terms and subject to the conditions set forth in the underwriting agreement dated the date of this prospectus, the underwriters named below have severally agreed to purchase, and priceline.com has agreed to sell to the underwriters, severally, the respective principal amount of notes set forth opposite their names below:
PRINCIPAL NAME AMOUNT - -------------------------------------------------------------------------------------------------- -------------- Morgan Stanley & Co. Incorporated................................................................. Goldman, Sachs & Co............................................................................... Allen & Company Incorporated...................................................................... BancBoston Robertson Stephens Inc................................................................. Donaldson, Lufkin & Jenrette Securities Corporation............................................... Merrill Lynch, Pierce, Fenner & Smith Incorporated............................................................................ -------------- Total....................................................................................... $ 250,000,000 -------------- --------------
The underwriters are offering the notes subject to their acceptance of the notes from priceline.com and subject to prior sale. The underwriting agreement provides that the obligation of the underwriters to pay for and accept delivery of the notes is subject to approval of certain legal matters by its counsel and to certain other conditions. The underwriters are obligated to take and pay for all of the notes offered if any are taken, other than the notes covered by the over-allotment option described below. The underwriters propose to offer part of the notes directly to the public at the public offering price set forth on the cover page of this prospectus and part to certain dealers at a price which represents a concession not in excess of % of the principal amount of the notes. The underwriters may allow, and such dealers may reallow, a concession not in excess of % of the principal amount of the notes to other underwriters or to other dealers. After the initial offering of the notes, the offering price and other selling terms may from time to time be varied by the underwriters. Priceline.com has granted to the underwriters an option, exercisable within 30 days of the date of the underwriting agreement, to purchase up to an additional $37,500,000 aggregate principal amount of the notes at the public offering price set forth on the cover page of this prospectus, less underwriting discounts and commissions. The underwriters may exercise this option solely for the purpose of covering over-allotments, if any. To the extent the option is exercised, each underwriter will become obligated to purchase about the same percentage of the additional notes as the principal amount listed next to the underwriter's name in the preceding table bears to the total principal amount of notes listed next to the names of all underwriters in the preceding table. If the underwriters' option is exercised in full, the total price to the public would be $ , the total underwriters' discounts and commissions would be $ and the total proceeds to priceline.com would be $ . The underwriting agreement provides that priceline.com will indemnify the underwriters against certain liabilities, including liabilities under the Securities Act. Priceline.com does not intend to list the notes on any national securities exchange or seek quotation of the notes on the Nasdaq National Market. The underwriters have advised priceline.com that they presently intend to make a market in the notes as permitted by applicable laws and regulations. The underwriters are not obligated, however, to make a market in the notes and any such market making may be discontinued at 112 any time at the sole discretion of the underwriters. Accordingly, no assurance can be given as to the liquidity of, or trading markets for, the notes. Each of priceline.com, the selling stockholders in the concurrent common stock offering and Mr. Jay S. Walker has agreed that, without the prior written consent of Morgan Stanley & Co. Incorporated on behalf of the underwriters, they will not, during the period ending 180 days after the date of this prospectus: - offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend or otherwise transfer or dispose of, directly or indirectly, any shares of common stock or any securities convertible into or exercisable or exchangeable for common stock; - enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the common stock; - as to selling stockholders that are parties to the registration rights agreement, make any demand for, or exercise any right with respect to, the registration of any shares of common stock or any security convertible into or exercisable or exchangeable for common stock; or - file a registration statement other than, in the case of priceline.com, a registration statement (1) on Form S-8 covering shares of common stock subject to outstanding options or options to be issued under the 1997 Omnibus Plan or the 1999 Omnibus Plan or (2) on any appropriate form in response to demand registration rights under the registration rights agreement. The restrictions described in this paragraph do not apply in certain circumstances, including: - the sale of the shares to the underwriters in the concurrent common stock offering; - the issuance of restricted stock awards under priceline.com's existing employee benefit plans or shares of common stock upon the exercise of an option or a warrant or the conversion of a security outstanding on the date of this prospectus; - the grant of options to certain officers, directors, employees or consultants provided such options are not exercisable prior to the end of the lock-up period; - the issuance of warrants (or shares of capital stock upon the exercise of such warrants) to suppliers or other entities providing products or services to priceline.com in connection with entering into certain supply, adaptive marketing or other similar arrangements, provided that the recipients of such warrants or shares agree to be bound by the foregoing provisions; - in the case of each selling stockholder, the sale or other transfers of any shares of common stock by certain of the foregoing persons to any associate of such selling stockholder, as such term is defined in Rule 12b-2 under the Exchange Act, of such person which agrees to be bound by the foregoing provisions; or - the grant of exchange rights and the issuance of our common stock on exercise of such exchange rights, in connection with the development by priceline.com of new lines of business through other entities, PROVIDED THAT no such issuance is permitted prior to 180 days after the date of this prospectus. 113 In order to facilitate the offering of the notes, the underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of the notes or the common stock. Specifically, the underwriters may over-allot in connection with the offering, creating a short position in the notes for their own account. In addition, to cover over-allotments or stabilize the price of the notes or the common stock, the underwriters may bid for, and purchase, the notes or shares of the common stock in the open market. Finally, the underwriting syndicate may reclaim selling concessions allowed to an underwriter or a dealer for distributing the notes in the offering, if the syndicate repurchases previously distributed notes in transactions to cover short positions, in stabilization transactions or otherwise. Any of these activities may stabilize or maintain the market price of the notes or the common stock above independent market levels. The underwriters are not required to engage in these activities, and may discontinue any of these activities at any time. Priceline.com has entered into an adaptive marketing agreement with Discover Financial Services, Inc. Discover Financial Services will pay priceline.com a fee for qualifying credit applications and qualifying upgrades of existing Discover credit card accounts. Discover Financial Services and Morgan Stanley & Co. Incorporated are both wholly owned by Morgan Stanley Dean Witter & Co. 114 LEGAL MATTERS The validity of the issuance of the notes offered, and of the shares of common stock into which the notes are convertible, and certain other matters will be passed upon for priceline.com by Skadden, Arps, Slate, Meagher & Flom LLP and Melissa M. Taub, Esq., Senior Vice President, General Counsel and Secretary of priceline.com, and the validity of the notes, and of the shares of common stock into which the notes are convertible, offered by priceline.com will be passed upon for the underwriters by Davis Polk & Wardwell. EXPERTS The combined financial statements of priceline.com and Priceline Travel, Inc. as of December 31, 1997 and December 31, 1998 (restated) and for the period July 18, 1997 (Inception) to December 31, 1997 and for the year ended December 31, 1998 (restated) included in this prospectus have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report appearing herein and have been so included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. ADDITIONAL INFORMATION Priceline.com has filed with the Securities and Exchange Commission a registration statement on Form S-1 under the Securities Act with respect to the shares of common stock offered hereby. This prospectus does not contain all of the information set forth in the registration statement and the exhibits thereto. For further information with respect to priceline.com and the common stock offered hereby, reference is made to the registration statement and the exhibits thereto. Statements contained in this prospectus regarding the contents of any contract or any other document to which reference is made are not necessarily complete, and, in each instance where a copy of such contract or other document has been filed as an exhibit to the registration statement, reference is made to the copy so filed, each such statement being qualified in all respects by such reference. A copy of the registration statement and the exhibits thereto may be inspected without charge at the Public Reference Room of the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and copies of all or any part of the registration statement may be obtained from the Public Reference Section of the Commission upon the payment of the fees prescribed by the Commission. The public may obtain information on the operation of the Public Reference Room by calling the Commission at 1-800-SEC-0330. The Commission also maintains a Web site (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding registrants, such as priceline.com, that file electronically with the Commission. 115 INDEX TO FINANCIAL STATEMENTS
PAGE --------- INDEPENDENT AUDITORS' REPORT............................................................................... F-2 COMBINED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1997 AND DECEMBER 31, 1998 AND FOR THE PERIOD JULY 18, 1997 (INCEPTION) TO DECEMBER 31, 1997 AND THE YEAR ENDED DECEMBER 31, 1998 (As Restated): Combined Balance Sheets................................................................................ F-3 Combined Statements of Operations...................................................................... F-4 Combined Statements of Changes in Stockholders' Equity................................................. F-5 Combined Statements of Cash Flows...................................................................... F-6 Notes to Combined Financial Statements................................................................. F-7 CONDENSED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998 AND JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 and 1999 (UNAUDITED): Condensed Balance Sheets............................................................................... F-22 Condensed Statements of Operations..................................................................... F-23 Condensed Statement of Changes in Stockholders' Equity................................................. F-24 Condensed Statements of Cash Flows..................................................................... F-25 Notes to Condensed Financial Statements................................................................ F-26
F-1 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders of priceline.com Incorporated and Priceline Travel, Inc. We have audited the accompanying combined balance sheets of priceline.com Incorporated and Priceline Travel, Inc. (collectively the Company) as of December 31, 1997 and 1998 and the related combined statements of operations, changes in stockholders' equity and cash flows for the period July 18, 1997 (Inception) to December 31, 1997 and the year ended December 31, 1998. These combined financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these combined financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the combined financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the combined financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such combined financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 1997 and 1998 and the results of their operations and their cash flows for the period July 18, 1997 to December 31, 1997 and the year ended December 31, 1998 in conformity with generally accepted accounting principles. As discussed in Note 13, the accompanying 1998 financial statements have been restated. /s/ Deloitte & Touche LLP Stamford, Connecticut February 10, 1999 (March 25, 1999 as to Note 12 and March 16, 1999 as to Note 13) F-2 PRICELINE.COM INCORPORATED AND PRICELINE TRAVEL, INC. COMBINED BALANCE SHEETS AS OF DECEMBER 31, 1997 AND 1998
1997 1998 ------------ -------------- AS RESTATED SEE NOTE 13 ASSETS CURRENT ASSETS: Cash and cash equivalents......................................................... $ 16,459 $ 53,593,026 Restricted bank deposit........................................................... -- 511,589 Accounts receivable, net of allowance for uncollectible accounts of $290,823 at December 31, 1998............................................................... -- 4,176,980 Note receivable from stockholder.................................................. 250,000 -- Prepaid expenses and other current assets......................................... -- 1,921,953 ------------ -------------- Total current assets.......................................................... 266,459 60,203,548 PROPERTY AND EQUIPMENT--Net......................................................... 1,180,119 5,926,877 RESTRICTED BANK CERTIFICATE OF DEPOSIT.............................................. -- 168,750 OTHER ASSETS........................................................................ 2,686 273,310 ------------ -------------- TOTAL ASSETS........................................................................ $ 1,449,264 $ 66,572,485 ------------ -------------- ------------ -------------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable.................................................................. $ 899,052 $ 5,268,430 Related party payable............................................................. 1,104,391 32,447 Accrued professional fees......................................................... 266,614 1,766,216 Accrued marketing fees............................................................ -- 1,225,315 Accrued telecommunications expense................................................ 24,354 776,303 Other accrued expenses............................................................ 36,595 490,807 Current portion of capital lease obligations...................................... 21,906 25,033 Other current liabilities......................................................... 302,363 696,997 ------------ -------------- Total current liabilities..................................................... 2,655,275 10,281,548 LONG-TERM DEBT--net................................................................. -- 989,018 CAPITAL LEASE OBLIGATIONS--net of current portion................................... 51,108 26,074 ------------ -------------- Total liabilities................................................................... 2,706,383 11,296,640 COMMITMENTS AND CONTINGENCIES (Note 10) STOCKHOLDERS' EQUITY (DEFICIENCY): Preferred stock................................................................... -- 311,262 Common stock...................................................................... 416,358 748,802 Additional paid-in capital........................................................ 840,005 171,155,186 Accumulated deficit............................................................... (2,513,482) (116,939,405) ------------ -------------- Total stockholders' equity (deficiency)....................................... (1,257,119) 55,275,845 ------------ -------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.......................................... $ 1,449,264 $ 66,572,485 ------------ -------------- ------------ --------------
See notes to combined financial statements. F-3 PRICELINE.COM INCORPORATED AND PRICELINE TRAVEL, INC. COMBINED STATEMENTS OF OPERATIONS FOR THE PERIOD JULY 18, 1997 (INCEPTION) TO DECEMBER 31, 1997 AND THE YEAR ENDED DECEMBER 31, 1998
JULY 18, 1997 (INCEPTION) TO YEAR ENDED DECEMBER 31, DECEMBER 31, 1997 1998 ------------- --------------- AS RESTATED SEE NOTE 13 Revenues.......................................................................... $ -- $ 35,236,860 Cost of revenues: Product costs................................................................... -- 33,495,745 Supplier warrant costs.......................................................... -- 3,029,014 ------------- --------------- Total cost of revenues............................................................ -- 36,524,759 ------------- --------------- Gross profit (loss)............................................................. -- (1,287,899) Expenses: Supplier start-up warrant costs................................................. -- 57,978,678 Sales and marketing............................................................. 441,479 24,388,061 General and administrative...................................................... 1,011,600 18,004,585 Systems and business development................................................ 1,060,091 11,131,650 ------------- --------------- Total expenses.................................................................... 2,513,170 111,502,974 ------------- --------------- Operating loss.................................................................... (2,513,170) (112,790,873) Interest income (expense), net.................................................... (312) 548,374 ------------- --------------- Net loss.......................................................................... (2,513,482) (112,242,499) Accretion on preferred stock...................................................... -- (2,183,424) ------------- --------------- Net loss applicable to common stockholders........................................ $ (2,513,482) $ (114,425,923) ------------- --------------- ------------- --------------- Per share basic and diluted net loss applicable to common stockholders............ $ (0.05) $ (1.41) ------------- --------------- ------------- --------------- Weighted average common shares outstanding........................................ 50,833,756 81,231,425
See notes to combined financial statements. F-4 PRICELINE.COM INCORPORATED AND PRICELINE TRAVEL, INC. COMBINED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE PERIOD JULY 18, 1997 (INCEPTION) TO DECEMBER 31, 1997 AND THE YEAR ENDED DECEMBER 31, 1998
PRICELINE.COM INCORPORATED PRICELINE TRAVEL, INC. COMBINED ------------------------------ --------------------------- ------------- PREFERRED STOCK COMMON STOCK ADDITIONAL COMMON STOCK ADDITIONAL -------------------- -------------------- PAID-IN --------------- PAID-IN ACCUMULATED SHARES AMOUNT SHARES AMOUNT CAPITAL SHARES AMOUNT CAPITAL DEFICIT ---------- -------- ---------- -------- ------------ ------ ------ ---------- ------------- Issuance of common stock and common stock subscriptions..... -- -- 51,669,719 $413,358 $ 836,642 3,000 $3,000 $3,363 -- Net loss............ -- -- -- -- -- -- -- -- $ (2,513,482) ---------- -------- ---------- -------- ------------ ------ ------ ---------- ------------- Balance, December 31, 1997.......... -- -- 51,669,719 413,358 836,642 3,000 3,000 3,363 (2,513,482) Issuance of common stock and common stock subscriptions..... -- -- 41,555,480 332,444 32,662,919 -- -- -- -- Issuance of Series A convertible preferred stock... 17,288,684 $172,887 -- -- 19,827,113 -- -- -- -- Issuance of Series B convertible preferred stock... 13,837,500 138,375 -- -- 54,276,175 -- -- -- -- Accretion on preferred stock as restated.......... -- -- -- -- 2,183,424 -- -- -- (2,183,424) Issuance of options to purchase common stock............. -- -- -- -- 245,063 -- -- -- -- Issuance of warrants to purchase common stock............. -- -- -- -- 61,120,487 -- -- -- -- Net loss as restated.......... -- -- -- -- -- -- -- -- (112,242,499) ---------- -------- ---------- -------- ------------ ------ ------ ---------- ------------- Balance, December 31, 1998 as restated.......... 31,126,184 $311,262 93,225,199 $745,802 $171,151,823 3,000 $3,000 $3,363 $(116,939,405) ---------- -------- ---------- -------- ------------ ------ ------ ---------- ------------- ---------- -------- ---------- -------- ------------ ------ ------ ---------- ------------- TOTAL ------------ Issuance of common stock and common stock subscriptions..... $ 1,256,363 Net loss............ (2,513,482) ------------ Balance, December 31, 1997.......... (1,257,119) Issuance of common stock and common stock subscriptions..... 32,995,363 Issuance of Series A convertible preferred stock... 20,000,000 Issuance of Series B convertible preferred stock... 54,414,550 Accretion on preferred stock as restated.......... -- Issuance of options to purchase common stock............. 245,063 Issuance of warrants to purchase common stock............. 61,120,487 Net loss as restated.......... (112,242,499) ------------ Balance, December 31, 1998 as restated.......... $ 55,275,845 ------------ ------------
See notes to combined financial statements. F-5 PRICELINE.COM INCORPORATED AND PRICELINE TRAVEL, INC. COMBINED STATEMENTS OF CASH FLOWS FOR THE PERIOD JULY 18, 1997 (INCEPTION) TO DECEMBER 31, 1997 AND THE YEAR ENDED DECEMBER 31, 1998
JULY 18, 1997 (INCEPTION) YEAR ENDED TO DECEMBER 31, DECEMBER 31, 1997 1998 --------------- ---------------------- AS RESTATED SEE NOTE 13 OPERATING ACTIVITIES: Net loss................................................................. $ (2,513,482) $ (112,242,499) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization.......................................... 211,996 1,860,096 Provision for uncollectible accounts................................... -- 580,448 Equity based compensation.............................................. -- 67,865,550 Changes in assets and liabilities: Accounts receivable.................................................. -- (4,757,428) Prepaid expenses and other current assets............................ -- (1,921,953) Restricted bank deposit and bank certificate of deposit.............. -- (680,339) Accounts payable and accrued expenses................................ 1,226,615 8,300,456 Other................................................................ 299,677 113,030 --------------- ---------------------- Net cash used in operating activities.............................. (775,194) (40,882,639) --------------- ---------------------- INVESTING ACTIVITIES--Additions to property and equipment................ (1,317,404) (6,606,854) --------------- ---------------------- FINANCING ACTIVITIES: Related party payable.................................................. 1,104,391 (1,071,944) Issuance of long-term debt............................................. -- 1,000,000 Principal payments under capital lease obligations..................... (1,697) (21,907) Issuance of common stock and subscription units........................ 1,006,363 26,495,361 Payment received on stockholder note................................... -- 250,000 Issuance of Series A convertible preferred stock....................... -- 20,000,000 Issuance of Series B convertible preferred stock....................... -- 54,414,550 --------------- ---------------------- Net cash provided by financing activities.......................... 2,109,057 101,066,060 --------------- ---------------------- NET INCREASE IN CASH AND CASH EQUIVALENTS................................ 16,459 53,576,567 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD........................... -- 16,459 --------------- ---------------------- CASH AND CASH EQUIVALENTS, END OF PERIOD................................. $ 16,459 $ 53,593,026 --------------- ---------------------- --------------- ---------------------- SUPPLEMENTAL CASH FLOW INFORMATION: Capital lease obligations.............................................. $ 74,711 $ -- Cash paid during the period for interest............................... 836 60,681
See notes to combined financial statements. F-6 PRICELINE.COM INCORPORATED AND PRICELINE TRAVEL, INC. NOTES TO COMBINED FINANCIAL STATEMENTS 1. BUSINESS DESCRIPTION Priceline.com Incorporated (priceline.com) has pioneered a unique new type of e-commerce known as a demand collection system that enables consumers to use the Internet to save money on a wide range of products and services while enabling sellers to generate incremental revenue. Using a simple and compelling consumer proposition--name your price, priceline.com collects consumer demand, in the form of individual customer offers guaranteed by a credit card, for a particular product or service at a price set by the customer. Priceline.com then either communicates that demand directly to participating sellers or accesses participating sellers' private databases to determine whether the customer's offer can be fulfilled on the basis of the pricing information and rules established by the sellers. Consumers agree to hold their offers open for a specified period of time and once fulfilled, offers cannot be canceled. By requiring consumers to be flexible with respect to brands, sellers and/or product features, priceline.com enables sellers to generate incremental revenue without disrupting their existing distribution channels or retail pricing structures. Priceline.com commenced its service on April 6, 1998 with the sale of leisure airline tickets. During 1997, the Company had been in the development stage. Priceline.com's services were expanded to include the sale of new automobiles, on a test basis, in July 1998, hotel room reservations in October 1998, and home mortgages in January 1999. Priceline.com was founded as a limited liability company (LLC) in July 1997 and converted to a corporation in July 1998. All LLC units and options and warrants to purchase units, were converted in July 1998 to common stock of priceline.com (Common Stock) and options and warrants to purchase Common Stock. For presentation purposes all such LLC units, and options and warrants to purchase units are presented as Common Stock or options and warrants to purchase Common Stock. Priceline Travel, Inc. (Priceline Travel) holds the travel agency license used to effect airline ticket sales. Priceline Travel is wholly owned by the founding stockholder and Vice-Chairman of priceline.com. Priceline.com has a call option to purchase Priceline Travel for nominal consideration. Priceline.com and Priceline Travel are entities under common control, accordingly, the financial statements of the two companies are presented on a combined basis. Priceline Travel will merge into priceline.com during the first quarter of 1999. Priceline.com and Priceline Travel are referred to, collectively, as the Company. Walker Digital Corporation (Walker Digital), a research and development company, developed the priceline.com service and the business model and related intellectual property rights underlying the priceline.com service, the rights for which were transferred to the Company on July 18, 1997. Walker Digital had no operations and no revenues related to the assets transferred to priceline.com. Walker Digital was founded and is controlled by the founding stockholder and Vice Chairman of priceline.com. Walker Digital has also been providing the Company with a variety of services including subleasing office facilities to the Company on a month to month basis. Charges to the Company for such services aggregated $19,813 and $706,160 during the period July 18, 1997 to December 31, 1997 and the year ended December 31, 1998, respectively. Such amounts are included in general and administrative expense. In addition, the Company charged Walker Digital $95,874 and $384,831 for the period July 18, 1997 to December 31, 1997 and the year ended December 31, 1998, respectively, for shared expenses. Such reimbursement has been offset against general and administrative expenses in the accompanying combined statements of operations. Several of the Company's executive offers and other key employees are also officers, employees and/or stockholders of Walker Digital. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF COMBINATION AND BASIS OF PRESENTATION--The combined financial statements for all periods presented include the financial statements of priceline.com and Priceline Travel. The combined financial F-7 PRICELINE.COM INCORPORATED AND PRICELINE TRAVEL, INC. NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) statements have been prepared in accordance with generally accepted accounting principles. All significant intercompany transactions have been eliminated. USE OF ESTIMATES--The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates. FAIR VALUE OF FINANCIAL INSTRUMENTS--The Company's financial instruments, including cash and cash equivalents, restricted bank deposits, accounts receivable-net and accounts payable, are carried at cost which approximates their fair value because of the short-term maturity of these financial instruments. The carrying value of the capital lease obligations and long-term debt approximates fair value because the interest rates on these obligations are comparable to the interest rates that could have been obtained at the date of the balance sheet. CASH AND CASH EQUIVALENTS, RESTRICTED BANK DEPOSITS--The Company invests excess cash primarily in money market accounts, certificates of deposits, and short-term commercial paper. All highly liquid instruments with an original maturity of three months or less are considered cash equivalents. Restricted bank deposits collateralize letters of credit issued in favor of certain airlines. NOTE RECEIVABLE FROM STOCKHOLDER--Represents a note receivable related to the sale of common stock that was subsequently paid on January 9, 1998. PROPERTY AND EQUIPMENT--Property and equipment are stated at historical cost. Depreciation and amortization of property and equipment is computed on a straight-line basis, generally over the estimated useful lives of the assets or, when applicable, the life of the lease, whichever is shorter. Capitalized software costs represent costs paid to third parties and are amortized on a straight-line basis over their estimated useful lives. Maintenance and repairs are charged directly to expense as incurred. INTANGIBLE ASSETS--The Company acquired certain patent rights covering the core buyer-driven commerce system and the method and system for pricing and selling airline ticket options from a Walker Digital affiliate on July 18, 1997 in exchange for 6,895,833 shares of common stock. Since the transfer was between entities under common control, it was recorded at the historical cost of the asset transferred, which was zero. IMPAIRMENT OF LONG-LIVED ASSETS--The Company evaluates the recoverability of its long-lived assets in accordance with Statement of Financial Accounting Standards (SFAS) No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of. SFAS No. 121 requires recognition of impairment of long-lived assets in the event the net book value of such assets exceeds the future undiscounted cash flows attributable to such assets. REVENUES AND COST OF REVENUES--The manner in which revenues are recognized differs depending on the product or service sold through the priceline.com service. With respect to airline ticket or hotel room reservation services, revenues are generated by transactions with customers who make offers to purchase airline tickets and hotel rooms supplied by participating sellers. All offers are guaranteed by a customer credit card. Credit cards are the only form of payment accepted by priceline.com. Revenues and related costs are recognized if, and when, the Company accepts the customer's offer and charges the customer's credit card. Because priceline.com is the merchant of record in these transactions, revenue for these F-8 PRICELINE.COM INCORPORATED AND PRICELINE TRAVEL, INC. NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) services includes the amount billed to the customer, net of certain transportation taxes and fees. Airline and hotel revenues may be supplemented by fees that are paid to the Company by third parties in connection with adaptive marketing programs. With respect to automobile and mortgage services, fees or other payments payable by the seller and/or the customer are recognized as revenue. Because priceline.com acts as an intermediary between the customer and the seller in these transactions, revenue for these products and services is recorded at the amount of the fee received in connection with the transaction, and not on the value of the underlying transaction, when the transaction is completed. Automobile and mortgage services revenues may also include fees from third parties for adaptive marketing programs. Revenues from adaptive marketing programs are earned when customers elect to increase their offering price, and thus the likelihood of a successful transaction, at no additional costs, by participating in a sponsor promotion. Priceline.com earns fee income from the corporate sponsor of each adaptive marketing program based primarily upon customer participation levels. During 1998, the Company generated approximately $4,037,000 of revenues from adaptive marketing programs. All of these adaptive marketing revenues resulted from fees paid to the Company by Capital One Bank in connection with a credit card promotion--see Note 12. Priceline.com expressly permits only credit cards as an acceptable form of payment from its consumers. Consequently, the Company believes that it does not have a significant risk of loss with respect to customer transactions. On rare occasions, the Company provides credit card refunds to individual customers to satisfy disputes and complaints. The Company accrues for expected credit card charge-backs and classifies the resulting expense as an addition to the allowance for doubtful accounts. The Company extends customary payment terms to corporate customers such as automobile dealers and adaptive marketing sponsors. The Company did not experience any uncollectible corporate accounts receivable in 1998. Cost of revenues includes product costs and the pro rata amount of the Delta Warrant earned prior to the December 31, 1998 measurement date based on their performance through that date--see Note 6. SUPPLIER START-UP WARRANT COSTS--Supplier start-up warrant costs includes the value of warrants issued to secure certain airline alliances and relationships including the value of the Delta Warrant net of the amount included in cost of revenues--see Note 6. SALES AND MARKETING--Sales and marketing expenses are comprised primarily of costs of radio and newspaper advertising, costs of the third-party offer-taking call center, credit card processing fees, provisions for customer credit card charge-backs and compensation for the Company's sales and marketing personnel. All sales and marketing costs are expensed as incurred. SYSTEMS AND BUSINESS DEVELOPMENT--Systems and business development expenses are comprised primarily of compensation to the Company's information systems and product development staff and payments to outside contractors, data communications and other expenses associated with operating the Company's Web site, depreciation on computer hardware and licensing fees for computer software. Such costs are expensed as incurred. INTEREST INCOME (EXPENSE), NET--Interest income (expense), net includes interest income of $523 and $633,294 and interest expense of $835 and $84,920 for the period July 18, 1997 to December 31, 1997 and the year ended December 31, 1998, respectively. F-9 PRICELINE.COM INCORPORATED AND PRICELINE TRAVEL, INC. NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) EQUITY-BASED COMPENSATION--The Company accounts for stock-based employee compensation arrangements in accordance with provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and complies with the disclosure provisions of SFAS No. 123, Accounting for Stock-Based Compensation. Under APB Opinion No. 25, compensation expense is based on the difference, if any, on the date of grant, between the fair value of priceline.com's stock and the exercise price. The Company accounts for equity instruments issued to non-employees in accordance with the provisions of SFAS No. 123 and Emerging Issues Task Force ("EITF") Issue No. 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services. All transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable. The measurement date of the fair value of the equity instrument issued is the earlier of the date on which the counterparty's performance is complete or the date on which it is probable that performance will occur. INCOME TAXES--The Company accounts for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes, which requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the temporary difference between the financial statement and tax basis of assets and liabilities using presently enacted tax rates in effect. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. During the period that priceline.com operated as an LLC, it was treated substantially as a partnership for tax purposes and, accordingly, the tax effect of its activities accrued to its members through July 1998. NET LOSS PER SHARE--The Company computes net loss per share in accordance with SFAS No. 128, Earnings Per Share which requires dual presentation of basic earnings per share ("EPS") and diluted EPS. Basic earnings per share is computed using the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed using the weighted average number of common shares and potentially dilutive shares outstanding during the period. Potential common shares consist of the incremental common shares issuable upon conversion of the Series A and Series B Convertible Preferred Stock (using the if-converted method) and shares issuable upon the exercise of stock options and warrants (using the treasury stock method). At December 31, 1998, Series A and Series B Convertible Preferred Stock were convertible into 21,610,854 shares and 17,296,874 shares, respectively, and options and warrants to purchase 42,181,997 shares of Common Stock were outstanding. Outstanding convertible preferred stock, warrants and options could potentially dilute basic earnings per share in the future but have not been included in the computation of diluted net loss per share as the impact would have been antidilutive for the periods presented. BUSINESS RISK--Business risks include the following: Competition--The markets for the products and services offered on the priceline.com service are intensely competitive. The Company competes with both traditional distribution channels and online services. The Company currently or potentially competes with a variety of companies with respect to each product or services offered. The Company potentially faces competition from a number of large online services that have expertise in developing online commerce and in facilitating Internet traffic. Many F-10 PRICELINE.COM INCORPORATED AND PRICELINE TRAVEL, INC. NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) competitors have significant competitive advantages. For example, airlines, hotels and other suppliers also sell their products and services directly to consumers and have established Web sites. Internet directories, search engines and large traditional retailers have significantly greater operating histories, customer bases, technical expertise, brand recognition and/or online commerce experience than the Company. In addition, certain competitors may be able to devote significantly greater resources to furthering their business. Dependence on Airline Industry and Certain Carriers--The Company's near term, and possibly long term, prospects are significantly dependent upon the sale of leisure airline tickets. Sales of leisure airline tickets and revenues derived from related adaptive marketing programs represented essentially all of the Company's revenues for the year ended December 31, 1998. Sales of airline tickets from the Company's three largest airline suppliers accounted for approximately 95% of airline ticket revenue for the year ended December 31, 1998. As a result, currently the Company is substantially dependent upon the continued participation of these three airlines in the priceline.com service in order to maintain and continue to grow its total airline ticket revenues. Significantly reducing the Company's dependence on the airlines is likely to take a long time and there can be no guarantee that the Company will succeed in reducing that dependence. Risks Associated with Brand Development--The Company intends to continue to pursue an aggressive brand-enhancement strategy, which will include mass market and multimedia advertising, promotional programs and public relations activities. To increase awareness of the priceline.com brand and expand it to a wide range of products and services, the Company will need to continue to spend significant amounts on advertising and promotions. These expenditures may not result in a sufficient increase in revenues to cover such advertising and promotions expenses. CONCENTRATION OF CREDIT RISK--Financial instruments which potentially subject the Company to concentrations of credit risk are principally bank deposits and accounts receivable. Cash and cash equivalents and restricted bank deposits are deposited with high credit quality financial institutions. Accounts receivable typically represent credit card purchases and are derived from the revenues earned from customers in the U.S. and are denominated in U.S. dollars. Accounts receivable balances are typically settled through customer credit cards and, as a result, the majority of accounts receivable are collected upon processing of credit card transactions. The Company maintains an allowance for uncollectible accounts based upon the expected collectibility of accounts receivable. During the year ended December 31, 1998, approximately 11% of revenues were generated from one vendor participating in an adaptive marketing program. As of December 31, 1998, amounts due from this vendor represented approximately 54% of accounts receivable. COMPREHENSIVE INCOME--Effective January 1, 1998, the Company adopted SFAS No. 130, Reporting Comprehensive Income. Under SFAS 130 changes in net assets of an entity resulting from transactions and other events and circumstances from non-owner sources are reported in a financial statement for the period in which they are recognized. Because there were no such changes, adoption of SFAS 130 did not impact the combined financial statements of the Company. SEGMENT REPORTING--Effective January 1, 1998, the Company adopted SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information. The Company operates as a single segment and will evaluate additional segment disclosure requirements as it expands its operations. F-11 PRICELINE.COM INCORPORATED AND PRICELINE TRAVEL, INC. NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, Statement of Financial Accounting Standards SFAS No 133 Accounting for Derivative Instruments and Hedging Activities was released. The statement requires the recognition of all derivatives as either assets or liabilities in the balance sheet and the measurement of those instruments at fair value. The accounting for changes in the fair value of a derivative depends on the planned use of the derivative and the resulting designation. The Company is required to implement the statement in the first quarter of fiscal 2000. The Company has not used derivative instruments and believes the impact of adoption of this statement will not have a significant effect on the financial statements. In March 1998, the American Institute of Certified Public Accountants issued Statement of Position (SOP) 98-1, Accounting for Costs of Computer Software Developed or Obtained for Internal Use. This SOP is effective for fiscal years beginning after December 15, 1998. This SOP requires capitalization of certain costs of computer software developed or obtained for internal use. 3. ACCOUNTS RECEIVABLE A summary of the activity in the allowance for uncollectible accounts for the year ended December 31, 1998 is as follows:
AMOUNT ----------- Provision charged to expense..................................................... $ 580,448 Charge offs...................................................................... (289,625) ----------- Balance at end of period......................................................... $ 290,823 ----------- -----------
4. PROPERTY AND EQUIPMENT Property and equipment at December 31, 1997 and 1998 consists of the following:
ESTIMATED USEFUL LIVES (YEARS) 1997 1998 ----------------- ------------ ------------ Computer equipment and software......................................... 3 $ 1,144,263 $ 7,034,088 Office equipment........................................................ 3 89,846 584,034 Furniture and fixtures.................................................. 7 158,006 380,847 ------------ ------------ Total................................................................... 1,392,115 7,998,969 Less accumulated depreciation and amortization.......................... 211,996 2,072,092 ------------ ------------ Property and equipment--net............................................. $ 1,180,119 $ 5,926,877 ------------ ------------ ------------ ------------
Depreciation and amortization expense was $211,996 and $1,860,096 for the period July 18, 1997 to December 31, 1997 and the year ended December 31, 1998, respectively. 5. LONG-TERM DEBT In April 1998, priceline.com issued a promissory note to an investor for $1,000,000. The promissory note bears interest at a rate of 6% per annum and matures on April 15, 2003. In connection with the promissory note, priceline.com issued detachable warrants to purchase 62,500 common shares at $0.80 per F-12 PRICELINE.COM INCORPORATED AND PRICELINE TRAVEL, INC. NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) 5. LONG-TERM DEBT (CONTINUED) share. The portion of the proceeds allocable to the warrant, estimated fair value of $12,795, was accounted for as additional paid-in capital. The fair value of the warrants was determined using an option pricing model. The discount will be recorded as interest expense over the term of the promissory note. At December 31, 1998, the principal balance of the promissory note, net of unamortized discount, was $989,018. 6. STOCKHOLDERS' EQUITY Combined stockholders' equity at December 31, 1997 and 1998 consists of the following:
1997 1998 ------------- --------------- Priceline.com Incorporated: Common stock, $0.008 par value--authorized 300,000,000 shares at December 31, 1997 and 1998 issued and outstanding, 51,669,719 and 93,225,199 shares at December 31, 1997 and 1998, respectively................................................. $ 413,358 $ 745,802 Convertible Preferred Stock, $0.01 par value; authorized 150,000,000 shares: Series A--$1.16 liquidation value; issued and outstanding 17,288,684 shares....... -- 172,887 Series B--$4.00 liquidation value; issued and outstanding, 13,837,500 shares...... -- 138,375 Additional paid-in capital........................................................ 836,642 171,151,823 Priceline Travel, Inc: Common stock, $1 par value--3,000 shares authorized, issued and outstanding....... 3,000 3,000 Additional paid-in capital........................................................ 3,363 3,363 Accumulated deficit............................................................... (2,513,482) (116,939,405) ------------- --------------- Total stockholders' equity (deficiency)........................................... $ (1,257,119) $ 55,275,845 ------------- --------------- ------------- ---------------
On July 18, 1997, priceline.com issued 42,990,211 shares of Common Stock for the initial contributed services of the founders. No compensation expense was recognized for the contributed services as priceline.com was in the earliest phases of development. Such services included conceiving the priceline.com business model, developing business strategies and operating plans, initiating contact with airline suppliers and raising capital. There were no employment agreements related to the services initially contributed and/or the shares issued in respect of such shares. Also, on July 18, 1997, priceline.com issued 6,895,833 shares of Common Stock to Walker Digital in exchange for the transfer by Walker Digital to priceline.com all of the rights, title, and interest in certain patents and patent applications relating to buyer driven commerce. In July 1998, priceline.com also issued 8,125,000 shares of Common Stock, to the Chairman and Chief Executive Officer which resulted in the recognition of a one time charge of $6,500,000 with respect to these shares. The shares were issued as compensation for agreeing to accept the position. In July 1998, pursuant to an agreement between priceline.com and two partnerships affiliated with General Atlantic Partners, LP (collectively GAP), priceline.com sold to GAP a total of 17,288,684 shares of F-13 PRICELINE.COM INCORPORATED AND PRICELINE TRAVEL, INC. NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) 6. STOCKHOLDERS' EQUITY (CONTINUED) Series A Convertible Preferred Stock, par value $0.01 per share (the Series A Preferred Stock) for $20,000,000. In December 1998, priceline.com raised net proceeds of approximately $54,414,550 by completing a private placement of an aggregate of 13,837,500 shares of its Series B Convertible Preferred Stock (the Series B Preferred Stock) with several investors, including GAP and Vulcan Ventures Incorporated. Fees of $850,000 have been paid to a company, in which a director of priceline.com is a director and stockholder, in connection with this transaction. Shares of the Series A and Series B Preferred Stock are automatically convertible, subject to antidilution adjustment, into an equal number of shares of Common Stock upon an initial public offering of the Company. The holders of the Series A and Series B Preferred Stock vote together as a single class with the holders of Common Stock. If the Company has not consummated an initial public offering by December 1999, the conversion price of Series B Preferred Stock will be adjusted to $1.97 per share. Since the Series B Preferred Stock contained this beneficial conversion feature at the date of issue, the Company allocated a portion of the proceeds equal to the value of the feature, $34,650,000, to additional paid-in capital. This amount will be amortized over one year. Amortization will cease if an initial public offering is completed within one year and the Series B Preferred Stock convert at $3.20 per share. The shares of the Series A and Series B Preferred Stock rank senior to the Common Stock with respect to liquidation and equal to the Common Stock with respect to dividends. In April 1998, priceline.com issued warrants to purchase 125,000 shares of Common Stock, at a zero exercise price, to a non-employee in exchange for services rendered to the Company. The estimated fair value of the warrants at the date of grant of $100,000 was based on the value of the equivalent shares as of the grant date, that is 125,000 shares at $0.80 per share, and has been reflected as sales and marketing expense and additional paid-in-capital. In April 1998, priceline.com issued warrants to purchase 62,500 shares of Common Stock at an exercise price of $0.80 per share in conjunction with a promissory note (see Note 5--Long-Term Debt). In August 1998, priceline.com entered into a warrant agreement with Delta Air Lines (Delta) to purchase up to 18,892,603 shares of Common Stock at an exercise price of approximately $0.93 per share (Delta Warrant) for agreeing to participate in the priceline.com service. Vesting was contingent upon achievement of certain predetermined performance thresholds. However, there was no penalty for failure to provide ticket inventory to satisfy these performance thresholds. Accordingly, no expense was recorded when the warrant was issued. On December 31, 1998, the Company amended its agreement with Delta to eliminate the vesting contingencies and fix the number of shares subject to the warrant at 18,619,402. The warrants were immediately vested on the date of grant, in that they are not subject to any forfeiture for any reason. The amended Delta Warrant will become exercisable at the earlier of seven years or over three years upon the achievement of certain performance thresholds. The agreement does not require Delta to make any performance commitments, is non-exclusive and allows Delta to participate in other programs similar to the priceline.com service. Accordingly, the Company recognized approximately $58.7 million of expense based upon the fair value of the warrant on December 31, 1998, of which $3 million is included in cost of revenues-supplier warrant costs and $55.7 million is included in expenses-supplier start-up warrant costs in the accompanying statement of operations. On December 31, 1998, priceline.com issued warrants to purchase 937,500 shares of Common Stock at an exercise price of $3.20 per share to three airlines in recognition of their being among the original F-14 PRICELINE.COM INCORPORATED AND PRICELINE TRAVEL, INC. NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) 6. STOCKHOLDERS' EQUITY (CONTINUED) participants in the priceline.com service. Because there are no requirements as to the nature or length of that participation and the warrants are not subject to forfeiture for any reason, the Company recognized approximately $2.3 million of expense based upon the fair value of the warrants at December 31, 1998, which is included in expenses-supplier start-up warrant costs in the accompanying statement of operations. On January 29, 1999, priceline.com issued warrants to an airline to purchase 1,250,000 shares of Common Stock at an exercise price of $6.40 per share. The warrants become exercisable as follows, 50% on January 29, 2000 and 50% on January 29, 2001. The agreement requires the airline to make available to priceline.com airline ticket inventory on certain specified terms and conditions for two years. If the airline does not provide the specified airline ticket inventory, the unexercised warrants are returnable and in addition, there is a penalty of $1.0 million in the first year and $0.5 million in the second year. The fair value of the warrant of $3.1 million at the grant date was capitalized and will be amortized over the two year period during which services will be provided to the Company. The fair value of the airline warrants was based on a third party valuation using an option pricing model and the following assumptions:
OTHER DELTA AIRLINE WARRANTS WARRANTS ----------- ------------- Stock Price............................................................................. $ 3.20 $ 3.20 Exercise Price.......................................................................... $ 0.93 $ 3.20-$6.40 Term.................................................................................... 7 years 3-4 years Volatility.............................................................................. 132% 132% Risk Free Rate.......................................................................... 4.6% 4.6%
As of December 31, 1998, no warrants had been exercised. 7. STOCK OPTION PLAN Priceline.com has adopted the 1997 Omnibus Plan (the Plan), which provides for grants of options as incentives and rewards to encourage employees, officers, consultants and directors in the long term success of the Company. The Plan provides for grants of options to purchase up to 23,875,000 shares at a purchase price equal to the fair market value on the date of grant. Generally, the options vest over three years from the date of grant. In accounting for the Plan, the Company has elected to follow APB 25 and related interpretations in accounting for its employee stock options. When the exercise price of employee stock options issued under the plan equaled the fair value of the underlying stock on the date of grant, no compensation expense was recorded. Compensation expense was recognized for the fair value of the options granted to non-employees and to the extent fair value of the underlying stock exceeded the exercise price of employee stock options. Compensation expense, included in general and administrative, recognized during the year ended December 31, 1998 aggregated $245,063. F-15 PRICELINE.COM INCORPORATED AND PRICELINE TRAVEL, INC. NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) The following summarizes the transactions pursuant to the Plan:
WEIGHTED AVERAGE RANGE SHARES OPTION PRICE OF SHARE ------------ ------------- ----------- Granted during 1998..................................................... 23,449,219 $ 0.93 $ 0.80-3.20 Forfeited............................................................... (189,374) 0.80 0.80 Cancelled............................................................... (815,625) 0.80 0.80 ------------ Balance at December 31, 1998............................................ 22,444,220 0.94 ------------ ------------ Exercisable at December 31, 1998........................................ None ------------ ------------ Available for grant at December 31, 1998................................ 1,430,780 ------------ ------------
Had compensation costs been determined based upon the fair value at grant date, the Company's pro forma net loss and pro forma net loss per share for the year ended December 31, 1998 would have been reported as follows:
REPORTED PRO FORMA -------------- -------------- Net loss......................................................................... $ 112,242,499 $ 114,613,228 Net loss applicable to common shareholders....................................... 114,425,923 116,796,653 Basic and diluted loss per common share.......................................... 1.41 1.44
The fair value of each option grant was determined on the date of grant using the minimum value method. The weighted average fair value of options granted during 1998 was estimated to be approximately $0.15 on the dates of grant using the minimum value method and the following assumptions: volatility of 0%, risk free interest rate of 6.00% and an expected life of 3 years, respectively. The Plan also provides for the grant of tandem stock appreciation rights, stand-alone stock appreciation rights, phantom stock and other forms of equity based incentive awards which do not reduce the number of shares with respect to which incentive awards may be granted. No such awards were made as of December 31, 1998. In February 1999, priceline.com established the 1999 Omnibus Plan (the 1999 Plan), which provides for grants of options as incentives and rewards to encourage employees, officers, consultants and directors in the long term success of the Company. The Plan provides for grants of options to purchase up to 9,375,000 shares at a purchase price equal to the fair market value on the date of grant. Generally, the options vest over three years from the date of grant. The Plan also provides for the grant of tandem stock appreciation rights, stand-alone stock appreciation rights, phantom stock and other forms of equity based incentive awards which do not reduce the number of shares with respect to which incentive awards may be granted. 8. TAXES INCOME TAXES--Through July 31, 1998, priceline.com operated as a limited liability company and income taxes (benefits) accrued to the members. Accordingly, no income taxes (benefits) were reflected in the accompanying financial statements as of December 31, 1997 and for the period then ended. Since converting from an LLC to a corporation in July 1998, the Company has incurred net operating losses of $22,703,000. This loss will expire if not utilized by December 31, 2018. As of December 31, 1998 a valuation allowance for the full amount of the net deferred tax asset of approximately $37,985,023, resulting from the tax net operating losses and other items was recorded because of the uncertainty regarding its realization. F-16 PRICELINE.COM INCORPORATED AND PRICELINE TRAVEL, INC. NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) 8. TAXES (CONTINUED) The tax effects of temporary differences that give rise to significant portions of deferred tax assets at December 31, 1998 are as follows:
1998 -------------- Equity based compensation..................................................... $ 25,267,265 Net operating loss carryforwards.............................................. 9,347,966 Start-up costs................................................................ 2,988,359 Other......................................................................... 381,433 -------------- Less valuation allowance...................................................... (37,985,023) -------------- Deferred tax asset, net....................................................... $ -- -------------- --------------
The income tax benefit is different from the amount computed using applicable statutory federal rates for the following reasons:
1998 -------------- Income tax benefit at federal statutory rate.................................. $ 39,284,875 Adjustment due to: LLC status through July 31, 1998............................................ (7,089,945) State taxes and other....................................................... 5,790,093 Increase in valuation allowance............................................. (37,985,023) -------------- Income tax benefit............................................................ $ -- -------------- --------------
FEDERAL AIR TRANSPORTATION TAX--Currently, a Federal transportation tax is imposed upon the sale of airline tickets and generally is collected by the airlines selling the tickets. The tax is based upon a percentage of the cost of transportation, which was 9% for periods prior to October 1, 1998 and 8% thereafter. The tax has been calculated based on the amount paid to the airline for a ticket, rather than the price paid by the customer. There is a possibility that current law requires computation of the tax based on the price paid by the customer. Approximately $111,000 in additional taxes relating to the method of calculating the tax has been accrued as of December 31, 1998. 9. OTHER RELATED PARTY TRANSACTIONS The Founder and Vice Chairman of priceline.com also serves as non-executive Chairman of NewSub Services, Inc. (NewSub), a direct marketing company co-founded by him. The Company participates in certain adaptive marketing programs with NewSub. Sales and marketing expense related to these programs totaled $80,799 for the year ended December 31, 1998. There was no such expense in 1997. In June 1998, priceline.com issued a promissory note to a Walker Digital for $1,000,000. The promissory note bore interest at a rate of 6% per annum and was due June 30, 1999. The note has been repaid. 10. COMMITMENTS AND CONTINGENCIES LEGAL PROCEEDINGS--On January 6, 1999, priceline.com received notice that a third party patent applicant and patent attorney, Thomas G. Woolston, purportedly had filed in December 1998 with the United States F-17 PRICELINE.COM INCORPORATED AND PRICELINE TRAVEL, INC. NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) 10. COMMITMENTS AND CONTINGENCIES (CONTINUED) Patent and Trademark Office a request to declare an interference between a patent application filed by Woolston describing an electronic market for used and collectible goods and priceline.com's core buyer-driven commerce patent. Priceline.com has received a copy of a Petition for Interference from Woolston, the named inventor of at least three United States Patent applications titled Consignment Nodes, one of which has issued as a patent. Priceline.com currently is awaiting information from the Patent Office regarding whether it will initiate an interference proceeding concerning Woolston's patent application and priceline.com's core buyer-driven commerce patent. An interference is an administrative proceeding instituted in the Patent Office to determine questions of patentability and priority of invention between two or more parties claiming the same patentable invention. There is no statutory period within which the Patent Office must act on an interference request. If an interference is declared and proceeds through a final hearing in the Patent Office, a final judgment is made by the Patent Office as to inventorship. Following such final judgment, appeals could be made in Federal court. While there can be no certainty as to time periods, interference proceedings typically take years to resolve. As a threshold to the initiation of an interference proceeding, Woolston must show that his patent application supports claims that he copied from the priceline.com core buyer-driven commerce patent. In order to make this showing, he would have to prove, among other things, that he invented the subject matter of the priceline.com claims before the inventors of the priceline.com patent. If the Patent Office were to find that Woolston's patent application supported the copied priceline.com claims, it would resolve the interference by awarding inventorship to the party with the earliest proven date of invention. Woolston recently announced an agreement to license his issued patent and pending patent applications to the owner of an Internet travel service that, according to such announcement, commenced on-line operations in the fourth quarter of 1998 and purports to compete with priceline.com. While the interference process is still at an early stage, priceline.com believes that it has meritorious defenses to Woolston's claim, which it intends to pursue vigorously. Among other things, priceline.com believes that the Woolston patent application does not disclose the inventions covered by the priceline.com patent claims. However, it is impossible to predict the outcome of an interference with certainty. While Woolston claims to have an earlier invention date by a period of approximately sixteen months, the final decision as to priority of invention would be made by the Patent Office after considering facts provided by each party during the interference proceeding. If an interference is declared and thereafter resolved in favor of Woolston, such resolution could result in an award of some or all of the disputed patent claims to Woolston. If, following such award, Woolston were successful in a patent infringement action against priceline.com, including prevailing over all defenses available to priceline.com such as those of non-infringement and invalidity, this could require priceline.com to obtain licenses from Woolston at a cost which could significantly adversely affect priceline.com's business. If Woolston prevailed in both an interference and an infringement action, then priceline.com could be enjoined from conducting business through the priceline.com service to the extent covered by the patent claims awarded to Woolston. In addition, defense of the interference action may be expensive and may divert management attention away from priceline.com's business. On January 19, 1999, Marketel International Inc. (Marketel), a California corporation, filed a lawsuit against priceline.com and Priceline Travel, among others. On February 22, 1999, Marketel filed an amended and supplemental complaint. The amended complaint filed by Marketel alleges causes of action for, among other things, misappropriation of trade secrets, breach of contract, conversion, breach of confidential relationship, copyright infringement, fraud, unfair competition and false advertising, and seeks injunctive relief and damages in an unspecified amount. In its amended complaint, Marketel alleges, F-18 PRICELINE.COM INCORPORATED AND PRICELINE TRAVEL, INC. NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) 10. COMMITMENTS AND CONTINGENCIES (CONTINUED) among other things, that the defendants conspired to misappropriate Marketel's business model, which it describes as a buyer-driven electronic marketplace for travel services and its appurtenant techniques, market research, forms, plans, and processes, which allegedly were provided in confidence approximately ten years ago. The amended complaint also alleges that three former Marketel employees are the actual sole inventors or co-inventors of a patent which was issued on August 11, 1998 and which patent has been assigned to priceline.com. Marketel asks that the patent's inventorship be corrected accordingly. Based upon publicly available information, priceline.com believes that Marketel's fax and fee-based business was launched in 1991 and ceased operations seven months later. Priceline.com's Internet-based model was independently developed by Walker Digital and priceline.com, and practiced by the Company starting in 1998. Based on publicly available information and Marketel's complaint, priceline.com understands that Marketel operated a fax-based travel information service which offered consumers, travel agents and/or consolidators the opportunity to purchase specially printed forms. These forms, when accompanied by an additional non-refundable fee, allowed prospective ticket buyers to fax to Marketel credit-card guaranteed bids for airline travel at a bid price specified by the buyer. The Company believes that Marketel has not engaged in any regular commercial activities since ceasing operations in 1992. Based upon publicly available information, Marketel reactivated its active status as a corporation by satisfying its back-due tax obligations to the State of California shortly after the filing of its complaint. On February 5, and February 10, 1999, the Company filed their answer and amended answer, respectively, to the amended complaint, in which they denied the material allegations of liability in the complaint. Priceline.com and all other defendants strongly dispute the material legal and factual allegations contained in Marketel's amended complaint and believe that the amended complaint is without merit. Priceline.com intends to defend vigorously against the action. Defending the lawsuit may involve significant expense and, due to the inherent uncertainties of litigation, there can be no certainty as to the ultimate outcome. Pursuant to the indemnification obligations contained in the Purchase and Intercompany Services Agreement with Walker Digital, Walker Digital has agreed to indemnify, defend and hold harmless priceline.com for damages, liabilities and legal expenses incurred in connection with the Marketel litigation. 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, and including claims of alleged infringement of third party intellectual property rights by the company. Such claims, even if not meritorious, could result in the expenditure of significant financial and managerial resources. AIRLINE ALLIANCES AND RELATIONSHIPS--Priceline.com has entered into Airline Participation Agreements with eighteen airlines for the supply of airline tickets. The Airline Participation Agreements do not commit the airlines to provide tickets for any particular routes or at a discount to their retail prices, but outline the terms and conditions under which tickets may be sold pursuant to fares, rules and availability that the airlines may provide from time to time. The Airline Participation Agreements are generally subject to termination upon 30 days notice by priceline.com or the airline. EMPLOYMENT CONTRACTS--Priceline.com has entered into employment agreements with certain members of senior management that provide for minimum annual compensation of approximately $2,135,000 in the aggregate. The agreements provide for periods of employment of up to 3 years. Generally, the agreements provide for incentives and bonuses based on the achievement of performance goals, as well as the grant of stock options under the 1997 Omnibus Stock Option Plan. F-19 PRICELINE.COM INCORPORATED AND PRICELINE TRAVEL, INC. NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) 10. COMMITMENTS AND CONTINGENCIES (CONTINUED) CAPITAL LEASES--Priceline.com leases certain machinery and equipment costing $74,711 under a capital lease agreement. Accumulated depreciation on this equipment was $2,075 and $26,979 at December 31, 1997, and December 31, 1998, respectively. These amounts are included in property and equipment in Note 4. Future minimum lease payments, including interest, under the capital lease at December 31, 1998 are as follows:
YEAR ENDING DECEMBER 31, - ------------------------------------------------------------------------------------------------------- 1999................................................................................................... $ 30,389 2000................................................................................................... 30,389 --------- Total minimum lease payments........................................................................... 60,778 Less amounts representing interest..................................................................... 9,671 --------- Present value of future minimum lease payments......................................................... 51,107 Less current portion of obligations.................................................................... 25,033 --------- Obligations under capital leases, net of current portion............................................... $ 26,074 --------- ---------
11. BENEFIT PLAN Priceline.com adopted a defined contribution 401(k) savings plan (the Plan) during 1998 covering all employees who are at least 21 years old and have completed 6 months of service. The Plan allows eligible employees to contribute up to 20% of their eligible earnings, subject to a statutorily prescribed annual limit. The Company may make matching contributions on a discretionary basis to the Plan. All participants are fully vested in their contributions and investment earnings. During the year ended December 31, 1998, the Company did not make any matching contributions to the Plan. 12. SUBSEQUENT EVENTS On March 25, 1999, the Company obtained shareholder approval of a 1.25 for 1 stock split of its common stock and an increase in the authorized shares of its common stock to 1,000,000,000 shares. In conjunction with the stock split the par value of the common stock was reduced from $.01 per share to $.008 per share. All share and per share data have been retroactively adjusted to reflect the stock split. On March 24, 1999, priceline.com exercised its call option to purchase Priceline Travel for nominal consideration and Priceline Travel was merged into priceline.com. On March 3, 1999, Capital One Bank notified the Company of its termination of its adaptive marketing program effective May 1, 1999. 13. RESTATEMENT Subsequent to the issuance of the Company's combined 1998 financial statements, the Company's management determined that the calculation of the fair value of the Delta warrant, other airline warrants and the beneficial conversion feature on the Series B Preferred Stock should be revised. The fair value of the Delta warrant and the other airline warrants has been revised to reflect the change in the volatility assumption from 50% to 132%, eliminate the large block and lack of marketability discounts, and consider F-20 PRICELINE.COM INCORPORATED AND PRICELINE TRAVEL, INC. NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) 13. RESTATEMENT (CONTINUED) the warrant's anti-dilution and exercisability features. As a result, the 1998 combined financial statements have been restated from the amounts previously reported to recognize an additional $22.0 million of expense based upon the revised fair value of the warrants at December 31, 1998, of which $3.0 million is included in the cost of revenues-supplier warrant costs and $19.0 million is included in expenses-supplier start-up warrant costs. In addition, the value of the beneficial conversion feature on the Series B Preferred Stock has been revised to calculate such amount based on 22,500,000 shares. As a result, additional paid-in capital and accumulated deficit have been restated from amounts previously reported to recognize an additional $883,424 of accretion of preferred stock based on the revalued beneficial conversion feature. A summary of the significant effects of the restatement is as follows:
AS PREVIOUSLY REPORTED AS RESTATED -------------- --------------- At December 31, 1998: Additional paid-in capital................................................. $ 148,224,070 $ 171,155,186 Accumulated deficit........................................................ (94,008,289) (116,939,405) For the year ended December 31, 1998: Cost of revenues-supplier warrant costs.................................... -- 3,029,014 Expenses-supplier start-up warrant costs................................... 38,960,000 57,978,678 Net loss................................................................... (90,194,807) (112,242,499) Accretion on preferred stock............................................... (1,300,000) (2,183,424) Net loss applicable to common stockholders................................. (91,494,807) (114,425,923) Per share basic and diluted net loss applicable to common stockholders..... (1.13 (1) (1.41)
- ------------------------ (1) Per share basic and diluted net loss applicable to common stockholders as previously reported has been restated for a 1.25 for one stock split. F-21 PRICELINE.COM INCORPORATED CONDENSED BALANCE SHEETS AS OF DECEMBER 31, 1998 AND JUNE 30, 1999 (UNAUDITED)
DECEMBER 31, JUNE 30, ASSETS 1998 1999 ------------ ------------ CURRENT ASSETS: Cash and cash equivalents.................................... $ 53,593,026 $142,803,134 Short term investments....................................... -- 9,307,474 Accounts receivable, net of allowance for uncollectible accounts of $290,823 and $1,173,243 at December 31, 1998 and June 30, 1999, respectively............................ 4,176,980 22,683,987 Related party receivable..................................... -- 1,383,592 Prepaid expenses and other current assets.................... 2,433,542 7,338,897 ------------ ------------ Total current assets....................................... 60,203,548 183,517,084 PROPERTY AND EQUIPMENT--net.................................... 5,926,877 15,311,214 RELATED PARTY RECEIVABLE....................................... -- 4,374,372 OTHER ASSETS................................................... 442,060 1,592,222 ------------ ------------ TOTAL ASSETS................................................... $ 66,572,485 $204,794,892 ------------ ------------ ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable............................................. $ 5,268,430 $ 26,933,608 Related party payable........................................ 32,447 -- Accrued expenses............................................. 4,258,641 6,403,716 Other current liabilities.................................... 722,030 136,109 ------------ ------------ Total current liabilities.................................. 10,281,548 33,473,433 LONG-TERM DEBT--net............................................ 989,018 -- CAPITAL LEASE OBLIGATIONS--net of current portion.............. 26,074 12,248 ------------ ------------ Total liabilities.............................................. 11,296,640 33,485,681 COMMITMENTS AND CONTINGENCIES (Note 6) STOCKHOLDERS' EQUITY Preferred stock.............................................. 311,262 -- Common stock................................................. 745,802 1,138,564 Additional paid-in capital................................... 171,158,186 326,880,953 Accumulated deficit.......................................... (116,939,405) (156,710,306) ------------ ------------ Total stockholders' equity................................. 55,275,845 171,309,211 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY..................... $ 66,572,485 $204,794,892 ------------ ------------ ------------ ------------
See accompanying notes to condensed financial statements. F-22 PRICELINE.COM INCORPORATED CONDENSED STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1999 (UNAUDITED)
JUNE 30, JUNE 30, 1998 1999 -------------- -------------- Revenues......................................................................... $ 7,021,639 $ 160,974,391 Cost of Revenues: Product costs.................................................................. 7,942,840 144,323,527 Supplier warrant costs......................................................... -- 761,518 -------------- -------------- Total cost of revenues........................................................... 7,942,840 145,085,045 Gross profit (loss)............................................................ (921,201) 15,889,346 -------------- -------------- Expenses: Sales and marketing............................................................ 7,764,477 34,871,086 General and administrative..................................................... 4,798,876 9,169,869 Systems and business development............................................... 5,368,214 5,652,423 -------------- -------------- Total expenses................................................................... 17,931,567 49,693,378 -------------- -------------- Operating loss................................................................... (18,852,768) (33,804,032) Interest income, net............................................................. 162,331 2,387,104 -------------- -------------- Net loss......................................................................... (18,690,437) (31,416,928) Accretion on preferred stock..................................................... -- (8,353,973) -------------- -------------- Net loss applicable to common stockholders....................................... $ (18,690,437) $ (39,770,901) -------------- -------------- -------------- -------------- Per share basic and diluted net loss applicable to common stockholders........... $ (0.27) $ (0.29) -------------- -------------- -------------- -------------- Weighted average common shares outstanding....................................... 69,738,365 137,436,399
See accompanying notes to condensed financial statements. F-23 PRICELINE.COM INCORPORATED CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED)
PREFERRED STOCK COMMON STOCK ADDITIONAL --------------------- --------------------- PAID-IN ACCUMULATED SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL ---------- --------- ---------- --------- ----------- ------------ ----------- Balance, January 1, 1999......... 31,126,184 $ 311,262 93,225,199 $ 745,802 $171,158,186 $(116,939,405) $55,275,845 Conversion of Series A convertible preferred stock.... (17,288,684) (172,887) 21,610,853 172,887 -- -- -- Conversion of Series B convertible preferred stock.... (13,837,500) (138,375) 17,296,875 138,375 -- -- -- Accretion on preferred stock..... -- -- -- -- 8,353,973 (8,353,973) -- Issuance of common stock......... -- -- 10,000,000 80,000 144,274,221 -- 144,354,221 Exercise of warrants............. 187,500 1,500 48,500 -- 50,000 Issuance of warrants to purchase common stock................... -- -- -- -- 3,046,073 -- 3,046,073 Net loss......................... -- -- -- -- -- (31,416,928) (31,416,928) ---------- --------- ---------- --------- ----------- ------------ ----------- Balance, June 30, 1999........... -- $ -- 142,320,427 $1,138,564 $326,880,953 $(156,710,306) $171,309,211 ---------- --------- ---------- --------- ----------- ------------ ----------- ---------- --------- ---------- --------- ----------- ------------ -----------
See accompanying notes to condensed financial statements. F-24 PRICELINE.COM INCORPORATED CONDENSED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1999 (UNAUDITED)
JUNE 30, JUNE 30, 1998 1999 -------------- -------------- OPERATING ACTIVITIES: Net loss......................................................................... $ (18,690,437) $ (31,416,928) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization................................................ 659,544 1,911,678 Provision for uncollectible accounts......................................... 5,829 1,401,372 Supplier warrant costs....................................................... 761,518 Changes in assets and liabilities: Receivables.................................................................. (1,679,081) (19,908,379) Related party receivables.................................................... -- (5,790,411) Prepaid expenses and other current assets.................................... (368,159) (3,382,318) Accounts payable and accrued expenses........................................ 3,315,410 23,703,167 Other........................................................................ (296,447) (1,030,020) -------------- -------------- Net cash used in operating activities...................................... (17,053,341) (33,750,321) INVESTING ACTIVITIES: Additions to property and equipment.......................................... (5,076,153) (11,285,032) Purchases of short-term investments.......................................... -- (9,307,474) -------------- -------------- Net cash used in investing activities...................................... (5,076,153) (20,592,506) FINANCING ACTIVITIES: Issuance of long-term debt................................................... 2,000,000 -- Payment of long-term debt and capital lease obligations...................... (10,587) (1,012,099) Issuance of common stock and subscription units.............................. 23,364,000 144,565,034 Payment received on stockholder note......................................... 250,000 -- -------------- -------------- Net cash provided by financing activities.................................. 25,603,413 143,552,935 NET INCREASE IN CASH AND CASH EQUIVALENTS........................................ 3,473,919 89,210,108 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD................................... 16,459 53,593,026 -------------- -------------- CASH AND CASH EQUIVALENTS, END OF PERIOD......................................... $ 3,490,378 $ 142,803,134 -------------- -------------- -------------- -------------- SUPPLEMENTAL CASH FLOW INFORMATION--Cash paid during the year for interest....... $ 5,232 $ 50,397
See accompanying notes to condensed financial statements. F-25 PRICELINE.COM INCORPORATED NOTES TO CONDENSED FINANCIAL STATEMENTS 1. BUSINESS DESCRIPTION Priceline.com Incorporated ("priceline.com") has pioneered a new type of e-commerce known as a demand collection system that enables consumers to use the Internet to save money on a wide range of products and services while enabling sellers to generate incremental revenue. Priceline.com collects consumer demand, in the form of individual customer offers guaranteed by a credit card for a particular product or service at a price set by the customer. Priceline.com then either communicates that demand directly to participating sellers or accesses participating sellers' private databases to determine whether the customer's offer can be fulfilled on the basis of the pricing information and rules established by the sellers. Consumers agree to hold their offers open for a specified period of time and once fulfilled, offers cannot be cancelled. By requiring consumers to be flexible with respect to brands, sellers and/or product features, priceline.com enables sellers to generate incremental revenue without disrupting their existing distribution channels or retail pricing structures. Priceline Travel, Inc. ("Priceline Travel") previously held the travel agency license used to effect airline ticket sales through the priceline.com service. Priceline Travel was wholly owned by the founding stockholder of priceline.com and on March 24, 1999, Priceline Travel was merged into priceline.com for nominal consideration. The accompanying condensed financial statements include the financial position and results of operations of Priceline Travel for all periods presented. 2. BASIS OF PRESENTATION The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring accruals considered necessary for a fair presentation, have been included in the accompanying unaudited financial statements. Operating results for the six months ended June 30, 1999 are not necessarily indicative of the results that may be expected for the full year ending December 31, 1999. 3. INITIAL PUBLIC OFFERING OF COMMON STOCK On April 1, 1999, priceline.com completed an initial public offering in which it sold 10,000,000 shares of its common stock at a price of $16.00 per share, raising $160.0 million in gross proceeds. Offering proceeds to priceline.com, net of approximately $11.2 million in aggregate underwriters discounts and commissions and $4.4 million in related expenses, were approximately $144.4 million. Simultaneous with the effectiveness on March 29, 1999 of priceline.com's Registration Statement on Form S-1, each outstanding share of priceline.com's Series A and Series B convertible preferred stock was automatically converted into shares of common stock. As of June 30, 1999, approximately 142.2 million shares of common stock were outstanding. 4. NET LOSS PER SHARE Priceline.com computes net loss per share in accordance with Statement of Financial Accounting Standards No. 128, "Earnings Per Share" which requires dual presentation of basic earnings per share ("EPS") and diluted EPS. Basic earnings per share is computed using the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed using the weighted average number F-26 PRICELINE.COM INCORPORATED NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED) 4. NET LOSS PER SHARE (CONTINUED) of common shares and potentially dilutive shares outstanding during the period. The effect of the conversion of the Series A and Series B convertible preferred stock is included in the weighted average number of shares outstanding during the period that commenced on the conversion date, March 29, 1999. The effect of the preferred stock conversion for the period prior to March 29, 1999 has not been included in the computation of diluted net loss per share as the impact would have been antidilutive for the periods presented. Potential common shares consist of the incremental common shares issuable upon the exercise of stock options and warrants. At June 30, 1999, options and warrants to purchase 48,228,959 shares of common stock were outstanding. Outstanding warrants and options could potentially dilute basic earnings per share in the future but have not been included in the computation of diluted net loss per share as the impact would have been antidilutive for the periods presented. Net loss applicable to common stockholders for the six month period ended June 30, 1999 was $39.8 million including a non-recurring, non-cash charge associated with the accretion on the Series B convertible preferred stock that was outstanding during such period of $8.4 million. Based on the weighted average number of 137.4 million shares of common stock outstanding during the six month period ended June 30, 1999, the per share basic and diluted net loss applicable to common stockholders was $0.29. 5. RECENT ACCOUNTING PRONOUNCEMENTS In March 1998, the American Institute of Certified Public Accountants issued Statement of Position ("SOP") 98-1, "Accounting for Costs of Computer Software Developed or Obtained for Internal Use." This SOP requires capitalization of certain costs of computer software developed or obtained for internal use. Priceline.com adopted this SOP on January 1, 1999 and for the six month period ended June 30, 1999, priceline.com capitalized approximately $5.7 million of computer software developed or obtained for internal use. Amortization of such costs aggregated approximately $149,000 during the six month period ended June 30, 1999. 6. COMMITMENTS AND CONTINGENCIES On January 6, 1999, priceline.com received notice that a third party patent applicant and patent attorney, Thomas G. Woolston, purportedly had filed in December 1998 with the United States Patent and Trademark Office a request to declare an "interference" between a patent application filed by Woolston describing an electronic market for used and collectible goods and priceline.com's core buyer-driven commerce patent. Priceline.com has received a copy of a Petition for Interference from Woolston, the named inventor of at least three United States Patent applications titled "Consignment Nodes," one of which has issued as a patent. Priceline.com currently is awaiting information from the Patent Office regarding whether it will initiate an interference proceeding concerning Woolston's patent application and priceline.com's core buyer-driven commerce patent. Woolston recently announced an agreement to license his issued patent and pending patent applications to the owner of a competing Internet travel service. While the interference process is still at an early stage, priceline.com believes that it has meritorious defenses to Woolston's claim, which it intends to pursue vigorously. Among other things, priceline.com believes that the Woolston patent application does not disclose the inventions covered by the priceline.com patent claims. However, it is impossible to predict the outcome of an interference with certainty. While Woolston claims to have an earlier invention date by a period of approximately sixteen months, the final decision as to priority of invention would be made by the Patent Office after considering facts provided by F-27 PRICELINE.COM INCORPORATED NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED) 6. COMMITMENTS AND CONTINGENCIES (CONTINUED) each party during the interference proceeding. If an interference is declared and thereafter resolved in favor of Woolston, such resolution could result in an award of some or all of the disputed patent claims to Woolston. If, following such award, Woolston were successful in a patent infringement action against priceline.com, including prevailing over all defenses available to priceline.com such as those of non-infringement and invalidity, this could require priceline.com to obtain licenses from Woolston at a cost which could significantly adversely affect priceline.com's business. If Woolston prevailed in both an interference and an infringement action, then priceline.com could be enjoined from conducting business through the priceline.com service to the extent covered by the patent claims awarded to Woolston. In addition, defense of the interference action may be expensive and may divert management attention away from priceline.com's business. On January 19, 1999, Marketel International Inc. ("Marketel"), a California corporation, filed a lawsuit against priceline.com and Priceline Travel, among others. On February 22, 1999, Marketel filed an amended and supplemental complaint, and on March 17, 1999, Marketel filed a second amended complaint. The second amended complaint filed by Marketel alleges causes of action for, among other things, misappropriation of trade secrets, breach of contract, conversion, breach of confidential relationship, copyright infringement, fraud, unfair competition and false advertising, and seeks injunctive relief and damages in an unspecified amount. In its second amended complaint, Marketel alleges, among other things, that the defendants conspired to misappropriate Marketel's business model, which it describes as a buyer-driven electronic marketplace for travel services and its appurtenant techniques, market research, forms, plans, and processes, which allegedly were provided in confidence to some of the defendants approximately ten years ago. The second amended complaint also alleges that three former Marketel employees are the actual sole inventors or co-inventors of a patent which was issued on August 11, 1998 and which patent has been assigned to priceline.com. Marketel asks that the patent's inventorship be corrected accordingly. On February 5, 1999, February 10, 1999 and March 31, 1999, the defendants filed their answer, amended answer and answer to the second amended complaint, respectively in which they denied the material allegations of liability in the complaints. Priceline.com and all other defendants strongly dispute the material legal and factual allegations contained in Marketel's second amended complaint and believe that the second amended complaint is without merit. Since May 28, 1999, there has been a discovery stay in effect, which was caused by the withdrawal of Marketel's counsel. Marketel has retained new counsel, and the priceline.com now anticipates moving forward with discovery. Defending the Marketel litigation may involve significant expense and, due to the inherent uncertainties of litigation, there can be no certainty as to the ultimate outcome. Pursuant to the indemnification obligations contained in the Purchase and Intercompany Services Agreement with Walker Digital, Walker Digital has agreed to indemnify, defend and hold harmless priceline.com for damages, liabilities and legal expenses incurred in connection with the Marketel litigation. From time to time priceline.com 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. Such claims, even if not meritorious, could result in the expenditure of significant financial and managerial resources. F-28 PRICELINE.COM INCORPORATED NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED) 7. SUBSEQUENT EVENTS COMMON STOCK AND CONVERTIBLE DEBT OFFERINGS. On July 23, 1999, priceline.com filed a registration statement covering the sale of up to $287.5 million of convertible subordinated notes (including $37.5 million in respect of an underwriters' over-allotment option) and up to 6.325 million shares of common stock (including 825,000 shares in respect of an underwriters' over-allotment option). The common stock offering is to be comprised of 2.0 million shares of common stock to be issued and sold by priceline.com and 3.5 million shares to be sold by certain selling stockholders, plus the sale by the selling stockholders of any additional shares sold upon exercise of the underwriters' over-allotment option. OPTION EXERCISE PROGRAM. On July 19, 1999, an option exercise program was established to enable employees employed as of June 1, 1999 to exercise options and sell shares through a cashless exercise program administered through a broker dealer. Priceline.com employees holding 938,540 options that were vested as of June 1, 1999 were permitted, during the period commencing on July 20, 1999 and ending on July 30, 1999, to exercise a portion of their options that otherwise were not exercisable until September 26, 1999 (following expiration of the 180 day initial public offering lock-up period) and to sell the underlying option shares through the program. Any employee who elected to exercise options and sell option shares pursuant to the option exercise program was required to agree to enter into a "lock-up" agreement in a form similar to that signed by selling stockholders in the secondary common stock offering, which prohibits additional option exercises or stock sales prior to 180 days from the completion of the secondary common stock offering. CONTINENTAL AIRLINES AGREEMENTS. Continental Airlines agreed to join the priceline.com service on July 20, 1999 pursuant to the terms of an Airline Participation Agreement with priceline.com. Upon exercise of the Airline Participation Agreement, Priceline.com issued a warrant to Continental for the purchase of 1 million shares of common stock at an exercise price of $97.41 per share. The warrant will become exercisable upon the earlier of July 2004 or the achievement of certain performance thresholds. However the agreement does not require Continental to make any performance commitments. Priceline.com will incur a non-cash charge of approximately $90 million during the quarter ending September 30, 1999, reflecting the fair value of the Continental warrant at the grant date. F-29 [At the top of the page, a picture of a customer in the middle of the following text: BUYER-DRIVEN COMMERCE] [Four page screen shots with textual descriptions of the four steps involved in making an offer for airline tickets with the heading: airline ticket example... and the following language below the heading: In just four steps, priceline.com customers can name their own price for a leisure airline ticket on a major carrier.] The first page screen shot in the top left with the following caption: Step 1: Tell us where and when.... Enter where you want to go and the dates you want to travel. Choose as many different airports to leave and arrive from as you want--the more the better. The second page screen shot in the top right with the following caption: Step 2: Review the rules.... Priceline.com's airline ticket service is designed for leisure travelers who can be flexible on their flights and routing. The rules are clearly explained on the Web site. The third page screen shot in the bottom left with the following caption: Step 3: Name your price.... Enter the price you want to pay--there are no minimums and no advance purchase restrictions. We encourage customers to shop around first and be reasonable. The fourth page screen shot in the bottom right with the following caption: Step 4: Provide a credit card.... Your credit card is used to guarantee that you'll buy the tickets if priceline.com is successful at getting a major airline to agree to your price. You get a yes or no answer in just one hour! priceline.com(sm) The page is blank except for the following text in the middle of the page: priceline.com(sm) name your own price..and save! PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth the costs and expenses, other than underwriting discounts and commissions, payable by priceline.com in connection with the sale of the securities being registered. All amounts are estimates. SEC registration fee............................................................ $ 251,009 NASD Filing fee................................................................. 59,750 Nasdaq National Market listing fee.............................................. 35,000 Printing and engraving expenses................................................. 1,000,000 Legal fees and expenses......................................................... 530,000 Accounting fees and expenses.................................................... 90,000 Blue sky fees and expenses...................................................... 10,000 Trustee fees.................................................................... 15,000 Transfer agent fees............................................................. 10,500 Miscellaneous fees and expenses................................................. 78,741 --------- Total......................................................................... $2,080,000 --------- ---------
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Section 145 of the Delaware General Corporation Law authorizes a corporation's board of directors to grant indemnity to directors and officers in terms sufficiently broad to permit such indemnification under certain circumstances for liabilities, including reimbursement for expenses incurred, arising under the Securities Act of 1933. As permitted by Delaware law, Article Seventh of priceline.com's certificate of incorporation provides that (1) priceline.com is required to indemnify its directors and officers to the fullest extent permitted by Delaware law, subject to certain very limited exceptions; (2) priceline.com is permitted to indemnify its other employees to the extent that it indemnifies its officers and directors, unless otherwise required by law, its certificate of incorporation, its by-laws or agreements; (3) priceline.com is required to advance expenses, as incurred, to its directors and officers in connection with a legal proceeding to the fullest extent permitted by Delaware law, subject to certain very limited exceptions; and (4) the rights conferred in the certificate of incorporation are not exclusive. As permitted by Delaware law, priceline.com's certificate of incorporation includes a provision that eliminates the personal liability of its directors for monetary damages for breach of fiduciary duty as a director, except for liability (1) for any breach of the director's duty of loyalty to priceline.com or its stockholders; (2) for acts of omissions not in good faith or that involve intentional misconduct or a knowing violation of law; (3) under Section 174 of Delaware General Corporation Law regarding payments of dividends, stock purchases or redemptions which are unlawful; or (4) for any transaction from which the director derived an improper personal benefit. This provision in the certificate of incorporation does not eliminate the directors' fiduciary duty, and in appropriate circumstances equitable remedies such as injunctive or other forms of non-monetary relief will remain available under Delaware law. In addition, each director will continue to be subject to liability for breach of the director's duty of loyalty to priceline.com for acts or omissions not in good faith or involving intentional misconduct, for knowing violations of law, for actions leading to improper personal benefit to the director, and for payment of dividends or approval of stock repurchases or redemptions that are unlawful under Delaware law. The provision also does not affect a director's responsibilities under any other law, such as the federal securities laws or state or federal environmental laws. II-1 As permitted by Delaware law, priceline.com has purchased insurance covering the company's directors and officers against liability asserted against them in their capacity as such. Reference is made to the Underwriting Agreement contained in Exhibit 1.1 hereto, which contains provisions indemnifying officers and directors of priceline.com against certain liabilities. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. Since its inception, priceline.com has issued and sold the following securities: In July 1997, priceline.com's predecessor issued an aggregate of 42,990,211 equity units to Messrs. Jay S. Walker, Jesse M. Fink, Timothy G. Brier, Paul E. Francis and two other executive officers for services previously rendered. In July 1997, priceline.com's predecessor issued 6,895,833 equity units to Walker Digital Corporation, which, together with its affiliate Walker Asset Management Limited Partnership, transferred to priceline.com all of their rights, title, and interest in certain patents and patent applications relating to buyer-driven commerce. From September 1997 to February 1998, priceline.com's predecessor issued and sold an aggregate of 6,350,878 equity units to Mr. Paul E. Francis, a partnership affiliated with General Atlantic Partners, LLC and six other investors for an estimated fair value of $0.70 per share. From March 1998 to July 1998, priceline.com's predecessor issued and sold an aggregate of 28,650,455 equity units to Mr. Jay S. Walker, a trust affiliated with Mr. Jay S. Walker, Walker Digital, Mr. Richard S. Braddock, a trust affiliated with Mr. N.J. Nicholas, Jr., Mr. Ralph M. Bahna and one other investor for an estimated fair value of $0.80 per share. In April 1998, priceline.com issued warrants to purchase 125,000 shares of common stock to a non-employee in exchange for services rendered to priceline.com for an estimated fair value of approximately $100,000. These warrants have been fully exercised. In April 1998, priceline.com issued warrants to purchase 62,500 shares of common stock at an exercise price of $0.80 per share to an individual in connection with the execution of a promissory note in the amount of $1,000,000. These warrants have been fully exercised. In July 1998, priceline.com's predecessor issued 8,125,000 equity units to Mr. Richard S. Braddock in connection with his employment as its Chief Executive Officer and Chairman. On July 31, 1998, all of the foregoing equity units were converted into an equal number of shares of common stock as a result of the merger of priceline.com's predecessor into priceline.com. On July 31, 1998, priceline.com issued and sold 17,288,684 shares of its Series A convertible preferred stock to two partnerships affiliated with General Atlantic Partners, LLC for an estimated fair value of approximately $1.16 per share. In August 1998, priceline.com issued warrants to Delta to purchase up to 18,892,603 shares of common stock at an exercise price of approximately $0.93 per share. This warrant was amended in December 1998 to, among other things, fix the number of shares of common stock subject to the warrant at 18,619,402. In October 1998, priceline.com issued and sold an aggregate of 134,698 shares of common stock to Mr. Paul J. Blackney and another individual for an estimated fair value of approximately $0.93 per share. On December 8, 1998, priceline.com issued and sold an aggregate of 13,837,500 shares of its Series B convertible preferred stock to Vulcan, two partnerships affiliated with General Atlantic Partners, LLC and seven other investors for an estimated fair value of $4.00 per share. II-2 On December 8, 1998, priceline.com issued and sold an aggregate of 78,125 shares of common stock to Mr. Braddock for an estimated fair value of $3.20 per share. In December 1998, priceline.com issued warrants entitling three airline participants to each purchase up to 312,500 shares of common stock at an exercise price of $3.20 per share. In January 1999, priceline.com issued warrants to an airline to purchase up to 1,250,000 shares of common stock at an exercise price of $6.40 per share. In July 1999, priceline.com issued warrants entitling an airline participant to purchase up to 1,000,000 shares of common stock at an exercise price of $97.41 per share. The issuances described above in this Item 15 were deemed exempt from registration under the Securities Act in reliance on either (1) Rule 701 promulgated under the Securities Act as offers and sales of securities pursuant to certain compensatory benefit plans and contracts relating to compensation in compliance with Rule 701 or (2) Section 4(2) of the Securities Act as transactions by an issuer not involving any public offering. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (A) EXHIBITS:
EXHIBIT DESCRIPTION - --------- --------------------------------------------------------------------------------------------------- 1.1 Form of Underwriting Agreement relating to common stock offering. 1.2 Form of Underwriting Agreement relating to convertible note offering. 2.1 * Agreement of Merger, dated as of July 31, 1998, between priceline.com LLC and the Registrant. 2.2 * Form of Agreement of Merger between Priceline Travel, Inc. and the Registrant. 3.1 * Form of Amended and Restated Certificate of Incorporation of the Registrant. 3.2 * Form of By-Laws of the Registrant. 4.1 Reference is hereby made to Exhibits 3.1 and 3.2. 4.2 * Specimen Certificate for Registrant's Common Stock. 4.3 * Amended and Restated Registration Rights Agreement, dated as of December 8, 1998, among the Registrant and certain stockholders of the Registrant. 4.4 Form of Indenture. 5.1 Opinion of Skadden, Arps, Slate, Meagher & Flom LLP. 5.2 Opinion of Melissa M. Taub, Esq., Senior Vice President, General Counsel and Secretary of the Registrant. 10.1.1 * 1997 Omnibus Plan of the Registrant. 10.1.2 * 1999 Omnibus Plan of the Registrant. 10.2 * Stock Purchase Agreement, dated July 31, 1998, among the Registrant and the investors named therein, as amended. 10.3 * Stock Purchase Agreement, dated as of December 8, 1998, among the Registrant and the investors named therein. 10.4 Reference is hereby made to Exhibit 4.3. 10.5 * Purchase and Intercompany Services Agreement, dated April 6, 1998, among the Registrant, Walker Asset Management Limited Partnership, Walker Digital Corporation and Priceline Travel, Inc.
II-3 (A) EXHIBITS: (CONTINUED)
EXHIBIT DESCRIPTION - --------- --------------------------------------------------------------------------------------------------- 10.6.1 * Employment Agreement, dated as of January 1, 1998, between Jay S. Walker, Walker Digital Corporation, the Registrant and Jesse M. Fink. 10.6.2 * Amendment No. 1 to Employment Agreement, dated November 16, 1998 between the Registrant and Jesse M. Fink. 10.7.1 * Employment Agreement, dated as of July 23, 1998, between the Registrant and Timothy G. Brier. 10.7.2 * Amendment No. 1 to Employment Agreement, dated November 16, 1998, between the Registrant and Timothy G. Brier. 10.8 * Amended and Restated Employment Agreement, dated as of August 15, 1998, by and between the Registrant and Richard S. Braddock. 10.9 * Airline Participation Agreement, dated April 1998, by and among the Registrant, Priceline Travel, Inc. and Trans World Airlines, Inc. 10.10 *+ Airline Participation Agreement, dated October 2, 1998, by and among the Registrant, Priceline Travel, Inc. and Northwest Airlines, Inc. 10.11.1 *+ General Agreement, dated August 31, 1998, by and among the Registrant, Priceline Travel, Inc. and Delta Air Lines, Inc. 10.11.2 *+ Airline Participation Agreement, dated August 31, 1998, by and among the Registrant, Priceline Travel, Inc. and Delta Air Lines, Inc. 10.11.3 *+ Amendment to the Airline Participation Agreement and the General Agreement, dated December 31, 1998, between and among the Registrant, Priceline Travel, Inc. and Delta Air Lines, Inc. 10.11.4+ Letter Agreement, dated July 16, 1999, between the Registrant and Delta Air Lines, Inc. 10.12 *+ Airline Participation Agreement, dated December 31, 1998, by and among the Registrant, Priceline Travel, Inc. and America West Airlines. 10.13 *+ Internet Marketing and Licensing Agreement, as of August 1, 1998, between the Registrant and LendingTree, Inc. 10.14 * Systems Access Agreement, dated as of August 4, 1997, between the Registrant and WORLDSPAN, L.P. 10.15 * Master Agreement for Outsourcing Call Center Support, dated as of April 6, 1998, between the Registrant and CALLTECH Communications, Incorporated. 10.16 * $1,000,000 Commercial Promissory Note, dated April 15, 1998, between the Registrant and Andre Jaeckle. 10.17 * Warrant Agreement, dated April 15, 1998, between the Registrant and Andre Jaeckle. 10.18 * Warrant Agreement, dated April 9, 1998, between the Registrant and William Shatner. 10.19.1 * Participation Warrant Agreement, dated August 31, 1998, between the Registrant and Delta Air Lines, Inc. 10.19.2 *+ First Amendment and Waiver to Participation Warrant Agreement, dated December 31, 1998, between the Registrant and Delta Air Lines, Inc. 10.21 * Form of Participation Warrant Agreement. 10.22.1 *+ Participation Warrant Agreement, dated as of December 31, 1998.
II-4 (A) EXHIBITS: (CONTINUED)
EXHIBIT DESCRIPTION - --------- --------------------------------------------------------------------------------------------------- 10.22.2 *+ Amendment No. 1, dated as of February 4, 1999, to Warrant Participation Agreement, dated as of December 31, 1999. 10.22.3 *+ Amendment No. 2, dated as of March 3, 1999, to Participation Warrant Agreement, dated as of December 31, 1998, as previously amended by Amendment No. 1 to Warrant Participation Agreement, dated as of February 4, 1999. 10.23 * Form of Hotel Agreement. 10.24 * Co-Marketing Agreement, dated February 18, 1999, by and between the Registrant and E*TRADE Group, Inc. 10.25 **+ Interactive Marketing Agreement, dated March 31, 1999, by and between the Registrant and First USA Bank, N.A. 10.26 ++ First Amendment to Interactive Marketing Agreement, dated as of April 26, 1999, modifying the Interactive Marketing Agreement, dated March 31, 1999, by and between the Registrant and First USA Bank, N.A. 10.27 + Employment Agreement, dated as of June 14, 1999, between the Registrant and Daniel H. Schulman. 10.28 + Airline Participation Agreement, dated July 16, 1999, between the Registrant and Continental Airlines, Inc. 10.29 + Participation Warrant Agreement, dated July 16, 1999, between the Registrant and Continental Airlines, Inc. 12.1 + Computation of Ratio of Earnings to Fixed Charges. 23.1 Consent of Skadden, Arps, Slate, Meagher & Flom LLP (included in Exhibit 5.1). 23.2 Consent of Melissa M. Taub, Esq. (included in Exhibit 5.2). 23.3 Consent of Deloitte & Touche LLP. 24.1 + Power of Attorney. 25.1 Statement of Eligibility of the Trustee on Form T-1.
- ------------------------ * Previously filed as an exhibit to the Form S-1 (Registration No. 333-69657) filed in connection with priceline.com's initial public offering and incorporated herein by reference. ** Previously filed as an exhibit to the Form 10-Q filed on May 17, 1999 and incorporated herein by reference. + Previously filed. + Certain portions of this document have been omitted pursuant to a confidential treatment request. (B) FINANCIAL STATEMENT SCHEDULES: All schedules have been omitted because the information required to be set forth therein is not applicable or is shown in the combined financial statements or notes thereto. II-5 ITEM 17. UNDERTAKINGS The undersigned Registrant hereby undertakes to provide to the underwriters at the closing specified in the underwriting agreement, certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon rule 430A and contained in a form of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) of (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purposes of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial BONA FIDE offering thereof. II-6 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this Amendment No. 2 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Stamford, State of Connecticut, on August 10, 1999. PRICELINE.COM INCORPORATED By: /s/ THOMAS P. D'ANGELO ----------------------------------------- Thomas P. D'Angelo VICE PRESIDENT FINANCE AND CONTROLLER
Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 2 to the Registration Statement has been signed by the following persons in the capacities and on the dates indicated:
SIGNATURE TITLE DATE - ------------------------------ --------------------------- ------------------- Chairman and Chief * Executive Officer - ------------------------------ (Principal Executive August 10, 1999 Richard S. Braddock Officer) * Vice Chairman, Founder and - ------------------------------ Director August 10, 1999 Jay S. Walker * Chief Financial Officer - ------------------------------ (Principal Financial August 10, 1999 Paul E. Francis Officer) * Senior Vice President, - ------------------------------ General Counsel and August 10, 1999 Melissa M. Taub Secretary /s/ THOMAS P. D'ANGELO Vice President Finance and - ------------------------------ Controller (Principal August 10, 1999 Thomas P. D'Angelo Accounting Officer) * Director - ------------------------------ August 10, 1999 Paul A. Allaire * Director - ------------------------------ August 10, 1999 Ralph M. Bahna
II-7
SIGNATURE TITLE DATE - ------------------------------ --------------------------- ------------------- * Director - ------------------------------ August 10, 1999 Paul J. Blackney * Director - ------------------------------ August 10, 1999 William E. Ford * Director - ------------------------------ August 10, 1999 Marshall Loeb * Director - ------------------------------ August 10, 1999 N.J. Nicholas, Jr. * Director - ------------------------------ August 10, 1999 Nancy B. Peretsman * Director - ------------------------------ August 10, 1999 Daniel H. Schulman
*By: /s/ THOMAS P. D'ANGELO ---------------------------------------- Thomas P. D'Angelo ATTORNEY-IN-FACT
II-8 EXHIBIT INDEX
EXHIBIT DESCRIPTION - --------- --------------------------------------------------------------------------------------------------- 1.1 Form of Underwriting Agreement relating to common stock offering. 1.2 Form of Underwriting Agreement relating to convertible note offering. 2.1 * Agreement of Merger, dated as of July 31, 1998, between priceline.com LLC and the Registrant. 2.2 * Form of Agreement of Merger between Priceline Travel, Inc. and the Registrant. 3.1 * Form of Amended and Restated Certificate of Incorporation of the Registrant. 3.2 * Form of By-Laws of the Registrant. 4.1 Reference is hereby made to Exhibits 3.1 and 3.2. 4.2 * Specimen Certificate for Registrant's Common Stock. 4.3 * Amended and Restated Registration Rights Agreement, dated as of December 8, 1998, among the Registrant and certain stockholders of the Registrant. 4.4 Form of Indenture. 5.1 Opinion of Skadden, Arps, Slate, Meagher & Flom LLP. 5.2 Opinion of Melissa M. Taub, Esq. Senior Vice President, General Counsel and Secretary of the Registrant. 10.1.1 * 1997 Omnibus Plan of the Registrant. 10.1.2 * 1999 Omnibus Plan of the Registrant. 10.2 * Stock Purchase Agreement, dated July 31, 1998, among the Registrant and the investors named therein, as amended. 10.3 * Stock Purchase Agreement, dated as of December 8, 1998, among the Registrant and the investors named therein. 10.4 Reference is hereby made to Exhibit 4.3. 10.5 * Purchase and Intercompany Services Agreement, dated April 6, 1998, among the Registrant, Walker Asset Management Limited Partnership, Walker Digital Corporation and Priceline Travel, Inc. 10.6.1 * Employment Agreement, dated as of January 1, 1998, between Jay S. Walker, Walker Digital Corporation, the Registrant and Jesse M. Fink. 10.6.2 * Amendment No. 1 to Employment Agreement, dated November 16, 1998 between the Registrant and Jesse M. Fink. 10.7.1 * Employment Agreement, dated as of July 23, 1998, between the Registrant and Timothy G. Brier. 10.7.2 * Amendment No. 1 to Employment Agreement, dated November 16, 1998, between the Registrant and Timothy G. Brier. 10.8 * Amended and Restated Employment Agreement, dated as of August 15, 1998, by and between the Registrant and Richard S. Braddock. 10.9 * Airline Participation Agreement, dated April 1998, by and among the Registrant, Priceline Travel, Inc. and Trans World Airlines, Inc. 10.10 *+ Airline Participation Agreement, dated October 2, 1998, by and among the Registrant, Priceline Travel, Inc. and Northwest Airlines, Inc. 10.11.1 *+ General Agreement, dated August 31, 1998, by and among the Registrant, Priceline Travel, Inc. and Delta Air Lines, Inc.
II-9
EXHIBIT DESCRIPTION - --------- --------------------------------------------------------------------------------------------------- 10.11.2 *+ Airline Participation Agreement, dated August 31, 1998, by and among the Registrant, Priceline Travel, Inc. and Delta Air Lines, Inc. 10.11.3 *+ Amendment to the Airline Participation Agreement and the General Agreement, dated December 31, 1998, between and among the Registrant, Priceline Travel, Inc. and Delta Air Lines, Inc. 10.11.4+ Letter Agreement, dated July 16, 1999, between the Registrant and Delta Air Lines, Inc. 10.12 *+ Airline Participation Agreement, dated December 31, 1998, by and among the Registrant, Priceline Travel, Inc. and America West Airlines. 10.13 *+ Internet Marketing and Licensing Agreement, as of August 1, 1998, between the Registrant and LendingTree, Inc. 10.14 * Systems Access Agreement, dated as of August 4, 1997, between the Registrant and WORLDSPAN, L.P. 10.15 * Master Agreement for Outsourcing Call Center Support, dated as of April 6, 1998, between the Registrant and CALLTECH Communications, Incorporated. 10.16 * $1,000,000 Commercial Promissory Note, dated April 15, 1998, between the Registrant and Andre Jaeckle. 10.17 * Warrant Agreement, dated April 15, 1998, between the Registrant and Andre Jaeckle. 10.18 * Warrant Agreement, dated April 9, 1998, between the Registrant and William Shatner. 10.19.1 * Participation Warrant Agreement, dated August 31, 1998, between the Registrant and Delta Air Lines, Inc. 10.19.2 *+ First Amendment and Waiver to Participation Warrant Agreement, dated December 31, 1998, between the Registrant and Delta Air Lines, Inc. 10.21 * Form of Participation Warrant Agreement. 10.22.1 *+ Participation Warrant Agreement, dated as of December 31, 1998. 10.22.2 *+ Amendment No. 1, dated as of February 4, 1999, to Warrant Participation Agreement, dated as of December 31, 1999. 10.22.3 *+ Amendment No. 2, dated as of March 3, 1999, to Participation Warrant Agreement, dated as of December 31, 1998, as previously amended by Amendment No. 1 to Warrant Participation Agreement, dated as of February 4, 1999. 10.23 * Form of Hotel Agreement. 10.24 * Co-Marketing Agreement, dated February 18, 1999, by and between the Registrant and E*TRADE Group, Inc. 10.25 **+ Interactive Marketing Agreement, dated March 31, 1999, by and between the Registrant and First USA Bank, N.A. 10.26 ++ First Amendment to Interactive Marketing Agreement, dated as of April 26, 1999, modifying the Interactive Marketing Agreement, dated March 31, 1999, by and between the Registrant and First USA Bank, N.A. 10.27 + Employment Agreement, dated as of June 14, 1999, between the Registrant and Daniel H. Schulman. 10.28 + Airline Participation Agreement, dated July 16, 1999, between the Registrant and Continental Airlines, Inc. 10.29 + Participation Warrant Agreement, dated July 16, 1999, between the Registrant and Continental Airlines, Inc. 12.1 + Computation of Ratio of Earnings to Fixed Charges.
II-10
EXHIBIT DESCRIPTION - --------- --------------------------------------------------------------------------------------------------- 23.1 Consent of Skadden, Arps, Slate, Meagher & Flom LLP (included in Exhibit 5.1). 23.2 Consent of Melissa M. Taub, Esq. (included in Exhibit 5.2). 23.3 Consent of Deloitte & Touche LLP. 24.1 + Power of Attorney. 25.1 Statement of Eligibility of the Trustee on Form T-1.
- ------------------------ * Previously filed as an exhibit to the Form S-1 (Registration No. 333-69657) filed in connection with priceline.com's initial public offering and incorporated herein by reference. ** Previously filed as an exhibit to the Form 10-Q filed on May 17, 1999 and incorporated herein by reference. + Previously filed. + Certain portions of this document have been omitted pursuant to a confidential treatment request. II-11 EX-1.1 2 U/A RELATING TO COMMON STOCK Exhibit 1.1 5,500,000 SHARES PRICELINE.COM INCORPORATED COMMON STOCK (PAR VALUE $.008 PER SHARE) UNDERWRITING AGREEMENT August __, 1999 August __, 1999 Morgan Stanley & Co. Incorporated Goldman, Sachs & Co. Allen & Company Incorporated BancBoston Robertson Stephens Inc. Donaldson, Lufkin & Jenrette Securities Corporation Merrill Lynch, Pierce, Fenner & Smith Incorporated c/o Morgan Stanley & Co. Incorporated 1585 Broadway New York, New York 10036 Morgan Stanley & Co. International Limited Goldman Sachs International Allen & Company Incorporated BancBoston Robertson Stephens International Limited Donaldson, Lufkin & Jenrette International Merrill Lynch International c/o Morgan Stanley & Co. International Limited 25 Cabot Square Canary Wharf London E14 4QA England Dear Sirs and Mesdames: Priceline.com Incorporated, a Delaware corporation (the "COMPANY"), proposes to issue and sell to the several Underwriters named in Schedule II and Schedule III hereto (the "UNDERWRITERS"), and certain stockholders of the Company (the "SELLING STOCKHOLDERS") named in Part A of Schedule I hereto severally propose to sell to the several Underwriters, an aggregate of 5,500,000 shares of the common stock (par value $.008 per share) of the Company (the "FIRM SHARES"), of which 2,000,000 shares are to be issued and sold by the Company (the "PRIMARY SHARES") and 3,500,000 shares are to be sold by the Selling Stockholders, each Selling Stockholder selling the amount set forth opposite such Selling Stockholder's name in Part A of Schedule I hereto. 1 It is understood that, subject to the conditions hereinafter stated, 4,400,000 Firm Shares (the "U.S. FIRM SHARES") will be sold to the several U.S. Underwriters named in Schedule II hereto (the "U.S. UNDERWRITERS") in connection with the offering and sale of such U.S. Firm Shares in the United States and Canada to United States and Canadian Persons (as such terms are defined in the Agreement Between U.S. and International Underwriters of even date herewith), and 1,100,000 Firm Shares (the "INTERNATIONAL SHARES") will be sold to the several International Underwriters named in Schedule III hereto (the "INTERNATIONAL UNDERWRITERS") in connection with the offering and sale of such International Shares outside the United States and Canada to persons other than United States and Canadian Persons. Morgan Stanley & Co. Incorporated, Goldman, Sachs & Co., BancBoston Robertson Stephens Inc., Donaldson, Lufkin & Jenrette Securities Corporation and Merrill Lynch, Pierce, Fenner & Smith Incorporated shall act as representatives (the "U.S. REPRESENTATIVES") of the several U.S. Underwriters, and Morgan Stanley & Co. International Limited, Goldman Sachs International, BancBoston Robertson Stephens International Limited, Donaldson, Lufkin & Jenrette International and Merrill Lynch International shall act as representatives (the "INTERNATIONAL REPRESENTATIVES") of the several International Underwriters. The U.S. Underwriters and the International Underwriters are hereinafter collectively referred to as the Underwriters. The Selling Stockholders named in Part B of Schedule I hereto also propose to issue and sell to the several U.S. Underwriters not more than an additional 825,000 shares of the common stock (par value $.008 per share) of the Company (the "ADDITIONAL SHARES") if and to the extent that the U.S. Representatives shall have determined to exercise, on behalf of the U.S. Underwriters, the right to purchase such shares of common stock granted to the Underwriters in Section 3 hereof. The Firm Shares and the Additional Shares are hereinafter collectively referred to as the "SHARES." The shares of common stock (par value $.008 per share) of the Company to be outstanding after giving effect to the sales contemplated hereby are hereinafter referred to as the "COMMON STOCK." The 3,500,000 Firm Shares to be sold by the Selling Stockholders and the Additional Shares are hereinafter collectively referred to as the "SECONDARY SHARES." The Company and the Selling Stockholders are hereinafter sometimes collectively referred to as the "SELLERS." The Company has filed with the Securities and Exchange Commission (the "COMMISSION") a registration statement relating to the Shares. The registration statement contains two prospectuses to be used in connection with the offering and sale of the shares: the U.S. prospectus, to be used in connection with the offering and sale of Shares in the United States and Canada to United States and Canadian persons, and the international prospectus, to be used in connection 2 with the offering and sale of Shares outside of the United States and Canada to persons other than United States and Canadian Persons. The international prospectus is identical to the U.S. prospectus except for the outside front cover page. The registration statement as amended at the time it becomes effective, including the information (if any) deemed to be part of the registration statement at the time of effectiveness pursuant to Rule 430A under the Securities Act of 1933, as amended (the "SECURITIES ACT"), is hereinafter referred to as the "REGISTRATION STATEMENT"; the U.S. prospectus and the international prospectus in the respective forms first used to confirm sales of Shares are hereinafter collectively referred to as the "PROSPECTUS." If the Company has filed an abbreviated registration statement to register additional shares of Common Stock pursuant to Rule 462(b) under the Securities Act (the "RULE 462 REGISTRATION STATEMENT"), then any reference herein to the term "REGISTRATION STATEMENT" shall be deemed to include such Rule 462 Registration Statement. 1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and warrants to and agrees with each of the Underwriters that: (a) The Registration Statement has become effective; no stop order suspending the effectiveness of the Registration Statement is in effect, and no proceedings for such purpose are pending before or, to the knowledge of the Company, threatened by the Commission. (b) (i) The Registration Statement, when it became effective, did not contain and, as amended or supplemented, if applicable, will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, (ii) the Registration Statement and the Prospectus comply and, as amended or supplemented, if applicable, will comply in all material respects with the Securities Act and the applicable rules and regulations of the Commission thereunder and (iii) the Prospectus does not contain and, as amended or supplemented, if applicable, will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, except that the representations and warranties set forth in this paragraph do not apply to statements or omissions in the Registration Statement or the Prospectus based upon information relating to any Underwriter furnished to the Company in writing by such Underwriter through you expressly for use therein. (c) The Company is a corporation, validly existing and in good standing under the laws of the State of Delaware, has the corporate power 3 and authority to own its property and to conduct its business as described in the Prospectus and is duly qualified to transact business and is in good standing in each jurisdiction in which the conduct of its business or its ownership or leasing of property requires such qualification, except to the extent that the failure to be so qualified or be in good standing would not have a material adverse effect on the Company. (d) The Company has no subsidiaries and does not otherwise own or control, directly or indirectly, any corporation, association or other entity. (e) This Agreement has been duly authorized, executed and delivered by the Company. (f) The authorized capital stock of the Company conforms as to legal matters to the description thereof contained in the Prospectus. (g) The shares of common stock of the Company outstanding prior to the issuance of the Primary Shares (including the Secondary Shares to be sold by the Selling Stockholders) have been duly authorized and are validly issued, fully paid and non-assessable. (h) The Primary Shares to be sold by the Company have been duly authorized and, when issued and delivered in accordance with the terms of this Agreement, will be validly issued, fully paid and non-assessable and the issuance of such Primary Shares will not be subject to any preemptive or similar rights. (i) The execution and delivery by the Company of, and the performance by the Company of its obligations under, this Agreement will not contravene (i) any provision of applicable law; (ii) the certificate of incorporation or by-laws of the Company; (iii) except as disclosed in the Prospectus, any agreement or other instrument binding upon the Company that is material to the Company or (iv) any judgment, order or decree of any governmental body, agency or court having jurisdiction over the Company, except where, in the case of (i), (iii) and (iv), such contravention would not, singly or in the aggregate, have a material adverse effect on the Company, and no consent, approval, authorization or order of, or qualification with, any governmental body or agency is required for the performance by the Company of its obligations under this Agreement, except such as have been obtained or made or such as may be required by the securities or Blue Sky laws of the various states in connection with the offer and sale of the Shares or such consents, 4 approvals, authorizations, orders or qualifications the failure of the Company to obtain would not have a material adverse effect on the Company or the offering of Shares contemplated hereunder. (j) There has not occurred any material adverse change, or any development involving a prospective material adverse change, in the condition, financial or otherwise, or in the earnings, business or operations of the Company from that set forth in the Prospectus (exclusive of any amendments or supplements thereto subsequent to the date of this Agreement). (k) There are no (i) legal or governmental proceedings pending or to the Company's knowledge threatened to which the Company is a party or to which any of the properties of the Company is subject that are required to be described in the Registration Statement or the Prospectus and are not so described or (ii) statutes, regulations, contracts or other documents that are required to be described in the Registration Statement or the Prospectus or to be filed as exhibits to the Registration Statement that are not described or filed as required. (l) Each preliminary prospectus filed as part of the registration statement as originally filed or as part of any amendment thereto, or filed pursuant to Rule 424 under the Securities Act, complied when so filed in all material respects with the Securities Act and the applicable rules and regulations of the Commission thereunder. (m) The Company is not and, after giving effect to the offering and sale of the Primary Shares and the application of the proceeds thereof as described in the Prospectus, will not be an "investment company" as such term is defined in the Investment Company Act of 1940, as amended. (n) Subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus, (i) the Company has not incurred any material liability or obligation, direct or contingent, nor entered into any material transaction not in the ordinary course of business; (ii) the Company has not purchased any of its outstanding capital stock, nor declared, paid or otherwise made any dividend or distribution of any kind on its capital stock other than ordinary and customary dividends; and (iii) there has not been any material change in the capital stock, short-term debt (other than in the ordinary course of business) or long-term debt of the Company, except in each case as described in the Prospectus. 5 (o) The Company owns no real property and has good and marketable title to all personal property owned by it which is material to the business of the Company, in each case free and clear of all liens, encumbrances and defects except such as are described in the Prospectus or such as do not materially affect the value of such property and do not materially interfere with the use made or proposed to be made of such property by the Company; and any real property and buildings held under lease by the Company are held by it under valid, subsisting and enforceable leases with such exceptions as are not material and do not materially interfere with the use made or proposed to be made of such property and buildings by the Company, in each case except as described in the Prospectus. (p) Except to the extent described in the Prospectus, the Company owns, possesses, or has an irrevocable right to use all patents, patent applications, trademarks, trademark applications, service marks, service mark applications, trade names, copyrights, licenses, inventions, trade secrets, technology and know-how (collectively, "INTELLECTUAL PROPERTY RIGHTS") currently employed by it in connection with and material to its business as described in the Prospectus; other than the claims described in the Prospectus, the Company is not aware of any rights of third parties to any such Intellectual Property Rights; in connection with the filing of its patent applications, the Company conducted reasonable investigations of the published literature and patent references relating to the inventions claimed in such applications. There are no enforceable United States or foreign patents known to the Company which the Company believes to be infringed by its present activities or which the Company believes would preclude the pursuit of its business as described in the Prospectus to any material extent; the Company is not aware of any infringement by third parties of any such Intellectual Property Rights which would have a material adverse effect on the Company; except as described in the Prospectus, there is no pending or, to the Company's knowledge, threatened action, suit, proceeding or claim challenging the validity or scope of the Company's rights in or to any such Intellectual Property Rights; and, except as described in the Prospectus, there is no pending or, to the Company's knowledge, threatened action, suit, proceeding or claim by others that the Company is infringing or otherwise violating intellectual property rights of others. (q) The Company possesses all certificates, licenses, authorizations and permits (collectively, "GOVERNMENTAL LICENSES") issued by the appropriate federal, state or foreign regulatory authorities necessary to conduct its business, except such Governmental Licenses the 6 failure of the Company to possess would not, singly or in the aggregate, have a material adverse effect on the Company; the Company has not received any notice of proceedings relating to the revocation or modification of any Governmental Licenses which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would have a material adverse effect on the Company, except as described in the Prospectus. (r) No material labor dispute with the employees of the Company exists, except as described in the Prospectus, or, to the knowledge of the Company, is imminent. (s) The Company is insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as it believes are reasonable for the business in which it is engaged and the Company believes it will be able to renew or replace its existing insurance coverage as and when such coverage expires or to obtain similar coverage from financially responsible insurers as may be necessary to continue its business at a cost that would not materially and adversely affect the Company, except as described in the Prospectus. (t) The Company maintains a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management's general or specific authorizations; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset accountability; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (u) The Company (i) is in compliance with any and all applicable foreign, federal, state and local laws and regulations relating to the protection of human health and safety, the environment or hazardous or toxic substances or wastes, pollutants or contaminants ("ENVIRONMENTAL LAWS"), (ii) has received all permits, licenses or other approvals required of it under applicable Environmental Laws to conduct its business and (iii) is in compliance with all terms and conditions of any such permit, license or approval, except, in each case, where such noncompliance with Environmental Laws, failure to receive required permits, licenses or other approvals or failure to comply with the terms 7 and conditions of such permits, licenses or approvals would not have a material adverse effect on the Company. (v) Except as described in the Prospectus, there are no contracts, agreements or understandings between the Company and any person granting such person the right to require the Company to file a registration statement under the Securities Act with respect to any securities of the Company or to require the Company to include such securities with the Shares registered pursuant to the Registration Statement. (w) Except as described or referred to in the Registration Statement (exclusive of any amendments or supplements thereto subsequent to the date of this Agreement) and except for the 10,000,000 shares of Common Stock sold on April 1, 1999 in the Company's initial public offering, the Company has not sold, issued or distributed any shares of Common Stock during the six-month period preceding the date hereof, including any sales pursuant to Rule 144A under, or Regulations D or S of, the Securities Act, other than shares issued pursuant to employee benefit plans, qualified stock option plans or other employee compensation plans or pursuant to outstanding options, rights or warrants. (x) Options issued or to be issued pursuant to any of the Company's stock option plans to employees who participated in the option exercise program described in the Prospectus are not exercisable until 180 days after the date of this Agreement. (y) The Company has reviewed its operations to the extent and in the manner described in the Prospectus to evaluate the extent to which the business or operations of the Company will be affected by the Year 2000 Problem (that is, any significant risk that computer hardware or software applications used by the Company will not, in the case of dates or time periods occurring after December 31, 1999, function at least as effectively as in the case of dates or time periods occurring prior to January 1, 2000); as a result of such review, the Company does not believe, that there are any issues related to the Company's preparedness to address the Year 2000 Problem that are of a character required to be described or referred to in the Registration Statement or Prospectus which have not been accurately described in the Registration Statement or Prospectus. (z) There are no outstanding obligations of the Company to repurchase, redeem or otherwise acquire any shares of Common Stock. 8 2. REPRESENTATIONS AND WARRANTIES OF THE SELLING STOCKHOLDERS. Each of the Selling Stockholders, severally and not jointly, represents and warrants to and agrees with each of the Underwriters that: (a) This Agreement has been duly authorized, executed and delivered by or on behalf of such Selling Stockholder. (b) The execution and delivery by such Selling Stockholder of, and the performance by such Selling Stockholder of its obligations under, this Agreement, the Custody Agreement signed by such Selling Stockholder and ChaseMellon Shareholder Services, L.L.C., as Custodian, relating to the deposit of the Shares to be sold by such Selling Stockholder (the "CUSTODY AGREEMENT") and the Power of Attorney appointing certain individuals as such Selling Stockholder's attorneys-in-fact to the extent set forth therein, relating to the transactions contemplated hereby and by the Registration Statement (the "POWER OF ATTORNEY"), will not contravene any provision of applicable law, or the certificate of incorporation or by-laws of such Selling Stockholder (if such Selling Stockholder is a corporation), or any agreement or other instrument binding upon such Selling Stockholder or any judgment, order or decree of any governmental body, agency or court having jurisdiction over such Selling Stockholder, and no consent, approval, authorization or order of, or qualification with, any governmental body or agency is required for the performance by such Selling Stockholder of its obligations under this Agreement or the Custody Agreement or Power of Attorney of such Selling Stockholder, except such as have been already obtained or as may be required by the securities or Blue Sky laws of the various states or foreign countries in connection with the offer and sale of the Shares. (c) Such Selling Stockholder has, and on the Closing Date or the Option Closing Date (as defined in Section 3 below), will have, valid title to the Shares to be sold by such Selling Stockholder, and with respect to Delta Airlines, Inc. ("DELTA") and Paul Breitenbach, each has the right to purchase the Shares to be sold by each of them, on such date and the legal right and power, and all authorization and approval required by law, to enter into this Agreement, the Custody Agreement and the Power of Attorney and to sell, transfer and deliver the Shares, to be sold by such Selling Stockholder. Delta has the legal right and power, and all authorization and approval required by law, to purchase the Shares to be sold by Delta under this Agreement by exercising warrants granted under the Participation Warrant Agreement dated as of August 31, 1998, as amended, between Delta and the Company. Paul Breitenbach has the legal right and power, and all authorization and approval required by law, to 9 purchase the Shares to be sold by him under this Agreement by exercising outstanding options to purchase the Shares. The representations and warranties made in this clause (c) with respect to Delta and Paul Breitenbach are being made only by Delta and Paul Breitenbach, respectively. (d) The Custody Agreement and the Power of Attorney have been duly authorized, executed and delivered by such Selling Stockholder and are valid and binding agreements of such Selling Stockholder enforceable against such Selling Stockholder, except to the extent that enforcement thereof may be limited by (a) bankruptcy, insolvency (including, without limitation, all laws relating to fraudulent transfers), reorganization, moratorium or other similar laws now or hereafter in effect relating to creditors' rights generally and (b) general principles of equity (regardless of whether enforcement is considered in a proceeding in equity or at law). (e) Delivery of the Shares to be sold by such Selling Stockholder pursuant to this Agreement will pass title to such Shares free and clear of any security interests, claims, liens, equities and other encumbrances. (f) The Registration Statement, when it became effective, did not contain and, as amended or supplemented, if applicable, will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading and the Prospectus does not contain and, as amended or supplemented, if applicable, will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, except that the representations and warranties set forth in this paragraph 2(f) apply only to statements or omissions in the Registration Statement or the Prospectus that are based upon information furnished by such Selling Stockholder to the Company in writing expressly for use in the Registration Statement or the Prospectus. 3. AGREEMENTS TO SELL AND PURCHASE. Upon the basis of the representations and warranties herein contained, but subject to the conditions hereinafter stated, each Seller, severally and not jointly, hereby agrees to sell to the several Underwriters, and each Underwriter, agrees, severally and not jointly, to purchase from such Seller at $ a share (the "PURCHASE PRICE") the number of Firm Shares (subject to such adjustments to eliminate fractional shares as you may determine) that bears the same proportion to the number of Firm Shares to be sold by such Seller as the number of Firm Shares set forth in Schedules II and III hereto opposite the name of such Underwriter bears to the total number of Firm Shares. 10 On the basis of the representations and warranties contained in this Agreement, and subject to its terms and conditions, each Selling Stockholder set forth in Part B of Schedule I hereto agrees, severally and not jointly, to sell to the U.S. Underwriters the Additional Shares, and the U.S. Underwriters shall have a one-time right to purchase, severally and not jointly, up to 825,000 Additional Shares at the Purchase Price. If the U.S. Representatives, on behalf of the U.S. Underwriters, elect to exercise such option, the U.S. Representatives shall so notify the Selling Stockholders set forth in Part B of Schedule I hereto in writing not later than 30 days after the date of this Agreement, which notice shall specify the number of Additional Shares to be purchased by the U.S. Underwriters and the date on which such shares are to be purchased. Such date may be the same as the Closing Date (as defined below) but not earlier than the Closing Date nor later than ten business days after the date of such notice. Additional Shares may be purchased as provided in Section 5 hereof solely for the purpose of covering over-allotments made in connection with the offering of the Firm Shares. If any Additional Shares are to be purchased, each Selling Stockholder named in Part B of Schedule I hereto agrees, severally and not jointly, to sell the number of Additional Shares (subject to such adjustments to eliminate fractional shares as you may determine) that bears the same proportion to the maximum number of Additional Shares to be sold by such Selling Stockholder as the total number of Additional Shares to be purchased bears to 825,000, and each U.S. Underwriter agrees, severally and not jointly, to purchase the number of Additional Shares (subject to such adjustments to eliminate fractional shares as you may determine) that bears the same proportion to the total number of Additional Shares to be sold by such Selling Stockholder as the number of U.S. Firm Shares set forth in Schedule II hereto opposite the name of such U.S. Underwriter bears to the total number of U.S. Firm Shares. Each Seller hereby agrees that, without the prior written consent of Morgan Stanley & Co. Incorporated on behalf of the Underwriters, it will not, during the period ending 180 days after the date of the Prospectus, (i) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend, or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock; (ii) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the Common Stock, whether any such transaction described in clause (i) or (ii) above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise, or (iii) in the case of the Company, file a registration statement other than a registration statement on Form S-8 covering shares of Common Stock subject to outstanding options under the 1997 Omnibus Plan or shares of Common Stock subject to options to be issued under the 1999 Omnibus Plan, for the registration of any shares of Common Stock or any security convertible or exercisable or exchangeable for Common Stock. The foregoing sentence shall not apply to (A) the Shares to be sold hereunder; (B) the issuance by the Company of 11 restricted stock awards under the Company's existing employee benefits plans or of shares of common stock upon the exercise of an option or warrant or the conversion of a security outstanding on the date hereof; (C) the grant of options to officers, directors, employees or consultants, PROVIDED such options are not exercisable (except in the case of a change of control) prior to the end of the lockup period; (D) the issuance by the Company of warrants (or shares of capital stock upon the exercise of such warrants) to suppliers or other entities providing products or services to the Company in connection with entering into certain supply, adaptive marketing or other similar arrangements, PROVIDED that the recipient of such warrants or shares agrees to be bound by the foregoing provisions; (E) the concurrent offering by the Company of its % convertible subordinated notes due 2006 ("NOTES OFFERING") and the sale of the convertible notes in an underwritten offering; (F) the filing of a Rule 462(b) Registration Statement; (G) in the case of each Selling Stockholder, transfers of any shares of common stock to any associate, as such term is defined in Rule 12b-2 under the Exchange Act, of such Selling Stockholder which agrees to be bound by the foregoing provisions; or (H) the filing by the Company of a registration statement in response to the exercise of demand registration rights under the Amended and Restated Registration Rights Agreement dated as of December 8, 1998 (the "Registration Rights Agreement") among the Company, General Atlantic Partners 48, L.P., GAP Coinvestment Partners, L.P., General Atlantic Partners 50, L.P. and the stockholders named therein, the grant of exchange rights and the issuance by the Company of common stock on exercise of such exchange rights, in connection with the development by priceline.com of new lines of business through other entities, PROVIDED THAT no such issuance is permitted prior to 180 days after the date of the Prospectus. In addition, each Selling Stockholder, agrees that, without the prior written consent of Morgan Stanley & Co. Incorporated on behalf of the Underwriters, it will not, during the period ending 180 days after the date of the Prospectus, make any demand for, or exercise any right with respect to, the registration of any shares of Common Stock or any security convertible into or exercisable or exchangeable for Common Stock. 4. TERMS OF PUBLIC OFFERING. The Sellers are advised by you that the Underwriters propose to make a public offering of their respective portions of the Shares as soon after the Registration Statement and this Agreement have become effective as in your judgment is advisable. The Sellers are further advised by you that the Shares are to be offered to the public initially at $ a share (the "PUBLIC OFFERING PRICE") and to certain dealers selected by you at a price that represents a concession not in excess of $ a share under the Public Offering Price, and that any Underwriter may allow, and such dealers may reallow, a concession, not in excess of $ a share, to any Underwriter or to certain other dealers. 5. PAYMENT AND DELIVERY. Payment for the Firm Shares to be sold by each Seller shall be made to such Seller in Federal or other funds immediately available in New York City against delivery of such Firm Shares for the 12 respective accounts of the several Underwriters at 10:00 a.m., New York City time, on August __, 1999 or at such other time on the same or such other date, not later than August __, 1999, as shall be designated in writing by you. The time and date of such payment are hereinafter referred to as the "CLOSING DATE." Payment for any Additional Shares shall be made to the Selling Stockholders set forth in Part B of Schedule I hereto in Federal or other funds immediately available in New York City against delivery of such Additional Shares for the respective accounts of the several U.S. Underwriters at 10:00 a.m., New York City time, on the date specified in the notice described in Section 3 or at such other time on the same or on such other date, in any event not later than September __, 1999, as shall be designated in writing by the U.S. Underwriters. The time and date of such payment are hereinafter referred to as the "OPTION CLOSING DATE." Certificates for the Firm Shares and Additional Shares shall be in definitive form and registered in such names and in such denominations as you shall request in writing not later than one full business day prior to the Closing Date or the Option Closing Date, as the case may be. The certificates evidencing the Firm Shares and Additional Shares shall be delivered to you on the Closing Date or the Option Closing Date, as the case may be, for the respective accounts of the several Underwriters, with any transfer taxes payable in connection with the transfer of the Shares to the Underwriters duly paid, against payment of the Purchase Price therefor. 6. CONDITIONS TO THE UNDERWRITERS' OBLIGATIONS. The obligations of the Sellers to sell the Shares to the Underwriters and the several obligations of the Underwriters to purchase and pay for the Shares on the Closing Date are subject to the condition that the Registration Statement shall have become effective not later than 5:00 p.m. (New York City time) on the date hereof. The several obligations of the Underwriters are subject to the following further conditions: (a) Subsequent to the execution and delivery of this Agreement and prior to the Closing Date: (i) there shall not have occurred any downgrading, nor shall any notice have been given of any intended or potential downgrading or of any review for a possible change that does not indicate the direction of the possible change, in the rating accorded any of the Company's securities by any "nationally recognized 13 statistical rating organization," as such term is defined for purposes of Rule 436(g)(2) under the Securities Act; and (ii) there shall not have occurred any change, or any development involving a prospective change, in the condition, financial or otherwise, or in the earnings, business or operations of the Company from that set forth in the Prospectus (exclusive of any amendments or supplements thereto subsequent to the date of this Agreement) that, in your judgment, is material and adverse and that makes it, in your judgment, impracticable to market the Shares on the terms and in the manner contemplated in the Prospectus. (b) The Underwriters shall have received on the Closing Date a certificate, dated the Closing Date and signed by Paul E. Francis, the Chief Financial Officer of the Company, to the effect set forth in Section 6(a)(i) above and to the effect that the representations and warranties of the Company contained in this Agreement are true and correct as of the Closing Date and that the Company has in all material respects complied with all of the agreements and satisfied all of the conditions on its part to be performed or satisfied hereunder on or before the Closing Date. The officer signing and delivering such certificate may rely upon the best of his or her knowledge as to proceedings threatened. (c) The Underwriters shall have received on the Closing Date an opinion of Skadden, Arps, Slate, Meagher & Flom LLP, special outside counsel for the Company, dated the Closing Date, to the effect set forth in Annex I hereto. (d) The Underwriters shall have received on the Closing Date the opinion of Melissa Taub, general counsel for the Company, dated the Closing Date, to the effect set forth in Annex II hereto. (e) The Underwriters shall have received on the Closing Date the opinion of outside patent counsel for the Company, dated the Closing Date, to the effect set forth in Annex IV hereto. (f) The Underwriters shall have received on the Closing Date an opinion of Paul, Weiss, Rifkind, Wharton & Garrison, counsel for the Selling Stockholders, or other counsel reasonably acceptable to the Underwriters, dated the Closing Date, to the effect set forth in Annex V hereto. 14 With respect to Section 6(f) above, Paul, Weiss, Rifkind, Wharton & Garrison may rely upon an opinion or opinions of counsel for any Selling Stockholders and, with respect to factual matters and to the extent such counsel deems appropriate, upon the representations of each Selling Stockholder contained herein and in the Custody Agreement and Power of Attorney of such Selling Stockholder and in other documents and instruments; PROVIDED that (A) each such counsel for the Selling Stockholders is satisfactory to your counsel, (B) a copy of each opinion so relied upon is delivered to you and is satisfactory to your counsel and (C) copies of such Custody Agreements and Powers of Attorney and of any such other documents and instruments shall be delivered to you and shall be in form and substance satisfactory to your counsel. (g) The Underwriters shall have received on the Closing Date an opinion of Davis Polk & Wardwell, counsel for the Underwriters, dated the Closing Date, in form and substance satisfactory to you. The opinions of counsel described in Sections 6(c), 6(d), 6(e) and 6(f) above shall be rendered to the Underwriters at the request of the applicable Seller. (h) The Underwriters shall have received, on each of the date hereof and the Closing Date, a letter dated the date hereof or the Closing Date, as the case may be, in form and substance satisfactory to the Underwriters, from Deloitte & Touche LLP, independent public accountants, containing statements and information of the type ordinarily included in accountants' "comfort letters" to underwriters with respect to the financial statements and certain financial information contained in the Registration Statement and the Prospectus; PROVIDED that the letter delivered on the Closing Date shall use a "cut-off date" not earlier than the date hereof. (i) The "lock-up" agreements, each substantially in the form of Exhibit A hereto, between you and [Jay S. Walker, The Richard S. Braddock 1999 Annuity Trust, Christina J. Braddock, The Paul E. Francis 1998 Trust, dated April 1, 1998, The Paul E. Francis 1998 Trust, dated December 2, 1998, The Paul E. Francis 1999 Trust, dated February 26, 1999, The Paul E. Francis 1999 Grantor Retained Annuity Trust, The T. Scott Case 1997 Grantor Retained Annuity Trust, The Jesse Fink 1998 Grantor Retained Annuity Trust and General Atlantic Partners 50, L.P. relating to sales and certain other 15 dispositions of shares of Common Stock or certain other securities, delivered to you on or before the date hereof, shall be in full force and effect on the Closing Date. (j) The several obligations of the U.S. Underwriters to purchase Additional Shares hereunder are subject to the delivery to the U.S. Representatives on the Option Closing Date of such documents as they may reasonably request with respect to the good standing of the Company, the due authorization and issuance of the Additional Shares and other matters related to the issuance of the Additional Shares. 7. COVENANTS OF THE COMPANY. In further consideration of the agreements of the Underwriters herein contained, the Company covenants with each Underwriter as follows: (a) To furnish to you, without charge, seven signed copies of the Registration Statement (including exhibits thereto) and for delivery to each other Underwriter a conformed copy of the Registration Statement (without exhibits thereto) and to furnish to you in New York City, without charge, prior to 3:00 p.m. New York City time on the business day next succeeding the date of this Agreement and during the period mentioned in Section 7(c) below, as many copies of the Prospectus and any supplements and amendments thereto or to the Registration Statement as you may reasonably request. (b) Before amending or supplementing the Registration Statement or the Prospectus, to furnish to you a copy of each such proposed amendment or supplement and not to file any such proposed amendment or supplement to which you reasonably object, and to file with the Commission within the applicable period specified in Rule 424(b) under the Securities Act any prospectus required to be filed pursuant to such Rule. (c) If, during such period after the first date of the public offering of the Shares as in the opinion of counsel for the Underwriters the Prospectus is required by law to be delivered in connection with sales by an Underwriter or dealer, any event shall occur or condition exist as a result of which it is necessary to amend or supplement the Prospectus in order to make the statements therein, in the light of the circumstances when the Prospectus is delivered to a purchaser, not misleading, or if, in the opinion of counsel for the Underwriters, it is necessary to amend or supplement the Prospectus to comply with applicable law, forthwith to prepare, file with the Commission and furnish, at its own expense, to the 16 Underwriters and to the dealers (whose names and addresses you will furnish to the Company) to which Shares may have been sold by you on behalf of the Underwriters and to any other dealers upon request, either amendments or supplements to the Prospectus so that the statements in the Prospectus as so amended or supplemented will not, in the light of the circumstances when the Prospectus is delivered to a purchaser, be misleading or so that the Prospectus, as amended or supplemented, will comply with law. (d) To endeavor to qualify the Shares for offer and sale under the securities or Blue Sky laws of such jurisdictions as you shall reasonably request; PROVIDED that the Company shall not be obligated to file any general consent to service of process or to qualify as a foreign corporation or as a dealer in securities in any jurisdiction in which it is not so qualified or to subject itself to taxation in respect of doing business in any jurisdiction in which it is not otherwise so subject. (e) To make generally available to the Company's security holders and to you as soon as practicable an earning statement covering the twelve-month period ending [September 30], 2000 that satisfies the provisions of Section 11(a) of the Securities Act and the rules and regulations of the Commission thereunder. (f) Not to release any option holder from, or in any other way, amend or modify the lock-up agreements entered into in connection with the option exercise program described in the Prospectus, without the consent of Morgan Stanley & Co. Incorporated on behalf of the Underwriters, which will not be unreasonably withheld. (g) To notify Morgan Stanley & Co. Incorporated promptly upon receipt by the Company of any demand registration request under the Registration Rights Agreement so that the Underwriters may exercise their holdback rights under Section 6(a) of Registration Rights Agreement. 8. EXPENSES. Whether or not the transactions contemplated in this Agreement are consummated or this Agreement is terminated, the Company agrees to pay or cause to be paid the following expenses incident to the performance of the Sellers' obligations under this Agreement, including: (i) the fees, disbursements and expenses of the Company's counsel, the Company's accountants and counsel for the Selling Stockholders in connection with the registration and delivery of the Shares under the Securities Act and all other fees or expenses in connection with the preparation and filing of the Registration Statement, any preliminary prospectus, the Prospectus and amendments and supplements to any of the 17 foregoing, including all printing costs associated therewith, and the mailing and delivering of copies thereof to the Underwriters and dealers, in the quantities herein specified, (ii) all costs and expenses related to the transfer and delivery of the Shares to the Underwriters, including any transfer or other taxes payable thereon, (iii) the cost of producing any Blue Sky or Legal Investment memorandum in connection with the offer and sale of the Shares under state securities laws and all expenses in connection with the qualification of the Shares for offer and sale under state securities laws as provided in Section 7(d) hereof, including filing fees and the reasonable fees and disbursements of counsel for the Underwriters in connection with such qualification and in connection with the Blue Sky or Legal Investment memorandum, not to exceed, together with fees for the concurrent convertible note offering, $10,000, (iv) all filing fees and the reasonable fees and disbursements of counsel to the Underwriters incurred in connection with the review and qualification of the offering of the Shares by the NASD Regulation, Inc., not to exceed, together with fees for the concurrent convertible note offering, $10,000, (v) all costs and expenses incident to the quotation of the Shares on the NASDAQ National Market, (vi) the cost of printing certificates representing the Shares, (vii) the costs and charges of any transfer agent, registrar or depositary, (viii) the costs and expenses of the Company relating to investor presentations on any "road show" undertaken in connection with the marketing of the offering of the Shares, including, without limitation, expenses associated with the production of road show slides and graphics, fees and expenses of any consultants engaged in connection with the road show presentations with the prior approval of the Company, travel and lodging expenses of the representatives and officers of the Company and any such consultants and the cost of any aircraft chartered in connection with the road show, (ix) all expenses in connection with any offer and sale of the Shares outside of the United States, including filing fees and the reasonable fees and disbursements of the counsel for the Underwriters in connection with offers and sales outside of the United States, and (x) all other costs and expenses incident to the performance of the obligations of the Sellers hereunder for which provision is not otherwise made in this Section. It is understood, however, that except as specifically provided in this Section, Section 9 entitled "Indemnity and Contribution", and the last paragraph of Section 11 below, the Underwriters will pay all of their costs and expenses, including fees and disbursements of their counsel, stock transfer taxes payable on resale of any of the Shares by them and any advertising expenses connected with any offers they may make. The provisions of this Section shall not supersede or otherwise affect any agreement that the Sellers may otherwise have for the allocation of such expenses among themselves. 18 9. INDEMNITY AND CONTRIBUTION. (a) The Company agrees to indemnify and hold harmless each Underwriter, each Selling Stockholder and each person, if any, who controls any Underwriter or Selling Stockholder within the meaning of either Section 15 of the Securities Act or Section 20 of the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"), from and against any and all losses, claims, damages and liabilities (including, without limitation, any legal or other expenses reasonably incurred in connection with defending or investigating any such action or claim) caused by any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or any amendment thereof, any preliminary prospectus or the Prospectus (as amended or supplemented if the Company shall have made any amendments or supplements thereto), or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein (in the case of the Prospectus, in light of the circumstances under which they were made) not misleading, except insofar as such losses, claims, damages or liabilities are caused by any such untrue statement or omission or alleged untrue statement or omission based upon information relating to any Underwriter furnished to the Company in writing by such Underwriter through you expressly for use therein; PROVIDED that the foregoing indemnity agreement with respect to any preliminary prospectus or the Prospectus shall not inure to the benefit of any Underwriter from whom the person asserting any such losses, claims, damages or liabilities purchased Shares, or any person controlling such Underwriter, if a copy of the Prospectus (as then amended or supplemented, if the Company shall have made any amendments or supplements) was not sent or given by or on behalf of such Underwriter to such person, if required by law so to have been delivered, at or prior to the written confirmation of the sale of the Shares to such person, and if the Prospectus (as so amended or supplemented) would have cured the defect giving rise to such loss, claim, damage or liability. (b) Each Selling Stockholder agrees, severally and not jointly, to indemnify and hold harmless each Underwriter, the Company and each person, if any, who controls any Underwriter or the Company within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act, from and against any and all losses, claims, damages and liabilities (including, without limitation, any legal or other expenses reasonably incurred in connection with defending or investigating any such action or claim) caused by any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or any amendment thereof, any preliminary prospectus or the Prospectus (as amended or supplemented if the Company shall have furnished any amendments or supplements thereto), or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein (in the case of the Prospectus, in light of the circumstances under which they were made) not misleading, but only with 19 reference to information relating to such Selling Stockholder furnished to the Company in writing by or on behalf of such Selling Stockholder expressly for use in the Registration Statement, any preliminary prospectus, the Prospectus or any amendments or supplements thereto; PROVIDED that the foregoing indemnity agreement with respect to any preliminary prospectus or the Prospectus shall not inure to the benefit of any Underwriter from whom the person asserting any such losses, claims, damages or liabilities purchased Shares, or any person controlling such Underwriter, if a copy of the Prospectus (as then amended or supplemented, if the Company shall have made any amendments or supplements) was not sent or given by or on behalf of such Underwriter to such person, if required by law so to have been delivered, at or prior to the written confirmation of the sale of the Shares to such person, and if the Prospectus (as so amended or supplemented) would have cured the defect giving rise to such loss, claim, damage or liability and PROVIDED, FURTHER, that the aggregate amount of all indemnification reimbursement payable by any Selling Stockholder pursuant to this Agreement shall in no case exceed the net proceeds to such Selling Stockholder from the sale of the Secondary Shares. (c) Each Underwriter agrees, severally and not jointly, to indemnify and hold harmless the Company, each Selling Stockholder, the directors of the Company, the officers of the Company who sign the Registration Statement and each person, if any, who controls the Company or any Selling Stockholder within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act from and against any and all losses, claims, damages and liabilities (including, without limitation, any legal or other expenses reasonably incurred in connection with defending or investigating any such action or claim) caused by any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or any amendment thereof, any preliminary prospectus or the Prospectus (as amended or supplemented if the Company shall have made any amendments or supplements thereto), or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading (in the case of the Prospectus, in light of the circumstances under which they were made), but only with reference to information relating to such Underwriter furnished to the Company in writing by such Underwriter through you expressly for use in the Registration Statement, any preliminary prospectus, the Prospectus or any amendments or supplements thereto. (d) In case any proceeding (including any governmental investigation) shall be instituted involving any person in respect of which indemnity may be sought pursuant to Section 9(a), 9(b) or 9(c), such person (the "INDEMNIFIED PARTY") shall promptly notify the person against whom such indemnity may be sought (the "INDEMNIFYING PARTY") in writing and the indemnifying party, upon 20 request of the indemnified party, shall retain counsel reasonably satisfactory to the indemnified party to represent the indemnified party and any others the indemnifying party may designate in such proceeding and shall pay the reasonable fees and disbursements of such counsel related to such proceeding. In any such proceeding, any indemnified party shall have the right to retain its own counsel, but the fees and expenses of such counsel shall be at the expense of such indemnified party unless (i) the indemnifying party and the indemnified party shall have mutually agreed to the retention of such counsel or (ii) the named parties to any such proceeding (including any impleaded parties) include both the indemnifying party and the indemnified party and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them. It is understood that the indemnifying party shall not, in respect of the legal expenses of any indemnified party in connection with any proceeding or related proceedings in the same jurisdiction, be liable for (i) the fees and expenses of more than one separate firm (in addition to any local counsel) for all Underwriters and all persons, if any, who control any Underwriter within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act, (ii) the fees and expenses of more than one separate firm (in addition to any local counsel) for the Company, its directors, its officers who sign the Registration Statement and each person, if any, who controls the Company within the meaning of either such Section and (iii) the fees and expenses of more than one separate firm (in addition to any local counsel) for all Selling Stockholders and all persons, if any, who control any Selling Stockholder within the meaning of either such Section, in each case as applicable, and that all such fees and expenses shall be reimbursed as they are incurred upon receipt of reasonably detailed invoices thereof. In the case of any such separate firm for the Underwriters and such control persons of any Underwriters, such firm shall be designated in writing by Morgan Stanley & Co. Incorporated. In the case of any such separate firm for the Company, and such directors, officers and control persons of the Company, such firm shall be designated in writing by the Company. In the case of any such separate firm for the Selling Stockholders and such control persons of any Selling Stockholders, such firm shall be designated in writing by a majority of the persons named as attorneys-in-fact for the Selling Stockholders under the Powers of Attorney. The indemnifying party shall not be liable for any settlement of any proceeding effected without its written consent, but if settled with such consent or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify the indemnified party from and against any loss or liability by reason of such settlement or judgment. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened proceeding in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party, unless such settlement includes an unconditional release of 21 such indemnified party from all liability on claims that are the subject matter of such proceeding. (e) To the extent the indemnification provided for in Section 9(a), 9(b) or 9(c) is unavailable to an indemnified party or insufficient in respect of any losses, claims, damages or liabilities referred to therein, then each indemnifying party under such paragraph, in lieu of indemnifying such indemnified party thereunder, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (i) in such proportion as is appropriate to reflect the relative benefits received by the indemnifying party or parties on the one hand and the indemnified party or parties on the other hand from the offering of the Shares or (ii) if the allocation provided by clause 9(e)(i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause 9(e)(i) above but also the relative fault of the indemnifying party or parties on the one hand and of the indemnified party or parties on the other hand in connection with the statements or omissions that resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations. The relative benefits received by the Sellers on the one hand and the Underwriters on the other hand in connection with the offering of the Shares shall be deemed to be in the same respective proportions as the net proceeds from the offering of the Shares (before deducting expenses) received by each Seller and the total underwriting discounts and commissions received by the Underwriters, in each case as set forth in the table on the cover of the Prospectus, bear to the aggregate Public Offering Price of the Shares. The relative fault of the Sellers on the one hand and the Underwriters on the other hand shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Sellers or by the Underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Underwriters' respective obligations to contribute pursuant to this Section 9 are several in proportion to the respective number of Shares they have purchased hereunder, and not joint. (f) The Sellers and the Underwriters agree that it would not be just or equitable if contribution pursuant to this Section 9 were determined by PRO RATA allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation that does not take account of the equitable considerations referred to in Section 9(e). The amount paid or payable by an indemnified party as a result of the losses, claims, damages and liabilities referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such 22 action or claim. Notwithstanding the provisions of this Section 9, no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Shares underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages that such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission and no Selling Stockholder shall be required to contribute any amount in excess of the net proceeds received by such Selling Stockholder from the offering of the Secondary Shares. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The remedies provided for in this Section 9 are not exclusive and shall not limit any rights or remedies which may otherwise be available to any indemnified party at law or in equity. (g) The indemnity and contribution provisions contained in this Section 9 and the representations, warranties and other statements of the Company and the Selling Stockholders contained in this Agreement shall remain operative and in full force and effect regardless of (i) any termination of this Agreement, (ii) any investigation made by or on behalf of any Underwriter or any person controlling any Underwriter, any Selling Stockholder or any person controlling any Selling Stockholder, or the Company, its officers or directors or any person controlling the Company and (iii) acceptance of and payment for any of the Shares. 10. TERMINATION. This Agreement shall be subject to termination by notice given by you to the Company, if (a) after the execution and delivery of this Agreement and prior to the Closing Date (i) trading generally shall have been suspended or materially limited on or by, as the case may be, any of the New York Stock Exchange, the American Stock Exchange or the National Association of Securities Dealers, Inc., (ii) trading of any securities of the Company shall have been suspended on any exchange or in any over-the-counter market, (iii) a general moratorium on commercial banking activities in New York shall have been declared by either Federal or New York State authorities or (iv) there shall have occurred any outbreak or escalation of hostilities or any change in financial markets or any calamity or crisis that, in your judgment, is material and adverse and (b) in the case of any of the events specified in clauses 10(a)(i) through 10(a)(iv), such event, singly or together with any other such event, makes it, in your judgment, impracticable to market the Shares on the terms and in the manner contemplated in the Prospectus. 11. EFFECTIVENESS; DEFAULTING UNDERWRITERS. This Agreement shall become effective upon the execution and delivery hereof by the parties hereto. 23 If, on the Closing Date or the Option Closing Date, as the case may be, any one or more of the Underwriters shall fail or refuse to purchase Shares that it has or they have agreed to purchase hereunder on such date, and the aggregate number of Shares which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase is not more than one-tenth of the aggregate number of the Shares to be purchased on such date, the other Underwriters shall be obligated severally in the proportions that the number of Firm Shares set forth opposite their respective names in Schedule II or Schedule III bears to the aggregate number of Firm Shares set forth opposite the names of all such non-defaulting Underwriters, or in such other proportions as you may specify, to purchase the Shares which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase on such date; PROVIDED that in no event shall the number of Shares that any Underwriter has agreed to purchase pursuant to this Agreement be increased pursuant to this Section 11 by an amount in excess of one-ninth of such number of Shares without the written consent of such Underwriter. If, on the Closing Date, any Underwriter or Underwriters shall fail or refuse to purchase Firm Shares and the aggregate number of Firm Shares with respect to which such default occurs is more than one-tenth of the aggregate number of Firm Shares to be purchased, and arrangements satisfactory to you, the Company and the Selling Stockholders for the purchase of such Firm Shares are not made within 36 hours after such default, this Agreement shall terminate without liability on the part of any non-defaulting Underwriter, the Company or any Selling Stockholder. In any such case either you or the relevant Sellers shall have the right to postpone the Closing Date, but in no event for longer than seven days, in order that the required changes, if any, in the Registration Statement and in the Prospectus or in any other documents or arrangements may be effected. If, on the Option Closing Date, any Underwriter or Underwriters shall fail or refuse to purchase Additional Shares and the aggregate number of Additional Shares with respect to which such default occurs is more than one-tenth of the aggregate number of Additional Shares to be purchased, the non-defaulting Underwriters shall have the option to (i) terminate their obligation hereunder to purchase Additional Shares or (ii) purchase not less than the number of Additional Shares that such non-defaulting Underwriters would have been obligated to purchase in the absence of such default. Any action taken under this paragraph shall not relieve any defaulting Underwriter from liability in respect of any default of such Underwriter under this Agreement. If this Agreement shall be terminated by the Underwriters, or any of them, because of any failure or refusal on the part of any Seller to comply with the terms or to fulfill any of the conditions of this Agreement, or if for any reason any Seller shall be unable to perform its obligations under this Agreement, the Sellers will reimburse the Underwriters or such Underwriters as have so terminated this Agreement with respect to themselves, severally, for all out-of-pocket expenses 24 (including the fees and disbursements of their counsel) reasonably incurred by such Underwriters in connection with this Agreement or the offering contemplated hereunder. 12. COUNTERPARTS. This Agreement may be signed in two or more counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. 13. APPLICABLE LAW. This Agreement shall be governed by and construed in accordance with the internal laws of the State of New York. 14. HEADINGS. The headings of the sections of this Agreement have been inserted for convenience of reference only and shall not be deemed a part of this Agreement. 25 Very truly yours, priceline.com Incorporated By: --------------------------------------- Name: Title: The Selling Stockholders named in Schedule I hereto, acting severally By: --------------------------------------- Attorney-in-Fact Accepted as of the date hereof Morgan Stanley & Co. Incorporated Goldman, Sachs & Co. Allen & Company Incorporated BancBoston Robertson Stephens Inc. Donaldson, Lufkin & Jenrette Securities Corporation Merrill Lynch, Pierce, Fenner & Smith Incorporated Acting severally on behalf of themselves and the several U.S. Underwriters named in Schedule II hereto. By: Morgan Stanley & Co. Incorporated By: --------------------------------------- Name: Title: 26 Morgan Stanley & Co. International Limited Goldman Sachs International Allen & Company Incorporated BancBoston Robertson Stephen Inc. Donaldson, Lufkin & Jenrette International Merrill Lynch International Acting severally on behalf of themselves and the several international Underwriters named in Schedule III hereto. By: Morgan Stanley & Co. International Limited By: --------------------------------------- Name: Title: 27 SCHEDULE I PART A
NUMBER OF FIRM SHARES SELLING STOCKHOLDER TO BE SOLD - ---------------------------------------------- --------------------- Walker Digital Corporation.................... 202,312 Richard S. Braddock........................... 202,313 GAP Coinvestment Partners, L.P................ 142,644 General Atlantic Partners 48, L.P............. 469,417 General Atlantic Partners 50, L.P............. 36,189 Vulcan Ventures Incorporated.................. 231,406 Jim Manzi..................................... 5,862 Yarmouth Limited Partnership.................. 1,851 Michael Loeb.................................. 69,648 Delta Airlines, Inc........................... 1,523,329 The Jonathan Otto Foundation, Inc............. 121,387 Paul E. Francis............................... 30,001 Strypemonde Foundation........................ 42,832 Timothy Brier................................. 64,740 The Tim Brier Grantor Retained Annuity Trust.. 8,092 T. Scott Case................................. 72,832 Jesse Fink.................................... 202,313 Paul Breitenbach.............................. 72,832 --------- Total:............................... 3,500,000 =========
I-1 PART B
MAXIMUM NUMBER OF ADDITIONAL SHARES TO BE SELLING STOCKHOLDER TO BE SOLD - ---------------------------------------------- ----------------------- Walker Digital Corporation.................... 47,687 Richard S. Braddock........................... 47,687 GAP Coinvestment Partners, L.P................ 33,623 General Atlantic Partners 48, L.P............. 110,648 General Atlantic Partners 50, L.P............. 8,536 Vulcan Ventures Incorporated.................. 54,546 Jim Manzi..................................... 1,362 Yarmouth Limited Partnership.................. 436 Michael Loeb.................................. 16,418 Delta Airlines................................ 359,071 The Jonathan Otto Foundation Inc.............. 28,613 Paul E. Francis............................... 7,071 Strypemonde Foundation........................ 10,096 Timothy Brier................................. 15,260 The Tim Brier Grantor Retained Annuity Trust.. 1,908 T. Scott Case................................. 17,168 Jesse Fink.................................... 47,687 Paul Breitenbach.............................. 17,168 ------- Total:............................... 825,000 =======
I-2 SCHEDULE II U.S. UNDERWRITERS
NUMBER OF FIRM SHARES UNDERWRITER TO BE PURCHASED - ----------------------------------------------- --------------------- Morgan Stanley & Co. Incorporated.............. Goldman, Sachs & Co............................ Allen & Company Incorporated................... BancBoston Robertson Stephens Inc.............. Donaldson, Lufkin & Jenrette Securities Corporation........................... Merrill Lynch, Pierce, Fenner & Smith Incorporated................. --------- Total U.S. Firm Shares....... 4,400,000 =========
II-1 SCHEDULE III INTERNATIONAL UNDERWRITERS
NUMBER OF FIRM SHARES UNDERWRITER TO BE PURCHASED - ----------------------------------------------- --------------------- Morgan Stanley & Co. International Limited..... Goldman Sachs International ................... Allen & Company Incorporated................... BancBoston Robertson Stephens International Limited........................................ Donaldson, Lufkin & Jenrette International..... Merrill Lynch International.................... --------- Total International Firm Shares... 1,100,000 =========
III-1 EXHIBIT A [FORM OF LOCK-UP LETTER] August __, 1999 Morgan Stanley & Co. Incorporated Goldman, Sachs & Co. Allen & Company Incorporated BancBoston Robertson Stephens Inc. Donaldson, Lufkin & Jenrette Securities Corporation Merrill Lynch, Pierce, Fenner & Smith Incorporated c/o Morgan Stanley & Co. Incorporated 1585 Broadway New York, New York 10036 Morgan Stanley & Co. International Limited Goldman Sachs International Allen & Company Incorporated BancBoston Robertson Stephens International Limited Donaldson, Lufkin & Jenrette International Merrill Lynch International c/o Morgan Stanley & Co. International Limited 25 Cabot Square Canary Wharf London E14 4QA England Dear Sirs and Mesdames: The undersigned understands that Morgan Stanley & Co. Incorporated ("MORGAN STANLEY") and Morgan Stanley & Co. International Limited ("MSIL") propose to enter into an Underwriting Agreement (the "UNDERWRITING AGREEMENT") with priceline.com Incorporated, a Delaware corporation (the "COMPANY") providing for the public offering (the "PUBLIC OFFERING") by the several underwriters, including Morgan Stanley and MSIL (the "UNDERWRITERS") of shares (the "SHARES") of the Common Stock (par value $.008 per share) of the Company (the "COMMON STOCK"). To induce the Underwriters that may participate in the Public Offering to continue their efforts in connection with the Public Offering, the undersigned hereby agrees that, without the prior written consent of Morgan Stanley on behalf of the Underwriters, it will not, during the period commencing on the date hereof and ending 180 days after the date of the final prospectus relating to the Public Offering (the "PROSPECTUS"), (1) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend, or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock or (2) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the Common Stock, whether any such transaction described in clause (1) or (2) above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise. In addition, the undersigned agrees that, without the prior written consent of Morgan Stanley on behalf of the Underwriters, it will not, during the period commencing on the date hereof and ending 180 days after the date of the Prospectus, make any demand for or exercise any right with respect to, the registration of any shares of Common Stock or any security convertible into or exercisable or exchangeable for Common Stock. The foregoing provisions shall not apply to the sale or other transfer of shares of Common Stock by the undersigned to any associate (as such term is defined in Rule 12b-2 of the Securities Exchange Act of 1934) of the undersigned; PROVIDED THAT, prior to any such sale or other transfer of shares of Common Stock, any such associated transferee agrees in writing to the restrictions on transfer set forth herein. Whether or not the Public Offering actually occurs depends on a number of factors, including market conditions. Any Public Offering will only be made pursuant to an Underwriting Agreement, the terms of which are subject to negotiation between the Company and the Underwriters. In the event that the Public Offering shall not have been consummated on or before October 31, 1999, this Lock-Up Agreement shall be of no further force or effect. Very truly yours, -------------------------------- Name -------------------------------- Address 2 Annex I Opinion of Skadden, Arps, Slate, Meagher & Flom LLP August 16, 1999 MORGAN STANLEY & CO. INCORPORATED GOLDMAN SACHS & CO. ALLEN & COMPANY INCORPORATED BANCBOSTON ROBERTSON STEPHENS INC. DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED As Representatives of the several U.S. Underwriters c/o Morgan Stanley & Co. Incorporated 1585 Broadway New York, NY 10036 MORGAN STANLEY & CO. INTERNATIONAL LIMITED GOLDMAN SACHS INTERNATIONAL ALLEN & COMPANY INCORPORATED BANCBOSTON ROBERTSON STEPHENS INTERNATIONAL INC. DONALDSON, LUFKIN & JENRETTE INTERNATIONAL MERRILL LYNCH INTERNATIONAL As Representatives of the several International Underwriters c/o Morgan Stanley & Co. International Incorporated 25 Cabot Square Canary Wharf London E14 4QA England Re: priceline.com Incorporated Public Offering of Common Stock, par value $.008 per share -------------------------------- Ladies and Gentlemen: We have acted as special counsel to priceline.com Incorporated, a Delaware corporation (the "Company") in MORGAN STANLEY & CO. INCORPORATED August 16, 1999 Page 2 connection with the Underwriting Agreement, dated August 10, 1999 (the "Underwriting Agreement"), between the Company, certain stockholders of the Company named therein (the "Selling Stockholders"), Morgan Stanley & Co. Incorporated, Goldman Sachs & Co., Allen & Company Incorporated, BancBoston Robertson Stephens Inc., Donaldson, Lufkin & Jenrette Securities Corporation and Merrill Lynch, Pierce, Fenner & Smith Incorporated as representatives of the several U.S. Underwriters named therein (the "U.S. Underwriters"), and Morgan Stanley & Co. International Limited, Goldman Sachs International, Allen & Company Incorporated, BancBoston Robertson Stephens International Inc., Donaldson, Lufkin & Jenrette International and Merrill Lynch International as representatives of the several International Under writers named therein (the "International Underwriters" and together with the U.S. Underwriters, the "Underwriters"), relating to the sale to the several Underwriters by the Company of 2,000,000 shares (the "Primary Shares") of the Company's common stock, par value $.008 per share ("Common Stock") and by the Selling Stockholders of 3,500,000 shares of Common Stock (the "Secondary Shares" and together with the Primary Shares, the "Shares"). This opinion is being furnished pursuant to Section 6(c) of the Underwriting Agreement. In connection with this opinion, we have examined originals or copies, certified or otherwise identified to our satisfaction, of (i) the Registration Statement on Form S-1 (File No. 333-83513) relating to the Shares, filed with the Securities and Exchange Commission (the "Commission") on July 23, 1999 under the Securities Act of 1933, as amended, (the "Act"), Amendment No. 1 thereto filed with the Commission on August 2, 1999 and Amendment No. 2 thereto filed with the Commission on August 10, 1999, including information deemed to be a part of the registration MORGAN STANLEY & CO. INCORPORATED August 16, 1999 Page 3 statement at the time of effectiveness pursuant to Rule 430A of the General Rules and Regulations under the Act (the "Rules and Regulations") (such Registration Statement, as so amended, being hereinafter referred to as the "Registration Statement"); (ii) the final prospectuses dated August 10, 1999 relating to the Shares in the form filed with the Commission pursuant to Rule 424(b) of the Rules and Regulations (the "Prospectuses"); (iii) a specimen certificate representing the Common Stock; (iv) an executed copy of the Underwriting Agreement; (v) the Certificate of Incorporation of the Company, as currently in effect (the "Certificate of Incorporation"); (vi) the Bylaws of the Company, as currently in effect (the "By-laws");(vii) certain resolutions of the Board of Directors of the Company and a Pricing Committee of the Board of Directors of the Company; (viii) the Amended and Restated Registration Rights Agreement, dated as of December 8, 1998, among the Company, General Atlantic Partners 48, L.P., GAP Coinvestment Partners, L.P., General Atlantic Partners 50, L.P., and the stockholders named therein (the "Registration Rights Agreement") and those other agreements and instruments listed on Schedule I hereto (together with the Registration Rights Agreement, the "Applicable Contracts"); (ix) executed acknowledgements from each of the parties to the Registration Rights Agreement (other than America West Airlines, Inc., Continental Airlines, Inc., Northwest Airlines, Inc. and Trans World Airlines, Inc. (the "Non-Consenting Stock holders") and the Company) consenting to the assignment of registration rights by certain stockholders and waiving rights to notice under the Registration Rights Agreement; and (x) an officer's certificate, dated the date hereof, a copy of which is attached as Exhibit A hereto. We have also examined originals or copies, certified or otherwise identified to our satisfaction, of such records of the Company and such agreements, certificates of public officials, certificates of officers or other representatives of the Company and others, and such other documents, MORGAN STANLEY & CO. INCORPORATED August 16, 1999 Page 4 certificates and records as we have deemed necessary or appropriate as a basis for the opinions set forth herein. In our examination, we have assumed the legal capacity of all natural persons, the genuineness of all signatures, the authenticity of all documents submitted to us as originals, the conformity to original documents of all documents submitted to us as certified or photo static copies and the authenticity of the originals of such latter documents. In making our examination of executed documents, we have assumed that the parties thereto, other than the Company, had the power, corporate or other, to enter into and perform all obligations thereunder and have also assumed the due authorization by all requisite action, corporate or other, and execution and delivery by such parties of such documents and the validity and binding effect thereof on such parties. As to any facts material to the opinions expressed herein which we did not independently establish or verify, we have relied upon oral or written statements and representations of officers and other representatives of the Company and others. In rendering the opinion set forth in paragraph 4 below, we have also assumed, with your consent, that the certificates representing the Primary Shares will be manually signed by one of the authorized officers of the Transfer Agent and Registrar for the Common Stock and registered by such Transfer Agent and Registrar and will conform to the specimen thereof examined by us. As used herein, (i) the term "Applicable Laws" means those laws of the State of New York, the State of Delaware and the United States of America that, in each case, in our experience, are normally applicable to transactions of the type contemplated by the Underwriting Agreement (except for United States, state and foreign securities or Blue Sky laws, anti-fraud laws and the rules and regulations of the National Association of Securities Dealers, Inc.) but without our having made any special MORGAN STANLEY & CO. INCORPORATED August 16, 1999 Page 5 investigation regarding any other laws; (ii) the term "Governmental Authorities" means any federal, New York or Delaware executive, legislative, judicial, administrative or regulatory body; (iii) the term "Applicable Orders" means those judgments, orders or decrees of any Governmental Authorities specifically identified to us by the Company to be applicable to the Company, as identified on Schedule II hereto and (iv) the term "Governmental Approval" means any consent, approval, license, authorization or validation of, or filing, qualification or registration with, any Governmental Authority required to be made or obtained by the Company pursuant to Applicable Laws, other than any consent, approval, license, authorization, validation, filing, qualification or registration which may have become applicable as a result of your involvement in the transactions contemplated by the Underwriting Agreement or because of your legal or regulatory status or because of any other facts specifically pertaining to you. Our opinion set forth in paragraph 1 below as to the existence and good standing of the Company under the laws of the State of Delaware is based solely on our review of a certificate to such effect from the Secretary of State of the State of Delaware. Members of our firm are admitted to the bar in the State of New York and the State of Delaware and we do not express any opinion as to the laws of any other jurisdiction other than the laws of the United States of America to the extent referred to specifically herein. Based upon and subject to the limitations, qualifications, exceptions and assumptions set forth herein, we are of the opinion that: MORGAN STANLEY & CO. INCORPORATED August 16, 1999 Page 6 1. The Company is a corporation validly existing and in good standing under the laws of the State of Delaware. 2. The Company has the corporate power and corporate authority to own, lease and operate its proper ties and to conduct its business as described in the Registration Statement. 3. The authorized capital stock of the Company conforms as to legal matters to the description thereof contained in each Prospectus. 4. The Primary Shares have been duly authorized by the Company and, when delivered to and paid for by the Underwriters in accordance with the terms of the Underwriting Agreement, will be validly issued, fully paid and non-assessable shares of Common Stock; and the issuance of the Primary Shares will not be subject to any preemptive or similar rights arising under the Certificate of Incorporation or the By-laws or the General Corporation Law of the State of Delaware, in each case as currently in effect. 5. The Underwriting Agreement has been duly authorized, executed and delivered by the Company. 6. The execution and delivery of the Underwriting Agreement by the Company and the consummation by the Company of the transactions contemplated thereby will not contravene (i) the Certificate of Incorporation or the By-laws; (ii) any Applicable Law; (iii) except to the extent disclosed in the Prospectuses, any Applicable Contract; (iv) any Applicable Order; or (v) the Act, the Rules and Regulations, the Securities Exchange Act of 1934, as amended (the "Exchange Act") or the rules and regulations thereunder, PROVIDED, HOWEVER, that we express no opinion in this paragraph 6 with regard to the anti-fraud provisions of MORGAN STANLEY & CO. INCORPORATED August 16, 1999 Page 7 the Act, the Rules and Regulations, the Exchange Act or the rules and regulations thereunder or the information contained in, the accuracy, completeness or correctness of, or the adequacy of the disclosure contained in, each Prospectus or the Registration Statement or the responsiveness thereof to the requirements of the Act and the Rules and Regulations, which matters are addressed in paragraph 10 below and the second paragraph following paragraph 11 below. 7. No Governmental Approval, or consent, filing, registration or approval of or with the Commission, is required to be made or obtained by the Company for the execution and delivery by the Company of the Underwriting Agreement or the issuance and sale of the Primary Shares by the Company pursuant to the Underwriting Agreement, except such as have been obtained or made. 8. The statements set forth in each Prospectus under the caption "Description of Capital Stock" and in Item 14 of the Registration Statement, insofar as such statements constitute summaries of legal matters or certain provisions of the documents referred to therein, fairly summarize the matters referred to therein in all material respects. 9. Although the discussion set forth in each Prospectus under the caption "Certain United States Federal Tax Consequences to Non-U.S. Investors" does not purport to discuss all possible United States federal income tax consequences of the purchase, ownership, and disposition of Shares, such discussion constitutes, in all material respects, a fair summary of the United States federal income tax consequences to Non-U.S. Investors of the purchase, ownership and disposition of Shares under current law. 10. The Registration Statement, at the time it became effective, and each Prospectus, as of its date, MORGAN STANLEY & CO. INCORPORATED August 16, 1999 Page 8 appeared on their face to be appropriately responsive in all material respects to the requirements of the Act and the Rules and Regulations, except that, in each case, we express no opinion as to the financial statements, schedules and other financial and statistical data included therein or excluded therefrom or the exhibits thereto, and, except to the extent expressly stated in paragraphs 8 and 9 above, we do not assume any responsibility for the accuracy, completeness or fairness of the statements contained in the Registration Statement or either Prospectus. 11. The Company is not and, upon the consummation of the transactions contemplated by the Underwriting Agreement, will not be, an investment company under the Investment Company Act of 1940, as amended. We have been orally advised by the Commission that the Registration Statement was declared effective under the Act at ____ p.m. on August 10, 1999. We have been orally advised by the Commission that no stop order suspending the effectiveness of the Registration Statement has been issued and, to the best of our knowledge, no proceedings for that purpose have been instituted or are pending or threatened by the Commission. In addition, we have participated in conferences with officers and other representatives of the Company, certain Selling Stockholders, counsel for the Selling Stockholders, representatives of the independent accountants of the Company, your counsel and you at which the contents of the Registration Statement and the Prospectuses and related matters were discussed and, although we are not passing upon, and do not assume any responsibility for, the accuracy, completeness or fairness of the statements contained in the Registration Statement or the Prospectuses and have made no independent check or verification thereof (except to the extent expressly stated in paragraphs 8 and 9 MORGAN STANLEY & CO. INCORPORATED August 16, 1999 Page 9 above), on the basis of the foregoing, no facts have come to our attention that have led us to believe that the Registration Statement, at the time it became effective, contained an untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary to make the statements therein not misleading, or that either Prospectus, as of its date and as of the date hereof, contained or contains an untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading, except that we express no opinion or belief with respect to the financial statements, schedules and other financial and statistical data included therein or excluded therefrom or the exhibits to the Registration Statement. This opinion is furnished to you solely for your benefit in connection with the closing under the Underwriting Agreement occurring today and is not to be used, circulated, quoted or otherwise referred to for any other purpose or relied upon by any other person without our express written permission. Very truly yours, MORGAN STANLEY & CO. INCORPORATED August 16, 1999 Page 10 SCHEDULE I APPLICABLE CONTRACTS Stock Purchase Agreement, dated July 31, 1998, by and among priceline.com Incorporated, General Atlantic Partners 48, L.P. and GAP Coinvestment Partners, L.P., as amended on September 18, 1998 Stock Purchase Agreement, dated December 8, 1998, by and between priceline.com Incorporated and the Investors listed on Schedule 2.1 thereto Airline Participation Agreement, dated April 1998, by and among priceline.com Incorporated, Priceline Travel, Inc. and Trans World Airlines, Inc. Airline Participation Agreement, dated October 2, 1998, by and among priceline.com Incorporated, Priceline Travel, Inc. and Northwest Airlines, Inc. Airline Participation Agreement, dated August 31, 1998, by and among priceline.com Incorporated, Priceline Travel, Inc. and Delta Air Lines, Inc., as amended on January 19, 1999 General Agreement, dated August 31, 1998, by and among priceline.com Incorporated, Priceline Travel, Inc. and Delta Air Lines, Inc., as amended on January 19, 1999 Participation Warrant Agreement, dated August 31, 1998, between priceline.com Incorporated and Delta Air Lines, Inc., as amended on December 31, 1998 Participation Warrant Agreement, dated December 31, 1998, between priceline.com Incorporated and America West Airlines, Inc. MORGAN STANLEY & CO. INCORPORATED August 16, 1999 Page 11 Participation Warrant Agreement, dated December 31, 1998, between priceline.com Incorporated and Trans World Air lines, Inc. Participation Warrant Agreement, dated December 31, 1998, between priceline.com Incorporated and Northwest Air lines, Inc., as amended on February 4, 1999 and March 3, 1999 Letter Agreement, dated July 16, 1999, between the Registrant and Delta Air Lines, Inc. Interactive Marketing Agreement, dated March 31, 1999, by and between the Registrant and First USA Bank, N.A. First Amendment to Interactive Marketing Agreement, dated as of April 26, 1999, modifying the Interactive Marketing Agreement, dated March 31, 1999, by and between the Registrant and First USA Bank, N.A. Airline Participation Agreement, dated July 16, 1999, between the Registrant and Continental Airlines, Inc. Participation Warrant Agreement, dated July 16, 1999, between the Registrant and Continental Airlines, Inc. MORGAN STANLEY & CO. INCORPORATED August 16, 1999 Page 12 SCHEDULE I APPLICABLE ORDERS None Exhibit A PRICELINE.COM INCORPORATED OFFICER'S CERTIFICATE I, Paul E. Francis, am Chief Financial Officer of priceline.com Incorporated, a Delaware corporation (the "Company"). I understand that pursuant to Section 6(c) of the Underwriting Agreement dated August 10, 1999 (the "Underwriting Agreement") among the Company, certain stockholders of the Company and the several underwriters (the "Underwriters") named in Schedule I thereto, Skadden, Arps, Slate, Meagher & Flom LLP is rendering an opinion, to be dated August 13, 1999 (the "Opinion") to the Underwriters. I further understand that Skadden, Arps, Slate, Meagher & Flom LLP is relying on this officer's certificate and the statements made herein in rendering such opinion. Capitalized terms not defined herein have the meanings given to such terms in the Opinion. With regard to the foregoing, on behalf of the Company, I certify that: (i) the Company's sole business is the ownership and operation of an electronic commerce business primarily over the Internet; (ii) the Company (a) is not engaged and does not propose to engage in the business of issuing face-amount certificates of the installment type, and has not been engaged in such business and does not have any such certificate outstanding, and (b) is not engaged and does not propose to engage in the business of investing, reinvesting, owning, holding or trading in securities, and does not own or propose to acquire investment securities (as defined in Section 3(a) of the Investment Company Act of 1940, as amended) having a value exceeding 40 percent of the value of the Company's total assets (exclusive of government securities and cash items) on an unconsolidated basis; (iii) there are no judgments, orders or decrees of any Governmental Authorities (as such term is defined in the Opinion) applicable or relating to, or affecting, the Company; (iv) the Company has complied with all its obligations under the confidentiality, publicity and non-disclosure provisions of the Applicable Contracts and, without limiting the generality of the foregoing, in those circumstances where an Applicable Contract does not by its terms permit the filing of the Applicable Contract as an exhibit to the Registration Statement or a description of certain provisions of the Applicable Contract in the Registration Statement, the Company has obtained the consent of the other party or parties (as applicable) to such Applicable Contract to the filing of such Applicable Contract as an exhibit to the Registration Statement or the description of certain provisions of such Applicable Contract in the Registration Statement; and (v) except to the extent disclosed in the Prospectuses, the Company has complied with all its obligations under Section 7 of the Registration Rights Agreement in connection with the filing of the Registration Statement with the Commission and the offerings contemplated by the Registration Statement, including (without limitation) the procedural, notice and time period requirements of such Section. IN WITNESS WHEREOF I have executed this certificate in the name and on behalf of priceline.com Incorporated this 16th day of August, 1999. priceline.com Incorporated By:______________________________ Name: Paul E. Francis Title: Chief Financial Officer Annex II Opinion of Melissa Taub Melissa M. Taub, Esq. Senior Vice President, General Counsel and Secretary priceline.com Incorporated Five High Ridge Park Stamford, Connecticut 06905 August 16, 1999 MORGAN STANLEY & CO. INCORPORATED GOLDMAN SACHS & CO. ALLEN & COMPANY INCORPORATED BANCBOSTON ROBERTSON STEPHENS INC. DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED As Representatives of the several U.S. Underwriters c/o Morgan Stanley & Co. Incorporated 1585 Broadway New York, NY 10036 MORGAN STANLEY & CO. INTERNATIONAL LIMITED GOLDMAN SACHS INTERNATIONAL ALLEN & COMPANY INCORPORATED BANCBOSTON ROBERTSON STEPHENS INTERNATIONAL INC. DONALDSON, LUFKIN & JENRETTE INTERNATIONAL MERRILL LYNCH INTERNATIONAL As Representatives of the several International Underwriters c/o Morgan Stanley & Co. International Incorporated 25 Cabot Square Canary Wharf London E14 4QA England Re: priceline.com Incorporated Public Offering of common stock, par value $.008 per share ------------------------------------------ Ladies and Gentlemen: I am Senior Vice President, General Counsel and Secretary of priceline.com Incorporated, a Delaware corporation (the "Company"), and have acted as general counsel to the Company in connection with the Underwriting Agreement, dated August 10, 1999 (the "Underwriting Agreement"), among the Company, certain stockholders of the Company named therein (the "Selling Stockholders"), Morgan Stanley & Co. Incorporated, Goldman Sachs & Co., Allen & Company Incorporated, BancBoston Robertson Stephens Inc., Donaldson, Lufkin & Jenrette Securities Corporation and Merrill Lynch, Pierce, Fenner & Smith Incorporated as representatives of the several U.S. Underwriters named therein (the "U.S. Underwriters"), and Morgan Stanley & Co. International Limited, Goldman Sachs International, Allen & Company Incorporated, BancBoston Robertson Stephens International Inc., Donaldson, Lufkin & Jenrette International and Merrill Lynch International as representatives of the several International Under writers named therein (the "International Underwriters" and together with the U.S. Underwriters, the "Underwriters"), relating to the sale to the several Underwriters by the Company of 2,000,000 shares (the "Primary Shares") of the Company's common stock, par value $.008 per share ("Common Stock"), and by the Selling Stockholders of 3,500,000 shares of Common Stock (the "Secondary Shares" and, together with the Primary Shares, the "Shares"). This opinion is being furnished pursuant to Section 6(d) of the Underwriting Agreement. In connection with this opinion, I have examined originals or copies, certified or otherwise identified to my satisfaction, of (i) the Registration Statement on Form S-1 (File No. 333-83513) relating to the Shares, filed with the Securities and Exchange Commission (the "Commission") on July 23, 1999 under the Securities Act of 1933, as amended, (the "Act"), Amendment No. 1 thereto filed with the Commission on August 2, 1999 and Amendment No. 2 thereto filed with the Commission on August [9][10], 1999, including information deemed to be a part of the registration statement at the time of effectiveness pursuant to Rule 430A of 2 the General Rules and Regulations under the Act (the "Rules and Regulations") (such Registration Statement, as so amended, being here inafter referred to as the "Registration Statement"); (ii) the final prospectuses dated August 10, 1999 relating to the Shares in the form filed with the Commission pursuant to Rule 424(b) of the Rules and Regulations (the "Prospectuses"); (iii) a specimen certificate representing the Common Stock; (iv) an executed copy of the Under writing Agreement; (v) the Certificate of Incorporation of the Company, as currently in effect (the "Certificate of Incorporation"); (vi) the By-laws of the Company, as currently in effect (the "By-laws");(vii) certain resolutions of the Board of Directors of the Company and a Pricing Committee of the Board of Directors of the Company; (viii) a certificate of the Chief Executive Officer and Chief Financial Officer of the Company as to the factual matters covered thereby, a copy of which is attached hereto (the "Officers' Certificate"); (ix) the agreements included as exhibits to the Registration Statement (the "Material Contracts"); and (x) certain documents purporting to assign the rights to United States patents No. 5,794,207 and No. 5,797,127 (collectively, the "Patents") to the Company. I have also examined originals or copies, certified or otherwise identified to my satisfaction, of such records of the Company and such agreements, certificates of public officials, certificates of officers or other representatives of the Company and others, and such other documents, certificates and records as I have deemed necessary or appropriate as a basis for the opinions set forth herein. In my examination, I have assumed the legal capacity of all natural persons, the genuineness of all signatures, the authenticity of all documents submitted to me as originals, the conformity to original documents of all documents submitted to me as certified, conformed or photostatic copies and the authenticity of the originals of such latter documents. In making my examination of executed documents, I have assumed that the parties thereto, other than the Company, had the power, corporate or other, to enter into and perform all obligations thereunder and I have also assumed the due authorization by all requisite action, corporate or other, and execution and delivery by such 3 parties of such documents and the validity and binding effect thereof on such parties. As used herein, (i) the term "Applicable Laws" means the General Corporation Law of the State of Delaware and those laws of the State of Connecticut and the United States of America that, in each instance, are normally applicable to transactions of the type contemplated by the Underwriting Agreement (except for United States, state and foreign securities or Blue Sky laws, anti-fraud laws, laws affecting creditors rights generally and the rules and regulations of the National Association of Securities Dealers, Inc.) but without my having made any investigation regarding any other laws; (ii) the term "Governmental Authorities" means any federal or Connecticut executive, legislative, administrative or regulatory body and the Secretary of State of the State of Delaware and (iii) the term "Governmental Approval" means any consent, approval, license, authorization or validation of, or filing, qualification or registration with, any Governmental Authority required to be obtained or made by the Company pursuant to Applicable Laws, other than any consent, approval, license, authorization, validation, filing, qualification or registration which may have become applicable as a result of your involvement in the transactions contemplated by the Underwriting Agreement or because of your legal or regulatory status or because of any other facts specifically pertaining to you. In providing the opinions set forth in paragraphs 2, 5, 6, 8, 9 and 10 below, I have made no investigation or search of public docket records of any court, governmental or administrative agency or body, or of any filings, applications or registrations with the United States Patent and Trademark Office or the United States Copy right Office. For the purposes of the opinions set forth in paragraphs 2, 5, 6, 8, 9 and 10 below, the expressions "to my knowledge" and "I have no knowledge" are each limited to those matters brought to my attention after reasonable inquiry of officers of the Company. 4 For the purposes of the opinion set forth in paragraph 10 below, the term "Liens" means all presently asserted liens or other encumbrances. Insofar as the opinion in paragraph 1 below relates to the laws of the States of California, Ohio, New Jersey or New York [ANY OTHERS?], I have relied solely on certificates of due qualification and good standing from the Secretary of State of each such state. I am the Senior Vice President, General Counsel and Secretary of the Company, and have held such position since September 1998. I am admitted to the bar in the State of Connecticut and, except to the extent set forth in the preceding paragraph, I do not express any opinion as to the laws of any other jurisdiction other than the General Corporation Law of the State of Delaware and the laws of the United States of America to the extent referred to specifically herein. I am not registered to practice before the US Patent and Trademark Office as a Patent Attorney. Except to the extent expressly set forth in paragraphs 4, 8, 9 and 10 below, I express no opinion with respect to any intellectual property rights or intellectual property matters of the Company, which are addressed in the opinion of Morgan & Finnigan, out side intellectual property counsel to the Company. Based upon and subject to the limitations, qualifications, exceptions and assumptions set forth herein, I am of the opinion that: 1. The Company is duly qualified to transact business and is in good standing in each jurisdiction in which the conduct of its business or its ownership or leasing of property requires such qualification, except to the extent that the failure to be so qualified or be in good standing could not reasonably be expected to have a material adverse effect on the Company. 2. The execution and delivery of the Underwriting Agreement by the Company and the consummation by the Company 5 of the transactions contemplated thereby will not contravene (a) any Applicable Law or (b) to my knowledge, except to the extent disclosed in the Prospectus, any Material Contract; or (c) to my knowledge, any judgment, order or decree of any court or Governmental Authority, applicable to the Company. 3. No Governmental Approval is required by the Company for the execution and delivery of the Underwriting Agreement or the consummation of the transactions contemplated therein, except such as have been obtained or made. 4. The statements in each Prospectus under the captions "Risk Factors-We Face Potential Conflicts of Interest relating to Walker Digital," "Risk Factors-Our Success Depends on Our Ability to Protect Our Intellectual Property" (other than the statements under the subheading "-Pending Interference Action"), "Risk Factors-Regulatory and Legal Uncertainties Could Harm Our Business," "Business-Intellectual Property," "Business-Governmental Regulation," and "Certain Transactions" and the final four paragraphs under the caption "Business-Legal Proceedings," in each case, insofar as such statements constitute summaries of legal matters, legal proceedings or certain provisions of the documents referred to therein, fairly summarize the legal matters, legal proceedings or provisions referred to therein in all material respects. 5. To my knowledge, except as described in each Prospectus, there are no legal or governmental proceedings pending or threatened to which the Company is a party or to which any of the properties of the Company is subject, the unfavorable outcome of which could reason ably be expected to have a material adverse effect on the Company. 6. To my knowledge, there are no statutes or regulations applicable to the Company or its properties or material contracts or documents to which the Company is party, that, in either case, are required to be described in the Registration Statement or the Prospectuses or to be filed as an exhibit to the Registration Statement, but are not described or filed as required. 6 7. The shares of Common Stock outstanding immediately prior to issuance of the Shares (including the shares of Common Stock being sold by certain selling stockholders in the concurrent underwritten offering of Common Stock) have been duly authorized and are validly issued, fully paid and non-assessable. 8. To my knowledge, there are currently no pending or threatened claims of infringement of any material patent, trademark, service mark or copyright or of misappropriation of trade secrets, necessary for the Company to conduct the business currently conducted by it, the unfavorable outcome of which could reasonably be expected to have a material adverse effect on the Company and that are required to be described in the Registration Statement or the Prospectuses but are not described as required. 9. Except as described in the Prospectuses, I have no knowledge that the Company will be unable to continue to operate under any current license of a patent, trade mark, service mark, copyright or trade secret, which license is necessary for the Company to conduct the business currently conducted by it. 10. To my knowledge, the Company owns the Patents, free and clear of all Liens, other than those that may arise from matters disclosed in the Prospectuses. This opinion is given as of the date hereof, and I assume no obligation to update or supplement this opinion to reflect any facts or circumstances that may come to my attention or any change in the law that may occur or become effective after the time of delivery hereof. This opinion is provided to you as a legal opinion only, and not as a guaranty or warranty of the matters discussed herein or of any transaction or obligation. This opinion is furnished to you solely for your benefit in connection with the closing under the Under writing Agreement occurring today and is not to be used, circulated, quoted or otherwise referred to for any 7 other purpose or relied upon by any other person without my express written permission. Very truly yours, Melissa M. Taub 8 EXHIBIT A Officers' Certificate PRICELINE.COM INCORPORATED The undersigned, Richard S. Braddock, the Chief Executive Officer of priceline.com Incorporated, a Delaware corporation (the "Company"), and Paul E. Francis, the Chief Financial Officer of the Company, each under stand that, pursuant to Section 6(d) of the Underwriting Agreement dated August 10, 1999 (the "Underwriting Agreement") among the Company, certain selling stockholders and the several underwriters (the "Underwriters") named in Schedule I thereto, the General Counsel of the Company is rendering an opinion, to be dated August 13, 1999 (the "Opinion") to the Underwriters. We further understand that the General Counsel of the Company is relying on this officer's certificate and the statements made herein in rendering such Opinion. With regard to the foregoing, on behalf of the Company, we certify that: (i) All contracts, agreements or other arrangements material to the business of the Company (the "Material Contracts") have been filed with the Securities and Exchange Commission as exhibits to the Registration Statement (as such term is defined in the Opinion); (ii) The Company has complied with all its obligations under the confidentiality, publicity and non-disclosure provisions of the Material Contracts and, without limiting the generality of the foregoing, in those circumstances where a Material Contract does not by its terms permit the filing of the Material Contract as an exhibit to the Registration Statement or a description of certain provisions of the Material Contract in the Registration Statement, the Company has obtained the consent of the other party or parties (as applicable) to such Material Contract to the filing of such Material Contract as an exhibit to the 9 Registration Statement or the description of certain provisions of such Material Contract in the Registration Statement; (iii) There are no judgments, orders or decrees of any Governmental Authority (as such term is defined in the Opinion) applicable or relating to, or affecting, the Company; (iv) Except as described in each Prospectus (as such term is defined in the Opinion), there are no legal or governmental proceedings pending or threatened to which the Company is a party or to which any proper ties of the Company is subject; and (v) The shares of Common Stock outstanding immediately prior to issuance of the Shares (including the shares of Common Stock being sold by certain selling stockholders in the concurrent underwritten offering of Common Stock) (as such terms are defined in the Opinion) are fully paid and non-assessable and the amount reflected in the corporate records of the Company as required to fully pay up such shares, has been received in full by the Company. IN WITNESS WHEREOF we have executed this certificate in the name and on behalf of priceline.com Incorporated this 16th day of August, 1999. priceline.com Incorporated By:_____________________________ Name: Richard S. Braddock Title: Chief Executive Officer 10 By:_____________________________ Name: Paul E. Francis Title: Chief Financial Officer 11 Annex III Opinion of outside patent counsel The statements made in the Prospectus under the captions "Risk Factors - - Our Success Depends on Our Ability to Protect Our Intellectual Property" (only the subsection entitled "Pending Interference Action") and "Business - Legal Proceedings" (only the first three paragraphs related to the potential Woolston interference matter), appear to be fair and accurate summaries of the matters described therein. Annex IV Opinion of Selling Stockholders' Counsel (i) the Underwriting Agreement has been duly authorized, executed and delivered by or on behalf of each of the Selling Stockholders; (ii) the execution and delivery by each Selling Stockholder of, and the performance by such Selling Stockholder of its obligations under, the Underwriting Agreement and the Custody Agreement and Powers of Attorney of such Selling Stockholder will not contravene any provision of applicable law, or the certificate of incorporation or by-laws of such Selling Stockholder (if such Selling Stockholder is a corporation), or, to the best of such counsel's knowledge, any agreement or other instrument binding upon such Selling Stockholder or, to the best of such counsel's knowledge, any judgment, order or decree of any governmental body, agency or court having jurisdiction over such Selling Stockholder, and no consent, approval, authorization or order of, or qualification with, any governmental body or agency is required for the performance by such Selling Stockholder of its obligations under this Agreement or the Custody Agreement or Power of Attorney of such Selling Stockholder, except such as may be required by the securities or Blue Sky laws of the various states in connection with offer and sale of the Shares; (i) each of the Selling Stockholders has valid title to the Shares to be sold by such Selling Stockholder and the legal right and power, and all authorization and approval required by law, to enter into the Underwriting Agreement and the Custody Agreement and Power of Attorney of such Selling Stockholder and to sell, transfer and deliver the Shares to be sold by such Selling Stockholder; (ii) the Custody Agreement and the Power of Attorney of each Selling Stockholder have been duly authorized, executed and delivered by such Selling Stockholder and are valid and binding agreements of such Selling Stockholder; and (iii) delivery of the Shares to be sold by each Selling Stockholder pursuant to the Underwriting Agreement will pass title to such Shares free and clear of any security interests, claims, liens, equities and other encumbrances. 2 EX-1.2 3 U/A RELATING TO CONVERTIBLE DEBT Exhibit 1.2 $250,000,000 PRICELINE.COM INCORPORATED % CONVERTIBLE SUBORDINATED NOTES DUE 2006 UNDERWRITING AGREEMENT August __, 1999 August __, 1999 Morgan Stanley & Co. Incorporated Goldman, Sachs & Co. Allen & Company Incorporated BancBoston Robertson Stephens Inc. Donaldson, Lufkin & Jenrette Securities Corporation Merrill Lynch, Pierce, Fenner & Smith Incorporated c/o Morgan Stanley & Co. Incorporated 1585 Broadway New York, New York 10036 Dear Sirs and Mesdames: Priceline.com Incorporated, a Delaware corporation (the "COMPANY"), proposes to issue and sell to the several Underwriters named in Schedule I hereto (the "UNDERWRITERS") $250,000,000 aggregate principal amount of its % Convertible Subordinated Notes due 2006 (the "FIRM SECURITIES") to be issued pursuant to the provisions of an Indenture dated as of August __, 1999 (the "INDENTURE") between the Company and Wilmington Trust Company, as Trustee (the "TRUSTEE"). The Company also proposes to issue and sell to the Underwriters not more than an additional $37,500,000 aggregate principal amount of its % Convertible Subordinated Notes Due 2006 (the "ADDITIONAL SECURITIES") if and to the extent that you, as managers of the offering, shall have determined to exercise, on behalf of the Underwriters, the right to purchase such % Convertible Subordinated Notes Due 2006 granted to the Underwriters in Section 2 hereof. The Firm Securities and the Additional Securities are hereinafter collectively referred to as the "SECURITIES." The Securities will be convertible into shares of common stock, par value $.008 per share, of the Company (the "COMMON STOCK") (such shares of Common Stock, the "UNDERLYING SECURITIES"). The Company has filed with the Securities and Exchange Commission (the "COMMISSION") a registration statement, including a prospectus, relating to the Securities. The registration statement as amended at the time it becomes effective, including the information (if any) deemed to be part of the registration statement at the time of effectiveness pursuant to Rule 430A under the Securities Act of 1933, as amended (the "SECURITIES ACT"), is hereinafter referred to as the "REGISTRATION STATEMENT"; the prospectus in the form first used to confirm sales of Securities is hereinafter referred to as the "PROSPECTUS." If the Company has filed an abbreviated registration statement to register additional % Convertible 1 Subordinated Notes due 2006 pursuant to Rule 462(b) under the Securities Act (the "RULE 462 REGISTRATION STATEMENT"), then any reference herein to the term "REGISTRATION STATEMENT" shall be deemed to include such Rule 462 Registration Statement. 1. REPRESENTATIONS AND WARRANTIES. The Company represents and warrants to and agrees with each of the Underwriters that: (a) The Registration Statement has become effective; no stop order suspending the effectiveness of the Registration Statement is in effect, and no proceedings for such purpose are pending before or, to the knowledge of the Company, threatened by the Commission. (b) (i) The Registration Statement, when it became effective, did not contain and, as amended or supplemented, if applicable, will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, (ii) the Registration Statement and the Prospectus comply and, as amended or supplemented, if applicable, will comply in all material respects with the Securities Act and the applicable rules and regulations of the Commission thereunder and (iii) the Prospectus does not contain and, as amended or supplemented, if applicable, will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, except that the representations and warranties set forth in this paragraph do not apply to statements or omissions in the Registration Statement or the Prospectus based upon information relating to any Underwriter furnished to the Company in writing by such Underwriter through you expressly for use therein. (c) The Company is a corporation, validly existing and in good standing under the laws of the State of Delaware, has the corporate power and authority to own its property and to conduct its business as described in the Prospectus and is duly qualified to transact business and is in good standing in each jurisdiction in which the conduct of its business or its ownership or leasing of property requires such qualification, except to the extent that the failure to be so qualified or be in good standing would not have a material adverse effect on the Company. (d) The Company has no subsidiaries and does not otherwise own or control, directly or indirectly, any corporation, association or other entity. 2 (e) This Agreement has been duly authorized, executed and delivered by the Company. (f) The authorized capital stock of the Company conforms as to legal matters to the description thereof contained in the Prospectus. (g) The shares of issued and outstanding capital stock of the Company have been duly authorized and, are validly issued, fully paid and non-assessable. (h) The Underlying Securities reserved for issuance upon conversion of the Securities have been duly authorized and reserved for issuance and, when issued and delivered upon conversion of the Securities in accordance with the terms of the Securities, will be validly issued, fully paid and non-assessable, and the issuance of the Underlying Securities will not be subject to any preemptive or similar rights. (i) The Indenture has been duly qualified under the Trust Indenture Act and has been duly authorized, executed and delivered by the Company and is a valid and binding agreement of the Company, enforceable against the Company, except to the extent that enforcement thereof may be limited by (a) bankruptcy, insolvency (including, without limitation, all laws relating to fraudulent transfers), reorganization, moratorium or other similar laws now or hereafter in effect relating to creditors' rights generally and (b) general principles of equity (regardless of whether enforcement is considered in a proceeding in equity or at law) and except that the waiver contained in Section [5.08] of the Indenture may be unenforceable. (j) The Securities have been duly authorized and, when executed and authenticated in accordance with the provisions of the Indenture and delivered to and paid for by the Underwriters in accordance with the terms of this Agreement, will be entitled to the benefits of the Indenture and will be valid and binding obligations of the Company, enforceable against the Company, except to the extent that enforcement thereof may be limited by (a) bankruptcy, insolvency (including, without limitation, all laws relating to fraudulent transfers), reorganization, moratorium or other similar laws now or hereafter in effect relating to creditors' rights generally and (b) general principles of equity (regardless of whether enforcement is considered in a proceeding in equity or at law) and except that the waiver contained in Section [5.08] of the Indenture may be unenforceable. 3 (k) The execution and delivery by the Company of, and the performance by the Company of its obligations under, this Agreement, the Indenture and the Securities will not contravene (i) any provision of applicable law; (ii) the certificate of incorporation or by-laws of the Company; (iii) except as disclosed in the Prospectus, any agreement or other instrument binding upon the Company that is material to the Company or (iv) any judgment, order or decree of any governmental body, agency or court having jurisdiction over the Company, except where, in the case of (i), (iii) and (iv), such contravention would not, singly or in the aggregate, have a material adverse effect on the Company, or on the validity or enforceability of the Indenture and the Securities, and no consent, approval, authorization or order of, or qualification with, any governmental body or agency is required for the performance by the Company of its obligations under this Agreement, the Indenture and the Securities, except such as have been obtained or made or such as may be required by the securities or Blue Sky laws of the various states in connection with the offer and sale of the Securities or such consents, approvals, authorizations, orders or qualifications the failure of the Company to obtain would not have a material adverse effect on the Company or the offering of Securities contemplated hereunder. (l) There has not occurred any material adverse change, or any development involving a prospective material adverse change, in the condition, financial or otherwise, or in the earnings, business or operations of the Company from that set forth in the Prospectus (exclusive of any amendments or supplements thereto subsequent to the date of this Agreement). (m) There are no (i) legal or governmental proceedings pending or to the Company's knowledge threatened to which the Company is a party or to which any of the properties of the Company is subject that are required to be described in the Registration Statement or the Prospectus and are not so described or (ii) statutes, regulations, contracts or other documents that are required to be described in the Registration Statement or the Prospectus or to be filed as exhibits to the Registration Statement that are not described or filed as required. (n) Each preliminary prospectus filed as part of the registration statement as originally filed or as part of any amendment thereto, or filed pursuant to Rule 424 under the Securities Act, complied when so filed in all material respects with the Securities Act and the applicable rules and regulations of the Commission thereunder. 4 (o) The Company is not and, after giving effect to the offering and sale of the Securities and the application of the proceeds thereof as described in the Prospectus, will not be an "investment company" as such term is defined in the Investment Company Act of 1940, as amended. (p) Subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus, (i) the Company has not incurred any material liability or obligation, direct or contingent, nor entered into any material transaction not in the ordinary course of business; (ii) the Company has not purchased any of its outstanding capital stock, nor declared, paid or otherwise made any dividend or distribution of any kind on its capital stock other than ordinary and customary dividends; and (iii) there has not been any material change in the capital stock, short-term debt (other than in the ordinary course of business) or long-term debt of the Company, except in each case as described in the Prospectus. (q) The Company owns no real property and has good and marketable title to all personal property owned by it which is material to the business of the Company, in each case free and clear of all liens, encumbrances and defects except such as are described in the Prospectus or such as do not materially affect the value of such property and do not materially interfere with the use made or proposed to be made of such property by the Company; and any real property and buildings held under lease by the Company are held by it under valid, subsisting and enforceable leases with such exceptions as are not material and do not materially interfere with the use made or proposed to be made of such property and buildings by the Company, in each case except as described in the Prospectus. (r) Except to the extent described in the Prospectus, the Company owns, possesses, or has an irrevocable right to use all patents, patent applications, trademarks, trademark applications, service marks, service mark applications, trade names, copyrights, licenses, inventions, trade secrets, technology and know-how (collectively, "INTELLECTUAL PROPERTY RIGHTS") currently employed by it in connection with and material to its business as described in the Prospectus; other than the claims described in the Prospectus, the Company is not aware of any rights of third parties to any such Intellectual Property Rights; in connection with the filing of its patent applications, the Company conducted reasonable investigations of the published literature and patent references relating to the inventions claimed in such applications. There are no enforceable United States or foreign patents known to the Company which the 5 Company believes to be infringed by its present activities or which the Company believes would preclude the pursuit of its business as described in the Prospectus to any material extent; the Company is not aware of any infringement by third parties of any such Intellectual Property Rights which would have a material adverse effect on the Company; except as described in the Prospectus, there is no pending or, to the Company's knowledge, threatened action, suit, proceeding or claim challenging the validity or scope of the Company's rights in or to any such Intellectual Property Rights; and, except as described in the Prospectus, there is no pending or, to the Company's knowledge, threatened action, suit, proceeding or claim by others that the Company is infringing or otherwise violating intellectual property rights of others. (s) The Company possesses all certificates, licenses, authorizations and permits (collectively, "GOVERNMENTAL LICENSES") issued by the appropriate federal, state or foreign regulatory authorities necessary to conduct its business, except such Governmental Licenses the failure of the Company to possess would not, singly or in the aggregate, have a material adverse effect on the Company; the Company has not received any notice of proceedings relating to the revocation or modification of any Governmental Licenses which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would have a material adverse effect on the Company, except as described in the Prospectus. (t) No material labor dispute with the employees of the Company exists, except as described in the Prospectus, or, to the knowledge of the Company, is imminent. (u) The Company is insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as it believes are reasonable for the business in which it is engaged and the Company believes it will be able to renew or replace its existing insurance coverage as and when such coverage expires or to obtain similar coverage from financially responsible insurers as may be necessary to continue its business at a cost that would not materially and adversely affect the Company, except as described in the Prospectus. (v) The Company maintains a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management's general or specific authorizations; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted 6 accounting principles and to maintain asset accountability; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (w) The Company (i) is in compliance with any and all applicable foreign, federal, state and local laws and regulations relating to the protection of human health and safety, the environment or hazardous or toxic substances or wastes, pollutants or contaminants ("ENVIRONMENTAL LAWS"), (ii) has received all permits, licenses or other approvals required of it under applicable Environmental Laws to conduct its business and (iii) is in compliance with all terms and conditions of any such permit, license or approval, except, in each case, where such noncompliance with Environmental Laws, failure to receive required permits, licenses or other approvals or failure to comply with the terms and conditions of such permits, licenses or approvals would not have a material adverse effect on the Company. (x) Except as described in the Prospectus, there are no contracts, agreements or understandings between the Company and any person granting such person the right to require the Company to file a registration statement under the Securities Act with respect to any securities of the Company or to require the Company to include such securities with the Securities registered pursuant to the Registration Statement. (y) Except as described or referred to in the Registration Statement (exclusive of any amendments or supplements thereto subsequent to the date of this Agreement) and except for the 10,000,000 shares of Common Stock sold on April 1, 1999 in the Company's initial public offering, the Company has not sold, issued or distributed any shares of Common Stock during the six-month period preceding the date hereof, including any sales pursuant to Rule 144A under, or Regulations D or S of, the Securities Act, other than shares issued pursuant to employee benefit plans, qualified stock option plans or other employee compensation plans or pursuant to outstanding options, rights or warrants. (z) Options issued or to be issued pursuant to any of the Company's stock option plans to employees who participated in the option exercise program described in the Prospectus are not exercisable until 180 days after the date of this Agreement. 7 (aa) The Company has reviewed its operations to the extent and in the manner described in the Prospectus to evaluate the extent to which the business or operations of the Company will be affected by the Year 2000 Problem (that is, any significant risk that computer hardware or software applications used by the Company will not, in the case of dates or time periods occurring after December 31, 1999, function at least as effectively as in the case of dates or time periods occurring prior to January 1, 2000); as a result of such review, (i) the Company does not believe, that (A) there are any issues related to the Company's preparedness to address the Year 2000 Problem that are of a character required to be described or referred to in the Registration Statement or Prospectus which have not been accurately described in the Registration Statement or Prospectus or (B) the Year 2000 Problem will have a material adverse effect on the Company. (bb) There are no outstanding obligations of the Company to repurchase, redeem or otherwise acquire any shares of Common Stock. 2. AGREEMENTS TO SELL AND PURCHASE. Upon the basis of the representations and warranties herein contained, but subject to the conditions hereinafter stated, the Company hereby agrees to sell to the several Underwriters, and each Underwriter, agrees, severally and not jointly, to purchase from the Company the respective principal amounts of Firm Securities set forth in Schedule I hereto opposite its name at % of their principal amount plus accrued interest, if any, from August __, 1999 to the date of payment and delivery. On the basis of the representations and warranties contained in this Agreement, and subject to its terms and conditions, the Company agrees to sell to the Underwriters the Additional Securities, and the Underwriters shall have a one-time right to purchase up to $37,500,000 aggregate principal amount of Additional Securities at the Purchase Price plus accrued interest, if any, from August __, 1999 to the date of payment and delivery. If the Underwriters elect to exercise such option, Morgan Stanley & Co. Incorporated shall so notify the Company in writing not later than 30 days after the date of this Agreement, which notice shall specify the aggregate principal amount of Additional Securities to be purchased by the Underwriters and the date on which such Additional Securities are to be purchased. Such date may be the same as the Closing Date but not earlier than the Closing Date nor later than ten business days after the date of such notice. Additional Securities may be purchased as provided in Section 4 solely for the purpose of covering over-allotments made in connection with the offering of the Firm Securities. 8 The Company hereby agrees that, without the prior written consent of Morgan Stanley & Co. Incorporated, it will not, during the period ending 180 days after the date of the Prospectus, (i) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend, or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock; (ii) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of shares of Common Stock, whether any such transaction described in clause (i) or (ii) above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise or (iii) in the case of the Company, file a registration statement, other than a registration statement on Form S-8 covering shares of common stock subject to outstanding options under the 1997 Omnibus Plan or shares of common stock subject to outstanding options under the 1999 Omnibus Plan, for the registration of any shares of Common Stock or any security convertible or exercisable or exchangeable for Common Stock. The foregoing sentence shall not apply to (A) the sale of the Securities under this Agreement; (B) the Common Stock issuable upon conversion of Securities; (C) the issuance by the Company of restricted stock awards under the Company's existing employee benefits plans or of shares of Common Stock upon the exercise of an option or warrant or the conversion of a security outstanding on the date hereof; (D) the grant of options to officers, directors, employees or consultants, PROVIDED such options are not exercisable (except in the case of a change of control or similar event) prior to the end of the lock-up period; (E) the issuance by the Company of warrants (or shares of capital stock upon the exercise of such warrants) to suppliers or other entities providing products or services to the Company in connection with entering into certain supply, adaptive marketing or other similar arrangements, provided that the recipient of such warrants or shares agrees to be bound by the foregoing provisions; (F) the concurrent offering by the Company of 2,000,000 shares of its Common Stock or the sale of the those 2,000,000 shares in an underwritten offering; (G) the filing of a Rule 462(b) Registration Statement; (H) subject to the other provisions herein the filing by the Company of a registration statement in response to the exercise of demand registration rights by holders of such rights as of the date hereof under the Amended and Restated Registration Rights Agreement dated as of December 8, 1998 (the "Registration Rights Agreement") among the Company, General Atlantic Partners 48, L.P., GAP Coinvestment Partners, L.P., General Atlantic Partners 50, L.P. and the stockholders named therein, or the grant of exchange rights and the issuance by the Company of common stock on exercise of such exchange rights, in connection with the development by priceline.com of new lines of business through other entities, PROVIDED THAT no such issuance is permitted prior to 180 days after the date of the Prospectus. 3. TERMS OF PUBLIC OFFERING. The Company is advised by you that the Underwriters propose to make a public offering of their respective portions of the Securities as soon after the Registration Statement and this Agreement have become effective as in your judgment is advisable. The Company is further advised by you that the Securities are to be offered to the public initially at % of their principal amount (the "PUBLIC OFFERING PRICE") plus accrued interest, if 9 any, from August __, 1999 to the date of payment and delivery and to certain dealers selected by you at a price that represents a concession not in excess of % of their principal amount, and that any Underwriter may allow, and such dealers may reallow, a concession, not in excess of % of their principal amount, to any Underwriter or to certain other dealers. 4. PAYMENT AND DELIVERY. Payment for the Securities shall be made to the Company in Federal or other funds immediately available in New York City at 10:00 a.m., New York City time, on August __, 1999, or at such other time on the same or such other date, not later than August __, 1999, as shall be designated in writing by you. The time and date of such payment are hereinafter referred to as the "CLOSING DATE." Payment for any Additional Securities shall be made to the Company in Federal or other funds immediately available in New York City against delivery of such Additional Securities for the respective accounts of the several Underwriters at 10:00 a.m., New York City time, on the date specified in the notice described in Section 2 or at such other time on the same or on such other date, in any event not later than September __, 1999, as shall be designated in writing by you. The time and date of such payment are hereinafter referred to as the "OPTION CLOSING DATE." Certificates for the Securities shall be in global form and registered in such names and in such denominations as you shall request in writing not later than one full business day prior to the Closing Date or the Option Closing Date, as the case may be. The certificates evidencing the Securities shall be delivered to you on the Closing Date or the Option Closing Date, as the case may be, for the account of the Underwriters, with any transfer taxes payable in connection with the transfer of the Securities to the Underwriters duly paid, against payment therefor. 5. CONDITIONS TO THE UNDERWRITERS' OBLIGATIONS. The obligations of the Company to sell the Securities to the Underwriters and the several obligations of the Underwriters to purchase and pay for the Securities are subject to the condition that the Registration Statement shall have become effective not later than 5:00 p.m. (New York City time) on the date hereof. The several obligations of the Underwriters are subject to the following further conditions: (a) Subsequent to the execution and delivery of this Agreement and prior to the Closing Date: 10 (i) there shall not have occurred any downgrading, nor shall any notice have been given of any intended or potential downgrading or of any review for a possible change that does not indicate the direction of the possible change, in the rating accorded any of the Company's securities by any "nationally recognized statistical rating organization," as such term is defined for purposes of Rule 436(g)(2) under the Securities Act; and (ii) there shall not have occurred any change, or any development involving a prospective change, in the condition, financial or otherwise, or in the earnings, business or operations of the Company, from that set forth in the Prospectus (exclusive of any amendments or supplements thereto subsequent to the date of this Agreement) that, in your judgment, is material and adverse and that makes it, in your judgment, impracticable to market the Securities on the terms and in the manner contemplated in the Prospectus. (b) The Underwriters shall have received on the Closing Date a certificate, dated the Closing Date and signed by Paul E. Francis, the Chief Financial Officer of the Company, to the effect set forth in Section 5(a)(i) above and to the effect that the representations and warranties of the Company contained in this Agreement are true and correct as of the Closing Date and that the Company has in all material respects complied with all of the agreements and satisfied all of the conditions on its part to be performed or satisfied hereunder on or before the Closing Date. The officer signing and delivering such certificate may rely upon the best of his or her knowledge as to proceedings threatened. (c) The Underwriters shall have received on the Closing Date an opinion of Skadden, Arps, Slate, Meagher & Flom LLP, special outside counsel for the Company, dated the Closing Date, to the effect set forth in Annex I hereto. (d) The Underwriters shall have received on the Closing Date the opinion of Melissa Taub, general counsel for the Company, dated the Closing Date, to the effect set forth in Annex II hereto. (e) The Underwriters shall have received on the Closing Date the opinion of outside patent counsel for the Company, dated the Closing Date, to the effect set forth in Annex IV hereto. 11 (f) The Underwriters shall have received on the Closing Date an opinion of Davis Polk & Wardwell, counsel for the Underwriters, dated the Closing Date, in form and substance satisfactory to you. The opinions described in Sections 5(c), 5(d), and 5(e) above shall be rendered to the Underwriters at the request of the Company. (g) The Underwriters shall have received, on each of the date hereof and the Closing Date, a letter dated the date hereof or the Closing Date, as the case may be, in form and substance satisfactory to the Underwriters, from Deloitte & Touche LLP, independent public accountants, containing statements and information of the type ordinarily included in accountants' "comfort letters" to underwriters with respect to the financial statements and certain financial information contained in the Registration Statement and the Prospectus; PROVIDED that the letter delivered on the Closing Date shall use a "cut-off date" not earlier than the date hereof. The obligations of the Underwriters to purchase Additional Securities hereunder are subject to the delivery to you on the Option Closing Date of such documents as you may reasonably request with respect to the good standing of the Company, the due authorization, execution and authentication of the Additional Securities, the due authorization and reservation of the Underlying Securities relating to the Additional Securities, and other matters related to the execution and authentication of the Additional Securities and the issuance of the Underlying Securities upon conversion of the Additional Securities. 6. COVENANTS OF THE COMPANY. In further consideration of the agreements of the Underwriters herein contained, the Company covenants with each Underwriter as follows: (a) To furnish to you, without charge, seven signed copies of the Registration Statement (including exhibits thereto) and for delivery to each other Underwriter a conformed copy of the Registration Statement (without exhibits thereto) and to furnish to you in New York City, without charge, prior to 3:00 p.m. New York City time on the business day next succeeding the date of this Agreement and during the period mentioned in Section 6(c) below, as many copies of the Prospectus and any supplements and amendments thereto or to the Registration Statement as you may reasonably request. (b) Before amending or supplementing the Registration Statement or the Prospectus, to furnish to you a copy of each such 12 proposed amendment or supplement and not to file any such proposed amendment or supplement to which you reasonably object, and to file with the Commission within the applicable period specified in Rule 424(b) under the Securities Act any prospectus required to be filed pursuant to such Rule. (c) If, during such period after the first date of the public offering of the Securities as in the opinion of counsel for the Underwriters the Prospectus is required by law to be delivered in connection with sales by an Underwriter or dealer, any event shall occur or condition exist as a result of which it is necessary to amend or supplement the Prospectus in order to make the statements therein, in the light of the circumstances when the Prospectus is delivered to a purchaser, not misleading, or if, in the opinion of counsel for the Underwriters, it is necessary to amend or supplement the Prospectus to comply with applicable law, forthwith to prepare, file with the Commission and furnish, at its own expense, to the Underwriters and to the dealers (whose names and addresses you will furnish to the Company) to which Securities may have been sold by you on behalf of the Underwriters and to any other dealers upon request, either amendments or supplements to the Prospectus so that the statements in the Prospectus as so amended or supplemented will not, in the light of the circumstances when the Prospectus is delivered to a purchaser, be misleading or so that the Prospectus, as amended or supplemented, will comply with law. (d) To endeavor to qualify the Securities for offer and sale under the securities or Blue Sky laws of such jurisdictions as you shall reasonably request; PROVIDED that the Company shall not be obligated to file any general consent to service of process or to qualify as a foreign corporation or as a dealer in securities in any jurisdiction in which it is not so qualified or to subject itself to taxation in respect of doing business in any jurisdiction in which it is not otherwise so subject. (e) To make generally available to the Company's security holders and to you as soon as practicable an earning statement covering the twelve-month period ending [September 30], 1999 that satisfies the provisions of Section 11(a) of the Securities Act and the rules and regulations of the Commission thereunder. (f) Whether or not the transactions contemplated in this Agreement are consummated or this Agreement is terminated, to pay or cause to be paid the following expenses incident to the performance of its obligations under this Agreement, including: (i) the fees, disbursements 13 and expenses of the Company's counsel and the Company's accountants in connection with the registration and delivery of the Securities under the Securities Act and all other fees or expenses in connection with the preparation and filing of the Registration Statement, any preliminary prospectus, the Prospectus and amendments and supplements to any of the foregoing, including all printing costs associated therewith, and the mailing and delivering of copies thereof to the Underwriters and dealers, in the quantities herein specified, (ii) all costs and expenses related to the transfer and delivery of the Securities to the Underwriters, including any transfer or other taxes payable thereon, (iii) the cost of producing any Blue Sky or legal investment memorandum in connection with the offer and sale of the Securities under state securities law and all expenses in connection with the qualification of the Securities for offer and sale under state securities law as provided in Section 6(d) hereof, including filing fees and the reasonable fees and disbursements of counsel for the Underwriters in connection with such qualification and in connection with the Blue Sky or legal investment memorandum, not to exceed, together with fees for the concurrent stock offering, $10,000, (iv) all filing fees and the reasonable fees and disbursements of counsel to the Underwriters incurred in connection with the review and qualification of the offering of the Securities by the NASD Regulation, Inc., not to exceed, together with fees for the concurrent stock offering, $10,000, (v) any fees charged by the rating agencies for the rating of the Securities, (vi) all costs and expenses incident to quotation of the Underlying Securities on the NASDAQ National Market, (vii) the cost of printing certificates representing the Securities, (viii) the costs and charges of any trustee, transfer agent, registrar or depositary, (ix) the costs and expenses of the Company relating to investor presentations on any "road show" undertaken in connection with the marketing of the offering of the Securities, including, without limitation, expenses associated with the production of road show slides and graphics, fees and expenses of any consultants engaged in connection with the road show presentations with the prior approval of the Company, travel and lodging expenses of the representatives and officers of the Company and any such consultants, and the cost of any aircraft chartered in connection with the road show, (x) all expenses in connection with any offer and sale of the Securities outside of the United States, including filing fees and the reasonable fees and disbursements of counsel for the Underwriters in connection with offers and sales outside of the United States and (xi) all other costs and expenses incident to the performance of the obligations of the Company hereunder for which provision is not otherwise made in this Section. It is understood, however, that except as provided in this Section, Section 7 entitled "Indemnity and Contribution", and the last paragraph of Section 9 below, the Underwriters will pay all of 14 their costs and expenses, including fees and disbursements of their counsel, transfer taxes payable on resale of any of the Securities by them and any advertising expenses connected with any offers they may make. (g) Not to release any option holder from, or in any other way, amend or modify the lock-up agreements entered into in connection with the Company's option exercise program described in the Prospectus, without the consent of Morgan Stanley & Co. Incorporated on behalf of the Underwriters, which shall not be unreasonably withheld. (h) To notify Morgan Stanley & Co. Incorporated promptly upon receipt by the Company of any demand registration request under the Registration Rights Agreement so that the Underwriters may exercise their holdback rights under Section 6(a) of Registration Rights Agreement. (i) To qualify the Underlying Securities for quotation on the NASDAQ National Market. 7. INDEMNITY AND CONTRIBUTION. (a) The Company agrees to indemnify and hold harmless each Underwriter and each person, if any, who controls any Underwriter within the meaning of either Section 15 of the Securities Act or Section 20 of the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"), from and against any and all losses, claims, damages and liabilities (including, without limitation, any legal or other expenses reasonably incurred in connection with defending or investigating any such action or claim) caused by any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or any amendment thereof, any preliminary prospectus or the Prospectus (as amended or supplemented if the Company shall have made any amendments or supplements thereto), or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein (in the case of the Prospectus, in light of the circumstances under which they were made) not misleading, except insofar as such losses, claims, damages or liabilities are caused by any such untrue statement or omission or alleged untrue statement or omission based upon information relating to any Underwriter furnished to the Company in writing by such Underwriter through you expressly for use therein, PROVIDED, that the foregoing indemnity agreement with respect to any preliminary prospectus or the Prospectus shall not inure to the benefit of any Underwriter from whom the person asserting any such losses, claims, damages or liabilities purchased Securities, or any person controlling such Underwriter, if a copy of the Prospectus (as then amended or supplemented, if the Company shall have made any amendments or supplements) was not sent or given by or on behalf of such Underwriter to such person, if required by law so to have been delivered, at or prior to the written confirmation of the sale of the Securities to such person, and if the Prospectus (as so amended or supplemented) would have cured the defect giving rise to such loss, claim, damage or liability. 15 (b) Each Underwriter agrees, severally and not jointly, to indemnify and hold harmless the Company, its directors, its officers who sign the Registration Statement and each person, if any, who controls the Company within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act to the same extent as the foregoing indemnity from the Company to such Underwriter, but only with reference to information relating to such Underwriter furnished to the Company in writing by such Underwriter through you expressly for use in the Registration Statement, any preliminary prospectus, the Prospectus or any amendments or supplements thereto. (c) In case any proceeding (including any governmental investigation) shall be instituted involving any person in respect of which indemnity may be sought pursuant to Section 7(a) or 7(b), such person (the "INDEMNIFIED PARTY") shall promptly notify the person against whom such indemnity may be sought (the "INDEMNIFYING PARTY") in writing and the indemnifying party, upon request of the indemnified party, shall retain counsel reasonably satisfactory to the indemnified party to represent the indemnified party and any others the indemnifying party may designate in such proceeding and shall pay the fees and disbursements of such counsel related to such proceeding. In any such proceeding, any indemnified party shall have the right to retain its own counsel, but the fees and expenses of such counsel shall be at the expense of such indemnified party unless (i) the indemnifying party and the indemnified party shall have mutually agreed to the retention of such counsel or (ii) the named parties to any such proceeding (including any impleaded parties) include both the indemnifying party and the indemnified party and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them. It is understood that the indemnifying party shall not, in respect of the legal expenses of any indemnified party in connection with any proceeding or related proceedings in the same jurisdiction, be liable for the fees and expenses of more than one separate firm (in addition to any local counsel) for all such indemnified parties and that all such fees and expenses shall be reimbursed as they are incurred upon receipt of reasonably detailed invoices thereof. Such firm shall be designated in writing by Morgan Stanley & Co. Incorporated, in the case of parties indemnified pursuant to Section 7(a), and by the Company, in the case of parties indemnified pursuant to Section 7(b). The indemnifying party shall not be liable for any settlement of any proceeding effected without its written consent, but if settled with such consent or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify the indemnified party from and against any loss or liability by reason of such settlement or judgment. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened proceeding in respect of which any indemnified party is or could have been a party and indemnity could have been 16 sought hereunder by such indemnified party, unless such settlement includes an unconditional release of such indemnified party from all liability on claims that are the subject matter of such proceeding. (d) To the extent the indemnification provided for in Section 7(a) or 7(b) is unavailable to an indemnified party or insufficient in respect of any losses, claims, damages or liabilities referred to therein, then each indemnifying party under such paragraph, in lieu of indemnifying such indemnified party thereunder, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (i) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the Underwriters on the other hand from the offering of the Securities or (ii) if the allocation provided by clause 7(d)(i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause 7(d)(i) above but also the relative fault of the Company on the one hand and of the Underwriters on the other hand in connection with the statements or omissions that resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the Underwriters on the other hand in connection with the offering of the Securities shall be deemed to be in the same respective proportions as the net proceeds from the offering of the Securities (before deducting expenses) received by the Company and the total underwriting discounts and commissions received by the Underwriters, in each case as set forth in the table on the cover of the Prospectus, bear to the aggregate Public Offering Price of the Securities. The relative fault of the Company on the one hand and the Underwriters on the other hand shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or by the Underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Underwriters' respective obligations to contribute pursuant to this Section 7 are several in proportion to the respective principal amounts of Securities they have purchased hereunder, and not joint. (e) The Company and the Underwriters agree that it would not be just or equitable if contribution pursuant to this Section 7 were determined by PRO RATA allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation that does not take account of the equitable considerations referred to in Section 7(d). The amount paid or payable by an indemnified party as a result of the losses, claims, damages and liabilities referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such 17 action or claim. Notwithstanding the provisions of this Section 7, no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Securities underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages that such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The remedies provided for in this Section 7 are not exclusive and shall not limit any rights or remedies which may otherwise be available to any indemnified party at law or in equity. (f) The indemnity and contribution provisions contained in this Section 7 and the representations, warranties and other statements of the Company contained in this Agreement shall remain operative and in full force and effect regardless of (i) any termination of this Agreement, (ii) any investigation made by or on behalf of any Underwriter or any person controlling any Underwriter or by or on behalf of the Company, its officers or directors or any person controlling the Company and (iii) acceptance of and payment for any of the Securities. 8. TERMINATION. This Agreement shall be subject to termination by notice given by you to the Company, if (a) after the execution and delivery of this Agreement and prior to the Closing Date (i) trading generally shall have been suspended or materially limited on or by, as the case may be, any of the New York Stock Exchange, the American Stock Exchange or the National Association of Securities Dealers, Inc., (ii) trading of any securities of the Company shall have been suspended on any exchange or in any over-the-counter market, (iii) a general moratorium on commercial banking activities in New York shall have been declared by either Federal or New York State authorities or (iv) there shall have occurred any outbreak or escalation of hostilities or any change in financial markets or any calamity or crisis that, in your judgment, is material and adverse and (b) in the case of any of the events specified in clauses 8(a)(i) through 8(a)(iv), such event, singly or together with any other such event, makes it, in your judgment, impracticable to market the Securities on the terms and in the manner contemplated in the Prospectus. 9. EFFECTIVENESS; DEFAULTING UNDERWRITERS. This Agreement shall become effective upon the execution and delivery hereof by the parties hereto. If, on the Closing Date, any one or more of the Underwriters shall fail or refuse to purchase Securities that it has or they have agreed to purchase hereunder on such date, and the aggregate principal amount of Securities which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase is 18 not more than one-tenth of the aggregate principal amount of the Securities to be purchased on such date, the other Underwriters shall be obligated severally in the proportions that the principal amount of Securities set forth opposite their respective names in Schedule I bears to the principal amount of Securities set forth opposite the names of all such non-defaulting Underwriters, or in such other proportions as you may specify, to purchase the Securities which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase on such date; PROVIDED that in no event shall the principal amount of Securities that any Underwriter has agreed to purchase pursuant to this Agreement be increased pursuant to this Section 9 by an amount in excess of one-ninth of such principal amount of Securities without the written consent of such Underwriter. If, on the Closing Date, any Underwriter or Underwriters shall fail or refuse to purchase Securities and the aggregate principal amount of Securities with respect to which such default occurs is more than one-tenth of the aggregate principal amount of Securities to be purchased on such date, and arrangements satisfactory to you and the Company for the purchase of such Securities are not made within 36 hours after such default, this Agreement shall terminate without liability on the part of any non-defaulting Underwriter or the Company. In any such case either you or the Company shall have the right to postpone the Closing Date, but in no event for longer than seven days, in order that the required changes, if any, in the Registration Statement and in the Prospectus or in any other documents or arrangements may be effected. If, on the Option Closing Date, any Underwriter or Underwriters shall fail or refuse to purchase Additional Securities and the aggregate number of Additional Securities with respect to which such default occurs is more than one-tenth of the aggregate number of Additional Securities to be purchased, the non-defaulting Underwriters shall have the option to (i) terminate their obligation hereunder to purchase Additional Securities or (ii) purchase not less than the number of Additional Securities that such non-defaulting Underwriters would have been obligated to purchase in the absence of such default. Any action taken under this paragraph shall not relieve any defaulting Underwriter from liability in respect of any default of such Underwriter under this Agreement. If this Agreement shall be terminated by the Underwriters, or any of them, because of any failure or refusal on the part of the Company to comply with the terms or to fulfill any of the conditions of this Agreement, or if for any reason the Company shall be unable to perform its obligations under this Agreement, the Company will reimburse the Underwriters or such Underwriters as have so terminated this Agreement with respect to themselves, severally, for all out-of-pocket expenses (including the fees and disbursements of their counsel) reasonably incurred by such Underwriters in connection with this Agreement or the offering contemplated hereunder. 19 10. COUNTERPARTS. This Agreement may be signed in two or more counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. 11. APPLICABLE LAW. This Agreement shall be governed by and construed in accordance with the internal laws of the State of New York. 12. HEADINGS. The headings of the sections of this Agreement have been inserted for convenience of reference only and shall not be deemed a part of this Agreement. 20 Very truly yours, priceline.com Incorporated By: --------------------------------- Name: Title: Accepted as of the date hereof Morgan Stanley & Co. Incorporated Goldman, Sachs & Co. Allen & Company Incorporated BancBoston Robertson Stephens Inc. Donaldson, Lufkin & Jenrette Securities Corporation Merrill Lynch, Pierce, Fenner & Smith Incorporated Acting severally on behalf of themselves and the several Underwriters named in Schedule I hereto. By: Morgan Stanley & Co. Incorporated By: --------------------------------- Name: Title: 21 SCHEDULE I
PRINCIPAL AMOUNT OF SECURITIES TO BE UNDERWRITER PURCHASED - ----------------------------------------------- -------------------- Morgan Stanley & Co. Incorporated Goldman, Sachs & Co........................... Allen & Company Incorporated.................. BancBoston Robertson Stephens Inc............. Donaldson, Lufkin & Jenrette Securities Corporation.......................... Merrill Lynch, Pierce, Fenner & Smith Incorporated ..................... ------------ Total:............................... $250,000,000 ============
I-1 Annex I Opinion of Skadden, Arps, Slate, Meagher & Flom LLP August 16, 1999 MORGAN STANLEY & CO. INCORPORATED GOLDMAN SACHS & CO. ALLEN & COMPANY INCORPORATED BANCBOSTON ROBERTSON STEPHENS INC. DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED As Representatives of the several Underwriters c/o Morgan Stanley & Co. Incorporated 1585 Broadway New York, NY 10036 Re: priceline.com Incorporated Public Offering of ___% Convertible Subordinated Notes Due 2006 ------------------------------------------------ Ladies and Gentlemen: We have acted as special counsel to priceline.com Incorporated, a Delaware corporation (the "Company") in connection with the Underwriting Agreement, dated August 13, 1999 (the "Underwriting Agreement"), between the Company and Morgan Stanley & Co. Incorporated, Goldman Sachs & Co., Allen & Company Incorporated, BancBoston Robertson Stephens Inc., Donaldson, Lufkin & Jenrette Securities Corporation and Merrill Lynch, Pierce, Fenner & Smith Incorporated as representatives of the several Underwriters named therein (the "Underwriters"), relating to the sale by the Company to the several Underwriters of $250,000,000 aggregate principal amount of the Company's ____% Convertible Subordinated Notes due 2006 (the "Notes"). MORGAN STANLEY & CO. INCORPORATED August 16, 1999 Page 2 This opinion is being furnished pursuant to Section 5(c) of the Underwriting Agreement. In connection with this opinion, we have examined originals or copies, certified or otherwise identified to our satisfaction, of (i) the Registration Statement on Form S-1 (File No. 333-83513) relating to the Notes, filed with the Securities and Exchange Commission (the "Commission") on July 23, 1999 under the Securities Act of 1933, as amended, (the "Act"), Amendment No. 1 thereto filed with the Commission on August 2, 1999 and Amendment No. 2 thereto filed with the Commission on August 10, 1999, including information deemed to be a part of the registration statement at the time of effectiveness pursuant to Rule 430A of the General Rules and Regulations under the Act (the "Rules and Regulations") (such Registration Statement, as so amended, being hereinafter referred to as the "Registration Statement"); (ii) the final prospectus dated August 10, 1999 relating to the Notes and the shares of Common Stock, par value $.008 per share, of the Company issuable upon conversion of the Notes (the "Conversion Shares"), in the form filed with the Commission pursuant to Rule 424(b) of the Rules and Regulations (the "Prospectus"); (iii) a form of global certificate representing the Notes; (iv) a specimen certificate representing Common Stock; (v) an executed copy of the Underwriting Agreement; (vi) an executed copy of the indenture, dated as of August 13, 1999 (the "Indenture"), between the Company and Wilmington Trust Company, as trustee (the "Trustee"); (vii) the Certificate of Incorporation of the Company, as currently in effect (the "Certificate of Incorporation"); (viii) the By-laws of the Company, as currently in effect (the "By-laws");(ix) certain resolutions of the Board of Directors of the Company and a Pricing Committee of the Board of Directors of the Company; (x) the Amended and Restated Registration Rights Agreement, dated as of December 8, 1998, among the Company, General Atlantic Partners 48, L.P., GAP Coinvestment Partners, L.P., MORGAN STANLEY & CO. INCORPORATED August 16, 1999 Page 3 General Atlantic Partners 50, L.P., and the stockholders named therein (the "Registration Rights Agreement") and those other agreements and instruments listed on Schedule I hereto (together with the Registration Rights Agreement, the "Applicable Contracts"); (xi) executed acknowledgements from each of the parties to the Registration Rights Agreement (other than America West Airlines, Inc., Continental Airlines, Inc., Northwest Airlines, Inc. and Trans World Airlines, Inc. (the "Non-Consenting Stock holders") and the Company) consenting to the assignment of registration rights by certain stockholders and waiving rights to notice under the Registration Rights Agreement; (xii) an executed copy of the Underwriting Agreement, dated August 10, 1999 (the "Stock Underwriting Agreement"), between the Company, certain stockholders of the Company named therein (the "Selling Stockholders"), Morgan Stanley & Co. Incorporated, Goldman Sachs & Co., Allen & Company Incorporated, BancBoston Robertson Stephens Inc., Donaldson, Lufkin & Jenrette Securities Corporation and Merrill Lynch, Pierce, Fenner & Smith Incorporated as representatives of the several U.S. Underwriters named therein (the "U.S. Underwriters"), and Morgan Stanley & Co. International Limited, Goldman Sachs International, Allen & Company Incorporated, BancBoston Robertson Stephens International Inc., Donaldson, Lufkin & Jenrette International and Merrill Lynch International as representatives of the several International Under writers named therein (the "International Underwriters" and together with the U.S. Underwriters, the "Stock Underwriters"), relating to the sale to the several Stock Underwriters by the Company of 2,000,000 shares (the "Primary Shares") of Common Stock and by the Selling Stockholders of 3,500,000 shares of Common Stock; and (xiii) an officer's certificate, dated the date hereof, a copy of which is attached as Exhibit A hereto. We have also examined originals or copies, certified or otherwise identified to our satisfaction, of such records of the Company and such agreements, certificates of public officials, certificates MORGAN STANLEY & CO. INCORPORATED August 16, 1999 Page 4 of officers or other representatives of the Company and others, and such other documents, certificates and records as we have deemed necessary or appropriate as a basis for the opinions set forth herein. In our examination, we have assumed the legal capacity of all natural persons, the genuineness of all signatures, the authenticity of all documents submitted to us as originals, the conformity to original documents of all documents submitted to us as certified or photo static copies and the authenticity of the originals of such latter documents. In making our examination of executed documents, we have assumed that the parties thereto, other than the Company, had the power, corporate or other, to enter into and perform all obligations thereunder and have also assumed the due authorization by all requisite action, corporate or other and the due execution and delivery by such parties of such documents and the validity and binding effect thereof on such parties. As to any facts material to the opinions ex pressed herein which we did not independently establish or verify, we have relied upon oral or written statements and representations of officers and other representatives of the Company and others. In rendering the opinions set forth in paragraphs 4 and 5 below, we have also assumed, with your consent, that the execution and delivery by the Company of the Indenture and the Notes and the performance by the Company of its obligations thereunder, do not and will not conflict with, contravene, violate or constitute a default under (i) any lease, indenture, instrument or other agreement to which the Company, or any property of the Company, is subject (except that we do not make the MORGAN STANLEY & CO. INCORPORATED August 16, 1999 Page 5 assumption set forth in this clause (i) with respect to the Certificate of Incorporation, the By-Laws or the Applicable Contracts), (ii) any rule, law or regulation to which the Company is subject (except that we do not make the assumption set forth in this clause (ii) with respect to Applicable Laws); (iii) any judicial or administrative order or decree of any governmental authority (except that we do not make the assumption set forth in this clause (iii) with respect to Applicable Orders); or (iv) any consent, approval, license, authorization or validation of, or filing, recording or registration with any governmental authority (except that we do not make this assumption with respect to Governmental Approvals). We do not express any opinion as to the effect on the opinions set forth herein of (i) the compliance or noncompliance by any party (other than the Company) with any state, federal or other laws or regulations applicable to it or (ii) the legal or regulatory status or the nature of the business of any party (other than the Company). Our opinion set forth in paragraph 1 below as to the existence and good standing of the Company under the laws of the State of Delaware is based solely on our review of a certificate to such effect from the Secretary of State of the State of Delaware. In rendering the opinions set forth in paragraphs 6 and 7 below, we have assumed, with your consent, that the certificates representing the Conversion Shares and the Primary Shares, respectively, will be manually signed by one of the authorized officers of the Transfer Agent and Registrar for the Common Stock and registered by such Transfer Agent and Registrar and will conform to the specimen certificate representing Common Stock examined by us. As used herein, (i) the term "Applicable Laws" means those laws of the State of New York, the State of Delaware and the United States of America that, in each case, in our experience, are normally applicable to MORGAN STANLEY & CO. INCORPORATED August 16, 1999 Page 6 transactions of the type contemplated by the Underwriting Agreement (except for United States, state and foreign securities or Blue Sky laws, anti-fraud laws and the rules and regulations of the National Association of Securities Dealers, Inc.) but without our having made any special investigation regarding any other laws; (ii) the term "Governmental Authorities" means any federal, New York or Delaware executive, legislative, judicial, administrative or regulatory body; (iii) the term "Applicable Orders" means those judgments, orders or decrees of any Governmental Authorities specifically identified to us by the Company to be applicable to the Company, as identified on Schedule II hereto and (iv) the term "Governmental Approval" means any consent, approval, license, authorization or validation of, or filing, qualification or registration with, any Governmental Authority required to be made or obtained by the Company pursuant to Applicable Laws, other than any consent, approval, license, authorization, validation, filing, qualification or registration which may have become applicable as a result of your involvement in the transactions contemplated by the Underwriting Agreement or because of your legal or regulatory status or because of any other facts specifically pertaining to you. Members of our firm are admitted to the bar in the State of New York and the State of Delaware and we do not express any opinion as to the laws of any other jurisdiction other than the laws of the United States of America to the extent referred to specifically herein. Based upon and subject to the limitations, qualifications, exceptions and assumptions set forth herein, we are of the opinion that: 1. The Company is a corporation validly existing and in good standing under the laws of the State of Delaware. MORGAN STANLEY & CO. INCORPORATED August 16, 1999 Page 7 2. The Company has the corporate power and corporate authority to own, lease and operate its proper ties and to conduct its business as described in the Registration Statement. 3. The authorized capital stock of the Company conforms as to legal matters to the description thereof contained in the Prospectus. 4. The Indenture has been duly authorized, executed and delivered by the Company and constitutes a valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except to the extent that enforcement thereof may be limited by (a) bankruptcy, insolvency (including, without limitation, all laws relating to fraudulent transfers), reorganization, moratorium or other similar laws now or hereafter in effect relating to creditors' rights generally and (b) general principles of equity (regardless of whether enforcement is considered in a proceeding in equity or at law) and except that the waiver contained in Section 5.08 of the Indenture may be unenforceable. 5. The Notes have been duly authorized for issuance by the Company and, when executed and authenticated in accordance with the terms of the Indenture and delivered to and paid for by you in accordance with the terms of the Underwriting Agreement, the Notes will constitute valid and binding obligations of the Company, entitled to the benefits of the Indenture and enforceable against the Company in accordance with their terms, except to the extent that enforcement thereof may be limited by (a) bankruptcy, insolvency (including, without limitation, all laws relating to fraudulent transfers), reorganization, moratorium or other similar laws now or hereafter in effect relating to creditors' rights generally and (b) general principles of equity (regardless of whether enforcement is considered in a MORGAN STANLEY & CO. INCORPORATED August 16, 1999 Page 8 proceeding in equity or at law) and, except that the waiver contained in Section 5.08 of the Indenture may be unenforceable. 6. The Conversion Shares initially issuable on conversion of the Notes have been duly authorized and reserved for issuance by the Company upon conversion of the Notes and (assuming payment for the Notes by you in accordance with the Underwriting Agreement), if and when issued upon conversion of the Notes in accordance with the terms of the Notes and the Indenture, such Conversion Shares will be validly issued, fully paid and nonassessable; and the issuance of the Conversion Shares will not be subject to any preemptive or similar rights arising under the Certificate of Incorporation or the By-laws or the General Corporation Law of the State of Delaware, in each case as currently in effect. 7. The Primary Shares have been duly authorized by the Company and, when delivered to and paid for by the Stock Underwriters in accordance with the terms of the Stock Underwriting Agreement, will be validly issued, fully paid and non-assessable shares of Common Stock. 8. The Underwriting Agreement has been duly authorized, executed and delivered by the Company. 9. The execution and delivery of the Underwriting Agreement, the Indenture and the Notes by the Company and the consummation by the Company of the transactions contemplated thereby will not contravene (i) the Certificate of Incorporation or the By-laws; (ii) any Applicable Law; (iii) except to the extent disclosed in the Prospectus, any Applicable Contract; (iv) any Applicable Order; or (v) the Act, the Rules and Regulations, the Securities Exchange Act of 1934, as amended (the "Exchange Act") or the rules and regulations thereunder, PROVIDED, MORGAN STANLEY & CO. INCORPORATED August 16, 1999 Page 9 HOWEVER, that we express no opinion in this paragraph 9 with regard to the anti-fraud provisions of the Act, the Rules and Regulations, the Exchange Act or the rules and regulations thereunder or the information contained in, the accuracy, completeness or correctness of, or the adequacy of the disclosure contained in, the Prospectus or the Registration Statement or the responsiveness thereof to the requirements of the Act and the Rules and Regulations, which matters are addressed in paragraph 13 below and the second paragraph following paragraph 14 below. 10. No Governmental Approval, or consent, filing, registration or approval of or with the Commission, is required to be made or obtained by the Company for the execution and delivery by the Company of the Underwriting Agreement and the Indenture, the execution, issuance and delivery by the Company of the Notes and the performance by the Company of its obligations under the Underwriting Agreement, the Indenture and the Notes, except such as have been obtained or made. 11. The statements set forth in the Prospectus under the captions "Description of the Notes and "Description of Capital Stock" and in Item 14 of the Registration Statement, insofar as such statements constitute summaries of legal matters or certain provisions of the documents referred to therein, fairly summarize the matters referred to therein in all material respects. 12. Although the discussion set forth in the Prospectus under the caption "Certain United States Federal Income Tax Considerations" does not purport to discuss all possible United States federal income tax consequences of the purchase, ownership, conversion and disposition of Notes, such discussion constitutes, in all material respects, a fair summary of the United States federal income MORGAN STANLEY & CO. INCORPORATED August 16, 1999 Page 10 tax consequences of the purchase, owner ship, conversion and disposition of Notes under current law. 13. The Registration Statement, at the time it became effective, and the Prospectus, as of its date, appeared on their face to be appropriately responsive in all material respects to the requirements of the Act and the Rules and Regulations, except that, in each case, we express no opinion as to the financial statements, schedules and other financial and statistical data included therein or excluded therefrom or the exhibits thereto, and, except to the extent expressly stated in paragraphs 11 and 12 above, we do not assume any responsibility for the accuracy, completeness or fairness of the statements contained in the Registration Statement or the Prospectus. 14. The Company is not and, upon the consummation of the transactions contemplated by the Underwriting Agreement, will not be, an investment company under the Investment Company Act of 1940, as amended. We have been orally advised by the Commission that the Registration Statement was declared effective under the Act at ____ p.m. on August 10, 1999. We have been orally advised by the Commission that no stop order suspending the effectiveness of the Registration Statement has been issued and, to the best of our knowledge, no proceedings for that purpose have been instituted or are pending or threatened by the Commission. In addition, we have participated in conferences with officers and other representatives of the Company, representatives of the independent accountants of the Company, your counsel and you at which the contents of the Registration Statement and the Prospectus and related matters were discussed and, although we are not passing upon, and do not assume any responsibility for, the MORGAN STANLEY & CO. INCORPORATED August 16, 1999 Page 11 accuracy, completeness or fairness of the statements contained in the Registration Statement or the Prospectus and have made no independent check or verification thereof (except to the extent expressly stated in paragraphs 11 and 12 above), on the basis of the foregoing, no facts have come to our attention that have led us to believe that the Registration Statement, at the time it became effective, contained an untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary to make the statements therein not misleading, or that the Prospectus, as of its date and as of the date hereof, contained or contains an untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading, except that we express no opinion or belief with respect to the financial statements, schedules and other financial and statistical data included therein or excluded therefrom or the exhibits to the Registration Statement. This opinion is furnished to you solely for your benefit in connection with the closing under the Underwriting Agreement occurring today and is not to be used, circulated, quoted or otherwise referred to for any other purpose or relied upon by any other person without our express written permission. Very truly yours, MORGAN STANLEY & CO. INCORPORATED August 16, 1999 Page 12 SCHEDULE I APPLICABLE CONTRACTS Stock Purchase Agreement, dated July 31, 1998, by and among priceline.com Incorporated, General Atlantic Partners 48, L.P. and GAP Coinvestment Partners, L.P., as amended on September 18, 1998 Stock Purchase Agreement, dated December 8, 1998, by and between priceline.com Incorporated and the Investors listed on Schedule 2.1 thereto Airline Participation Agreement, dated April 1998, by and among priceline.com Incorporated, Priceline Travel, Inc. and Trans World Airlines, Inc. Airline Participation Agreement, dated October 2, 1998, by and among priceline.com Incorporated, Priceline Travel, Inc. and Northwest Airlines, Inc. Airline Participation Agreement, dated August 31, 1998, by and among priceline.com Incorporated, Priceline Travel, Inc. and Delta Air Lines, Inc., as amended on January 19, 1999 General Agreement, dated August 31, 1998, by and among priceline.com Incorporated, Priceline Travel, Inc. and Delta Air Lines, Inc., as amended on January 19, 1999 Participation Warrant Agreement, dated August 31, 1998, between priceline.com Incorporated and Delta Air Lines, Inc., as amended on December 31, 1998 Participation Warrant Agreement, dated December 31, 1998, between priceline.com Incorporated and America West Airlines, Inc. MORGAN STANLEY & CO. INCORPORATED August 16, 1999 Page 13 Participation Warrant Agreement, dated December 31, 1998, between priceline.com Incorporated and Trans World Air lines, Inc. Participation Warrant Agreement, dated December 31, 1998, between priceline.com Incorporated and Northwest Air lines, Inc., as amended on February 4, 1999 and March 3, 1999 Letter Agreement, dated July 16, 1999, between the Registrant and Delta Air Lines, Inc. Interactive Marketing Agreement, dated March 31, 1999, by and between the Registrant and First USA Bank, N.A. First Amendment to Interactive Marketing Agreement, dated as of April 26, 1999, modifying the Interactive Marketing Agreement, dated March 31, 1999, by and between the Registrant and First USA Bank, N.A. Airline Participation Agreement, dated July 16, 1999, between the Registrant and Continental Airlines, Inc. Participation Warrant Agreement, dated July 16, 1999, between the Registrant and Continental Airlines, Inc. MORGAN STANLEY & CO. INCORPORATED August 16, 1999 Page 14 SCHEDULE II APPLICABLE ORDERS None Exhibit A PRICELINE.COM INCORPORATED OFFICER'S CERTIFICATE I, Paul E. Francis, am Chief Financial Officer of priceline.com Incorporated, a Delaware corporation (the "Company"). I understand that pursuant to Section 5(c) of the Underwriting Agreement dated August 10, 1999 (the "Underwriting Agreement") among the Company and the several underwriters (the "Underwriters") named in Schedule I thereto, Skadden, Arps, Slate, Meagher & Flom LLP is rendering an opinion, to be dated August 13, 1999 (the "Opinion") to the Underwriters. I further understand that Skadden, Arps, Slate, Meagher & Flom LLP is relying on this officer's certificate and the statements made herein in rendering such opinion. With regard to the foregoing, on behalf of the Company, I certify that: (i) the Company's sole business is the ownership and operation of an electronic commerce business primarily over the Internet; (ii) the Company (a) is not engaged and does not propose to engage in the business of issuing face-amount certificates of the installment type, and has not been engaged in such business and does not have any such certificate outstanding, and (b) is not engaged and does not propose to engage in the business of investing, reinvesting, owning, holding or trading in securities, and does not own or propose to acquire investment securities (as defined in Section 3(a) of the Investment Company Act of 1940, as amended) having a value exceeding 40 percent of the value of the Company's total assets (exclusive of government securities and cash items) on an unconsolidated basis; (iii) there are no judgments, orders or decrees of any Governmental Authorities (as such term is defined in the Opinion) applicable or relating to, or affecting, the Company; (iv) the Company has complied with all its obligations under the confidentiality, publicity and non-disclosure provisions of the Applicable Contracts and, without limiting the generality of the foregoing, in those circumstances where an Applicable Contract does not by its terms permit the filing of the Applicable Contract as an exhibit to the Registration Statement or a description of certain provisions of the Applicable Contract in the Registration Statement, the Company has obtained the consent of the other party or parties (as applicable) to such Applicable Contract to the filing of such Applicable Contract as an exhibit to the Registration Statement or the description of certain provisions of such Applicable Contract in the Registration Statement; and (v) except to the extent disclosed in the Prospectus, the Company has complied with all its obligations under Section 7 of the Registration Rights Agreement in connection with the filing of the Registration Statement with the Commission and the offerings contemplated by the Registration Statement, including (without limitation) the procedural, notice and time period requirements of such Section. IN WITNESS WHEREOF I have executed this certificate in the name and on behalf of priceline.com Incorporated this 16th day of August, 1999. priceline.com Incorporated By:____________________________ Name: Paul E. Francis Title: Chief Financial Officer Annex II Opinion of Melissa Taub Melissa M. Taub, Esq. Senior Vice President, General Counsel and Secretary priceline.com Incorporated Five High Ridge Park Stamford, Connecticut 06905 August 16, 1999 MORGAN STANLEY & CO. INCORPORATED GOLDMAN SACHS & CO. ALLEN & COMPANY INCORPORATED BANCBOSTON ROBERTSON STEPHENS INC. DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED As Representatives of the several Underwriters c/o Morgan Stanley & Co. Incorporated 1585 Broadway New York, NY 10036 Re: priceline.com Incorporated Public Offering of ___% Convertible Subordinated Notes Due 2006 ------------------------------------------------ Ladies and Gentlemen: I am Senior Vice President, General Counsel and Secretary of priceline.com Incorporated, a Delaware corporation (the "Company"), and have acted as general counsel to the Company in connection with the Underwriting Agreement, dated August 10, 1999 (the "Underwriting Agreement"), between the Company and Morgan Stanley & Co. Incorporated, Goldman Sachs & Co., Allen & Company Incorporated, BancBoston Robertson Stephens Inc., Donaldson, Lufkin & Jenrette Securities Corporation and Merrill Lynch, Pierce, Fenner & Smith Incorporated as representatives of the several Underwriters named therein (the "Underwriters"), relating to the sale by the Company to the several Underwriters of $250,000,000 aggregate principal amount of the Company's ____% Convertible Subordinated Notes due 2006 (the "Notes"). This opinion is being furnished pursuant to Section 5(d) of the Underwriting Agreement. In connection with this opinion, I have examined originals or copies, certified or otherwise identified to my satisfaction, of (i) the Registration Statement on Form S-1 (File No. 333-83513) relating to the Notes, filed with the Securities and Exchange Commission (the "Commission") on July 23, 1999 under the Securities Act of 1933, as amended (the "Act"), Amendment No. 1 thereto filed with the Commission on August 2, 1999 and Amendment No. 2 thereto filed with the Commission on August [9][10], 1999, including information deemed to be a part of the registration statement at the time of effectiveness pursuant to Rule 430A of the General Rules and Regulations under the Act (the "Rules and Regulations") (such Registration Statement, as so amended, being here inafter referred to as the "Registration Statement"); (ii) the final prospectus dated August 10, 1999 relating to the Notes and the shares of common stock, par value $.008 per share ("Common Stock"), of the Company issuable upon conversion of the Notes, in the form filed with the Commission pursuant to Rule 424(b) of the Rules and Regulations (the "Prospectus"); (iii) a form of global certificate representing the Notes; (iv) a specimen certificate representing Common Stock; (v) an executed copy of the Underwriting Agreement; (vi) an executed copy of the indenture, dated as of August 13, 1999 (the "In denture"), between the Company and Wilmington Trust Company, as trustee (the "Trustee"); (vii) the Certificate of Incorporation of the Company, as currently in effect (the "Certificate of Incorporation"); (viii) the By-laws of the Company, as currently in effect (the "Bylaws"); (ix) certain resolutions of the Board of Directors of the Company and a Pricing Committee of the Board of Directors of the Company; (x) a certificate of the Chief Executive Officer and Chief Financial Officer of the Company as to the factual matters covered thereby, a copy of which is attached hereto (the 2 "Officers' Certificate"); (ix) the agreements included as exhibits to the Registration Statement (the "Material Contracts"); and (x) certain documents purporting to assign the rights to United States patents No. 5,794,207 and No. 5,797,127 (collectively, the "Patents") to the Company. I have also examined originals or copies, certified or otherwise identified to my satisfaction, of such records of the Company and such agreements, certificates of public officials, certificates of officers or other representatives of the Company and others, and such other documents, certificates and records as I have deemed necessary or appropriate as a basis for the opinions set forth herein. In my examination, I have assumed the legal capacity of all natural persons, the genuineness of all signatures, the authenticity of all documents submitted to me as originals, the conformity to original documents of all documents submitted to me as certified, conformed or photostatic copies and the authenticity of the originals of such latter documents. In making my examination of executed documents, I have assumed that the parties thereto, other than the Company, had the power, corporate or other, to enter into and perform all obligations thereunder and I have also assumed the due authorization by all requisite action, corporate or other, and execution and delivery by such parties of such documents and the validity and binding effect thereof on such parties. As used herein, (i) the term "Applicable Laws" means the General Corporation Law of the State of Delaware and those laws of the State of Connecticut and the United States of America that, in each instance, are normally applicable to transactions of the type contemplated by the Underwriting Agreement (except for United States, state and foreign securities or Blue Sky laws, anti-fraud laws, laws affecting creditors rights generally and the rules and regulations of the National Association of Securities Dealers, Inc.) but without my having made any investigation regarding any other laws; (ii) the term "Governmental Authorities" means any federal or Connecticut executive, legislative, administrative or regulatory body and the Secretary of State of the State of Delaware and (iii) the term "Governmental Approval" 3 means any consent, approval, license, authorization or validation of, or filing, qualification or registration with, any Governmental Authority required to be obtained or made by the Company pursuant to Applicable Laws, other than any consent, approval, license, authorization, validation, filing, qualification or registration which may have become applicable as a result of your involvement in the transactions contemplated by the Underwriting Agreement or because of your legal or regulatory status or because of any other facts specifically pertaining to you. In providing the opinions set forth in paragraphs 2, 5, 6, 8, 9 and 10 below, I have made no investigation or search of public docket records of any court, governmental or administrative agency or body, or of any filings, applications or registrations with the United States Patent and Trademark Office or the United States Copy right Office. For the purposes of the opinions set forth in paragraphs 2, 5, 6, 8, 9 and 10 below, the expressions "to my knowledge" and "I have no knowledge" are each limited to those matters brought to my attention after reasonable inquiry of officers of the Company. For the purposes of the opinion set forth in paragraph 10 below, the term "Liens" means all presently asserted liens or other encumbrances. Insofar as the opinion in paragraph 1 below relates to the laws of the States of California, Ohio, New Jersey or New York [ANY OTHERS?], I have relied solely on certificates of due qualification and good standing from the Secretary of State of each such state. I am the Senior Vice President, General Counsel and Secretary of the Company, and have held such position since September 1998. I am admitted to the bar in the State of Connecticut and, except to the extent set forth in the preceding paragraph, I do not express any opinion as to the laws of any other jurisdiction other than the General Corporation Law of the State of Delaware and the laws of the 4 United States of America to the extent referred to specifically herein. I am not registered to practice before the US Patent and Trademark Office as a Patent Attorney. Except to the extent expressly set forth in paragraphs 4, 8, 9 and 10 below, I express no opinion with respect to any intellectual property rights or intellectual property matters of the Company, which are addressed in the opinion of Morgan & Finnigan, outside intellectual property counsel to the Company. Based upon and subject to the limitations, qualifications, exceptions and assumptions set forth herein, I am of the opinion that: 1. The Company is duly qualified to transact business and is in good standing in each jurisdiction in which the conduct of its business or its ownership or leasing of property requires such qualification, except to the extent that the failure to be so qualified or be in good standing could not reasonably be expected to have a material adverse effect on the Company. 2. The execution and delivery of the Underwriting Agreement, the Indenture and the Notes by the Company and the consummation by the Company of the transactions contemplated thereby will not contravene (a) any Applicable Law or (b) to my knowledge, except to the extent disclosed in the Prospectus, any Material Contract; or (c) to my knowledge, any judgment, order or decree of any court or Governmental Authority, applicable to the Company. 3. No Governmental Approval is required by the Company for the execution and delivery of the Underwriting Agreement, the Indenture or the Notes, or for the consummation of the transactions contemplated therein, except such as have been obtained or made. 4. The statements in the Prospectus under the captions "Risk Factors-We Face Potential Conflicts of Interest Relating to Walker Digital," "Risk Factors-Our Success Depends on Our Ability to Protect Our Intellectual Property" 5 (other than the statements under the subheading "-Pending Interference Action"), "Risk Factors-Regulatory and Legal Uncertainties Could Harm Our Business," "Business-Intellectual Property," "Business-Governmental Regulation," and "Certain Transactions" and the final four paragraphs under the caption "Business-Legal Proceedings," in each case, insofar as such statements constitute summaries of legal matters, legal proceedings or certain provisions of the documents referred to therein, fairly summarize the legal matters, legal proceedings or provisions referred to therein in all material respects. 5. To my knowledge, except as described in the Prospectus, there are no legal or governmental proceedings pending or threatened to which the Company is a party or to which any of the properties of the Company is subject, the unfavorable outcome of which could reason ably be expected to have a material adverse effect on the Company. 6. To my knowledge, there are no statutes or regulations applicable to the Company or its properties or material contracts or documents to which the Company is party, that, in either case, are required to be described in the Registration Statement or the Prospectus or to be filed as an exhibit to the Registration Statement, but are not described or filed as required. 7. The shares of Common Stock outstanding immediately prior to issuance of the Notes (including the shares of Common Stock being sold by certain selling stockholders in the concurrent underwritten offering of Common Stock) have been duly authorized and are validly issued, fully paid and non-assessable. 8. To my knowledge, there are currently no pending or threatened claims of infringement of any material patent, trademark, service mark or copyright or of misappropriation of trade secrets, necessary for the Company to conduct the business currently conducted by it, the unfavorable outcome of which could reasonably be expected to have a material adverse effect on the Company and that are required to be 6 described in the Registration Statement or the Prospectus but are not described as required. 9. Except as described in the Prospectus, I have no knowledge that the Company will be unable to continue to operate under any current license of a patent, trademark, service mark, copyright or trade secret, which license is necessary for the Company to conduct the business currently conducted by it. 10. To my knowledge, the Company owns the Patents, free and clear of all Liens, other than those that may arise from matters disclosed in the Prospectus. This opinion is given as of the date hereof, and I assume no obligation to update or supplement this opinion to reflect any facts or circumstances that may come to my attention or any change in the law that may occur or become effective after the time of delivery hereof. This opinion is provided to you as a legal opinion only, and not as a guaranty or warranty of the matters discussed herein or of any transaction or obligation. This opinion is furnished to you solely for your benefit in connection with the closing under the Under writing Agreement occurring today and is not to be used, circulated, quoted or otherwise referred to for any other purpose or relied upon by any other person without my express written permission. Very truly yours, Melissa M. Taub 7 EXHIBIT A Officers' Certificate PRICELINE.COM INCORPORATED The undersigned, Richard S. Braddock, the Chief Executive Officer of priceline.com Incorporated, a Delaware corporation (the "Company"), and Paul E. Francis, the Chief Financial Officer of the Company, each under stand that, pursuant to Section 5(d) of the Underwriting Agreement dated August 10, 1999 (the "Underwriting Agreement") among the Company and the several underwriters (the "Underwriters") named in Schedule I thereto, the General Counsel of the Company is rendering an opinion, to be dated August 13, 1999 (the "Opinion") to the Under writers. We further understand that the General Counsel of the Company is relying on this officer's certificate and the statements made herein in rendering such Opinion. With regard to the foregoing, on behalf of the Company, we certify that: (i) All contracts, agreements or other arrangements material to the business of the Company (the "Material Contracts") have been filed with the Securities and Exchange Commission as exhibits to the Registration Statement (as such term is defined in the Opinion); (ii) The Company has complied with all its obligations under the confidentiality, publicity and non-disclosure provisions of the Material Contracts and, without limiting the generality of the foregoing, in those circumstances where a Material Contract does not by its terms permit the filing of the Material Contract as an exhibit to the Registration Statement or a description of certain provisions of the Material Contract in the Registration Statement, the Company has obtained the consent of the other party or parties (as applicable) to such Material Contract to the filing of such Material Contract as an exhibit to the Registration Statement or the description of certain 8 provisions of such Material Contract in the Registration Statement; (iii) There are no judgments, orders or decrees of any Governmental Authority (as such term is defined in the Opinion) applicable or relating to, or affecting, the Company; (iv) Except as described in the Prospectus (as such term is defined in the Opinion), there are no legal or governmental proceedings pending or threatened to which the Company is a party or to which any properties of the Company is subject; and (v) The shares of Common Stock outstanding immediately prior to issuance of the Notes (including the shares of Common Stock being sold by certain selling stockholders in the concurrent underwritten offering of Common Stock)(as such terms are defined in the Opinion) are fully paid and non-assessable and the amount reflected in the corporate records of the Company as required to fully pay up such shares, has been received in full by the Company. IN WITNESS WHEREOF we have executed this certificate in the name and on behalf of priceline.com Incorporated this 16th day of August, 1999. priceline.com Incorporated By:____________________________ Name: Richard S. Braddock Title: Chief Executive Officer By:____________________________ Name: Paul E. Francis Title: Chief Financial Officer 9 Annex III Opinion of outside patent counsel The statements made in the Prospectus under the captions "Risk Factors - - Our Success Depends on Our Ability to Protect Our Intellectual Property" (only the subsection entitled "Pending Interference Action") and "Business - Legal Proceedings" (only the first three paragraphs related to the potential Woolston interference matter), appear to be fair and accurate summaries of the matters described therein. EX-4.4 4 FORM OF INDENTURE Exhibit 4.4 PRICELINE.COM INCORPORATED WILMINGTON TRUST COMPANY AS TRUSTEE INDENTURE DATED AS OF AUGUST __, 1999 -----% CONVERTIBLE SUBORDINATED NOTES DUE 2006 TABLE OF CONTENTS ----------------------
PAGE ---- ARTICLE 1 DEFINITIONS SECTION 1.01. DEFINITIONS......................................................................2 ARTICLE 2 ISSUE, DESCRIPTION, EXECUTION, REGISTRATION AND EXCHANGE OF NOTES SECTION 2.01. DESIGNATION AMOUNT AND ISSUE OF NOTES............................................8 SECTION 2.02. FORM OF NOTES....................................................................9 SECTION 2.03. DATE AND DENOMINATION OF NOTES; PAYMENTS OF INTEREST.............................9 SECTION 2.04. EXECUTION OF NOTES..............................................................11 SECTION 2.05. EXCHANGE AND REGISTRATION OF TRANSFER OF NOTES; GLOBAL NOTES; DEPOSITARY.....................................................................12 SECTION 2.06. MUTILATED, DESTROYED, LOST OR STOLEN NOTES......................................15 SECTION 2.07. TEMPORARY NOTES.................................................................16 SECTION 2.08. CANCELLATION OF NOTES PAID, ETC.................................................17 SECTION 2.09. CUSIP NUMBERS...................................................................17 ARTICLE 3 REDEMPTION OF NOTES SECTION 3.01. REDEMPTION PRICES...............................................................18 SECTION 3.02. NOTICE OF REDEMPTION; SELECTION OF NOTES........................................18 SECTION 3.03. PAYMENT OF NOTES CALLED FOR REDEMPTION..........................................20 SECTION 3.04. CONVERSION ARRANGEMENT ON CALL FOR REDEMPTION...................................20 SECTION 3.05. REDEMPTION AT OPTION OF HOLDERS.................................................21 ARTICLE 4 SUBORDINATION OF NOTES SECTION 4.01. AGREEMENT OF SUBORDINATION......................................................24 SECTION 4.02. PAYMENT TO NOTEHOLDERS..........................................................24 SECTION 4.03. SUBROGATION OF NOTES............................................................28 SECTION 4.04. AUTHORIZATION TO EFFECT SUBORDINATION...........................................29 SECTION 4.05. NOTICE TO TRUSTEE...............................................................29 SECTION 4.06. TRUSTEE'S RELATION TO SENIOR INDEBTEDNESS.......................................30 SECTION 4.07. NO IMPAIRMENT OF SUBORDINATION..................................................30 SECTION 4.08. CERTAIN CONVERSIONS NOT DEEMED PAYMENT..........................................31
i PAGE ---- SECTION 4.09. ARTICLE APPLICABLE TO PAYING AGENTS.............................................31 SECTION 4.10. SENIOR INDEBTEDNESS ENTITLED TO RELY............................................31 SECTION 4.11. RELIANCE ON JUDICIAL ORDER OR CERTIFICATE OF LIQUIDATING AGENT.................................................................................32 ARTICLE 5 PARTICULAR COVENANTS OF THE COMPANY SECTION 5.01. PAYMENT OF PRINCIPAL, PREMIUM AND INTEREST......................................32 SECTION 5.02. MAINTENANCE OF OFFICE OR AGENCY.................................................32 SECTION 5.03. APPOINTMENTS TO FILL VACANCIES IN TRUSTEE'S OFFICE..............................33 SECTION 5.04. PROVISIONS AS TO PAYING AGENT...................................................33 SECTION 5.05. EXISTENCE.......................................................................34 SECTION 5.06. MAINTENANCE OF PROPERTIES.......................................................35 SECTION 5.07. PAYMENT OF TAXES AND OTHER CLAIMS...............................................35 SECTION 5.08. STAY, EXTENSION AND USURY LAWS..................................................35 SECTION 5.09. COMPLIANCE CERTIFICATE..........................................................36 ARTICLE 6 NOTEHOLDERS' LISTS AND REPORTS BY THE COMPANY AND THE TRUSTEE SECTION 6.01. NOTEHOLDERS' LISTS..............................................................36 SECTION 6.02. PRESERVATION AND DISCLOSURE OF LISTS............................................37 SECTION 6.03. REPORTS BY TRUSTEE..............................................................37 SECTION 6.04. REPORTS BY COMPANY..............................................................37 ARTICLE 7 REMEDIES OF THE TRUSTEE AND NOTEHOLDERS ON AN EVENT OF DEFAULT SECTION 7.01. EVENTS OF DEFAULT...............................................................38 SECTION 7.02. PAYMENTS OF NOTES ON DEFAULT; SUIT THEREFOR.....................................40 SECTION 7.03. APPLICATION OF MONIES COLLECTED BY TRUSTEE......................................42 SECTION 7.04. PROCEEDINGS BY NOTEHOLDER.......................................................43 SECTION 7.05. PROCEEDINGS BY TRUSTEE..........................................................44 SECTION 7.06. REMEDIES CUMULATIVE AND CONTINUING..............................................44 SECTION 7.07. DIRECTION OF PROCEEDINGS AND WAIVER OF DEFAULTS BY MAJORITY OF NOTEHOLDERS...............................................................44 SECTION 7.08. NOTICE OF DEFAULTS..............................................................45 SECTION 7.09. UNDERTAKING TO PAY COSTS........................................................45
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PAGE ---- ARTICLE 8 CONCERNING THE TRUSTEE SECTION 8.01. DUTIES AND RESPONSIBILITIES OF TRUSTEE..........................................46 SECTION 8.02. RELIANCE ON DOCUMENTS, OPINIONS, ETC............................................47 SECTION 8.03. NO RESPONSIBILITY FOR RECITALS, ETC.............................................48 SECTION 8.04. TRUSTEE, PAYING AGENTS, CONVERSION AGENTS OR REGISTRAR MAY OWN NOTES.........................................................................49 SECTION 8.05. MONIES TO BE HELD IN TRUST......................................................49 SECTION 8.06. COMPENSATION AND EXPENSES OF TRUSTEE............................................49 SECTION 8.07. OFFICERS' CERTIFICATE AS EVIDENCE...............................................50 SECTION 8.08. CONFLICTING INTERESTS OF TRUSTEE................................................50 SECTION 8.09. ELIGIBILITY OF TRUSTEE..........................................................50 SECTION 8.10. RESIGNATION OR REMOVAL OF TRUSTEE...............................................50 SECTION 8.11. ACCEPTANCE BY SUCCESSOR TRUSTEE.................................................52 SECTION 8.12. SUCCESSION BY MERGER, ETC.......................................................53 SECTION 8.13. PREFERENTIAL COLLECTION OF CLAIMS...............................................53 SECTION 8.14. TRUSTEE'S APPLICATION FOR INSTRUCTIONS FROM THE COMPANY.........................53 ARTICLE 9 CONCERNING THE NOTEHOLDERS SECTION 9.01. ACTION BY NOTEHOLDERS...........................................................54 SECTION 9.02. PROOF OF EXECUTION BY NOTEHOLDERS...............................................54 SECTION 9.03. WHO ARE DEEMED ABSOLUTE OWNERS..................................................54 SECTION 9.04. COMPANY-OWNED NOTES DISREGARDED.................................................55 SECTION 9.05. REVOCATION OF CONSENTS; FUTURE HOLDERS BOUND....................................55 ARTICLE 10 NOTEHOLDERS' MEETINGS SECTION 10.01. PURPOSE OF MEETINGS............................................................56 SECTION 10.02. CALL OF MEETINGS BY TRUSTEE....................................................56 SECTION 10.03. CALL OF MEETINGS BY COMPANY OR NOTEHOLDERS.....................................57 SECTION 10.04. QUALIFICATIONS FOR VOTING......................................................57 SECTION 10.05. REGULATIONS....................................................................57 SECTION 10.06. VOTING.........................................................................58 SECTION 10.07. NO DELAY OF RIGHTS BY MEETING..................................................58
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PAGE ---- ARTICLE 11 SUPPLEMENTAL INDENTURES SECTION 11.01. SUPPLEMENTAL INDENTURES WITHOUT CONSENT OF NOTEHOLDERS.........................59 SECTION 11.02. SUPPLEMENTAL INDENTURES WITH CONSENT OF NOTEHOLDERS............................60 SECTION 11.03. EFFECT OF SUPPLEMENTAL INDENTURE...............................................61 SECTION 11.04. NOTATION ON NOTES..............................................................62 SECTION 11.05. EVIDENCE OF COMPLIANCE OF SUPPLEMENTAL INDENTURE TO BE FURNISHED TRUSTEE.....................................................................62 ARTICLE 12 CONSOLIDATION, MERGER, SALE, CONVEYANCE AND LEASE SECTION 12.01. COMPANY MAY CONSOLIDATE ETC. ON CERTAIN TERMS..................................62 SECTION 12.02. SUCCESSOR CORPORATION TO BE SUBSTITUTED........................................63 SECTION 12.03. OPINION OF COUNSEL TO BE GIVEN TRUSTEE.........................................63 ARTICLE 13 SATISFACTION AND DISCHARGE OF INDENTURE SECTION 13.01. DISCHARGE OF INDENTURE.........................................................64 SECTION 13.02. DEPOSITED MONIES TO BE HELD IN TRUST BY TRUSTEE................................64 SECTION 13.03. PAYING AGENT TO REPAY MONIES HELD..............................................65 SECTION 13.04. RETURN OF UNCLAIMED MONIES.....................................................65 SECTION 13.05. REINSTATEMENT..................................................................65 ARTICLE 14 IMMUNITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS AND DIRECTORS SECTION 14.01. INDENTURE AND NOTES SOLELY CORPORATE OBLIGATIONS...............................66 ARTICLE 15 CONVERSION OF NOTES SECTION 15.01. RIGHT TO CONVERT...............................................................66 SECTION 15.02. EXERCISE OF CONVERSION PRIVILEGE; ISSUANCE OF COMMON STOCK ON CONVERSION; NO ADJUSTMENT FOR INTEREST OR DIVIDENDS..........................67 SECTION 15.03. CASH PAYMENTS IN LIEU OF FRACTIONAL SHARES.....................................68 SECTION 15.04. CONVERSION PRICE...............................................................69 SECTION 15.05. ADJUSTMENT OF CONVERSION PRICE.................................................69 SECTION 15.06. EFFECT OF RECLASSIFICATION, CONSOLIDATION, MERGER OR SALE......................79
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PAGE ---- SECTION 15.07. TAXES ON SHARES ISSUED.........................................................80 SECTION 15.08. RESERVATION OF SHARES; SHARES TO BE FULLY PAID; COMPLIANCE WITH GOVERNMENTAL REQUIREMENTS; LISTING OF COMMON STOCK.................................................................................80 SECTION 15.09. RESPONSIBILITY OF TRUSTEE......................................................81 SECTION 15.10. NOTICE TO HOLDERS PRIOR TO CERTAIN ACTIONS.....................................82 ARTICLE 16 MISCELLANEOUS PROVISIONS SECTION 16.01. PROVISIONS BINDING ON COMPANY'S SUCCESSORS.....................................83 SECTION 16.02. OFFICIAL ACTS BY SUCCESSOR CORPORATION.........................................83 SECTION 16.03. ADDRESSES FOR NOTICES, ETC.....................................................83 SECTION 16.04. GOVERNING LAW..................................................................84 SECTION 16.05. EVIDENCE OF COMPLIANCE WITH CONDITIONS PRECEDENT; CERTIFICATES TO TRUSTEE...............................................................84 SECTION 16.06. LEGAL HOLIDAYS.................................................................84 SECTION 16.07. TRUST INDENTURE ACT............................................................85 SECTION 16.08. NO SECURITY INTEREST CREATED...................................................85 SECTION 16.09. BENEFITS OF INDENTURE..........................................................85 SECTION 16.10. TABLE OF CONTENTS, HEADINGS, ETC...............................................85 SECTION 16.11. AUTHENTICATING AGENT...........................................................85 SECTION 16.12. EXECUTION IN COUNTERPARTS......................................................87
v INDENTURE dated as of August __, 1999 between priceline.com Incorporated, a Delaware corporation (hereinafter sometimes called the "COMPANY", as more fully set forth in Section ), and Wilmington Trust Company, a national banking association organized under the laws of the United States of America, as trustee hereunder (hereinafter sometimes called the "TRUSTEE", as more fully set forth in Section ). W I T N E S S E T H : WHEREAS, for its lawful corporate purposes, the Company has duly authorized the issue of its __% Convertible Subordinated Notes Due 2006 (hereinafter sometimes called the "NOTES"), in an aggregate principal amount not to exceed $287,500,000 (including up to $37,500,000 aggregate principal amount of Notes if the over-allotment option set forth in Section __ of the Underwriting Agreement dated August __, 1999 between the Company and the underwriters named therein is exercised in full), and to provide the terms and conditions upon which the Notes are to be authenticated, issued and delivered, the Company has duly authorized the execution and delivery of this Indenture; and WHEREAS, all acts and things necessary to make the Notes, when executed by the Company and authenticated and delivered by the Trustee or a duly authorized authenticating agent, as in this Indenture provided, the valid, binding and legal obligations of the Company, and to constitute this Indenture a valid agreement according to its terms, have been done and performed, and the execution of this Indenture and the issue hereunder of the Notes have in all respects been duly authorized. NOW, THEREFORE, THIS INDENTURE WITNESSETH: That in order to declare the terms and conditions upon which the Notes are, and are to be, authenticated, issued and delivered, and in consideration of the premises and of the purchase and acceptance of the Notes by the holders thereof, the Company covenants and agrees with the Trustee for the equal and proportionate benefit of the respective holders from time to time of the Notes (except as otherwise provided below), as follows: ARTICLE 1 DEFINITIONS SECTION 1.01. DEFINITIONS. The terms defined in this Section 1.01 (except as herein otherwise expressly provided or unless the context otherwise requires) for all purposes of this Indenture and of any indenture supplemental hereto shall have the respective meanings specified in this Section 1.01. All other terms used in this Indenture that are defined in the Trust Indenture Act or which are by reference therein defined in the Securities Act (except as herein otherwise expressly provided or unless the context otherwise requires) shall have the meanings assigned to such terms in said Trust Indenture Act and in said Securities Act as in force at the date of the execution of this Indenture. The words "HEREIN," "HEREOF," "HEREUNDER," and words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other Subdivision. The terms defined in this Article include the plural as well as the singular. "AFFILIATE" of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For the purposes of this definition, "CONTROL," when used with respect to any specified Person means the power to direct or cause the direction of the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "CONTROLLING" and "CONTROLLED" have meanings correlative to the foregoing. "BOARD OF DIRECTORS" means the Board of Directors of the Company or a committee of such Board duly authorized to act for it hereunder. "BUSINESS DAY" means each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which the banking institutions in The City of New York or Stamford, Connecticut or the city in which the Corporate Trust Office is located are authorized or obligated by law or executive order to close or be closed. "CLOSING PRICE" has the meaning specified in Section 15.05(h)(i). "COMMISSION" means the Securities and Exchange Commission. "COMMON STOCK" means any stock of any class of the Company which has no preference in respect of dividends or of amounts payable in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company and which is not subject to redemption by the Company. Subject to the provisions of Section 15.06, however, shares issuable on conversion of Notes 2 shall include only shares of the class designated as common stock of the Company at the date of this Indenture or shares of any class or classes resulting from any reclassification or reclassifications thereof and which have no preference in respect of dividends or of amounts payable in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company and which are not subject to redemption by the Company; PROVIDED that if at any time there shall be more than one such resulting class, the shares of each such class then so issuable shall be substantially in the proportion which the total number of shares of such class resulting from all such reclassifications bears to the total number of shares of all such classes resulting from all such reclassifications. "COMPANY" means priceline.com Incorporated, a Delaware corporation, having its principal office at Five High Ridge Park, Stamford, Connecticut 06905 and subject to the provisions of Article 12, shall include its successors and assigns. "CONVERSION PRICE" has the meaning specified in Section 15.04. "CORPORATE TRUST OFFICE" or other similar term, means the principal office of the Trustee at which at any particular time its corporate trust business shall be principally administered, which office is, at the date as of which this Indenture is dated, located at Rodney Square North, 1100 North Market Street, Wilmington, Delaware 19890.* "CUSTODIAN" means Wilmington Trust Company, as custodian with respect to the Notes in global form, or any successor entity thereto. "DEFAULT" means any event that is, or after notice or passage of time, or both, would be, an Event of Default. "DEPOSITARY" means, with respect to the Notes issuable or issued in whole or in part in global form, the person specified in Section 2.05(b) as the Depositary with respect to such Notes, until a successor shall have been appointed and become such pursuant to the applicable provisions of this Indenture, and thereafter, "DEPOSITARY" shall mean or include such successor. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder, as in effect from time to time. - ------------------- * See Section 5.02 -- there must be an office in New York City. 3 "EVENT OF DEFAULT" means any event specified in Section 7.01(a), (b), (c), (d) or (e). "FUNDAMENTAL CHANGE" means the occurrence of any transaction or event in connection with which all or substantially all of the outstanding Common Stock shall be exchanged for, converted into, acquired for, or constitute the right to receive, consideration which is not all or substantially all equity interests which are (or, upon consummation of or immediately following such transaction or event, will be) listed on a United States national securities exchange or approved for quotation on the Nasdaq National Market or any similar United States system of automated dissemination of quotations of securities prices (whether by means of an exchange offer, liquidation, tender offer, consolidation, merger, combination, reclassification, recapitalization or otherwise). "GLOBAL NOTE" has the meaning set forth in Section 2.05(b). "INDEBTEDNESS" means, with respect to any Person, and without duplication, (a) all indebtedness, obligations and other liabilities (contingent or otherwise) of such Person for borrowed money (including obligations of such Person in respect of overdrafts, foreign exchange contracts, currency exchange or similar agreements, interest rate protection, hedging or similar agreements, and any loans or advances from banks, whether or not evidenced by notes or similar instruments) or evidenced by bonds, debentures, notes or similar instruments (whether or not the recourse of the lender is to the whole of the assets of such Person or to only a portion thereof) other than any account payable or other accrued current liability or obligation, in each case incurred in the ordinary course of business in connection with the obtaining of materials or services; (b) all reimbursement obligations and other liabilities (contingent or otherwise) of such Person with respect to letters of credit, bank guarantees or bankers' acceptances; (c) all obligations and liabilities (contingent or otherwise) in respect of leases of such Person required, in conformity with generally accepted accounting principles, to be accounted for as capitalized lease obligations on the balance sheet of such Person and all obligations and other liabilities (contingent or otherwise) under any lease or related document, including, without limitation, the balance deferred and unpaid of any purchase price of any property and a purchase agreement in connection with the lease of real property which provides that such Person is contractually obligated to purchase or cause a third party to purchase the leased property and thereby guarantee a minimum residual value of the leased property to the lessor and the obligations of such Person under such lease or related document to purchase or to cause a third party to purchase such leased property; (d) all obligations of such Person (contingent or otherwise) with respect to an interest rate or other swap, cap or collar agreement or other similar instrument or agreement or foreign currency hedge, exchange, purchase or similar 4 instrument or agreement; (e) all direct or indirect guaranties or similar agreements by such Person in respect of, and obligations or liabilities (contingent or otherwise) of such Person to purchase or otherwise acquire or otherwise assure a creditor against loss in respect of indebtedness, obligations or liabilities of another Person of the kind described in clauses (a) through (d); (f) any indebtedness or other obligations described in clauses (a) through (d) secured by any mortgage, pledge, lien or other encumbrance existing on property which is owned or held by such Person, regardless of whether the indebtedness or other obligation secured thereby shall have been assumed by such Person; and (g) any and all deferrals, renewals, extensions, refinancings and refundings of, or amendments, modifications or supplements to, any indebtedness, obligation or liability of the kind described in clauses (a) through (f). "INDENTURE" means this instrument as originally executed or, if amended or supplemented as herein provided, as so amended or supplemented. "NOTE" or "NOTES" means any Note or Notes, as the case may be, authenticated and delivered under this Indenture, including the Global Note. "NOTEHOLDER" or "HOLDER" as applied to any Note, or other similar terms (but excluding the term "BENEFICIAL HOLDER"), means any person in whose name at the time a particular Note is registered on the Note registrar's books. "NOTE REGISTER" has the meaning specified in Section 2.05. "OFFICERS' CERTIFICATE," when used with respect to the Company, means a certificate signed by both (a) the President, the Chief Executive Officer, Chief Financial Officer, Executive or Senior Vice President or any Vice President (whether or not designated by a number or numbers or word or words added before or after the title "Vice President") and (b) by the Treasurer or any Assistant Treasurer or Secretary or any Assistant Secretary of the Company. "OPINION OF COUNSEL" means an opinion in writing signed by legal counsel, who may be an employee of or counsel to the Company, or other counsel acceptable to the Trustee, which opinion may be subject to usual and customary assumption, qualifications, limitations and exceptions. "OUTSTANDING," when used with reference to Notes, means, subject to the provisions of Section 9.04, as of any particular time, all Notes authenticated and delivered by the Trustee under this Indenture, except (a) Notes theretofore canceled by the Trustee or delivered to the Trustee for cancellation; 5 (b) Notes, or portions thereof, (i) for the redemption of which monies in the necessary amount shall have been deposited in trust with the Trustee or with any paying agent (other than the Company) or (ii) which shall have been otherwise defeased in accordance with Article 13; (c) Notes in lieu of which, or in substitution for which, other Notes shall have been authenticated and delivered pursuant to the terms of Section 2.06; and (d) Notes converted into Common Stock pursuant to Article 15 and Notes deemed not outstanding pursuant to Article 3. "PAYMENT BLOCKAGE NOTICE" has the meaning specified in Section 4.02. "PERSON" means a corporation, an association, a partnership, a limited liability corporation, an individual, a joint venture, a joint stock company, a trust, an unincorporated organization or a government or an agency or a political subdivision thereof. "PREDECESSOR NOTE" of any particular Note means every previous Note evidencing all or a portion of the same debt as that evidenced by such particular Note; and, for the purposes of this definition, any Note authenticated and delivered under Section 2.06 in lieu of a lost, destroyed or stolen Note shall be deemed to evidence the same debt as the lost, destroyed or stolen Note that it replaces. "RECORD DATE" has the meaning specified in Section 2.03. "REPRESENTATIVE" means (a) the indenture trustee or other trustee, agent or representative for any Senior Indebtedness or (b) with respect to any Senior Indebtedness that does not have any such trustee, agent or other representative, (i) in the case of such Senior Indebtedness issued pursuant to an agreement providing for voting arrangements as among the holders or owners of such Senior Indebtedness, any holder or owner of such Senior Indebtedness acting with the consent of the required Persons necessary to bind such holders or owners of such Senior Indebtedness and (ii) in the case of all other such Senior Indebtedness, the holder or owner of such Senior Indebtedness. "RESPONSIBLE OFFICER," when used with respect to the Trustee, means an officer of the Trustee in the Corporate Trust Office assigned and duly authorized by the Trustee to administer its corporate trust matters. 6 "SECURITIES ACT" means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder. "SENIOR INDEBTEDNESS" means the principal of, premium, if any, interest (including all interest, at or above the rate specified in the governing instrument, accruing subsequent to the commencement of any bankruptcy, reorganization or similar proceeding, whether or not a claim for post-petition interest is allowable as a claim in any such proceeding), rent, liquidated damages and other obligations payable on or in connection with, and all fees, costs, expenses and other amounts accrued or due on or in connection with, Indebtedness of the Company, whether outstanding on the date of this Indenture or thereafter created, incurred, assumed, guaranteed or in effect guaranteed by the Company (including all deferrals, renewals, extensions, refinancings or refundings of, or amendments, modifications or supplements to, the foregoing), unless in the case of any particular Indebtedness the instrument creating or evidencing the same or the assumption or guarantee thereof expressly provides that such Indebtedness shall not be senior in right of payment to the Notes or expressly provides that such Indebtedness is "pari passu" with or " junior" to the Notes. Notwithstanding the foregoing, the term SENIOR INDEBTEDNESS shall not include any Indebtedness of the Company to any Subsidiary of the Company. If any payment made to any holder of any Senior Indebtedness or its Representative with respect to such Senior Indebtedness is rescinded or must otherwise be returned by such holder or Representative upon the insolvency, bankruptcy or reorganization of the Company or otherwise, the reinstated Indebtedness of the Company arising as a result of such rescission or return shall constitute Senior Indebtedness effective as of the date of such rescission or return. "SIGNIFICANT SUBSIDIARY" means, as of any date of determination, a Subsidiary of the Company, that would constitute a "significant subsidiary" as such term is defined under Rule 1-02 of Regulation S-X of the Commission. "SUBSIDIARY" means, with respect to any Person, (i) any corporation, association or other business entity of which more than 50% of the total voting power of shares of capital stock or other equity interest entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by such Person or one or more of the other subsidiaries of that Person (or a combination thereof) and (ii) any partnership (a) the sole general partner or managing general partner of which is such Person or a subsidiary of such Person or (b) the only general partners of which are such Person or one or more subsidiaries of such Person (or any combination thereof). "TRADING DAY" has the meaning specified in Section 15.05(h)(v). 7 "TRIGGER EVENT" has the meaning specified in Section 15.05(d). "TRUST INDENTURE ACT" means the Trust Indenture Act of 1939, as amended, as it was in force at the date of execution of this Indenture, except as provided in Sections 11.03 and 15.06; PROVIDED that in the event the Trust Indenture Act of 1939 is amended after the date hereof, the term "TRUST INDENTURE ACT" means, to the extent required by such amendment, the Trust Indenture Act of 1939 as so amended. "TRUSTEE" means Wilmington Trust Company, and its successors and any corporation resulting from or surviving any consolidation or merger to which it or its successors may be a party and any successor trustee at the time serving as successor trustee hereunder. "UNDERWRITING AGREEMENT" means the Underwriting Agreement dated August __, 1999 between the Company and the underwriters named therein relating to the sale by the Company of the Notes to the underwriters. The definitions of certain other terms are as specified in Sections 2.05, 3.05, 4.02 and Article 15. ARTICLE 2 ISSUE, DESCRIPTION, EXECUTION, REGISTRATION AND EXCHANGE OF NOTES SECTION 2.01. DESIGNATION AMOUNT AND ISSUE OF NOTES. The Notes shall be designated as the "___% Convertible Subordinated Notes Due 2006." Notes not to exceed the aggregate principal amount of $287,500,000 (including up to $37,500,000 aggregate principal amount that may be issued upon exercise of the over-allotment option granted to the underwriters in the Underwriting Agreement) (except pursuant to Sections 2.05, 2.06, 3.03, 3.05 and 15.02 hereof) upon the execution of this Indenture, or from time to time thereafter, may be executed by the Company and delivered to the Trustee for authentication, and the Trustee shall thereupon authenticate and deliver said Notes to or upon the written order of the Company, signed by its (a) Chief Executive Officer, President, Chief Financial Officer or any Vice President (whether or not designated by a number or numbers or word or words added before or after the title "Vice President") and (b) Treasurer or Assistant Treasurer or Secretary or any Assistant Secretary, without any further action by the Company hereunder. 8 SECTION 2.02. FORM OF NOTES. The Notes and the Trustee's certificate of authentication to be borne by such Notes shall be substantially in the form set forth in Exhibit A, which is incorporated in and made a part of this Indenture. Any of the Notes may have such letters, numbers or other marks of identification and such notations, legends and endorsements as the officers executing the same may approve (execution thereof to be conclusive evidence of such approval) and as are not inconsistent with the provisions of this Indenture, or as may be required to comply with any law or with any rule or regulation made pursuant thereto or with any rule or regulation of any securities exchange or automated quotation system on which the Notes may be listed, or to conform to usage. Any Global Note shall represent such of the outstanding Notes as shall be specified therein and shall provide that it shall represent the aggregate amount of outstanding Notes from time to time endorsed thereon and that the aggregate amount of outstanding Notes represented thereby may from time to time be increased or reduced to reflect transfers or exchanges permitted hereby. Any endorsement of a Global Note to reflect the amount of any increase or decrease in the amount of outstanding Notes represented thereby shall be made by the Trustee or the Custodian, at the direction of the Trustee, in such manner and upon instructions given by the holder of such Notes in accordance with this Indenture. Payment of principal of and interest and premium, if any, on any Global Note shall be made to the holder of such Global Note. The terms and provisions contained in the form of Note attached as Exhibit A hereto shall constitute, and are hereby expressly made, a part of this Indenture and, to the extent applicable, the Company and the Trustee, by their execution and delivery of this Indenture, expressly agree to such terms and provisions and to be bound thereby. SECTION 2.03. DATE AND DENOMINATION OF NOTES; PAYMENTS OF INTEREST. The Notes shall be issuable in registered form without coupons in denominations of $1,000 principal amount and integral multiples thereof. Every Note shall be dated the date of its authentication and shall bear interest from the applicable date in each case as specified on the face of the form of Note attached as Exhibit A hereto. Interest on the Notes shall be computed on the basis of a 360-day year comprised of twelve (12) 30-day months. The Person in whose name any Note (or its Predecessor Note) is registered on the Note register at the close of business on any record date with respect to any interest payment date shall be entitled to receive the interest payable on such interest payment date, except that the interest payable upon redemption will be 9 payable only to the Person to whom principal is payable pursuant to such redemption (unless the date of redemption is an interest payment date, in which case the semi-annual payment of interest becoming due on such date shall be payable to the holders of such Notes registered as such on the relevant record date). Notwithstanding the foregoing, if any Note (or portion thereof) is converted into Common Stock during the period from (but excluding) a record date to (but excluding) the next succeeding interest payment date and such Note (or portion thereof) has been called for redemption on a redemption date which occurs during such period, the Company shall not be required to pay interest on such interest payment date in respect of any such Note (or portion thereof). Interest may, as the Company shall specify to the paying agent in writing by each record date, be paid either (i) by check mailed to the address of the Person entitled thereto as it appears in the Note register or (ii) by transfer to an account maintained by such Person located in the United States if such Person has notified the Company of the details of such account at least seven (7) days prior to a scheduled interest payment date; PROVIDED that payments to the Depositary will be made by wire transfer of immediately available funds to the account of the Depositary or its nominee. The term "RECORD DATE" with respect to any interest payment date shall mean the January 15 or July 15 preceding said February 1 or August 1, respectively. Any interest on any Note which is payable, but is not punctually paid or duly provided for, on any said February 1 or August 1 (herein called "DEFAULTED INTEREST") shall forthwith cease to be payable to the Noteholder on the relevant record date by virtue of his having been such Noteholder; and such Defaulted Interest shall be paid by the Company, at its election in each case, as provided in clause (a) or (b) below; (a) The Company may elect to make payment of any Defaulted Interest to the Persons in whose names the Notes (or their respective Predecessor Notes) are registered at the close of business on a special record date for the payment of such Defaulted Interest, which shall be fixed in the following manner. The Company shall notify the Trustee in writing of the amount of Defaulted Interest to be paid on each Note and the date of the payment (which shall be not less than twenty-five (25) days after the receipt by the Trustee of such notice, unless the Trustee shall consent to an earlier date), and at the same time the Company shall deposit with the Trustee an amount of money equal to the aggregate amount to be paid in respect of such Defaulted Interest or shall make arrangements satisfactory to the Trustee for such deposit prior to the date of the proposed payment, such money when deposited to be held in trust for the benefit of the Persons entitled to such Defaulted Interest as in this clause provided. Thereupon the Trustee shall fix a special record date for the 10 payment of such Defaulted Interest which shall be not more than fifteen (15) days and not less than ten (10) days prior to the date of the proposed payment, and not less than ten (10) days after the receipt by the Trustee of the notice of the proposed payment, the Trustee shall promptly notify the Company of such special record date and, in the name and at the expense of the Company, shall cause notice of the proposed payment of such Defaulted Interest and the special record date therefor to be mailed, first-class postage prepaid, to each Noteholder at his address as it appears in the Note register, not less than ten (10) days prior to such special record date. Notice of the proposed payment of such Defaulted Interest and the special record date therefor having been so mailed, such Defaulted Interest shall be paid to the Persons in whose names the Notes (or their respective Predecessor Notes) were registered at the close of business on such special record date and shall no longer be payable pursuant to the following clause (b) of this Section 2.03. (b) The Company may make payment of any Defaulted Interest in any other lawful manner not inconsistent with the requirements of any securities exchange or automated quotation system on which the Notes may be listed or designated for issuance, and upon such notice as may be required by such exchange or automated quotation system, if, after notice given by the Company to the Trustee of the proposed payment pursuant to this clause, such manner of payment shall be deemed practicable by the Trustee. SECTION 2.04. EXECUTION OF NOTES. The Notes shall be signed in the name and on behalf of the Company by the manual or facsimile signature of its Chief Executive Officer, President, Chief Financial Officer, any Executive or Senior or any Vice President (whether or not designated by a number or numbers or word or words added before or after the title "Vice President") and attested by the manual or facsimile signature of its Secretary or any of its Assistant Secretaries or Treasurer or any of its Assistant Treasurers (which may be printed, engraved or otherwise reproduced thereon, by facsimile or otherwise). Only such Notes as shall bear thereon a certificate of authentication substantially in the form set forth on the form of Note attached as Exhibit A hereto, manually executed by the Trustee (or an authenticating agent appointed by the Trustee as provided by Section 16.11), shall be entitled to the benefits of this Indenture or be valid or obligatory for any purpose. Such certificate by the Trustee (or such an authenticating agent) upon any Note executed by the Company shall be conclusive evidence that the Note so authenticated has been duly authenticated and delivered hereunder and that the holder is entitled to the benefits of this Indenture. 11 In case any officer of the Company who shall have signed any of the Notes shall cease to be such officer before the Notes so signed shall have been authenticated and delivered by the Trustee, or disposed of by the Company, such Notes nevertheless may be authenticated and delivered or disposed of as though the Person who signed such Notes had not ceased to be such officer of the Company; and any Note may be signed on behalf of the Company by such Persons as, at the actual date of the execution of such Note, shall be the proper officers of the Company, although at the date of the execution of this Indenture any such Person was not such an officer. SECTION 2.05. EXCHANGE AND REGISTRATION OF TRANSFER OF NOTES; GLOBAL NOTES; DEPOSITARY. (a) The Company shall cause to be kept at the Corporate Trust Office a register (the register maintained in such office and in any other office or agency of the Company designated pursuant to Section 5.02 being herein sometimes collectively referred to as the "NOTE REGISTER") in which, subject to such reasonable regulations as it may prescribe, the Company shall provide for the registration of Notes and of transfers of Notes. The Note register shall be in written form or in any form capable of being converted into written form within a reasonably prompt period of time. The Trustee is hereby appointed "NOTE REGISTRAR" for the purpose of registering Notes and transfers of Notes as herein provided. The Company may appoint one or more co-registrars in accordance with Section 5.02. Upon surrender for registration of transfer of any Note to the Note registrar or any co-registrar, and satisfaction of the requirements for such transfer set forth in this Section 2.05, the Company shall execute, and the Trustee shall authenticate and deliver, in the name of the designated transferee or transferees, one or more new Notes of any authorized denominations and of a like aggregate principal amount. Notes may be exchanged for other Notes of any authorized denominations and of a like aggregate principal amount, upon surrender of the Notes to be exchanged at any such office or agency maintained by the Company pursuant to Section 5.02. Whenever any Notes are so surrendered for exchange, the Company shall execute, and the Trustee shall authenticate and deliver, the Notes which the Noteholder making the exchange is entitled to receive bearing registration numbers not contemporaneously outstanding. All Notes issued upon any registration of transfer or exchange of Notes shall be the valid obligations of the Company, evidencing the same debt, and 12 entitled to the same benefits under this Indenture, as the Notes surrendered upon such registration of transfer or exchange. All Notes presented or surrendered for registration of transfer or for exchange, redemption or conversion shall (if so required by the Company or the Note registrar) be duly endorsed, or be accompanied by a written instrument or instruments of transfer in form satisfactory to the Company and the Trustee, and the Notes shall be duly executed by the Noteholder thereof or his attorney duly authorized in writing. No service charge shall be made for any registration of transfer or exchange of Notes, but the Company may require payment of a sum sufficient to cover any tax, assessment or other governmental charge that may be imposed in connection with any registration of transfer or exchange of Notes. Neither the Company nor the Trustee nor any Note registrar shall be required to exchange or register a transfer of (i) any Notes for a period of fifteen (15) days next preceding any selection of Notes to be redeemed or (ii) any Notes or portions thereof called for redemption pursuant to Section 3.02 or (iii) any Notes or portion thereof surrendered for conversion pursuant to Article 15 or (iv) any Notes or portions thereof tendered for redemption (and not withdrawn) pursuant to Section 3.05. (b) So long as the Notes are eligible for book-entry settlement with the Depositary, or unless otherwise required by law, all Notes will be represented by one or more Notes in global form registered in the name of the Depositary or the nominee of the Depositary (the "GLOBAL NOTE"), except as otherwise specified below. The transfer and exchange of beneficial interests in any such Global Note shall be effected through the Depositary in accordance with this Indenture and the procedures of the Depositary therefor. Except as provided below, beneficial owners of a Global Note shall not be entitled to have certificates registered in their names, will not receive or be entitled to receive physical delivery of certificates in definitive form and will not be considered holders of Global Notes. Notwithstanding any other provisions of this Indenture, a Global Note may not be transferred as a whole or in part except by the Depositary to a nominee of the Depositary or by a nominee of the Depositary to the Depositary or another nominee of the Depositary or by the Depositary or any such nominee to a successor Depositary or a nominee of such successor Depositary. The Depositary shall be a clearing agency registered under the Exchange Act. The Company initially appoints The Depository Trust Company to act as Depositary with respect to the Global Notes. Initially, each Global Note shall be 13 issued to the Depositary, registered in the name of Cede & Co., as the nominee of the Depositary, and deposited with the Custodian for Cede & Co. Holders of beneficial interests in a Global Note shall have no rights under this Indenture with respect to any Global Note held on their behalf by the Depositary, and the Depositary may be treated by the Company, the Trustee, any registrar, any paying agent and any conversion agent as the absolute owner and holder of such Global Note for all purposes whatsoever. Neither the Company, the Trustee nor any paying agent shall have any responsibility or liability for any aspect of the records relating to or payments made on account of beneficial interests in any Global Note or for maintaining, supervising or reviewing any records relating to any beneficial interests in any Global Note. Notwithstanding the foregoing, the Depositary or its nominee may grant proxies and otherwise authorize any person (including any direct or indirect participant of the Depositary and any person that holds a beneficial interest in a Global Note through such a direct or indirect participant) to take any action which a holder is entitled to take under this Indenture or the Notes and nothing herein shall impair, as between the Depositary and its direct or indirect participants, the operation of customary practices governing the exercise of the rights of a holder of any security. If at any time the Depositary for a Global Note notifies the Company that it is unwilling or unable to continue as Depositary for such Note, the Company may appoint a successor Depositary with respect to such Note. If a successor Depositary is not appointed by the Company within ninety (90) days after the Company receives such notice, the Company will execute, and the Trustee, upon receipt of an Officers' Certificate for the authentication and delivery of Notes, will authenticate and deliver, Notes in definitive form, in aggregate principal amount equal to the principal amount of such Global Note, in exchange for such Global Note. The Company may at any time in its sole discretion determine that Notes issued in the form of one or more Global Notes shall no longer be represented by such Global Notes. In such event the Company will execute, and the Trustee, upon receipt of a Company order for the authentication and delivery of individual Notes of such series in exchange in whole or in part of such Global Note, will authenticate and deliver individual Notes of such series of like tenor and terms in a definitive form in an aggregate principal amount equal to the principal amount of such Global Note or Notes representing such series in exchange for such Global Note or Notes. If a Note in definitive form is issued in exchange for any portion of a Global Note after the close of business at the office or agency where such exchange occurs on any record date and before the opening of business at such 14 office or agency on the next succeeding interest payment date, interest will not be payable on such interest payment date in respect of such definitive Note, but will be payable on such interest payment date, subject to the provisions of Section 2.03, only to the Person to whom interest in respect of such portion of such Global Note is payable in accordance with the provisions of this Indenture. Notes in definitive form issued in exchange for all or a part of a Global Note pursuant to this Section 2.05 shall be registered in such names and in such authorized denominations as the Depositary, pursuant to instructions from its direct or indirect participants or otherwise, shall instruct the Trustee. Upon execution and authentication, the Trustee shall deliver such Notes in definitive form to the Persons in whose names such Notes in definitive form are so registered. At such time as all interests in a Global Note have been redeemed, converted, canceled, exchanged for Notes in definitive form, or transferred to a transferee who receives Notes in definitive form, such Global Note shall, upon receipt thereof, be canceled by the Trustee in accordance with standing procedures and instructions existing between the Depositary and the Custodian. At any time prior to such cancellation, if any interest in a Global Note is redeemed, converted, repurchased or canceled, exchanged for Notes in definitive form or transferred to a transferee who receives Notes in definitive form therefor or any Note in definitive form is exchanged or transferred for part of a Global Note, the principal amount of such Global Note shall, in accordance with the standing procedures and instructions existing between the Depositary and the Custodian, be appropriately reduced or increased, as the case may be, and an endorsement shall be made on such Global Note, by the Trustee or the Custodian, at the direction of the Trustee, to reflect such reduction or increase. SECTION 2.06. MUTILATED, DESTROYED, LOST OR STOLEN NOTES. In case any Note shall become mutilated or be destroyed, lost or stolen, the Company in its discretion may execute, and upon its written request the Trustee or an authenticating agent appointed by the Trustee shall authenticate and make available for delivery, a new Note, bearing a number not contemporaneously outstanding, in exchange and substitution for the mutilated Note, or in lieu of and in substitution for the Note so destroyed, lost or stolen. In every case the applicant for a substituted Note shall furnish to the Company, to the Trustee and, if applicable, to such authenticating agent, such security or indemnity as may be required by them to save each of them harmless for any loss, liability, cost or expense caused by or connected with such substitution, and, in every case of destruction, loss or theft, the applicant shall also furnish to the Company, to the Trustee and, if applicable, to such authenticating agent evidence to their 15 satisfaction of the destruction, loss or theft of such Note and of the ownership thereof. Following receipt by the Company, the Trustee or such authenticating agent, as the case may be, of satisfactory security or indemnity and evidence, as described in the preceding paragraph, the Trustee or such authenticating agent may authenticate any such substituted Note and make available for delivery such Note. Upon the issuance of any substituted Note, the Company may require the payment of a sum sufficient to cover any tax, assessment or other governmental charge that may be imposed in relation thereto and any other expenses connected therewith. In case any Note which has matured or is about to mature or has been called for redemption or has been tendered for redemption (and not withdrawn) or is about to be converted into Common Stock shall become mutilated or be destroyed, lost or stolen, the Company may, instead of issuing a substitute Note, pay or authorize the payment of or convert or authorize the conversion of the same (without surrender thereof except in the case of a mutilated Note), as the case may be, if the applicant for such payment or conversion shall furnish to the Company, to the Trustee and, if applicable, to such authenticating agent, such security or indemnity as may be required by them to save each of them harmless for any loss, liability, cost or expense caused by or connected with such substitution, and, in every case of destruction, loss or theft, the applicant shall also furnish to the Company, the Trustee and, if applicable, any paying agent or conversion agent, evidence to their satisfaction of the destruction, loss or theft of such Note and of the ownership thereof. Every substitute Note issued pursuant to the provisions of this Section 2.06 by virtue of the fact that any Note is destroyed, lost or stolen shall constitute an additional contractual obligation of the Company, whether or not the destroyed, lost or stolen Note shall be found at any time, and shall be entitled to all the benefits of (but shall be subject to all the limitations set forth in) this Indenture equally and proportionately with any and all other Notes duly issued hereunder. To the extent permitted by law, all Notes shall be held and owned upon the express condition that the foregoing provisions are exclusive with respect to the replacement or payment or conversion of mutilated, destroyed, lost or stolen Notes and shall preclude any and all other rights or remedies notwithstanding any law or statute existing or hereafter enacted to the contrary with respect to the replacement or payment or conversion of negotiable instruments or other securities without their surrender. SECTION 2.07. TEMPORARY NOTES. Pending the preparation of Notes in definitive form, the Company may execute and the Trustee or an authenticating agent appointed by the Trustee shall, upon the written request of the Company, authenticate and deliver temporary Notes (printed or lithographed). Temporary 16 Notes shall be issuable in any authorized denomination, and substantially in the form of the Notes in definitive form, but with such omissions, insertions and variations as may be appropriate for temporary Notes, all as may be determined by the Company. Every such temporary Note shall be executed by the Company and authenticated by the Trustee or such authenticating agent upon the same conditions and in substantially the same manner, and with the same effect, as the Notes in definitive form. Without unreasonable delay the Company will execute and deliver to the Trustee or such authenticating agent Notes in definitive form (other than in the case of Global Notes) and thereupon any or all temporary Notes (other than any such Global Note) may be surrendered in exchange therefor, at each office or agency maintained by the Company pursuant to Section 5.02 and the Trustee or such authenticating agent shall authenticate and make available for delivery in exchange for such temporary Notes an equal aggregate principal amount of Notes in definitive form. Such exchange shall be made by the Company at its own expense and without any charge therefor. Until so exchanged, the temporary Notes shall in all respects be entitled to the same benefits and subject to the same limitations under this Indenture as Notes in definitive form authenticated and delivered hereunder. SECTION 2.08. CANCELLATION OF NOTES PAID, ETC. All Notes surrendered for the purpose of payment, redemption, conversion, exchange or registration of transfer shall, if surrendered to the Company or any paying agent or any Note registrar or any conversion agent, be surrendered to the Trustee and promptly canceled by it, or, if surrendered to the Trustee, shall be promptly canceled by it, and no Notes shall be issued in lieu thereof except as expressly permitted by any of the provisions of this Indenture. The Trustee shall return such canceled Notes to the Company. If the Company shall acquire any of the Notes, such acquisition shall not operate as a redemption or satisfaction of the indebtedness represented by such Notes unless and until the same are delivered to the Trustee for cancellation. SECTION 2.09. CUSIP NUMBERS. The Company in issuing the Notes shall use "CUSIP" numbers (if then generally in use), and, if so, the Trustee shall use CUSIP numbers in notices of redemption as a convenience to Noteholders; PROVIDED that any such notice may state that no representation is made as to the correctness of such numbers either as printed on the Notes or as contained in any notice of a redemption and that reliance may be placed only on the other identification numbers printed on the Notes, and any such redemption shall not be affected by any defect in or omission of such numbers. The Company will promptly notify the Trustee of any change in the CUSIP numbers. 17 ARTICLE 3 REDEMPTION OF NOTES SECTION 3.01. REDEMPTION PRICES. The Company may not redeem the Notes prior to August 6, 2002. At any time on or after August 6, 2002, the Company may, at its option, redeem all or from time to time any part of the Notes on any date prior to maturity, upon notice as set forth in Section 3.02, and at the optional redemption prices set forth in the form of Note attached as Exhibit A hereto, together with accrued interest to, but excluding, the date fixed for redemption. SECTION 3.02. NOTICE OF REDEMPTION; SELECTION OF NOTES. In case the Company shall desire to exercise the right to redeem all or, as the case may be, any part of the Notes pursuant to Section 3.01, it shall fix a date for redemption and it or, at its written request received by the Trustee not fewer than thirty (30) days prior (or such shorter period of time as may be acceptable to the Trustee) to the date fixed for redemption, the Trustee in the name of and at the expense of the Company, shall mail or cause to be mailed a notice of such redemption at least thirty (30) but not more than sixty (60) days prior to the date fixed for redemption to the holders of Notes so to be redeemed as a whole or in part at their last addresses as the same appear on the Note register; PROVIDED that if the Company shall give such notice, it shall also give written notice, and written notice of the Notes to be redeemed, to the Trustee. Such mailing shall be by first class mail. The notice if mailed in the manner herein provided shall be conclusively presumed to have been duly given, whether or not the holder receives such notice. The Company shall also publish notice of any such redemption in Bloomberg Business News, DowJones News and Reuters Financial Report in New York City. In any case, failure to give such notice by mail or any defect in the notice to the holder of any Note designated for redemption as a whole or in part shall not affect the validity of the proceedings for the redemption of any other Note. Each such notice of redemption shall specify the aggregate principal amount of Notes to be redeemed, the CUSIP numbers, the date fixed for redemption (which shall be a Business Day), the redemption price at which Notes are to be redeemed, the place or places of payment, that payment will be made upon presentation and surrender of such Notes, that interest accrued to the date fixed for redemption will be paid as specified in said notice, and that on and after said date interest thereon or on the portion thereof to be redeemed will cease to accrue. Such notice shall also state the current Conversion Price and the date on which the right to convert such Notes or portions thereof into Common Stock will expire. If fewer than all the Notes are to be redeemed, the notice of redemption shall identify the Notes to be redeemed (including CUSIP numbers, if any). In 18 case any Note is to be redeemed in part only, the notice of redemption shall state the portion of the principal amount thereof to be redeemed and shall state that, on and after the date fixed for redemption, upon surrender of such Note, a new Note or Notes in principal amount equal to the unredeemed portion thereof will be issued. On or prior to the redemption date specified in the notice of redemption given as provided in this Section 3.02, the Company will deposit with the Trustee or with one or more paying agents (or, if the Company is acting as its own paying agent, set aside, segregate and hold in trust as provided in Section 5.04) an amount of money sufficient to redeem on the redemption date all the Notes (or portions thereof) so called for redemption (other than those theretofore surrendered for conversion into Common Stock) at the appropriate redemption price, together with accrued interest to, but excluding, the date fixed for redemption; PROVIDED that if such payment is made on the redemption date it must be received by the Trustee or paying agent, as the case may be, by 10:00 a.m. New York City time, on such date. If any Note called for redemption is converted into Common Stock pursuant to the terms hereof, any money deposited with the Trustee or any paying agent or so segregated and held in trust for the redemption of such Note shall be paid to the Company upon its written request, or, if then held by the Company shall be discharged from such trust. Whenever any Notes are to be redeemed, the Company will give the Trustee written notice in the form of an Officers' Certificate not fewer than thirty (30) days (or such shorter period of time as may be acceptable to the Trustee) prior to the redemption date as to the aggregate principal amount of Notes to be redeemed. If fewer than all the outstanding Notes are to be redeemed, the Trustee shall select the Notes (or portions thereof) to be redeemed (in principal amounts of $1,000 or integral multiples thereof), by lot, on a pro rata basis or by another method the Trustee deems fair and appropriate. If any Note selected for partial redemption is converted in part after such selection, the converted portion of such Note shall be deemed (so far as may be) to be the portion to be selected for redemption. The Notes (or portions thereof) so selected shall be deemed duly selected for redemption for all purposes hereof, notwithstanding that any such Note is converted as a whole or in part before the mailing of the notice of redemption. Upon any redemption of less than all of the outstanding Notes, the Company and the Trustee may (but need not) treat as outstanding any Notes surrendered for conversion during the period of fifteen (15) days next preceding the mailing of a notice of redemption and may (but need not) treat as outstanding any Note authenticated and delivered during such period in exchange for the unconverted portion of any Note converted in part during such period. 19 SECTION 3.03. PAYMENT OF NOTES CALLED FOR REDEMPTION. If notice of redemption has been given as above provided, the Notes or portion of Notes with respect to which such notice has been given shall, unless converted into Common Stock pursuant to the terms hereof, become due and payable on the date fixed for redemption and at the place or places stated in such notice at the applicable redemption price, together with interest accrued to (but excluding) the date fixed for redemption, and on and after said date (unless the Company shall default in the payment of such Notes at the redemption price, together with interest accrued to said date), interest on the Notes or portion of Notes so called for redemption shall cease to accrue and such Notes shall cease after the close of business on the Business Day next preceding the date fixed for redemption to be convertible into Common Stock and, except as provided in Sections 8.05 and 13.04, to be entitled to any benefit or security under this Indenture, and the holders thereof shall have no right in respect of such Notes except the right to receive the redemption price thereof and unpaid interest to (but excluding) the date fixed for redemption. On presentation and surrender of such Notes at a place of payment in said notice specified, the said Notes or the specified portions thereof shall be paid and redeemed by the Company at the applicable redemption price, together with interest accrued thereon to (but excluding) the date fixed for redemption; PROVIDED that, if the applicable redemption date is an interest payment date, the semi-annual payment of interest becoming due on such date shall be payable to the holders of such Notes registered as such on the relevant record date instead of the holders surrendering such Notes for redemption on such date. Upon presentation of any Note redeemed in part only, the Company shall execute and the Trustee shall authenticate and make available for delivery to the holder thereof, at the expense of the Company, a new Note or Notes, of authorized denominations, in principal amount equal to the unredeemed portion of the Notes so presented. Notwithstanding the foregoing, the Trustee shall not redeem any Notes or mail any notice of optional redemption during the continuance of a default in payment of principal, premium, if any, or interest on the Notes or any other Event of Default of which a Responsible Officer of the Trustee has knowledge, unless all such defaults and Events of Default are cured at the time of redemption. If any Note called for redemption shall not be so paid upon surrender thereof for redemption, the principal and premium, if any, shall, until paid or duly provided for, bear interest from the date fixed for redemption at the rate borne by the Note and such Note shall remain convertible into Common Stock until the principal and premium, if any, and interest shall have been paid or duly provided for. SECTION 3.04. CONVERSION ARRANGEMENT ON CALL FOR REDEMPTION. In connection with any redemption of Notes, the Company may arrange for the 20 purchase and conversion of any Notes by an agreement with one or more investment bankers or other purchasers to purchase such Notes by paying to the Trustee in trust for the Noteholders, on or before the date fixed for redemption, an amount not less than the applicable redemption price, together with interest accrued to (but excluding) the date fixed for redemption, of such Notes. Notwithstanding anything to the contrary contained in this Article 3, the obligation of the Company to pay the redemption price of such Notes, together with interest accrued to (but excluding) the date fixed for redemption, shall be deemed to be satisfied and discharged to the extent such amount is so paid by such purchasers. If such an agreement is entered into, a copy of which will be filed with the Trustee prior to the date fixed for redemption, any Notes not duly surrendered for conversion by the holders thereof may, at the option of the Company, be deemed, to the fullest extent permitted by law, acquired by such purchasers from such holders and (notwithstanding anything to the contrary contained in Article 15) surrendered by such purchasers for conversion, all as of immediately prior to the close of business on the date fixed for redemption (and the right to convert any such Notes shall be extended through such time), subject to payment of the above amount as aforesaid. At the direction of the Company, the Trustee shall hold and dispose of any such amount paid to it in the same manner as it would monies deposited with it by the Company for the redemption of Notes. Without the Trustee's prior written consent, no arrangement between the Company and such purchasers for the purchase and conversion of any Notes shall increase or otherwise affect any of the powers, duties, responsibilities or obligations of the Trustee as set forth in this Indenture. SECTION 3.05. REDEMPTION AT OPTION OF HOLDERS. (a) If there shall occur a Fundamental Change at any time prior to August 1, 2006, then each Noteholder shall have the right, at such holder's option, to require the Company to redeem all of such holder's Notes, or any portion thereof that is an integral multiple of $1,000 principal amount, on the date (the "REPURCHASE DATE") that is thirty (30) days after the date of the Company Notice (as defined in Section 3.05(b) below) of such Fundamental Change (or, if such 30th day is not a Business Day, the next succeeding Business Day). Such repayment shall be made at a price equal to 100% of the principal amount to be redeemed. The Company shall also pay to such holders accrued interest on the redeemed Notes to, but excluding, the Repurchase Date; PROVIDED that, if such Repurchase Date is an interest payment date, the semi-annual payment of interest becoming due on such date shall be paid to the holders of such Notes registered as such on the relevant record date instead of the holders surrendering such Notes for redemption on such date. 21 Upon presentation of any Note redeemed in part only, the Company shall execute and, upon the Company's written direction to the Trustee, the Trustee shall authenticate and deliver to the holder thereof, at the expense of the Company, a new Note or Notes, of authorized denominations, in principal amount equal to the unredeemed portion of the Notes so presented. (b) On or before the tenth day after the occurrence of a Fundamental Change, the Company, or, at its written request (which must be received by the Trustee at least five (5) Business Days prior to the date the Trustee is requested to give notice as described below), the Trustee in the name of and at the expense of the Company, shall mail or cause to be mailed to all holders of record on the date of the Fundamental Change a notice (the "COMPANY NOTICE") of the occurrence of such Fundamental Change and of the redemption right at the option of the holders arising as a result thereof. Such notice shall be mailed in the manner and with the effect set forth in the first paragraph of Section 3.02. The Company shall also deliver a copy of the Company Notice to the Trustee at such time as it is mailed to Noteholders. Concurrently with the mailing of any Company Notice, the Company shall also publish notice of any such redemption in Bloomberg Business News, DowJones News and Reuters Financial Report in New York City. Each Company Notice shall specify the circumstances constituting the Fundamental Change, the Repurchase Date, the price at which the Company shall be obligated to redeem Notes, the latest time (not less than thirty (30) days after the date of the Company's notice of a Fundamental Change) on the Repurchase Date by which the holder must exercise the redemption right (the "FUNDAMENTAL CHANGE EXPIRATION TIME"), that the holder shall have the right to withdraw any Notes surrendered prior to the Fundamental Change Expiration Time, a description of the procedure which a Noteholder must follow to exercise such redemption right and to withdraw any surrendered Notes, the place or places where the holder is to surrender such holder's Notes, and the amount of interest accrued on each Note to (but excluding) the Repurchase Date. No failure of the Company to give the foregoing notices or to issue any press release and no defect therein shall limit the Noteholders' redemption rights or affect the validity of the proceedings for the redemption of the Notes pursuant to this Section 3.05. (c) For a Note to be so redeemed at the option of the holder, the Company must receive at the office or agency of the Company maintained for that purpose or, at the option of such holder, the Corporate Trust Office, such Note with the form entitled "Option to Elect Repayment Upon A Fundamental Change" on the reverse thereof duly completed, together with such Notes duly endorsed for transfer, on or before the Fundamental Change Expiration Time. All questions as 22 to the validity, eligibility (including time of receipt) and acceptance of any Note for repayment shall be determined by the Company, whose determination shall be final and binding absent manifest error. (d) Following the Fundamental Change Expiration Time, but on or prior to the Repurchase Date, the Company will deposit with the Trustee or with one or more paying agents (or, if the Company is acting as its own paying agent, set aside, segregate and hold in trust as provided in Section 5.04) an amount of money sufficient to redeem on the Repurchase Date all the Notes to be redeemed on such date at the appropriate redemption price, together with accrued interest to (but excluding) the Repurchase Date; PROVIDED that if such payment is made on the Repurchase Date it must be received by the Trustee or paying agent, as the case may be, by 10:00 a.m. New York City time, on such date. Payment for Notes surrendered for redemption (and not withdrawn) prior to the Fundamental Change Expiration Time will be made promptly (but in no event more than five (5) Business Days) following the Repurchase Date by mailing checks for the amount payable to the holders of such Notes entitled thereto as they shall appear on the registry books of the Company. (e) In the case of a reclassification, change, consolidation, merger, combination, sale or conveyance to which Section 15.06 applies, in which the Common Stock of the Company is changed or exchanged as a result into the right to receive stock, securities or other property or assets (including cash), which includes shares of Common Stock of the Company or shares of common stock of another Person that are, or upon issuance will be, traded on a United States national securities exchange or approved for trading on an established automated over-the-counter trading market in the United States and such shares constitute at the time such change or exchange becomes effective in excess of 50% of the aggregate fair market value of such stock, securities or other property or assets (including cash) (as determined by the Company, which determination shall be conclusive and binding), then the Person formed by such consolidation or resulting from such merger or which acquires such assets, as the case may be, shall execute and deliver to the Trustee a supplemental indenture (accompanied by an Opinion of Counsel that such supplemental indenture complies with the Trust Indenture Act as in force at the date of execution of such supplemental indenture) modifying the provisions of this Indenture relating to the right of holders of the Notes to cause the Company to repurchase the Notes following a Fundamental Change, including without limitation the applicable provisions of this Section 3.05 and the definitions of the Common Stock and Fundamental Change, as appropriate, as determined in good faith by the Company (which determination shall be conclusive and binding), to make such provisions apply to such other Person and the common stock of such Person if different from the 23 Company and Common Stock of the Company (in lieu of the Company and the Common Stock of the Company). (f) The Company will comply with the provisions of Rule 13e-4 and any other tender offer rules under the Exchange Act to the extent then applicable in connection with the redemption rights of the holders of Notes in the event of a Fundamental Change. ARTICLE 4 SUBORDINATION OF NOTES SECTION 4.01. AGREEMENT OF SUBORDINATION. The Company covenants and agrees, and each holder of Notes issued hereunder by its acceptance thereof likewise covenants and agrees, that all Notes shall be issued subject to the provisions of this Article 4; and each Person holding any Note, whether upon original issue or upon transfer, assignment or exchange thereof, accepts and agrees to be bound by such provisions. The payment of the principal of, premium, if any, and interest on and all other amounts payable under all Notes (including, but not limited to, the redemption price with respect to the Notes called for redemption in accordance with Section 3.02 or submitted for redemption in accordance with Section 3.05, as the case may be, as provided in this Indenture) issued hereunder shall, to the extent and in the manner hereinafter set forth, be subordinated, junior and subject in right of payment to the prior payment in full, in cash or other payment satisfactory to the holders of Senior Indebtedness, of all Senior Indebtedness, whether outstanding at the date of this Indenture or thereafter incurred. No provision of this Article 4 shall prevent the occurrence of any Default or Event of Default hereunder. SECTION 4.02. PAYMENT TO NOTEHOLDERS. No payment shall be made with respect to the principal of, premium, if any, or interest on the Notes (including, but not limited to, the redemption price with respect to the Notes to be called for redemption in accordance with Section 3.02 or submitted for redemption in accordance with Section 3.05, as the case may be, as provided in this Indenture), except payments and distributions made by the Trustee as permitted by the first or second paragraph of Section 4.05, if: 24 (a) a default in the payment of principal, premium, if any, interest, rent or any other obligations in respect of Senior Indebtedness occurs and is continuing (or, in the case of Senior Indebtedness for which there is a period of grace, in the event of such a default that continues beyond the period of grace, if any, specified in the agreement, instrument, lease or other document evidencing such Senior Indebtedness) (a "PAYMENT DEFAULT"), unless and until such Payment Default shall have been cured or waived or shall have ceased to exist; or (b) a default, other than a Payment Default, on any Senior Indebtedness occurs and is continuing that permits holders of such Senior Indebtedness to accelerate its maturity and either (i) such default is the subject of judicial proceedings or (ii) the Trustee receives a notice of the default (a "PAYMENT BLOCKAGE NOTICE") from a holder of Senior Indebtedness, a Representative of Senior Indebtedness or the Company (a "NON-PAYMENT DEFAULT"). If the Trustee receives any Payment Blockage Notice pursuant to clause (b) above, no subsequent Payment Blockage Notice shall be effective for purposes of this Section 4.02 unless and until at least 360 days shall have elapsed since the initial effectiveness of the immediately prior Payment Blockage Notice unless such Event of Default or such other Events of Default have been cured or waived for a period of not less than 90 consecutive days. No new Payment Blockage Period may be commenced by the holder of Senior Indebtedness during any period of 360 consecutive days unless all Events of Default which triggered the preceding Payment Blockage period have been cured or waived. No NonPayment Default that existed or was continuing on the date of delivery of any Payment Blockage Notice to the Trustee shall be, or be made, the basis for a subsequent Payment Blockage Notice. The Company may and shall resume payments on and distributions in respect of the Notes upon the earlier of: (i) in the case of a Payment Default, the date upon which any such Payment Default is cured or waived or ceases to exist, or (ii) in the case of a Non-Payment Default, the earlier of (A) the date upon which such default is cured or waived or ceases to exist or (B) 179 days after the applicable Payment Blockage Notice is received, unless this Article 4 otherwise prohibits the payment or distribution at the time of such payment or distribution. Upon any payment by the Company, or distribution of assets of the Company of any kind or character, whether in cash, property or securities, to 25 creditors upon any dissolution or winding up or liquidation or reorganization of the Company, whether voluntary or involuntary or in bankruptcy, insolvency, receivership or other proceedings, all amounts due or to become due upon all Senior Indebtedness shall first be paid in full in cash or other payment satisfactory to the holders of such Senior Indebtedness, before any payment is made on account of the principal of, premium, if any, or interest on and all other amounts payable under the Notes (except payments made pursuant to Article 13 from monies deposited with the Trustee pursuant thereto prior to commencement of proceedings for such dissolution, winding up, liquidation or reorganization and in compliance with this Article 4); and upon any such dissolution or winding up or liquidation or reorganization of the Company or bankruptcy, insolvency, receivership or other proceeding, any payment by the Company, or distribution of assets of the Company of any kind or character, whether in cash, property or securities, to which the holders of the Notes or the Trustee would be entitled, except for the provisions of this Article 4, shall (except as aforesaid) be paid by the Company or by any receiver, trustee in bankruptcy, liquidating trustee, agent or other Person making such payment or distribution, or by the holders of the Notes or by the Trustee under this Indenture if received by them or it, directly to the holders of Senior Indebtedness (pro rata to such holders on the basis of the respective amounts of Senior Indebtedness held by such holders, or as otherwise required by law or a court order) or their Representative or Representatives, or to the trustee or trustees under any indenture pursuant to which any instruments evidencing any Senior Indebtedness may have been issued, as their respective interests may appear as calculated by the Company, to the extent necessary to pay all Senior Indebtedness in full, in cash or other payment satisfactory to the holders of such Senior Indebtedness, after giving effect to any concurrent payment or distribution in cash or other payment satisfactory to the holders of Senior Indebtedness to or for the holders of Senior Indebtedness, before any payment or distribution is made to the holders of the Notes or to the Trustee. For purposes of this Article 4, the words, "CASH, PROPERTY OR SECURITIES" shall not be deemed to include shares of stock of the Company as reorganized or readjusted, or securities of the Company or any other corporation provided for by a plan of reorganization or readjustment, the payment of which is subordinated at least to the extent provided in this Article 4 with respect to the Notes to the payment of all Senior Indebtedness which may at the time be outstanding (as determined by the holders of Senior Indebtedness or the Representative(s)); PROVIDED that (i) the Senior Indebtedness is assumed by the new corporation, if any, resulting from any reorganization or readjustment, and (ii) the rights of the holders of Senior Indebtedness (other than leases which, in accordance with applicable law and their terms, are not assumed by the Company or the new corporation, as the case may be) are not, without the consent of such holders, altered by such reorganization or readjustment. The consolidation of the 26 Company with, or the merger of the Company into, another corporation or the liquidation or dissolution of the Company following the conveyance or transfer of its property as an entirety, or substantially as an entirety, to another corporation upon the terms and conditions provided for in Article 12 shall not be deemed a dissolution, winding-up, liquidation or reorganization for the purposes of this Section 4.02 if such other corporation shall, as a part of such consolidation, merger, conveyance or transfer, comply with the conditions stated in Article 12. In the event of the acceleration of the Notes because of an Event of Default, no payment or distribution shall be made to the Trustee or any holder of Notes in respect of the principal of, premium, if any, or interest and all other amounts payable on the Notes (including, but not limited to, the redemption price with respect to the Notes called for redemption in accordance with Section 3.02 or submitted for redemption in accordance with Section 3.05, as the case may be, as provided in the Indenture), except payments and distributions made by the Trustee as permitted by the first or second paragraph of Section 4.05, until all Senior Indebtedness has been paid in full in cash or other payment satisfactory to the holders of Senior Indebtedness or such acceleration is rescinded in accordance with the terms of this Indenture, in which case any payments thereafter made shall only be made if the other provision of this Article 4 permit such payments. If payment of the Notes is accelerated because of an Event of Default, the Company shall promptly notify holders of Senior Indebtedness of the acceleration. If, notwithstanding the foregoing provisions, any payment or distribution of assets of the Company of any kind or character, whether in cash, property or securities (including, without limitation, by way of setoff or otherwise), prohibited by the foregoing provisions in this Section 4.02, shall be received by the Trustee or the holders of the Notes before all Senior Indebtedness is paid in full in cash or other payment satisfactory to the holders of such Senior Indebtedness, such payment or distribution shall be held in trust for the benefit of and shall be paid over or delivered to the holders of Senior Indebtedness or their Representative or Representatives, or to the trustee or trustees under any indenture pursuant to which any instruments evidencing any Senior Indebtedness may have been issued, as their respective interests may appear, as calculated by the Company, for application to the payment of any Senior Indebtedness remaining unpaid to the extent necessary to pay all Senior Indebtedness in full in cash or other payment satisfactory to the holders of such Senior Indebtedness, after giving effect to any concurrent payment or distribution in cash or other payment satisfactory to the holders of Senior Indebtedness to or for the holders of such Senior Indebtedness. Nothing in this Section 4.02 shall apply to claims of, or payments to, the Trustee under or pursuant to Section 8.06. This Section 4.02 shall be subject to the further provisions of Section 4.05. 27 SECTION 4.03. SUBROGATION OF NOTES. Subject to the payment in full in cash or other payment satisfactory to the holders of Senior Indebtedness of all Senior Indebtedness, the rights of the holders of the Notes shall be subrogated to the extent of the payments or distributions made to the holders of such Senior Indebtedness pursuant to the provisions of this Article 4 (equally and ratably with the holders of all Indebtedness of the Company which by its express terms is subordinated to other Indebtedness of the Company to substantially the same extent as the Notes are subordinated and is entitled to like rights of subrogation) to the rights of the holders of Senior Indebtedness to receive payments or distributions of cash, property or securities of the Company applicable to the Senior Indebtedness until the principal, premium, if any, and interest on the Notes shall be paid in full; and, for the purposes of such subrogation, no payments or distributions to the holders of the Senior Indebtedness of any cash, property or securities to which the holders of the Notes or the Trustee would be entitled except for the provisions of this Article 4, and no payment over pursuant to the provisions of this Article 4, to or for the benefit of the holders of Senior Indebtedness by holders of the Notes or the Trustee, shall, as between the Company, its creditors other than holders of Senior Indebtedness, and the holders of the Notes, be deemed to be a payment by the Company to or on account of the Senior Indebtedness; and no payments or distributions of cash, property or securities to or for the benefit of the holders of the Notes pursuant to the subrogation provisions of this Article 4, which would otherwise have been paid to the holders of Senior Indebtedness shall be deemed to be a payment by the Company to or for the account of the Notes. It is understood that the provisions of this Article 4 are and are intended solely for the purposes of defining the relative rights of the holders of the Notes, on the one hand, and the holders of the Senior Indebtedness, on the other hand. Nothing contained in this Article 4 or elsewhere in this Indenture or in the Notes is intended to or shall impair, as among the Company, its creditors other than the holders of Senior Indebtedness, and the holders of the Notes, the obligation of the Company, which is absolute and unconditional, to pay to the holders of the Notes the principal of, premium, if any, and interest on the Notes as and when the same shall become due and payable in accordance with their terms, or is intended to or shall affect the relative rights of the holders of the Notes and creditors of the Company other than the holders of the Senior Indebtedness, nor shall anything herein or therein prevent the Trustee or the holder of any Note from exercising all remedies otherwise permitted by applicable law upon default under this Indenture, subject in each case to the rights under this Article 4 of the holders of Senior Indebtedness in respect of cash, property or securities of the Company received upon the exercise of any such remedy. 28 Upon any payment or distribution of assets of the Company referred to in this Article 4, the Trustee, subject to the provisions of Section 8.01, and the holders of the Notes shall be entitled to rely upon any order or decree made by any court of competent jurisdiction in which any bankruptcy, dissolution, winding up, liquidation or reorganization proceedings of the Company are pending, or a certificate of the receiver, trustee in bankruptcy, liquidating trustee, agent or other Person making such payment or distribution, delivered to the Trustee or to the holders of the Notes, for the purpose of ascertaining the Persons entitled to participate in such distribution, the holders of the Senior Indebtedness and other indebtedness of the Company, the amount thereof or payable thereon and all other facts pertinent thereto or to this Article 4. SECTION 4.04. AUTHORIZATION TO EFFECT SUBORDINATION. Each holder of a Note by the holder's acceptance thereof authorizes and directs the Trustee on the holder's behalf to take such action as may be necessary or appropriate to effectuate the subordination as provided in this Article 4 and appoints the Trustee to act as the holder's attorney-in-fact for any and all such purposes. If the Trustee does not file a proper proof of claim or proof of debt in the form required in any proceeding referred to in the third paragraph of Section 7.02 hereof at least thirty (30) days before the expiration of the time to file such claim, the holders of any Senior Indebtedness or their representatives are hereby authorized to file an appropriate claim for and on behalf of the holders of the Notes. SECTION 4.05. NOTICE TO TRUSTEE. The Company shall give prompt written notice in the form of an Officers' Certificate to a Responsible Officer of the Trustee and to any paying agent of any fact known to the Company which would prohibit the making of any payment of monies to or by the Trustee or any paying agent in respect of the Notes pursuant to the provisions of this Article 4. Notwithstanding the provisions of this Article 4 or any other provision of this Indenture, the Trustee shall not be charged with knowledge of the existence of any facts which would prohibit the making of any payment of monies to or by the Trustee in respect of the Notes pursuant to the provisions of this Article 4, unless and until a Responsible Officer of the Trustee shall have received written notice thereof at the Corporate Trust Office from the Company (in the form of an Officers' Certificate) or a Representative or a holder or holders of Senior Indebtedness or from any trustee thereof; and before the receipt of any such written notice, the Trustee, subject to the provisions of Section 8.01, shall be entitled in all respects to assume that no such facts exist; PROVIDED that if on a date not less than two Business Days prior to the date upon which by the terms hereof any such monies may become payable for any purpose (including, without limitation, the payment of the principal of, or premium, if any, or interest on any Note) the Trustee shall not have received, with respect to such monies, the notice provided for in this Section 4.05, then, anything herein contained to the contrary 29 notwithstanding, the Trustee shall have full power and authority to apply monies received to the purpose for which they were received, and shall not be affected by any notice to the contrary which may be received by it on or after such prior date. Notwithstanding anything in this Article 4 to the contrary, nothing shall prevent any payment by the Trustee to the Noteholders of monies deposited with it pursuant to Section 13.01, and any such payment shall not be subject to the provisions of Section 4.01 or 4.02. The Trustee, subject to the provisions of Section 8.01, shall be entitled to rely on the delivery to it of a written notice by a Representative or a person representing himself to be a holder of Senior Indebtedness (or a trustee on behalf of such holder) to establish that such notice has been given by a Representative or a holder of Senior Indebtedness or a trustee on behalf of any such holder or holders. The Trustee shall not be required to make any payment or distribution to or on behalf of a holder of Senior Indebtedness pursuant to this Article 4 unless it has received satisfactory evidence as to the amount of Senior Indebtedness held by such person, the extent to which such person is entitled to participate in such payment or distribution and any other facts pertinent to the rights of such person under this Article 4. SECTION 4.06. TRUSTEE'S RELATION TO SENIOR INDEBTEDNESS. The Trustee in its individual capacity shall be entitled to all the rights set forth in this Article 4 in respect of any Senior Indebtedness at any time held by it, to the same extent as any other holder of Senior Indebtedness, and nothing in Section 8.13 or elsewhere in this Indenture shall deprive the Trustee of any of its rights as such holder. With respect to the holders of Senior Indebtedness, the Trustee undertakes to perform or to observe only such of its covenants and obligations as are specifically set forth in this Article 4, and no implied covenants or obligations with respect to the holders of Senior Indebtedness shall be read into this Indenture against the Trustee. The Trustee shall not be deemed to owe any fiduciary duty to the holders of Senior Indebtedness and, subject to the provisions of Section 8.01, the Trustee shall not be liable to any holder of Senior Indebtedness (i) for any failure to make any payments or distributions to such holder or (ii) if it shall pay over or deliver to holders of Notes, the Company or any other Person money or assets to which any holder of Senior Indebtedness shall be entitled by virtue of this Article 4 or otherwise. SECTION 4.07. NO IMPAIRMENT OF SUBORDINATION. No right of any present or future holder of any Senior Indebtedness to enforce subordination as herein provided shall at any time in any way be prejudiced or impaired by any act or failure to act on the part of the Company or by any act or failure to act, in good 30 faith, by any such holder, or by any noncompliance by the Company with the terms, provisions and covenants of this Indenture, regardless of any knowledge thereof which any such holder may have or otherwise be charged with. SECTION 4.08. CERTAIN CONVERSIONS NOT DEEMED PAYMENT. For the purposes of this Article 4 only, (1) the issuance and delivery of junior securities upon conversion of Notes in accordance with Article 15 shall not be deemed to constitute a payment or distribution on account of the principal of, premium, if any, or interest on Notes or on account of the purchase or other acquisition of Notes, and (2) the payment, issuance or delivery of cash (except in satisfaction of fractional shares pursuant to Section 15.03), property or securities (other than junior securities) upon conversion of a Note shall be deemed to constitute payment on account of the principal of, premium, if any, or interest on such Note. For the purposes of this Section 4.08, the term "JUNIOR SECURITIES" means (a) shares of any stock of any class of the Company or (b) securities of the Company that are subordinated in right of payment to all Senior Indebtedness that may be outstanding at the time of issuance or delivery of such securities to substantially the same extent as, or to a greater extent than, the Notes are so subordinated as provided in this Article. Nothing contained in this Article 4 or elsewhere in this Indenture or in the Notes is intended to or shall impair, as among the Company, its creditors other than holders of Senior Indebtedness and the holders of the Notes, the right, which is absolute and unconditional, of the holder of any Note to convert such Note in accordance with Article 15. SECTION 4.09. ARTICLE APPLICABLE TO PAYING AGENTS. If at any time any paying agent other than the Trustee shall have been appointed by the Company and be then acting hereunder, the term "TRUSTEE" as used in this Article shall (unless the context otherwise requires) be construed as extending to and including such paying agent within its meaning as fully for all intents and purposes as if such paying agent were named in this Article in addition to or in place of the Trustee; PROVIDED that the first paragraph of Section 4.05 shall not apply to the Company or any Affiliate of the Company if it or such Affiliate acts as paying agent. The Trustee shall not be responsible for the actions or inactions of any other paying agents (including the Company if acting as its own paying agent) and shall not be deemed to have control of any funds held by such other paying agents. SECTION 4.10. SENIOR INDEBTEDNESS ENTITLED TO RELY. The holders of Senior Indebtedness shall have the right to rely upon and be entitled in full to the benefits of this Article 4, and no amendment or modification of the provisions 31 contained herein shall diminish the rights of such holders unless such holders shall have agreed in writing thereto. SECTION 4.11. RELIANCE ON JUDICIAL ORDER OR CERTIFICATE OF LIQUIDATING AGENT. Upon any payment or distribution of assets of the Company referred to in this Article, the Trustee and the Noteholders shall be entitled to rely upon any order or decree entered by any court of competent jurisdiction in which such insolvency, bankruptcy, receivership, liquidation, reorganization, dissolution, winding up or similar case or proceeding is pending, or a certificate of the trustee in bankruptcy, liquidating trustee, custodian, receiver, assignee for the benefit of creditors, agent or other Person making such payment or distribution, delivered to the Trustee or to the Noteholders, for the purpose of ascertaining the Persons entitled to participate in such payment or distribution, the holders of Senior Indebtedness and other indebtedness of the Company, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article. ARTICLE 5 PARTICULAR COVENANTS OF THE COMPANY SECTION 5.01. PAYMENT OF PRINCIPAL, PREMIUM AND INTEREST. The Company covenants and agrees that it will duly and punctually pay or cause to be paid the principal of and premium, if any (including upon redemption pursuant to Article 3), and interest on each of the Notes at the places, at the respective times and in the manner provided herein and in the Notes. Each installment of interest on the Notes due on any semi-annual interest payment date may be paid either (i) by check mailed to the address of the Person entitled thereto as it appears in the Note register; or (ii) by transfer to an account maintained by such Person located in the United States if such Person has notified the Company of the details of such account at least seven (7) days prior to a scheduled interest payment date; PROVIDED that payments to the Depositary will be made by wire transfer of immediately available funds to the account of the Depositary or its nominee. SECTION 5.02. MAINTENANCE OF OFFICE OR AGENCY. The Company will maintain in The Borough of Manhattan, The City of New York, an office or agency where the Notes may be surrendered for registration of transfer or exchange or for presentation for payment or for conversion or redemption and where notices and demands to or upon the Company in respect of the Notes and this Indenture may be served. The Company will give prompt written notice to the Trustee of the location, and any change in the location, of such office or 32 agency not designated or appointed by the Trustee. If at any time the Company shall fail to maintain any such required office or agency or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the Corporate Trust Office. The Company hereby appoints the Trustee at its [Corporate Trust Office] its agent to receive all such presentations, surrenders, notices and demands. The Company may also from time to time designate co-registrars and one or more other offices or agencies where the Notes may be presented or surrendered for any or all such purposes and may from time to time rescind such designations. The Company will give prompt written notice to the Trustee of any such designation or rescission and of any change in the location of any such other office or agency. The Company hereby initially designates the Trustee as paying agent, Note registrar, Custodian and conversion agent. So long as the Trustee is the Note registrar, the Trustee agrees to mail, or cause to be mailed, the notices set forth in Section 8.10(a) and the third paragraph of Section 8.11. If co-registrars have been appointed in accordance with this Section, the Trustee shall mail such notices only to the Company and the holders of Notes it can identify from its records. SECTION 5.03. APPOINTMENTS TO FILL VACANCIES IN TRUSTEE'S OFFICE. The Company, whenever necessary to avoid or fill a vacancy in the office of Trustee, will appoint, in the manner provided in Section 8.10, a Trustee, so that there shall at all times be a Trustee hereunder. SECTION 5.04. PROVISIONS AS TO PAYING AGENT. (a) If the Company shall appoint a paying agent other than the Trustee, or if the Trustee shall appoint such a paying agent, it will cause such paying agent to execute and deliver to the Trustee an instrument in which such agent shall agree with the Trustee, subject to the provisions of this Section 5.04: (i) that it will hold all sums held by it as such agent for the payment of the principal of and premium, if any, or interest on the Notes (whether such sums have been paid to it by the Company or by any other obligor on the Notes) in trust for the benefit of the holders of the Notes; (ii) that it will give the Trustee notice of any failure by the Company (or by any other obligor on the Notes) to make any payment of 33 the principal of and premium, if any, or interest on the Notes when the same shall be due and payable; and (iii) that at any time during the continuance of an Event of Default, upon request of the Trustee, it will forthwith pay to the Trustee all sums so held in trust. The Company shall, on or before each due date of the principal of, premium, if any, or interest on the Notes, deposit with the paying agent a sum sufficient (in immediately available funds) to pay such principal, premium, if any, or interest, and (unless such paying agent is the Trustee) the Company will promptly notify the Trustee of any failure to take such action; PROVIDED that if such deposit is made on the due date, such deposit shall be received by the paying agent by 10:00 a.m. New York City time, on such date. (b) If the Company shall act as its own paying agent, it will, on or before each due date of the principal of, premium, if any, or interest on the Notes, set aside, segregate and hold in trust for the benefit of the holders of the Notes a sum sufficient to pay such principal, premium, if any, or interest so becoming due and will notify the Trustee of any failure to take such action and of any failure by the Company (or any other obligor under the Notes) to make any payment of the principal of, premium, if any, or interest on the Notes when the same shall become due and payable. (c) Anything in this Section 5.04 to the contrary notwithstanding, the Company may, at any time, for the purpose of obtaining a satisfaction and discharge of this Indenture, or for any other reason, pay or cause to be paid to the Trustee all sums held in trust by the Company or any paying agent hereunder as required by this Section 5.04, such sums to be held by the Trustee upon the trusts herein contained and upon such payment by the Company or any paying agent to the Trustee, the Company or such paying agent shall be released from all further liability with respect to such sums. (d) Anything in this Section 5.04 to the contrary notwithstanding, the agreement to hold sums in trust as provided in this Section 5.04 is subject to Sections 13.03 and 13.04. SECTION 5.05. EXISTENCE. Subject to Article 12, the Company will do or cause to be done all things necessary to preserve and keep in full force and effect its existence and rights (charter and statutory); PROVIDED that the Company shall not be required to preserve any such right if the Company shall determine that the preservation thereof is no longer desirable in the conduct of the business of the 34 Company and that the loss thereof is not disadvantageous in any material respect to the holders. SECTION 5.06. MAINTENANCE OF PROPERTIES. The Company will cause all properties used or useful in the conduct of its business or the business of any Significant Subsidiary to be maintained and kept in good condition, repair and working order except for ordinary wear and tear and supplied with all necessary equipment and will cause to be made all necessary repairs, renewals, replacements, betterments and improvements thereof, all as in the judgment of the Company may be necessary so that the business carried on in connection therewith may be properly conducted at all times; PROVIDED that nothing in this Section shall prevent the Company from discontinuing the operation or maintenance of any of such properties if such discontinuance is, in the judgment of the Company, desirable in the conduct of its business or the business of any Significant Subsidiary and not disadvantageous in any material respect to the holders. SECTION 5.07. PAYMENT OF TAXES AND OTHER CLAIMS. The Company will pay or discharge, or cause to be paid or discharged, before the same may become delinquent, (i) all taxes, assessments and governmental charges levied or imposed upon the Company or any Significant Subsidiary or upon the income, profits or property of the Company or any Significant Subsidiary, (ii) all claims for labor, materials and supplies which, if unpaid, might by law become a lien or charge upon the property of the Company or any Significant Subsidiary and (iii) all stamps and other duties, if any, which may be imposed by the United States or any political subdivision thereof or therein in connection with the issuance, transfer, exchange or conversion of any Notes or with respect to this Indenture (except to the extent this Indenture imposes liability therefor on a holder of Notes); PROVIDED that, in the case of clauses (i) and (ii), the Company shall not be required to pay or discharge or cause to be paid or discharged any such tax, assessment, charge or claim (A) if the failure to do so will not, in the aggregate, have a material adverse impact on the Company, or (B) if the amount, applicability or validity is being contested in good faith by appropriate proceedings. SECTION 5.08. STAY, EXTENSION AND USURY LAWS. The Company covenants (to the extent that it may lawfully do so) that it shall not at any time insist upon, plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay, extension or usury law or other law which would prohibit or forgive the Company from paying all or any portion of the principal of, premium, if any, or interest on the Notes as contemplated herein, wherever enacted, now or at any time hereafter in force, or which may affect the covenants or the performance of this Indenture, and the Company (to the extent it may lawfully do so) hereby 35 expressly waives all benefit or advantage of any such law, and covenants that it will not, by resort to any such law, hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted. SECTION 5.09. COMPLIANCE CERTIFICATE. The Company shall deliver to the Trustee, within one hundred twenty (120) days after the end of each fiscal year of the Company, a certificate signed by either the principal executive officer, principal financial officer or principal accounting officer of the Company, stating whether or not to the best knowledge of the signer thereof the Company is in default in the performance and observance of any of the terms, provisions and conditions of this Indenture (without regard to any period of grace or requirement of notice provided hereunder) and, if the Company shall be in default, specifying all such defaults and the nature and status thereof of which the signer may have knowledge. The Company will deliver to the Trustee, forthwith upon becoming aware of any default in the performance or observance of any covenant, agreement or condition contained in this Indenture, or any Event of Default, an Officers' Certificate specifying with particularity such default or Event of Default and further stating what action the Company has taken, is taking or proposes to take with respect thereto. Any notice required to be given under this Section 5.09 shall be delivered to the Trustee at its Corporate Trust Office. ARTICLE 6 NOTEHOLDERS' LISTS AND REPORTS BY THE COMPANY AND THE TRUSTEE SECTION 6.01. NOTEHOLDERS' LISTS. The Company covenants and agrees that it will furnish or cause to be furnished to the Trustee, semiannually, not more than fifteen (15) days after each February 1 and August 1 in each year beginning with February 1, 2000, and at such other times as the Trustee may request in writing, within thirty (30) days after receipt by the Company of any such request (or such lesser time as the Trustee may reasonably request in order to enable it to timely provide any notice to be provided by it hereunder), a list in such form as the Trustee may reasonably require of the names and addresses of the holders of Notes as of a date not more than fifteen (15) days (or such other date as the Trustee may reasonably request in order to so provide any such notices) prior to the time such information is furnished, except that no such list need be furnished 36 by the Company to the Trustee so long as the Trustee is acting as the sole Note registrar. SECTION 6.02. PRESERVATION AND DISCLOSURE OF LISTS. (a) The Trustee shall preserve, in as current a form as is reasonably practicable, all information as to the names and addresses of the holders of Notes contained in the most recent list furnished to it as provided in Section 6.01 or maintained by the Trustee in its capacity as Note registrar or co-registrar in respect of the Notes, if so acting. The Trustee may destroy any list furnished to it as provided in Section 6.01 upon receipt of a new list so furnished. (b) The rights of Noteholders to communicate with other holders of Notes with respect to their rights under this Indenture or under the Notes, and the corresponding rights and duties of the Trustee, shall be as provided by the Trust Indenture Act. (c) Every Noteholder, by receiving and holding the same, agrees with the Company and the Trustee that neither the Company nor the Trustee nor any agent of either of them shall be held accountable by reason of any disclosure of information as to names and addresses of holders of Notes made pursuant to the Trust Indenture Act. SECTION 6.03. REPORTS BY TRUSTEE. (a) Within sixty (60) days after January 31 of each year commencing with the year 2000, the Trustee shall transmit to holders of Notes such reports dated as of January 31 of the year in which such reports are made concerning the Trustee and its actions under this Indenture as may be required pursuant to the Trust Indenture Act at the times and in the manner provided pursuant thereto. (b) A copy of such report shall, at the time of such transmission to holders of Notes, be filed by the Trustee with each stock exchange and automated quotation system upon which the Notes are listed and with the Company. The Company will notify the Trustee in writing within a reasonable time when the Notes are listed on any stock exchange or automated quotation system. SECTION 6.04. REPORTS BY COMPANY. The Company shall file with the Trustee and the Commission, and transmit to holders of Notes, such information, documents and other reports and such summaries thereof, as may be required pursuant to the Trust Indenture Act at the times and in the manner provided pursuant to such Act; PROVIDED that any such information, documents or reports required to be filed with the Commission pursuant to Section 13 or 15(d) of the 37 Exchange Act shall be filed with the Trustee within fifteen (15) days after the same is so required to be filed with the Commission. Delivery of such reports, information and documents to the Trustee is for informational purposes only and the Trustee's receipt of such shall not constitute constructive notice of any information contained therein or determinable from information contained therein, including the Company's compliance with any of its covenants hereunder (as to which the Trustee is entitled to rely exclusively on Officers' Certificates). ARTICLE 7 REMEDIES OF THE TRUSTEE AND NOTEHOLDERS ON AN EVENT OF DEFAULT SECTION 7.01. EVENTS OF DEFAULT. In case one or more of the following Events of Default (whatever the reason for such Event of Default and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body) shall have occurred and be continuing: (a) default in the payment of any installment of interest upon any of the Notes as and when the same shall become due and payable, and continuance of such default for a period of thirty (30) days, whether or not such payment is permitted under Article 4 hereof; or (b) default in the payment of the principal of or premium, if any, on any of the Notes as and when the same shall become due and payable either at maturity or in connection with any redemption pursuant to Article 3, by acceleration or otherwise, whether or not such payment is permitted under Article 4 hereof; or (c) failure on the part of the Company duly to observe or perform any other of the covenants or agreements on the part of the Company in the Notes or in this Indenture (other than a covenant or agreement a default in whose performance or whose breach is elsewhere in this Section 7.01 specifically dealt with) continued for a period of sixty (60) days after the date on which written notice of such failure, requiring the Company to remedy the same, shall have been given to the Company by the Trustee, or to the Company and a Responsible Officer of the Trustee by the holders of at least twenty-five percent (25%) in aggregate principal amount of the Notes at the time outstanding determined in accordance with Section 9.04; or 38 (d) the Company shall commence a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of the property of the Company, or shall consent to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against it, or shall make a general assignment for the benefit of creditors, or shall fail generally to pay its debts as they become due; except that any dissolution, winding up or liquidation of the Company as contemplated by Section 12.02 of this Indenture will not be an Event of Default; or (e) an involuntary case or other proceeding shall be commenced against the Company seeking liquidation, reorganization or other relief with respect to it or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of the property of the Company, and such involuntary case or other proceeding shall remain undismissed and unstayed for a period of ninety (90) consecutive days; then, and in each and every such case (other than an Event of Default specified in Section 7.01(d) or (e) with respect to the Company), unless the principal of all of the Notes shall have already become due and payable, either the Trustee or the holders of not less than twenty-five percent (25%) in aggregate principal amount of the Notes then outstanding hereunder determined in accordance with Section 9.04, by notice in writing to the Company (and to the Trustee if given by Noteholders), may declare the principal of and premium, if any, on all the Notes and the interest accrued thereon to be due and payable immediately, and upon any such declaration the same shall become and shall be immediately due and payable, anything in this Indenture or in the Notes contained to the contrary notwithstanding. If an Event of Default specified in Section 7.01(d) or (e) with respect to the Company occurs, the principal of all the Notes and the interest accrued thereon shall be immediately and automatically due and payable without necessity of further action. This provision, however, is subject to the conditions that if, at any time after the principal of the Notes shall have been so declared due and payable, and before any judgment or decree for the payment of the monies due shall have been obtained or entered as hereinafter provided, the Company shall pay or shall deposit with the Trustee a sum sufficient to pay all matured installments of interest upon all Notes and the principal of and premium, if any, on any and all Notes which shall have become due otherwise than by acceleration (with interest on overdue installments of interest (to the extent that payment of such interest is enforceable under applicable law) and on such principal and premium, if any, at the rate borne by the Notes, to the date of such payment or 39 deposit) and amounts due to the Trustee pursuant to Section 8.06, and if any and all defaults under this Indenture, other than the nonpayment of principal of and premium, if any, and accrued interest on Notes which shall have become due by acceleration, shall have been cured or waived pursuant to Section 7.07--then and in every such case the holders of a majority in aggregate principal amount of the Notes then outstanding, by written notice to the Company and to the Trustee, may waive all defaults or Events of Default and rescind and annul such declaration and its consequences; but no such waiver or rescission and annulment shall extend to or shall affect any subsequent default or Event of Default, or shall impair any right consequent on any such subsequent Default or Event of Default. The Company shall notify a Responsible Officer of the Trustee, promptly upon becoming aware thereof, of any Event of Default. In case the Trustee shall have proceeded to enforce any right under this Indenture and such proceedings shall have been discontinued or abandoned because of such waiver or rescission and annulment or for any other reason or shall have been determined adversely to the Trustee, then and in every such case the Company, the holders of Notes, and the Trustee shall be restored respectively to their several positions and rights hereunder, and all rights, remedies and powers of the Company, the holders of Notes, and the Trustee shall continue as though no such proceeding had been taken. SECTION 7.02. PAYMENTS OF NOTES ON DEFAULT; SUIT THEREFOR. The Company covenants that (a) in case default shall be made in the payment of any installment of interest upon any of the Notes as and when the same shall become due and payable, and such default shall have continued for a period of thirty (30) days, or (b) in case default shall be made in the payment of the principal of or premium, if any, on any of the Notes as and when the same shall have become due and payable, whether at maturity of the Notes or in connection with any redemption, by or under this Indenture or otherwise--then, upon demand of the Trustee, the Company will pay to the Trustee, for the benefit of the holders of the Notes, the whole amount that then shall have become due and payable on all such Notes for principal and premium, if any, or interest, as the case may be, with interest upon the overdue principal and premium, if any, and (to the extent that payment of such interest is enforceable under applicable law) upon the overdue installments of interest at the rate borne by the Notes; and, in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, including reasonable compensation to the Trustee, its agents, attorneys and counsel, and any expenses or liabilities reasonably incurred by the Trustee hereunder other than through its negligence or bad faith. Until such demand by the Trustee, the Company may pay the principal of and premium, if any, and interest on the Notes to the registered holders, whether or not the Notes are overdue. 40 In case the Company shall fail forthwith to pay such amounts upon such demand, the Trustee, in its own name and as trustee of an express trust, shall be entitled and empowered to institute any actions or proceedings at law or in equity for the collection of the sums so due and unpaid, and may prosecute any such action or proceeding to judgment or final decree, and may enforce any such judgment or final decree against the Company or any other obligor on the Notes and collect in the manner provided by law out of the property of the Company or any other obligor on the Notes wherever situated the monies adjudged or decreed to be payable. In the case there shall be pending proceedings for the bankruptcy or for the reorganization of the Company or any other obligor on the Notes under Title 11 of the United States Code, or any other applicable law, or in case a receiver, assignee or trustee in bankruptcy or reorganization, liquidator, sequestrator or similar official shall have been appointed for or taken possession of the Company or such other obligor, the property of the Company or such other obligor, or in the case of any other judicial proceedings relative to the Company or such other obligor upon the Notes, or to the creditors or property of the Company or such other obligor, the Trustee, irrespective of whether the principal of the Notes shall then be due and payable as therein expressed or by declaration or otherwise and irrespective of whether the Trustee shall have made any demand pursuant to the provisions of this Section 7.02, shall be entitled and empowered, by intervention in such proceedings or otherwise, to file and prove a claim or claims for the whole amount of principal, premium, if any, and interest owing and unpaid in respect of the Notes, and, in case of any judicial proceedings, to file such proofs of claim and other papers or documents as may be necessary or advisable in order to have the claims of the Trustee and of the Noteholders allowed in such judicial proceedings relative to the Company or any other obligor on the Notes, its or their creditors, or its or their property, and to collect and receive any monies or other property payable or deliverable on any such claims, and to distribute the same after the deduction of any amounts due the Trustee under Section 8.06; and any receiver, assignee or trustee in bankruptcy or reorganization, liquidator, custodian or similar official is hereby authorized by each of the Noteholders to make such payments to the Trustee, and, in the event that the Trustee shall consent to the making of such payments directly to the Noteholders, to pay to the Trustee any amount due it for reasonable compensation, expenses, disbursements and advances, (including reasonable counsel fees incurred by it up to the date of such distribution). To the extent that such payment of reasonable compensation, expenses, advances and disbursements out of the estate in any such proceedings shall be denied for any reason, payment of the same shall be secured by a lien on, and shall be paid out of, any and all distributions, dividends, monies, securities and other property which the holders of the Notes may be entitled to receive in 41 such proceedings, whether in liquidation or under any plan of reorganization or arrangement or otherwise. All rights of action and of asserting claims under this Indenture, or under any of the Notes, may be enforced by the Trustee without the possession of any of the Notes, or the production thereof at any trial or other proceeding relative thereto, and any such suit or proceeding instituted by the Trustee shall be brought in its own name as trustee of an express trust, and any recovery of judgment shall, after provision for the payment of the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, be for the ratable benefit of the holders of the Notes. In any proceedings brought by the Trustee (and in any proceedings involving the interpretation of any provision of this Indenture to which the Trustee shall be a party) the Trustee shall be held to represent all the holders of the Notes, and it shall not be necessary to make any holders of the Notes parties to any such proceedings. SECTION 7.03. APPLICATION OF MONIES COLLECTED BY TRUSTEE. Any monies collected by the Trustee pursuant to this Article 7 shall be applied in the order following, at the date or dates fixed by the Trustee for the distribution of such monies, upon presentation of the several Notes, and stamping thereon the payment, if only partially paid, and upon surrender thereof, if fully paid: FIRST: To the payment of all amounts due the Trustee under Section 8.06; SECOND: Subject to the provisions of Article 4, in case the principal of the outstanding Notes shall not have become due and be unpaid, to the payment of interest on the Notes in default in the order of the maturity of the installments of such interest, with interest (to the extent that such interest has been collected by the Trustee) upon the overdue installments of interest at the rate borne by the Notes, such payments to be made ratably to the Persons entitled thereto; THIRD: Subject to the provisions of Article 4, in case the principal of the outstanding Notes shall have become due, by declaration or otherwise, and be unpaid to the payment of the whole amount then owing and unpaid upon the Notes for principal and premium, if any, and interest, with interest on the overdue principal and premium, if any (to the extent that such interest has been collected by the Trustee), and in case such monies shall be insufficient to pay in full the whole amounts so due and unpaid upon the Notes, then to the payment of such principal and 42 premium, if any, and interest without preference or priority of principal and premium, if any, over interest, or of interest over principal and premium, if any, or of any installment of interest over any other installment of interest, or of any Note over any other Note, ratably to the aggregate of such principal and premium, if any, and accrued and unpaid interest; and FOURTH: Subject to the provisions of Article 4, to the payment of the remainder, if any, to the Company or any other Person lawfully entitled thereto. SECTION 7.04. PROCEEDINGS BY NOTEHOLDER. No holder of any Note shall have any right by virtue of or by availing of any provision of this Indenture to institute any suit, action or proceeding in equity or at law upon or under or with respect to this Indenture, or for the appointment of a receiver, trustee, liquidator, custodian or other similar official, or for any other remedy hereunder, unless such holder previously shall have given to the Trustee written notice of an Event of Default and of the continuance thereof, as hereinbefore provided, and unless also the holders of at least a majority in aggregate principal amount of the Notes then outstanding shall have made written request upon the Trustee to institute such action, suit or proceeding in its own name as Trustee hereunder and shall have offered to the Trustee such indemnity as it may reasonably require against the costs, expenses and liabilities to be incurred therein or thereby, and the Trustee for sixty (60) days after its receipt of such notice, request and offer of indemnity, shall have neglected or refused to institute any such action, suit or proceeding and no direction inconsistent with such written request shall have been given to the Trustee pursuant to Section 7.07; it being understood and intended, and being expressly covenanted by the taker and holder of every Note with every other taker and holder and the Trustee, that no one or more holders of Notes shall have any right in any manner whatever by virtue of or by availing of any provision of this Indenture to affect, disturb or prejudice the rights of any other holder of Notes, or to obtain or seek to obtain priority over or preference to any other such holder, or to enforce any right under this Indenture, except in the manner herein provided and for the equal, ratable and common benefit of all holders of Notes (except as otherwise provided herein). For the protection and enforcement of this Section 7.04, each and every Noteholder and the Trustee shall be entitled to such relief as can be given either at law or in equity. Notwithstanding any other provision of this Indenture and any provision of any Note, the right of any holder of any Note to receive payment of the principal of and premium, if any (including upon redemption pursuant to Article 3), and accrued interest on such Note, on or after the respective due dates expressed in such Note or in the event of redemption, or to institute suit for the 43 enforcement of any such payment on or after such respective dates against the Company shall not be impaired or affected without the consent of such holder. Anything in this Indenture or the Notes to the contrary notwithstanding, the holder of any Note, without the consent of either the Trustee or the holder of any other Note, on its own behalf and for its own benefit, may enforce, and may institute and maintain any proceeding suitable to enforce, its rights of conversion as provided herein. SECTION 7.05. PROCEEDINGS BY TRUSTEE. In case of an Event of Default the Trustee may in its discretion proceed to protect and enforce the rights vested in it by this Indenture by such appropriate judicial proceedings as the Trustee shall deem most effectual to protect and enforce any of such rights, either by suit in equity or by action at law or by proceeding in bankruptcy or otherwise, whether for the specific enforcement of any covenant or agreement contained in this Indenture or in aid of the exercise of any power granted in this Indenture, or to enforce any other legal or equitable right vested in the Trustee by this Indenture or by law. SECTION 7.06. REMEDIES CUMULATIVE AND CONTINUING. Except as provided in Section 2.06, all powers and remedies given by this Article 7 to the Trustee or to the Noteholders shall, to the extent permitted by law, be deemed cumulative and not exclusive of any thereof or of any other powers and remedies available to the Trustee or the holders of the Notes, by judicial proceedings or otherwise, to enforce the performance or observance of the covenants and agreements contained in this Indenture, and no delay or omission of the Trustee or of any holder of any of the Notes to exercise any right or power accruing upon any default or Event of Default occurring and continuing as aforesaid shall impair any such right or power, or shall be construed to be a waiver of any such default or any acquiescence therein; and, subject to the provisions of Section 7.04, every power and remedy given by this Article 7 or by law to the Trustee or to the Noteholders may be exercised from time to time, and as often as shall be deemed expedient, by the Trustee or by the Noteholders. SECTION 7.07. DIRECTION OF PROCEEDINGS AND WAIVER OF DEFAULTS BY MAJORITY OF NOTEHOLDERS. The holders of a majority in aggregate principal amount of the Notes at the time outstanding determined in accordance with Section 9.04 shall have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred on the Trustee; PROVIDED that (a) such direction shall not be in conflict with any rule of law or with this Indenture, (b) the Trustee may take any other action deemed proper by the Trustee which is not inconsistent with such direction and (c) the Trustee may decline to take any action that would benefit 44 some Noteholder to the detriment of other Noteholders. The holders of a majority in aggregate principal amount of the Notes at the time outstanding determined in accordance with Section 9.04 may on behalf of the holders of all of the Notes waive any past default or Event of Default hereunder and its consequences except (i) a default in the payment of interest or premium, if any, on, or the principal of, the Notes, (ii) a failure by the Company to convert any Notes into Common Stock, (iii) a default in the payment of redemption price pursuant to Article 3 or (iv) a default in respect of a covenant or provisions hereof which under Article 11 cannot be modified or amended without the consent of the holders of all Notes then outstanding. Upon any such waiver, the Company, the Trustee and the holders of the Notes shall be restored to their former positions and rights hereunder; but no such waiver shall extend to any subsequent or other default or Event of Default or impair any right consequent thereon. Whenever any default or Event of Default hereunder shall have been waived as permitted by this Section 7.07, said default or Event of Default shall for all purposes of the Notes and this Indenture be deemed to have been cured and to be not continuing; but no such waiver shall extend to any subsequent or other default or Event of Default or impair any right consequent thereon. SECTION 7.08. NOTICE OF DEFAULTS. The Trustee shall, within ninety (90) days after a Responsible Officer of the Trustee has knowledge of the occurrence of a default, mail to all Noteholders, as the names and addresses of such holders appear upon the Note register, notice of all defaults known to a Responsible Officer, unless such defaults shall have been cured or waived before the giving of such notice; and PROVIDED that, except in the case of default in the payment of the principal of, or premium, if any, or interest on any of the Notes, the Trustee shall be protected in withholding such notice if and so long as a trust committee of directors and/or Responsible Officers of the Trustee in good faith determine that the withholding of such notice is in the interests of the Noteholders. SECTION 7.09. UNDERTAKING TO PAY COSTS. All parties to this Indenture agree, and each holder of any Note by his acceptance thereof shall be deemed to have agreed, that any court may, in its discretion, require, in any suit for the enforcement of any right or remedy under this Indenture, or in any suit against the Trustee for any action taken or omitted by it as Trustee, the filing by any party litigant in such suit of an undertaking to pay the costs of such suit and that such court may in its discretion assess reasonable costs, including reasonable attorneys' fees, against any party litigant in such suit, having due regard to the merits and good faith of the claims or defenses made by such party litigant; PROVIDED that the provisions of this Section 7.09 (to the extent permitted by law) shall not apply to any suit instituted by the Trustee, to any suit instituted by any Noteholder, or group of Noteholders, holding in the aggregate more than 25 percent in principal amount of the Notes at the time outstanding determined in accordance with 45 Section 9.04, or to any suit instituted by any Noteholder for the enforcement of the payment of the principal of or premium, if any, or interest on any Note on or after the due date expressed in such Note or to any suit for the enforcement of the right to convert any Note in accordance with the provisions of Article 15. ARTICLE 8 CONCERNING THE TRUSTEE SECTION 8.01. DUTIES AND RESPONSIBILITIES OF TRUSTEE. The Trustee, prior to the occurrence of an Event of Default and after the curing of all Events of Default which may have occurred, undertakes to perform such duties and only such duties as are specifically set forth in this Indenture. In case an Event of Default has occurred (which has not been cured or waived) the Trustee shall exercise such of the rights and powers vested in it by this Indenture, and use the same degree of care and skill in their exercise, as a prudent man would exercise or use under the circumstances in the conduct of his own affairs. No provision of this Indenture shall be construed to relieve the Trustee from liability for its own negligent action, its own negligent failure to act, its own willful misconduct, its own recklessness or its own bad faith, except that (a) prior to the occurrence of an Event of Default and after the curing or waiving of all Events of Default which may have occurred: (i) the duties and obligations of the Trustee shall be determined solely by the express provisions of this Indenture and the Trust Indenture Act, and the Trustee shall not be liable except for the performance of such duties and obligations as are specifically set forth in this Indenture and no implied covenants or obligations shall be read into this Indenture and the Trust Indenture Act against the Trustee; and (ii) in the absence of bad faith and willful misconduct on the part of the Trustee, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon any certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture; but, in the case of any such certificates or opinions which by any provisions hereof are specifically required to be furnished to the Trustee, the Trustee shall be under a duty to examine the same to determine whether or not they conform to the requirements of this Indenture; 46 (b) the Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer or Officers of the Trustee, unless the Trustee was negligent in ascertaining the pertinent facts; (c) the Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith in accordance with the written direction of the holders of not less than a majority in principal amount of the Notes at the time outstanding determined as provided in Section 9.04 relating to the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred upon the Trustee, under this Indenture; (d) whether or not therein provided, every provision of this Indenture relating to the conduct or affecting the liability of, or affording protection to, the Trustee shall be subject to the provisions of this Section; (e) the Trustee, as trustee, shall not be liable in respect of any payment (as to the correctness of amount, entitlement to receive or any other matters relating to payment) or notice effected by the Company or any paying agent or any records maintained by any co-registrar with respect to the Notes; and (f) if any party fails to deliver a notice relating to an event the fact of which, pursuant to this Indenture, requires notice to be sent to the Trustee, the Trustee may conclusively rely on its failure to receive such notice as reason to act as if no such event occurred. None of the provisions contained in this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur personal financial liability in the performance of any of its duties or in the exercise of any of its rights or powers, if there is reasonable ground for believing that the repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. SECTION 8.02. RELIANCE ON DOCUMENTS, OPINIONS, ETC. Except as otherwise provided in Section 8.01: (a) the Trustee may conclusively rely and shall be protected in acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, bond, debenture, note, coupon or other paper or document believed by it in good faith to be genuine and to have been signed or presented by the proper party or parties; 47 (b) any request, direction, order or demand of the Company mentioned herein shall be sufficiently evidenced by an Officers' Certificate (unless other evidence in respect thereof be herein specifically prescribed); and any resolution of the Board of Directors may be evidenced to the Trustee by a copy thereof certified by the Secretary or an Assistant Secretary of the Company; (c) the Trustee may consult with counsel of its selection and any advice of counsel or Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken or omitted by it hereunder in good faith and in accordance with such advice of counsel or Opinion of Counsel; (d) the Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request, order or direction of any of the Noteholders pursuant to the provisions of this Indenture, unless such Noteholders shall have offered to the Trustee security or indemnity reasonably satisfactory to the Trustee against the costs, expenses and liabilities which may be incurred therein or thereby; (e) the Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture or other paper or document, but the Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit, and, if the Trustee shall determine to make such further inquiry or investigation, it shall be entitled to examine the books, records and premises of the Company personally or by agent or attorney; and (f) the Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents or attorneys and the Trustee shall not be responsible for any misconduct or negligence on the part of any agent or attorney appointed by it with due care hereunder. SECTION 8.03. NO RESPONSIBILITY FOR RECITALS, ETC. The recitals contained herein and in the Notes (except in the Trustee's certificate of authentication or with respect to the Trustee's status) shall be taken as the statements of the Company, and the Trustee assumes no responsibility for the correctness of the same. The Trustee makes no representations as to the validity or sufficiency of this Indenture or of the Notes. The Trustee shall not be accountable for the use or application by the Company of any Notes or the proceeds of any Notes authenticated and delivered by the Trustee in conformity with the provisions of this Indenture. 48 SECTION 8.04. TRUSTEE, PAYING AGENTS, CONVERSION AGENTS OR REGISTRAR MAY OWN NOTES. The Trustee, any paying agent, any conversion agent or Note registrar, in its individual or any other capacity, may become the owner or pledgee of Notes with the same rights it would have if it were not Trustee, paying agent, conversion agent or Note registrar. SECTION 8.05. MONIES TO BE HELD IN TRUST. Subject to the provisions of Section 13.04 and Section 4.02, all monies received by the Trustee shall, until used or applied as herein provided, be held in trust for the purposes for which they were received. Money held by the Trustee in trust hereunder need not be segregated from other funds except to the extent required by law. The Trustee shall be under no liability for interest on any money received by it hereunder except as may be agreed from time to time by the Company and the Trustee. SECTION 8.06. COMPENSATION AND EXPENSES OF TRUSTEE. The Company covenants and agrees to pay to the Trustee from time to time, and the Trustee shall be entitled to, reasonable compensation for all services rendered by it hereunder in any capacity (which shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust) as mutually agreed to in writing between the Company and the Trustee, and the Company will pay or reimburse the Trustee upon its request for all reasonable expenses, disbursements and advances reasonably incurred or made by the Trustee in accordance with any of the provisions of this Indenture (including the reasonable compensation and the expenses and disbursements of its counsel and of all Persons not regularly in its employ) except any such expense, disbursement or advance as may arise from its negligence, willful misconduct, recklessness or bad faith. The Company also covenants to indemnify the Trustee (or any officer, director or employee of the Trustee) in any capacity under this Indenture and its agents and any authenticating agent for, and to hold them harmless against, any loss, liability or expense incurred without negligence, willful misconduct, recklessness, or bad faith on the part of the Trustee or such officers, directors, employees and agent or authenticating agent, as the case may be, and arising out of or in connection with the acceptance or administration of this trust or in any other capacity hereunder, including the reasonable costs and expenses of defending themselves against any claim of liability in the premises. The obligations of the Company under this Section 8.06 to compensate or indemnify the Trustee and to pay or reimburse the Trustee for reasonable expenses, disbursements and advances shall be secured by a lien prior to that of the Notes upon all property and funds held or collected by the Trustee as such, except funds held in trust for the benefit of the holders of particular Notes. The obligation of the Company under this Section shall survive the satisfaction and discharge of this Indenture. 49 When the Trustee and its agents and any authenticating agent incur expenses or render services after an Event of Default specified in Section 7.01(d) or (e) with respect to the Company occurs, the expenses and the compensation for the services are intended to constitute expenses of administration under any bankruptcy, insolvency or similar laws. SECTION 8.07. OFFICERS' CERTIFICATE AS EVIDENCE. Except as otherwise provided in Section 8.01, whenever in the administration of the provisions of this Indenture the Trustee shall deem it necessary or desirable that a matter be proved or established prior to taking or omitting any action hereunder, such matter (unless other evidence in respect thereof be herein specifically prescribed) may, in the absence of negligence, willful misconduct, recklessness, or bad faith on the part of the Trustee, be deemed to be conclusively proved and established by an Officers' Certificate delivered to the Trustee. SECTION 8.08. CONFLICTING INTERESTS OF TRUSTEE. If the Trustee has or shall acquire a conflicting interest within the meaning of the Trust Indenture Act, the Trustee shall either eliminate such conflict or resign, to the extent and in the manner provided by, and subject to the provisions of, the Trust Indenture Act and this Indenture. SECTION 8.09. ELIGIBILITY OF TRUSTEE. There shall at all times be a Trustee hereunder which shall be a Person that is eligible pursuant to the Trust Indenture Act to act as such and has a combined capital and surplus of at least $50,000,000 (or if such Person is a member of a bank holding company system, its bank holding company shall have a combined capital and surplus of at least $50,000,000). If such Person publishes reports of condition at least annually, pursuant to law or to the requirements of any supervising or examining authority, then for the purposes of this Section, the combined capital and surplus of such Person shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time the Trustee shall cease to be eligible in accordance with the provisions of this Section, it shall resign immediately in the manner and with the effect hereinafter specified in this Article. SECTION 8.10. RESIGNATION OR REMOVAL OF TRUSTEE. (a) The Trustee may at any time resign by giving written notice of such resignation to the Company and to the holders of Notes. Upon receiving such notice of resignation, the Company shall promptly appoint a successor trustee by written instrument, in duplicate, executed by order of the Board of Directors, one copy of which instrument shall be delivered to the resigning Trustee and one copy to the successor trustee. If no successor trustee shall have been so appointed and have accepted appointment sixty (60) days after the mailing of such notice of 50 resignation to the Noteholders, the resigning Trustee may petition any court of competent jurisdiction for the appointment of a successor trustee, or any Noteholder who has been a bona fide holder of a Note or Notes for at least six (6) months may, subject to the provisions of Section 7.09, on behalf of himself and all others similarly situated, petition any such court for the appointment of a successor trustee. Such court may thereupon, after such notice, if any, as it may deem proper and prescribe, appoint a successor trustee. (b) In case at any time any of the following shall occur: (i) the Trustee shall fail to comply with Section 8.08 after written request therefor by the Company or by any Noteholder who has been a bona fide holder of a Note or Notes for at least six (6) months; or (ii) the Trustee shall cease to be eligible in accordance with the provisions of Section 8.09 and shall fail to resign after written request therefor by the Company or by any such Noteholder; or (iii) the Trustee shall become incapable of acting, or shall be adjudged a bankrupt or insolvent, or a receiver of the Trustee or of its property shall be appointed, or any public officer shall take charge or control of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation; then, in any such case, the Company may remove the Trustee and appoint a successor trustee by written instrument, in duplicate, executed by order of the Board of Directors, one copy of which instrument shall be delivered to the Trustee so removed and one copy to the successor trustee, or, subject to the provisions of Section 7.09, any Noteholder who has been a bona fide holder of a Note or Notes for at least six (6) months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor trustee; PROVIDED that if no successor Trustee shall have been appointed and have accepted appointment sixty (60) days after either the Company or the Noteholders has removed the Trustee, the Trustee so removed may petition any court of competent jurisdiction for an appointment of a successor trustee. Such court may thereupon, after such notice, if any, as it may deem proper and prescribe, remove the Trustee and appoint a successor trustee. (c) The holders of a majority in aggregate principal amount of the Notes at the time outstanding may at any time remove the Trustee and nominate a successor trustee which shall be deemed appointed as successor trustee unless within ten (10) days after notice to the Company of such nomination the Company 51 objects thereto, in which case the Trustee so removed or any Noteholder, upon the terms and conditions and otherwise as in Section 8.10(a) provided, may petition any court of competent jurisdiction for an appointment of a successor trustee. (d) Any resignation or removal of the Trustee and appointment of a successor trustee pursuant to any of the provisions of this Section 8.10 shall become effective upon acceptance of appointment by the successor trustee as provided in Section 8.11. SECTION 8.11. ACCEPTANCE BY SUCCESSOR TRUSTEE. Any successor trustee appointed as provided in Section 8.10 shall execute, acknowledge and deliver to the Company and to its predecessor trustee an instrument accepting such appointment hereunder, and, if requested by the Company a supplemental indenture under which it assumes the rights, duties and obligations of the Trustee hereunder and thereupon the resignation or removal of the predecessor trustee shall become effective and such successor trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, duties and obligations of its predecessor hereunder, with like effect as if originally named as trustee herein; but, nevertheless, on the written request of the Company or of the successor trustee, the trustee ceasing to act shall, upon payment of any amounts then due it pursuant to the provisions of Section 8.06, execute and deliver an instrument transferring to such successor trustee all the rights and powers of the trustee so ceasing to act. Upon request of any such successor trustee, the Company shall execute any and all instruments in writing for more fully and certainly vesting in and confirming to such successor trustee all such rights and powers. Any trustee ceasing to act shall, nevertheless, retain a lien upon all property and funds held or collected by such trustee as such, except for funds held in trust for the benefit of holders of particular Notes, to secure any amounts then due it pursuant to the provisions of Section 8.06. No successor trustee shall accept appointment as provided in this Section 8.11 unless at the time of such acceptance such successor trustee shall be qualified under the provisions of Section 8.08 and be eligible under the provisions of Section 8.09. Upon acceptance of appointment by a successor trustee as provided in this Section 8.11, the Company (or the former trustee, at the written direction of the Company) shall mail or cause to be mailed notice of the succession of such trustee hereunder and of the address of the new corporate trust office to the holders of Notes at their addresses as they shall appear on the Note register. If the Company fails to mail such notice within ten (10) days after acceptance of appointment by the successor trustee, the successor trustee shall cause such notice to be mailed at the expense of the Company. 52 SECTION 8.12. SUCCESSION BY MERGER, ETC. Any corporation into which the Trustee may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Trustee shall be a party, or any corporation succeeding to all or substantially all of the corporate trust business of the Trustee (including any trust created by this Indenture), shall be the successor to the Trustee hereunder without the execution or filing of any paper or any further act on the part of any of the parties hereto, PROVIDED that in the case of any corporation succeeding to all or substantially all of the corporate trust business of the Trustee such corporation shall be and shall continue to be qualified under the provisions of Section 8.08 and eligible under the provisions of Section 8.09. In case at the time such successor to the Trustee shall succeed to the trusts created by this Indenture, any of the Notes shall have been authenticated but not delivered, any such successor to the Trustee may adopt the certificate of authentication of any predecessor trustee or authenticating agent appointed by such predecessor trustee, and deliver such Notes so authenticated; and in case at that time any of the Notes shall not have been authenticated, any successor to the Trustee or an authenticating agent appointed by such successor trustee may authenticate such Notes either in the name of any predecessor trustee hereunder or in the name of the successor trustee; and in all such cases such certificate of authentication shall have the full force which it is provided in the Notes or in this Indenture; PROVIDED that the right to adopt the certificate of authentication of any predecessor Trustee or authenticate Notes in the name of any predecessor Trustee shall apply only to its successor or successors by merger, conversion or consolidation. SECTION 8.13. PREFERENTIAL COLLECTION OF CLAIMS. If and when the Trustee shall be or become a creditor of the Company (or any other obligor upon the Notes), the Trustee shall be subject to the provisions of the Trust Indenture Act regarding the collection of the claims against the Company (or any such other obligor). SECTION 8.14. TRUSTEE'S APPLICATION FOR INSTRUCTIONS FROM THE COMPANY. Any application by the Trustee for written instructions from the Company (other than with regard to any action proposed to be taken or omitted to be taken by the Trustee that affects the rights of the holders of the Notes or holders of Senior Indebtedness under this Indenture, including, without limitation, under Article 4 hereof) may, at the option of the Trustee, set forth in writing any action proposed to be taken or omitted by the Trustee under this Indenture and the date on and/or after which such action shall be taken or such omission shall be effective. The Trustee shall not be liable for any action taken by, or omission of, the Trustee in accordance with a proposal included in such application on or after the date 53 specified in such application (which date shall not be less than five (5) Business Days after the date any officer of the Company actually receives such application, unless any such officer shall have consented in writing to any earlier date) unless prior to taking any such action (or the effective date in the case of an omission), the Trustee shall have received written instructions in response to such application specifying the action to be taken or omitted. ARTICLE 9 CONCERNING THE NOTEHOLDERS SECTION 9.01. ACTION BY NOTEHOLDERS. Whenever in this Indenture it is provided that the holders of a specified percentage in aggregate principal amount of the Notes may take any action (including the making of any demand or request, the giving of any notice, consent or waiver or the taking of any other action), the fact that at the time of taking any such action, the holders of such specified percentage have joined therein may be evidenced (a) by any instrument or any number of instruments of similar tenor executed by Noteholders in Person or by agent or proxy appointed in writing, or (b) by the record of the holders of Notes voting in favor thereof at any meeting of Noteholders duly called and held in accordance with the provisions of Article 10, or (c) by a combination of such instrument or instruments and any such record of such a meeting of Noteholders. Whenever the Company or the Trustee solicits the taking of any action by the holders of the Notes, the Company or the Trustee may fix in advance of such solicitation, a date as the record date for determining holders entitled to take such action. The record date shall be not more than fifteen (15) days prior to the date of commencement of solicitation of such action. SECTION 9.02. PROOF OF EXECUTION BY NOTEHOLDERS. Subject to the provisions of Sections 8.01, 8.02 and 10.05, proof of the execution of any instrument by a Noteholder or its agent or proxy shall be sufficient if made in accordance with such reasonable rules and regulations as may be prescribed by the Trustee or in such manner as shall be reasonably satisfactory to the Trustee. The holding of Notes shall be proved by the registry of such Notes or by a certificate of the Note registrar. The record of any Noteholders' meeting shall be proved in the manner provided in Section 10.06. SECTION 9.03. WHO ARE DEEMED ABSOLUTE OWNERS. The Company, the Trustee, any paying agent, any conversion agent and any Note registrar may deem 54 the Person in whose name such Note shall be registered upon the Note register to be, and may treat it as, the absolute owner of such Note (whether or not such Note shall be overdue and notwithstanding any notation of ownership or other writing thereon) for the purpose of receiving payment of or on account of the principal of, premium, if any, and interest on such Note, for conversion of such Note and for all other purposes; and neither the Company nor the Trustee nor any paying agent nor any conversion agent nor any Note registrar shall be affected by any notice to the contrary. All such payments so made to any holder for the time being, or upon his order, shall be valid, and, to the extent of the sum or sums so paid, effectual to satisfy and discharge the liability for monies payable upon any such Note. SECTION 9.04. COMPANY-OWNED NOTES DISREGARDED. In determining whether the holders of the requisite aggregate principal amount of Notes have concurred in any direction, consent, waiver or other action under this Indenture, Notes which are owned by the Company or any other obligor on the Notes or any Affiliate of the Company or any other obligor on the Notes shall be disregarded and deemed not to be outstanding for the purpose of any such determination; PROVIDED that for the purposes of determining whether the Trustee shall be protected in relying on any such direction, consent, waiver or other action only Notes which a Responsible Officer knows are so owned shall be so disregarded. Notes so owned which have been pledged in good faith may be regarded as outstanding for the purposes of this Section 9.04 if the pledgee shall establish to the satisfaction of the Trustee the pledgee's right to vote such Notes and that the pledgee is not the Company, any other obligor on the Notes or any Affiliate of the Company or any such other obligor. In the case of a dispute as to such right, any decision by the Trustee taken upon the advice of counsel shall be full protection to the Trustee. Upon request of the Trustee, the Company shall furnish to the Trustee promptly an Officers' Certificate listing and identifying all Notes, if any, known by the Company to be owned or held by or for the account of any of the above described Persons; and, subject to Section 8.01, the Trustee shall be entitled to accept such Officers' Certificate as conclusive evidence of the facts therein set forth and of the fact that all Notes not listed therein are outstanding for the purpose of any such determination. SECTION 9.05. REVOCATION OF CONSENTS; FUTURE HOLDERS BOUND. At any time prior to (but not after) the evidencing to the Trustee, as provided in Section 9.01, of the taking of any action by the holders of the percentage in aggregate principal amount of the Notes specified in this Indenture in connection with such action, any holder of a Note which is shown by the evidence to be included in the Notes the holders of which have consented to such action may, by filing written notice with the Trustee at its Corporate Trust Office and upon proof of holding as provided in Section 9.02, revoke such action so far as concerns such 55 Note. Except as aforesaid, any such action taken by the holder of any Note shall be conclusive and binding upon such holder and upon all future holders and owners of such Note and of any Notes issued in exchange or substitution therefor, irrespective of whether any notation in regard thereto is made upon such Note or any Note issued in exchange or substitution therefor. ARTICLE 10 NOTEHOLDERS' MEETINGS SECTION 10.01. PURPOSE OF MEETINGS. A meeting of Noteholders may be called at any time and from time to time pursuant to the provisions of this Article 10 for any of the following purposes: (a) to give any notice to the Company or to the Trustee or to give any directions to the Trustee permitted under this Indenture, or to consent to the waiving of any default or Event of Default hereunder and its consequences, or to take any other action authorized to be taken by Noteholders pursuant to any of the provisions of Article 7; (b) to remove the Trustee and nominate a successor trustee pursuant to the provisions of Article 8; (c) to consent to the execution of an indenture or indentures supplemental hereto pursuant to the provisions of Section 11.02; or (d) to take any other action authorized to be taken by or on behalf of the holders of any specified aggregate principal amount of the Notes under any other provision of this Indenture or under applicable law. SECTION 10.02. CALL OF MEETINGS BY TRUSTEE. The Trustee may at any time call a meeting of Noteholders to take any action specified in Section 10.01, to be held at such time and at such place as the Trustee shall determine. Notice of every meeting of the Noteholders, setting forth the time and the place of such meeting and in general terms the action proposed to be taken at such meeting and the establishment of any record date pursuant to Section 9.01, shall be mailed to holders of Notes at their addresses as they shall appear on the Note register. Such notice shall also be mailed to the Company. Such notices shall be mailed not less than twenty (20) nor more than ninety (90) days prior to the date fixed for the meeting. 56 Any meeting of Noteholders shall be valid without notice if the holders of all Notes then outstanding are present in person or by proxy or if notice is waived before or after the meeting by the holders of all Notes outstanding, and if the Company and the Trustee are either present by duly authorized representatives or have, before or after the meeting, waived notice. SECTION 10.03. CALL OF MEETINGS BY COMPANY OR NOTEHOLDERS. In case at any time the Company, pursuant to a resolution of its Board of Directors, or the holders of at least ten percent (10%) in aggregate principal amount of the Notes then outstanding, shall have requested the Trustee to call a meeting of Noteholders, by written request setting forth in reasonable detail the action proposed to be taken at the meeting, and the Trustee shall not have mailed the notice of such meeting within twenty (20) days after receipt of such request, then the Company or such Noteholders may determine the time and the place for such meeting and may call such meeting to take any action authorized in Section 10.01, by mailing notice thereof as provided in Section 10.02. SECTION 10.04. QUALIFICATIONS FOR VOTING. To be entitled to vote at any meeting of Noteholders a Person shall be a (a) holder of one or more Notes on the record date pertaining to such meeting or (b) Person appointed by an instrument in writing as proxy by a holder of one or more Notes on the record date pertaining to such meeting. The only Persons who shall be entitled to be present or to speak at any meeting of Noteholders shall be the Persons entitled to vote at such meeting and their counsel and any representatives of the Trustee and its counsel and any representatives of the Company and its counsel. SECTION 10.05. REGULATIONS. Notwithstanding any other provisions of this Indenture, the Trustee may make such reasonable regulations as it may deem advisable for any meeting of Noteholders, in regard to proof of the holding of Notes and of the appointment of proxies, and in regard to the appointment and duties of inspectors of votes, the submission and examination of proxies, certificates and other evidence of the right to vote, and such other matters concerning the conduct of the meeting as it shall think fit. The Trustee shall, by an instrument in writing, appoint a temporary chairman of the meeting, unless the meeting shall have been called by the Company or by Noteholders as provided in Section 10.03, in which case the Company or the Noteholders calling the meeting, as the case may be, shall in like manner appoint a temporary chairman. A permanent chairman and a permanent secretary of the meeting shall be elected by vote of the holders of a majority in principal amount of the Notes represented at the meeting and entitled to vote at the meeting. 57 Subject to the provisions of Section 9.04, at any meeting each Noteholder or proxyholder shall be entitled to one vote for each $1,000 principal amount of Notes held or represented by him; PROVIDED that no vote shall be cast or counted at any meeting in respect of any Note challenged as not outstanding and ruled by the chairman of the meeting to be not outstanding. The chairman of the meeting shall have no right to vote other than by virtue of Notes held by him or instruments in writing as aforesaid duly designating him as the proxy to vote on behalf of other Noteholders. Any meeting of Noteholders duly called pursuant to the provisions of Section 10.02 or 10.03 may be adjourned from time to time by the holders of a majority of the aggregate principal amount of Notes represented at the meeting, whether or not constituting a quorum, and the meeting may be held as so adjourned without further notice. SECTION 10.06. VOTING. The vote upon any resolution submitted to any meeting of Noteholders shall be by written ballot on which shall be subscribed the signatures of the holders of Notes or of their representatives by proxy and the principal amount of the Notes held or represented by them. The permanent chairman of the meeting shall appoint two inspectors of votes who shall count all votes cast at the meeting for or against any resolution and who shall make and file with the secretary of the meeting their verified written reports in duplicate of all votes cast at the meeting. A record in duplicate of the proceedings of each meeting of Noteholders shall be prepared by the secretary of the meeting and there shall be attached to said record the original reports of the inspectors of votes on any vote by ballot taken thereat and affidavits by one or more Persons having knowledge of the facts setting forth a copy of the notice of the meeting and showing that said notice was mailed as provided in Section 10.02 and Section 10.03. The record shall show the principal amount of the Notes voting in favor of or against any resolution. The record shall be signed and verified by the affidavits of the permanent chairman and secretary of the meeting and one of the duplicates shall be delivered to the Company and the other to the Trustee to be preserved by the Trustee, the latter to have attached thereto the ballots voted at the meeting. Any record so signed and verified shall be conclusive evidence of the matters therein stated. SECTION 10.07. NO DELAY OF RIGHTS BY MEETING. Nothing in this Article 10 contained shall be deemed or construed to authorize or permit, by reason of any call of a meeting of Noteholders or any rights expressly or impliedly conferred hereunder to make such call, any hindrance or delay in the exercise of any right or rights conferred upon or reserved to the Trustee or to the Noteholders under any of the provisions of this Indenture or of the Notes. 58 ARTICLE 11 SUPPLEMENTAL INDENTURES SECTION 11.01. SUPPLEMENTAL INDENTURES WITHOUT CONSENT OF NOTEHOLDERS. The Company, when authorized by the resolutions of the Board of Directors, and the Trustee may from time to time and at any time enter into an indenture or indentures supplemental hereto for one or more of the following purposes: (a) to make provision with respect to the conversion rights of the holders of Notes pursuant to the requirements of Section 15.06 and the redemption obligations of the Company pursuant to the requirements of Section 3.05(e); (b) subject to Article 4, to convey, transfer, assign, mortgage or pledge to the Trustee as security for the Notes, any property or assets; (c) to evidence the succession of another corporation to the Company, or successive successions, and the assumption by the successor corporation of the covenants, agreements and obligations of the Company pursuant to Article 12; (d) to add to the covenants of the Company such further covenants, restrictions or conditions as the Board of Directors and the Trustee shall consider to be for the benefit of the holders of Notes, and to make the occurrence, or the occurrence and continuance, of a default in any such additional covenants, restrictions or conditions a default or an Event of Default permitting the enforcement of all or any of the several remedies provided in this Indenture as herein set forth; PROVIDED that in respect of any such additional covenant, restriction or condition, such supplemental indenture may provide for a particular period of grace after default (which period may be shorter or longer than that allowed in the case of other defaults) or may provide for an immediate enforcement upon such default or may limit the remedies available to the Trustee upon such default; (e) to provide for the issuance under this Indenture of Notes in coupon form (including Notes registrable as to principal only) and to provide for exchangeability of such Notes with the Notes issued hereunder in fully registered form and to make all appropriate changes for such purpose; (f) to cure any ambiguity or to correct or supplement any provision contained herein or in any supplemental indenture which may be defective or inconsistent with any other provision contained herein or in any supplemental indenture, or to make such other provisions in regard to matters or questions 59 arising under this Indenture which shall not materially adversely affect the interests of the holders of the Notes; (g) to evidence and provide for the acceptance of appointment hereunder by a successor Trustee with respect to the Notes; or (h) to modify, eliminate or add to the provisions of this Indenture to such extent as shall be necessary to effect the qualifications of this Indenture under the Trust Indenture Act, or under any similar federal statute hereafter enacted. Upon the written request of the Company, accompanied by a copy of the resolutions of the Board of Directors certified by its Secretary or Assistant Secretary authorizing the execution of any supplemental indenture, the Trustee is hereby authorized to join with the Company in the execution of any such supplemental indenture, to make any further appropriate agreements and stipulations which may be therein contained and to accept the conveyance, transfer and assignment of any property thereunder, but the Trustee shall not be obligated to, but may in its discretion, enter into any supplemental indenture which affects the Trustee's own rights, duties or immunities under this Indenture or otherwise. Any supplemental indenture authorized by the provisions of this Section 11.01. may be executed by the Company and the Trustee without the consent of the holders of any of the Notes at the time outstanding, notwithstanding any of the provisions of Section 11.02. SECTION 11.02. SUPPLEMENTAL INDENTURES WITH CONSENT OF NOTEHOLDERS. With the consent (evidenced as provided in Article 9) of the holders of not less than a majority in aggregate principal amount of the Notes at the time outstanding, the Company, when authorized by the resolutions of the Board of Directors, and the Trustee may from time to time and at any time enter into an indenture or indentures supplemental hereto for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture or any supplemental indenture or of modifying in any manner the rights of the holders of the Notes; PROVIDED that no such supplemental indenture shall (i) extend the fixed maturity of any Note, or reduce the rate or extend the time of payment of interest thereon, or reduce the principal amount thereof or premium, if any, thereon, or reduce any amount payable on redemption thereof, or impair the right of any Noteholder to institute suit for the payment thereof, or make the principal thereof or interest or premium, if any, thereon payable in any coin or currency other than that provided in the Notes, or modify the provisions of this Indenture with respect to the subordination of the Notes in a manner adverse 60 to the Noteholders in any material respect, or change the obligation of the Company to redeem any Note upon the happening of a Fundamental Change in a manner adverse to the holder of Notes, or impair the right to convert the Notes into Common Stock subject to the terms set forth herein, including Section 15.06, in each case, without the consent of the holder of each Note so affected, or (ii) reduce the aforesaid percentage of Notes, the holders of which are required to consent to any such supplemental indenture, without the consent of the holders of all Notes then outstanding. Upon the written request of the Company, accompanied by a copy of the resolutions of the Board of Directors certified by its Secretary or Assistant Secretary authorizing the execution of any such supplemental indenture, and upon the filing with the Trustee of evidence of the consent of Noteholders as aforesaid, the Trustee shall join with the Company in the execution of such supplemental indenture unless such supplemental indenture affects the Trustee's own rights, duties or immunities under this Indenture or otherwise, in which case the Trustee may in is discretion, but shall not be obligated to, enter into such supplemental indenture. It shall not be necessary for the consent of the Noteholders under this Section 11.02 to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such consent shall approve the substance thereof. SECTION 11.03. EFFECT OF SUPPLEMENTAL INDENTURE. Any supplemental indenture executed pursuant to the provisions of this Article 11 shall comply with the Trust Indenture Act, as then in effect; PROVIDED that this Section 11.03 shall not require such supplemental indenture or the Trustee to be qualified under the Trust Indenture Act prior to the time such qualification is in fact required under the terms of the Trust Indenture Act or the Indenture has been qualified under the Trust Indenture Act, nor shall it constitute any admission or acknowledgment by any party to such supplemental indenture that any such qualification is required prior to the time such qualification is in fact required under the terms of the Trust Indenture Act or the Indenture has been qualified under the Trust Indenture Act. Upon the execution of any supplemental indenture pursuant to the provisions of this Article 11, this Indenture shall be and be deemed to be modified and amended in accordance therewith and the respective rights, limitation of rights, obligations, duties and immunities under this Indenture of the Trustee, the Company and the holders of Notes shall thereafter be determined, exercised and enforced hereunder subject in all respects to such modifications and amendments and all the terms and conditions of any such supplemental indenture shall be and be deemed to be part of the terms and conditions of this Indenture for any and all purposes. 61 SECTION 11.04. NOTATION ON NOTES. Notes authenticated and delivered after the execution of any supplemental indenture pursuant to the provisions of this Article 11 may bear a notation in form approved by the Trustee as to any matter provided for in such supplemental indenture. If the Company or the Trustee shall so determine, new Notes so modified as to conform, in the opinion of the Trustee and the Board of Directors, to any modification of this Indenture contained in any such supplemental indenture may, at the Company's expense, be prepared and executed by the Company, authenticated by the Trustee (or an authenticating agent duly appointed by the Trustee pursuant to Section 16.11) and delivered in exchange for the Notes then outstanding, upon surrender of such Notes then outstanding. SECTION 11.05. EVIDENCE OF COMPLIANCE OF SUPPLEMENTAL INDENTURE TO BE FURNISHED TRUSTEE. Prior to entering into any supplemental indenture, the Trustee may request an Officers' Certificate and an Opinion of Counsel as conclusive evidence that any supplemental indenture executed pursuant hereto complies with the requirements of this Article 11. ARTICLE 12 CONSOLIDATION, MERGER, SALE, CONVEYANCE AND LEASE SECTION 12.01. COMPANY MAY CONSOLIDATE ETC. ON CERTAIN TERMS. Subject to the provisions of Section 12.02, nothing contained in this Indenture or in any of the Notes shall prevent any consolidation or merger of the Company with or into any other corporation or corporations (whether or not affiliated with the Company), or successive consolidations or mergers in which the Company or its successor or successors shall be a party or parties, or shall prevent any sale, conveyance or lease (or successive sales, conveyances or leases) of all or substantially all of the property of the Company, to any other corporation (whether or not affiliated with the Company), authorized to acquire and operate the same and which shall be organized under the laws of the United States of America, any state thereof or the District of Columbia; PROVIDED that upon any such consolidation, merger, sale, conveyance or lease, the due and punctual payment of the principal of and premium, if any, and interest on all of the Notes, according to their tenor, and the due and punctual performance and observance of all of the covenants and conditions of this Indenture to be performed by the Company, shall be expressly assumed, by supplemental indenture satisfactory in form to the Trustee, executed and delivered to the Trustee by the corporation (if other than the Company) formed by such consolidation, or into which the Company shall have been merged, or by the corporation which shall have 62 acquired or leased such property, and such supplemental indenture shall provide for the applicable conversion rights set forth in Section 15.06. SECTION 12.02. SUCCESSOR CORPORATION TO BE SUBSTITUTED. In case of any such consolidation, merger, sale, conveyance or lease and upon the assumption by the successor corporation, by supplemental indenture, executed and delivered to the Trustee and satisfactory in form to the Trustee, of the due and punctual payment of the principal of and premium, if any, and interest on all of the Notes and the due and punctual performance and observance of all of the covenants and conditions of this Indenture to be performed by the Company, such successor corporation shall succeed to and be substituted for the Company, with the same effect as if it had been named herein as the party of the first part. Such successor corporation thereupon may cause to be signed, and may issue either in its own name or in the name of the Company any or all of the Notes issuable hereunder which theretofore shall not have been signed by the Company and delivered to the Trustee; and, upon the order of such successor corporation instead of the Company and subject to all the terms, conditions and limitations in this Indenture prescribed, the Trustee shall authenticate and shall deliver, or cause to be authenticated and delivered, any Notes which previously shall have been signed and delivered by the officers of the Company to the Trustee for authentication, and any Notes which such successor corporation thereafter shall cause to be signed and delivered to the Trustee for that purpose. All the Notes so issued shall in all respects have the same legal rank and benefit under this Indenture as the Notes theretofore or thereafter issued in accordance with the terms of this Indenture as though all of such Notes had been issued at the date of the execution hereof. In the event of any such consolidation, merger, sale, conveyance or lease, the person named as the "COMPANY" in the first paragraph of this Indenture or any successor which shall thereafter have become such in the manner prescribed in this Article 12 may be dissolved, wound up and liquidated at any time thereafter and such person shall be released from its liabilities as obligor and maker of the Notes and from its obligations under this Indenture. In case of any such consolidation, merger, sale, conveyance or lease, such changes in phraseology and form (but not in substance) may be made in the Notes thereafter to be issued as may be appropriate. SECTION 12.03. OPINION OF COUNSEL TO BE GIVEN TRUSTEE. The Trustee shall receive an Officers' Certificate and an Opinion of Counsel as conclusive evidence that any such consolidation, merger, sale, conveyance or lease and any such assumption complies with the provisions of this Article 12. 63 ARTICLE 13 SATISFACTION AND DISCHARGE OF INDENTURE SECTION 13.01. DISCHARGE OF INDENTURE. When (a) the Company shall deliver to the Trustee for cancellation all Notes theretofore authenticated (other than any Notes which have been destroyed, lost or stolen and in lieu of or in substitution for which other Notes shall have been authenticated and delivered) and not theretofore canceled, or (b) all the Notes not theretofore canceled or delivered to the Trustee for cancellation shall have become due and payable, or are by their terms to become due and payable within one year or are to be called for redemption within one year under arrangements satisfactory to the Trustee for the giving of notice of redemption, and the Company shall deposit with the Trustee, in trust, funds sufficient to pay at maturity or upon redemption of all of the Notes (other than any Notes which shall have been mutilated, destroyed, lost or stolen and in lieu of or in substitution for which other Notes shall have been authenticated and delivered) not theretofore canceled or delivered to the Trustee for cancellation, including principal and premium, if any, and interest due or to become due to such date of maturity or redemption date, as the case may be, accompanied by a verification report, as to the sufficiency of the deposited amount, from an independent certified accountant or other financial professional satisfactory to the Trustee, and if the Company shall also pay or cause to be paid all other sums payable hereunder by the Company, then this Indenture shall cease to be of further effect (except as to (i) remaining rights of registration of transfer, substitution and exchange and conversion of Notes, (ii) rights hereunder of Noteholders to receive payments of principal of and premium, if any, and interest on, the Notes and the other rights, duties and obligations of Noteholders, as beneficiaries hereof with respect to the amounts, if any, so deposited with the Trustee and (iii) the rights, obligations and immunities of the Trustee hereunder), and the Trustee, on written demand of the Company accompanied by an Officers' Certificate and an Opinion of Counsel as required by Section 16.05 and at the cost and expense of the Company, shall execute proper instruments acknowledging satisfaction of and discharging this Indenture; the Company, however, hereby agreeing to reimburse the Trustee for any costs or expenses thereafter reasonably and properly incurred by the Trustee and to compensate the Trustee for any services thereafter reasonably and properly rendered by the Trustee in connection with this Indenture or the Notes. SECTION 13.02. DEPOSITED MONIES TO BE HELD IN TRUST BY TRUSTEE. Subject to Section 13.04, all monies deposited with the Trustee pursuant to Section 13.01, provided such deposit was not in violation of Article 4, shall be held in trust for the sole benefit of the Noteholders and not to be subject to the subordination provisions of Article 4, and such monies shall be applied by the 64 Trustee to the payment, either directly or through any paying agent (including the Company if acting as its own paying agent), to the holders of the particular Notes for the payment or redemption of which such monies have been deposited with the Trustee, of all sums due and to become due thereon for principal and interest and premium, if any. SECTION 13.03. PAYING AGENT TO REPAY MONIES HELD. Upon the satisfaction and discharge of this Indenture, all monies then held by any paying agent of the Notes (other than the Trustee) shall, upon written request of the Company, be repaid to it or paid to the Trustee, and thereupon such paying agent shall be released from all further liability with respect to such monies. SECTION 13.04. RETURN OF UNCLAIMED MONIES. Subject to the requirements of applicable law, any monies deposited with or paid to the Trustee for payment of the principal of, premium, if any, or interest on Notes and not applied but remaining unclaimed by the holders of Notes for two years after the date upon which the principal of, premium, if any, or interest on such Notes, as the case may be, shall have become due and payable, shall be repaid to the Company by the Trustee on demand and all liability of the Trustee shall thereupon cease with respect to such monies; and the holder of any of the Notes shall thereafter look only to the Company for any payment which such holder may be entitled to collect unless an applicable abandoned property law designates another Person. SECTION 13.05. REINSTATEMENT. If the Trustee or the paying agent is unable to apply any money in accordance with Section 13.02 by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, the Company's obligations under this Indenture and the Notes shall be revived and reinstated as though no deposit had occurred pursuant to Section 13.01 until such time as the Trustee or the paying agent is permitted to apply all such money in accordance with Section 13.02; PROVIDED that if the Company makes any payment of interest or premium on or principal of any Note following the reinstatement of its obligations, the Company shall be subrogated to the rights of the holders of such Notes to receive such payment from the money held by the Trustee or paying agent. 65 ARTICLE 14 IMMUNITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS AND DIRECTORS SECTION 14.01. INDENTURE AND NOTES SOLELY CORPORATE OBLIGATIONS. No recourse for the payment of the principal of or premium, if any, or interest on any Note, or for any claim based thereon or otherwise in respect thereof, and no recourse under or upon any obligation, covenant or agreement of the Company in this Indenture or in any supplemental indenture or in any Note, or because of the creation of any indebtedness represented thereby, shall be had against any incorporator, stockholder, employee, agent, officer, or director or subsidiary, past, present or future, of the Company or of any successor corporation, either directly or through the Company or any successor corporation, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise; it being expressly understood that all such liability is hereby expressly waived and released as a condition of, and as a consideration for, the execution of this Indenture and the issue of the Notes. ARTICLE 15 CONVERSION OF NOTES SECTION 15.01. RIGHT TO CONVERT. Subject to and upon compliance with the provisions of this Indenture, including without limitation Article 4, the holder of any Note shall have the right, at its option, at any time after original issuance thereof through the close of business on August 1, 2006 (except that, with respect to any Note or portion of a Note which shall be called for redemption, such right shall terminate, except as provided in Section 15.02, Section 3.02 or Section 3.04, at the close of business on the Business Day next preceding the date fixed for redemption of such Note or portion of a Note unless the Company shall default in payment due upon redemption thereof) to convert the principal amount of any such Note, or any portion of such principal amount which is $1,000 or an integral multiple thereof, into that number of fully paid and non-assessable shares of Common Stock (as such shares shall then be constituted) obtained by dividing the principal amount of the Note or portion thereof surrendered for conversion by the Conversion Price in effect at such time, by surrender of the Note so to be converted in whole or in part in the manner provided, together with any required funds, in Section 15.02. A Note in respect of which a holder is exercising its option to require redemption upon a Fundamental Change pursuant to Section 3.05 may be converted only if such holder withdraws its election to exercise in accordance with Section 3.05. A holder of Notes is not entitled to any rights of a holder of Common Stock until such holder has converted his Notes to 66 Common Stock, and only to the extent such Notes are deemed to have been converted to Common Stock under this Article 15. SECTION 15.02. EXERCISE OF CONVERSION PRIVILEGE; ISSUANCE OF COMMON STOCK ON CONVERSION; NO ADJUSTMENT FOR INTEREST OR DIVIDENDS. In order to exercise the conversion privilege with respect to any Note in definitive form, the holder of any such Note to be converted in whole or in part shall surrender such Note, duly endorsed, at an office or agency maintained by the Company pursuant to Section 5.02, accompanied by the funds, if any, required by this Section 15.02, and shall give written notice of conversion in the form provided on the Notes (or such other notice which is acceptable to the Company) to the office or agency that the holder elects to convert such Note or the portion thereof specified in said notice. Such notice shall also state the name or names (with address or addresses) in which the certificate or certificates for shares of Common Stock which shall be issuable on such conversion shall be issued, and shall be accompanied by transfer taxes, if required pursuant to Section 15.07. Each such Note surrendered for conversion shall, unless the shares issuable on conversion are to be issued in the same name as the registration of such Note, be duly endorsed by, or be accompanied by instruments of transfer in form satisfactory to the Company duly executed by, the holder or his duly authorized attorney. In order to exercise the conversion privilege with respect to any interest in a Global Note, the beneficial holder must complete, or cause to be completed, the appropriate instruction form for conversion pursuant to the Depository's book-entry conversion program, deliver, or cause to be delivered, by book-entry delivery an interest in such Global Note, furnish appropriate endorsements and transfer documents if required by the Company or the Trustee or conversion agent, and pay the funds, if any, required by this Section 15.02 and any transfer taxes if required pursuant to Section 15.07. As promptly as practicable after satisfaction of the requirements for conversion set forth above, the Company shall issue and shall deliver to such holder at the office or agency maintained by the Company for such purpose pursuant to Section 5.02, a certificate or certificates for the number of full shares of Common Stock issuable upon the conversion of such Note or portion thereof in accordance with the provisions of this Article and a check or cash in respect of any fractional interest in respect of a share of Common Stock arising upon such conversion, as provided in Section 15.03. In case any Note of a denomination greater than $1,000 shall be surrendered for partial conversion, and subject to Section 2.03, the Company shall execute and the Trustee shall authenticate and deliver to the holder of the Note so surrendered, without charge to him, a new Note or Notes in authorized denominations in an aggregate principal amount equal to the unconverted portion of the surrendered Note. 67 Each conversion shall be deemed to have been effected as to any such Note (or portion thereof) on the date on which the requirements set forth above in this Section 15.02 have been satisfied as to such Note (or portion thereof), and the Person in whose name any certificate or certificates for shares of Common Stock shall be issuable upon such conversion shall be deemed to have become on said date the holder of record of the shares represented thereby; PROVIDED that any such surrender on any date when the stock transfer books of the Company shall be closed shall constitute the Person in whose name the certificates are to be issued as the record holder thereof for all purposes on the next succeeding day on which such stock transfer books are open, but such conversion shall be at the Conversion Price in effect on the date upon which such Note shall be surrendered. Any Note or portion thereof surrendered for conversion during the period from the close of business on the record date for any interest payment date to the close of business on the Business Day next preceding the following interest payment date that has not been called for redemption during such period, shall be accompanied by payment, in immediately available funds or other funds acceptable to the Company, of an amount equal to the interest otherwise payable on such interest payment date on the principal amount being converted; PROVIDED that no such payment need be made to the extent any overdue interest shall exist at the time of conversion with respect to any such Note or portion thereof. Except as provided above in this Section 15.02, no payment or other adjustment shall be made for interest accrued on any Note converted or for dividends on any shares issued upon the conversion of such Note as provided in this Article. Upon the conversion of an interest in a Global Note, the Trustee (or other conversion agent appointed by the Company), or the Custodian at the direction of the Trustee (or other conversion agent appointed by the Company), shall make a notation on such Global Note as to the reduction in the principal amount represented thereby. The Company shall notify the Trustee in writing of any conversions of Notes effected through any conversion agent other than the Trustee. SECTION 15.03. CASH PAYMENTS IN LIEU OF FRACTIONAL SHARES. No fractional shares of Common Stock or scrip representing fractional shares shall be issued upon conversion of Notes. If more than one Note shall be surrendered for conversion at one time by the same holder, the number of full shares which shall be issuable upon conversion shall be computed on the basis of the aggregate principal amount of the Notes (or specified portions thereof to the extent permitted hereby) so surrendered. If any fractional share of stock would be issuable upon the conversion of any Note or Notes, the Company shall make an adjustment and payment therefor in cash at the current market price thereof to the holder of Notes. The current market price of a share of Common Stock shall be 68 the Closing Price on the last Trading Day immediately preceding the day on which the Notes (or specified portions thereof) are deemed to have been converted. SECTION 15.04. CONVERSION PRICE. The conversion price shall be as specified in the form of Note (herein called the "CONVERSION PRICE") attached as Exhibit A hereto, subject to adjustment as provided in this Article 15. SECTION 15.05. ADJUSTMENT OF CONVERSION PRICE. The Conversion Price shall be adjusted from time to time by the Company as follows: (a) In case the Company shall hereafter pay a dividend or make a distribution to all holders of the outstanding Common Stock in shares of Common Stock, the Conversion Price in effect at the opening of business on the date following the date fixed for the determination of stockholders entitled to receive such dividend or other distribution shall be reduced by multiplying such Conversion Price by a fraction of which the numerator shall be the number of shares of Common Stock outstanding at the close of business on the date fixed for such determination and the denominator shall be the sum of such number of shares and the total number of shares constituting such dividend or other distribution, such reduction to become effective immediately after the opening of business on the day following the date fixed for such determination. The Company will not pay any dividend or make any distribution on shares of Common Stock held in the treasury of the Company. If any dividend or distribution of the type described in this Section 15.05(a) is declared but not so paid or made, the Conversion Price shall not be adjusted pursuant hereto. (b) In case the Company shall issue rights or warrants to all holders of its outstanding shares of Common Stock entitling them (for a period expiring within forty-five (45) days after the date fixed for determination of stockholders entitled to receive such rights or warrants) to subscribe for or purchase shares of Common Stock at a price per share less than the Current Market Price (as defined below) on the date fixed for determination of stockholders entitled to receive such rights or warrants, the Conversion Price shall be reduced so that the Conversion Price shall equal the price determined by multiplying the Conversion Price in effect immediately prior to the date fixed for determination of stockholders entitled to receive such rights or warrants by a fraction of which the numerator shall be the number of shares of Common Stock outstanding at the close of business on the date fixed for determination of stockholders entitled to receive such rights and warrants plus the number of shares which the aggregate offering price of the total number of shares so offered would purchase at such Current Market Price, and of which the denominator shall be the number of shares of Common Stock outstanding on the date fixed for determination of stockholders 69 entitled to receive such rights and warrants plus the total number of additional shares of Common Stock offered for subscription or purchase. Such adjustment shall be successively made whenever any such rights and warrants are issued, and shall become effective immediately after the opening of business on the day following the date fixed for determination of stockholders entitled to receive such rights or warrants. To the extent that shares of Common Stock are not delivered after the expiration of such rights or warrants, the Conversion Price shall be readjusted to the Conversion Price which would then be in effect had the adjustments made upon the issuance of such rights or warrants been made on the basis of delivery of only the number of shares of Common Stock actually delivered. If such rights or warrants are not so issued, the Conversion Price shall not be adjusted pursuant hereto. In determining whether any rights or warrants entitle the holders to subscribe for or purchase shares of Common Stock at less than such Current Market Price, and in determining the aggregate offering price of such shares of Common Stock, there shall be taken into account any consideration received by the Company for such rights or warrants, the value of such consideration, if other than cash, to be determined by the Board of Directors. (c) In case outstanding shares of Common Stock shall be subdivided into a greater number of shares of Common Stock, the Conversion Price in effect at the opening of business on the day following the day upon which such subdivision becomes effective shall be proportionately reduced, and conversely, in case outstanding shares of Common Stock shall be combined into a smaller number of shares of Common Stock, the Conversion Price in effect at the opening of business on the day following the day upon which such combination becomes effective shall be proportionately increased, such reduction or increase, as the case may be, to become effective immediately after the opening of business on the day following the day upon which such subdivision or combination becomes effective. (d) In case the Company shall, by dividend or otherwise, distribute to all holders of its Common Stock shares of any class of capital stock of the Company (other than any dividends or distributions to which Section 15.05(a) applies) or evidences of its indebtedness or assets (including securities, but excluding any rights or warrants referred to in Section 15.05(b), and excluding any dividend or distribution (x) paid exclusively in cash or (y) referred to in Section 15.05(a) (any of the foregoing hereinafter in this Section 15.05(d) called the "SECURITIES")), then, in each such case (unless the Company elects to reserve such Securities for distribution to the Noteholders upon the conversion of the Notes so that any such holder converting Notes will receive upon such conversion, in addition to the shares of Common Stock to which such holder is entitled, the amount and kind of such Securities which such holder would have received if such holder had converted its Notes into Common Stock immediately prior to the Record Date (as defined in Section 15.05(h) for such distribution of the Securities)), the 70 Conversion Price shall be reduced so that the Conversion Price shall be equal to the price determined by multiplying the Conversion Price in effect on the Record Date with respect to such distribution by a fraction of which the numerator shall be the Current Market Price per share of the Common Stock on such Record Date less the fair market value (as determined by the Board of Directors, whose determination shall be conclusive, and described in a resolution of the Board if Directors) on the Record Date of the portion of the Securities so distributed applicable to one share of Common Stock and the denominator shall be the Current Market Price per share of the Common Stock on the Record Date, such reduction to become effective immediately prior to the opening of business on the day following such Record Date; PROVIDED that if the then fair market value (as so determined) of the portion of the Securities so distributed applicable to one share of Common Stock is equal to or greater than the Current Market Price of the Common Stock on the Record Date, in lieu of the foregoing adjustment, adequate provision shall be made so that each Noteholder shall have the right to receive upon conversion the amount of Securities such holder would have received had such holder converted each Note on the Record Date. If such dividend or distribution is not so paid or made, the Conversion Price shall again be adjusted to be the Conversion Price which would then be in effect if such dividend or distribution had not been declared. If the Board of Directors determines the fair market value of any distribution for purposes of this Section 15.05(d) by reference to the actual or when issued trading market for any securities, it must in doing so consider the prices in such market over the same period used in computing the Current Market Price of the Common Stock. If the Company implements a stockholders' rights plan ("RIGHTS PLAN"), such Rights Plan must provide that, subject to customary exceptions, upon conversion of the Notes the holders will receive, in addition to the Common Stock issuable upon conversion, such rights whether or not such rights have separated from the Common Stock at the time of such conversion. Rights or warrants distributed by the Company to all holders of Common Stock entitling the holders thereof to subscribe for or purchase shares of the Company's capital stock (either initially or under certain circumstances), which rights or warrants, until the occurrence of a specified event or events ("TRIGGER EVENT"): (i) are deemed to be transferred with such shares of Common Stock; (ii) are not exercisable; and (iii) are also issued in respect of future issuances of Common Stock, shall be deemed not to have been distributed for purposes of this Section 15.05 (and no adjustment to the Conversion Price under this Section 15.05 or otherwise will be required or made) until the occurrence of the earliest Trigger Event, whereupon such rights and warrants shall be deemed to have been distributed and an appropriate adjustment (if any is required) to the Conversion Price at the time of such Trigger Event shall be made under this 71 Section 15.05(d). If any such right or warrant, including any such existing rights or warrants distributed prior to the date of this Indenture, are subject to events, upon the occurrence of which such rights or warrants become exercisable to purchase different securities, evidences of indebtedness or other assets, then the date of the occurrence of any and each such event shall be deemed to be the date of distribution and record date with respect to new rights or warrants with such rights (and a termination or expiration of the existing rights or warrants without exercise by any of the holders thereof). In addition, in the event of any distribution (or deemed distribution) of rights or warrants, or any Trigger Event or other event (of the type described in the preceding sentence) with respect thereto that was counted for purposes of calculating a distribution amount for which an adjustment to the Conversion Price under this Section 15.05 was made, (1) in the case of any such rights or warrants which shall all have been redeemed or repurchased without exercise by any holders thereof, the Conversion Price shall be readjusted upon such final redemption or repurchase to give effect to such distribution or Trigger Event, as the case may be, as though it were a cash distribution, equal to the per share redemption or repurchase price received by a holder or holders of Common Stock with respect to such rights or warrants (assuming such holder had retained such rights or warrants), made to all holders of Common Stock as of the date of such redemption or repurchase, and (2) in the case of such rights or warrants which shall have expired or been terminated without exercise by any holders thereof, the Conversion Price shall be readjusted as if such rights and warrants had not been issued. For purposes of this Section 15.05(d) and Sections 15.05(a) and (b), any dividend or distribution to which this Section 15.05(d) is applicable that also includes shares of Common Stock, or rights or warrants to subscribe for or purchase shares of Common Stock (or both), shall be deemed instead to be (1) a dividend or distribution of the evidences of indebtedness, assets or shares of capital stock other than such shares of Common Stock or rights or warrants (and any Conversion Price reduction required by this Section 15.05(d) with respect to such dividend or distribution shall then be made) immediately followed by (2) a dividend or distribution of any such shares of Common Stock or such rights or warrants (and any further Conversion Price reduction required by Sections 15.05(a) and (b) with respect to such dividend or distribution shall then be made), except (A) the Record Date of such dividend or distribution shall be substituted as "the date fixed for the determination of stockholders entitled to receive such dividend or other distribution" and "the date fixed for such determination" within the meaning of Sections 15.05(a) and (b) and (B) any shares of Common Stock included in such dividend or distribution shall not be deemed "outstanding at the close of business on the date fixed for such determination" within the meaning of Section 15.05(a). 72 (e) In case the Company shall, by dividend or otherwise, distribute to all holders of its Common Stock cash (excluding (x) any quarterly cash dividend on the Common Stock to the extent the aggregate cash dividend per share of Common Stock in any fiscal quarter does not exceed the greater of (A) the amount per share of Common Stock of the next preceding quarterly cash dividend on the Common Stock to the extent that such preceding quarterly dividend did not require any adjustment of the Conversion Price pursuant to this Section 15.05(e) (as adjusted to reflect subdivisions or combinations of the Common Stock), and (B) 3.75% of the arithmetic average of the Closing Price (determined as set forth in Section 15.05(h)) during the ten Trading Days (as defined in Section 15.05(h)) immediately prior to the date of declaration of such dividend, and (y) any dividend or distribution in connection with the liquidation, dissolution or winding up of the Company, whether voluntary or involuntary), then, in such case, the Conversion Price shall be reduced so that the same shall equal the price determined by multiplying the Conversion Price in effect immediately prior to the close of business on the Record Date for such cash distribution by a fraction of which the numerator shall be the Current Market Price of the Common Stock on the Record Date less the amount of cash so distributed (and not excluded as provided above) applicable to one share of Common Stock and the denominator shall be the Current Market Price of the Common Stock on the Record Date, such reduction to be effective immediately prior to the opening of business on the day following the Record Date; PROVIDED that if the portion of the cash so distributed applicable to one share of Common Stock is equal to or greater than the Current Market Price of the Common Stock on the Record Date, in lieu of the foregoing adjustment, adequate provision shall be made so that each Noteholder shall have the right to receive upon conversion the amount of cash such holder would have received had such holder converted each Note on the Record Date. If such dividend or distribution is not so paid or made, the Conversion Price shall again be adjusted to be the Conversion Price which would then be in effect if such dividend or distribution had not been declared. If any adjustment is required to be made as set forth in this Section 15.05(e) as a result of a distribution that is a quarterly dividend, such adjustment shall be based upon the amount by which such distribution exceeds the amount of the quarterly cash dividend permitted to be excluded pursuant hereto. If an adjustment is required to be made as set forth in this Section 15.05(e) above as a result of a distribution that is not a quarterly dividend, such adjustment shall be based upon the full amount of the distribution. (f) In case a tender or exchange offer made by the Company or any Subsidiary for all or any portion of the Common Stock shall expire and such tender or exchange offer (as amended upon the expiration thereof) shall require the payment to stockholders of consideration per share of Common Stock having a fair market value (as determined by the Board of Directors, whose determination shall be conclusive and described in a resolution of the Board of Directors) that as 73 of the last time (the "EXPIRATION TIME") tenders or exchanges may be made pursuant to such tender or exchange offer (as it may be amended) exceeds the Current Market Price of the Common Stock on the Trading Day next succeeding the Expiration Time, the Conversion Price shall be reduced so that the same shall equal the price determined by multiplying the Conversion Price in effect immediately prior to the Expiration Time by a fraction of which the numerator shall be the number of shares of Common Stock outstanding (including any tendered or exchanged shares) on the Expiration Time multiplied by the Current Market Price of the Common Stock on the Trading Day next succeeding the Expiration Time and the denominator shall be the sum of (x) the fair market value (determined as aforesaid) of the aggregate consideration payable to stockholders based on the acceptance (up to any maximum specified in the terms of the tender or exchange offer) of all shares validly tendered or exchanged and not withdrawn as of the Expiration Time (the shares deemed so accepted, up to any such maximum, being referred to as the "PURCHASED SHARES") and (y) the product of the number of shares of Common Stock outstanding (less any Purchased Shares) on the Expiration Time and the Current Market Price of the Common Stock on the Trading Day next succeeding the Expiration Time, such reduction to become effective immediately prior to the opening of business on the day following the Expiration Time. If the Company is obligated to purchase shares pursuant to any such tender or exchange offer, but the Company is permanently prevented by applicable law from effecting any such purchases or all such purchases are rescinded, the Conversion Price shall again be adjusted to be the Conversion Price which would then be in effect if such tender or exchange offer had not been made. (g) In case of a tender or exchange offer made by a Person other than the Company or any Subsidiary for an amount which increases the offeror's ownership of Common Stock to more than twenty-five percent (25%) of the Common Stock outstanding and shall involve the payment by such Person of consideration per share of Common Stock having a fair market value (as determined by the Board of Directors, whose determination shall be conclusive, and described in a resolution of the Board of Directors) at the last time (the "OFFER EXPIRATION TIME") tenders or exchanges may be made pursuant to such tender or exchange offer (as it shall have been amended) that exceeds the Current Market Price of the Common Stock on the Trading Day next succeeding the Offer Expiration Time, and in which, as of the Offer Expiration Time the Board of Directors is not recommending rejection of the offer, the Conversion Price shall be reduced so that the same shall equal the price determined by multiplying the Conversion Price in effect immediately prior to the Offer Expiration Time by a fraction of which the numerator shall be the number of shares of Common Stock outstanding (including any tendered or exchanged shares) on the Offer Expiration Time multiplied by the Current Market Price of the Common Stock on the Trading Day next succeeding the Offer Expiration Time and the denominator 74 shall be the sum of (x) the fair market value (determined as aforesaid) of the aggregate consideration payable to stockholders based on the acceptance (up to any maximum specified in the terms of the tender or exchange offer) of all shares validly tendered or exchanged and not withdrawn as of the Offer Expiration Time (the shares deemed so accepted, up to any such maximum, being referred to as the "ACCEPTED PURCHASED SHARES") and (y) the product of the number of shares of Common Stock outstanding (less any Accepted Purchased Shares) on the Offer Expiration Time and the Current Market Price of the Common Stock on the Trading Day next succeeding the Offer Expiration Time, such reduction to become effective immediately prior to the opening of business on the day following the Offer Expiration Time. If such Person is obligated to purchase shares pursuant to any such tender or exchange offer, but such Person is prevented by applicable law from effecting any such purchases or all such purchases are rescinded, the Conversion Price shall again be adjusted to be the Conversion Price which would then be in effect if such tender or exchange offer had not been made. Notwithstanding the foregoing, the adjustment described in this Section 15.05(g) shall not be made if, as of the Offer Expiration Time, the offering documents with respect to such offer disclose a plan or intention to cause the Company to engage in or otherwise involve the Company engaging in any transaction described in Article 12. (h) For purposes of this Section 15.05, the following terms shall have the meaning indicated: (i) "CLOSING PRICE" with respect to any securities on any day means the closing sale price regular way on such day or, in case no such sale takes place on such day, the average of the reported closing bid and asked prices, regular way, in each case on the New York Stock Exchange, or, if such security is not listed or admitted to trading on such Exchange, on the principal national security exchange or quotation system on which such security is quoted or listed or admitted to trading, or, if not quoted or listed or admitted to trading on any national securities exchange or quotation system, the average of the closing bid and asked prices of such security on the over-the-counter market on the day in question as reported by the National Quotation Bureau Incorporated, or a similar generally accepted reporting service, or if not so available, in such manner as furnished by any New York Stock Exchange member firm selected from time to time by the Board of Directors for that purpose, or a price determined in good faith by the Board of Directors or, to the extent permitted by applicable law, a duly authorized committee thereof, whose determination shall be conclusive. 75 (ii) For purposes of any computation under Section 15.05(b), (d) or (e), "CURRENT MARKET PRICE" means the average of the daily Closing Prices per share of Common Stock for the ten consecutive Trading Days immediately prior to the date in question; PROVIDED that (1) if the "ex" date (as hereinafter defined) for any event (other than the issuance or distribution requiring such computation) that requires an adjustment to the Conversion Price pursuant to Section 15.05(a), (b), (c), (d), (e), (f) or (g) occurs during such ten consecutive Trading Days, the Closing Price for each Trading Day prior to the "ex" date for such other event shall be adjusted by multiplying such Closing Price by the same fraction by which the Conversion Price is so required to be adjusted as a result of such other event, (2) if the "ex" date for any event (other than the issuance or distribution requiring such computation) that requires an adjustment to the Conversion Price pursuant to Section 15.05(a), (b), (c), (d), (e), (f) or (g) occurs on or after the "ex" date for the issuance or distribution requiring such computation and prior to the date in question, the Closing Price for each Trading Day on and after the "ex" date for such other event shall be adjusted by multiplying such Closing Price by the reciprocal of the fraction by which the Conversion Price is so required to be adjusted as a result of such other event, and (3) if the "ex" date for the issuance or distribution requiring such computation is prior to the date in question, after taking into account any adjustment required pursuant to clause (1) or (2) of this proviso, the Closing Price for each Trading Day on or after such "ex" date shall be adjusted by adding thereto the amount of any cash and the fair market value (as determined by the Board of Directors or, to the extent permitted by applicable law, a duly authorized committee thereof in a manner consistent with any determination of such value for purposes of Section 15.05(d), (f) or (g), whose determination shall be conclusive and described in a resolution of the Board of Directors or such duly authorized committee thereof, as the case may be) of the evidences of indebtedness, shares of capital stock or assets being distributed applicable to one share of Common Stock as of the close of business on the day before such "ex" date. For purposes of any computation under Section 15.05(f) or (g), the CURRENT MARKET PRICE of the Common Stock on any date shall be deemed to be the average of the daily Closing Prices per share of Common Stock for such day and the next two succeeding Trading Days; PROVIDED that if the "ex" date for any event (other than the tender or exchange offer requiring such computation) that requires an adjustment to the Conversion Price pursuant to Section 15.05(a), (b), (c), (d), (e), (f) or (g) occurs on or after the Expiration Time or Offer Expiration Time, as the case may be, for the tender or exchange offer requiring such computation and before the 76 end of the averaging period used to calculate the Current Market Price, the Closing Price for each Trading Day on and after the "ex" date for such other event shall be adjusted by multiplying such Closing Price by the reciprocal of the fraction by which the Conversion Price is so required to be adjusted as a result of such other event. For purposes of the definition of Current Market Price, the term "EX" date, (1) when used with respect to any issuance or distribution, means the first date on which the Common Stock trades regular way on the relevant exchange or in the relevant market from which the Closing Price was obtained without the right to receive such issuance or distribution, (2) when used with respect to any subdivision or combination of shares of Common Stock, means the first date on which the Common Stock trades regular way on such exchange or in such market after the time at which such subdivision or combination becomes effective, and (3) when used with respect to any tender or exchange offer means the first date on which the Common Stock trades regular way on such exchange or in such market after the last time tenders or exchanges may be made pursuant to such tender or exchange offer. (iii) "FAIR MARKET VALUE" means the amount which a willing buyer would pay a willing seller in an arm's length transaction. (iv) "RECORD DATE" means, with respect to any dividend, distribution or other transaction or event in which the holders of Common Stock have the right to receive any cash, securities or other property or in which the Common Stock (or other applicable security) is exchanged for or converted into any combination of cash, securities or other property, the date fixed for determination of stockholders entitled to receive such cash, securities or other property (whether such date is fixed by the Board of Directors or by statute, contract or otherwise). (v) "TRADING DAY" means (x) if the applicable security is listed or admitted for trading on the New York Stock Exchange or another national security exchange, a day on which the New York Stock Exchange or such other national security exchange is open for business or (y) if the applicable security is quoted on the Nasdaq National Market, a day on which trades may be made thereon or (z) if the applicable security is not so listed, admitted for trading or quoted, any day other than a Saturday or Sunday or a day on which banking institutions in the State of New York are authorized or obligated by law or executive order to close. 77 (i) The Company may make such reductions in the Conversion Price, in addition to those required by Sections 15.05(a), (b), (c), (d), (e), (f) or (g) as the Board of Directors considers to be advisable to avoid or diminish any income tax to holders of Common Stock or rights to purchase Common Stock resulting from any subdivision of stock, dividend or distribution of stock or securities convertible into or exchangeable for stock, (or rights to acquire stock) or from any event treated as such for income tax purposes. To the extent permitted by applicable law, the Company from time to time may reduce the Conversion Price by any amount for any period of time if the period is at least twenty (20) days, the reduction is irrevocable during the period and the Board of Directors shall have made a determination that such reduction would be in the best interests of the Company, which determination shall be conclusive. Whenever the Conversion Price is reduced pursuant to the preceding sentence, the Company shall mail to holders of record of the Notes a notice of the reduction at least fifteen (15) days prior to the date the reduced Conversion Price takes effect, and such notice shall state the reduced Conversion Price and the period during which it will be in effect. (j) No adjustment in the Conversion Price under any provision of this Section 15.05 shall be required unless such adjustment would require an increase or decrease of at least one percent (1%) in such price; PROVIDED that any adjustments which by reason of this Section 15.05(j) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Article 15 shall be made by the Company and shall be made to the nearest cent or to the nearest one-hundredth (1/100) of a share, as the case may be. Notwithstanding the other premises of this Section 15.05, no adjustment need be made for rights to purchase Common Stock pursuant to a Company plan for reinvestment of dividends or other distributions or interest. To the extent the Notes become convertible into cash, assets, property or securities (other than capital stock of the Company), no adjustment need be made thereafter as to the cash, assets, property or such securities. Interest will not accrue on the cash. (k) Whenever the Conversion Price is adjusted as herein provided, the Company shall promptly file with the Trustee and any conversion agent other than the Trustee an Officers' Certificate setting forth the Conversion Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment. Promptly after delivery of such certificate, the Company shall prepare a notice of such adjustment of the Conversion Price setting forth the adjusted Conversion Price and the date on which each adjustment becomes effective and shall mail such notice to the holder of each Note at his last address appearing on the Note register provided for in Section 2.05 of this Indenture, 78 within twenty (20) days after execution thereof. Failure to deliver such notice shall not affect the legality or validity of any such adjustment. (l) In any case in which this Section 15.05 provides that an adjustment shall become effective immediately after a record date for an event, the Company may defer until the occurrence of such event (i) issuing to the holder of any Note converted after such record date and before the occurrence of such event the additional shares of Common Stock issuable upon such conversion by reason of the adjustment required by such event over and above the Common Stock issuable upon such conversion before giving effect to such adjustment and (ii) paying to such holder any amount in cash in lieu of any fraction pursuant to Section 15.03. If the event does not in fact occur, no additional distribution shall be required, as contemplated by this Section 15.05. (m) For purposes of this Section 15.05, the number of shares of Common Stock at any time outstanding shall not include shares held in the treasury of the Company but shall include shares issuable in respect of scrip certificates issued in lieu of fractions of shares of Common Stock. The Company will not pay any dividend or make any distribution on shares of Common Stock held in the treasury of the Company. SECTION 15.06. EFFECT OF RECLASSIFICATION, CONSOLIDATION, MERGER OR SALE. If any of the following events occur, namely (i) any reclassification or change of the outstanding shares of Common Stock (other than a subdivision or combination to which Section 15.05(c) applies), (ii) any consolidation, merger or combination of the Company with another corporation as a result of which holders of Common Stock shall be entitled to receive stock, securities or other property or assets (including cash) with respect to or in exchange for such Common Stock, or (iii) any sale or conveyance of the properties and assets of the Company as, or substantially as, an entirety to any other corporation as a result of which holders of Common Stock shall be entitled to receive stock, securities or other property or assets (including cash) with respect to or in exchange for such Common Stock, then the Company or the successor or purchasing corporation, as the case may be, shall execute with the Trustee a supplemental indenture (which shall comply with the Trust Indenture Act as in force at the date of execution of such supplemental indenture) providing that such Note shall be convertible into the kind and amount of shares of stock and other securities or property or assets (including cash) receivable upon such reclassification, change, consolidation, merger, combination, sale or conveyance by a holder of a number of shares of Common Stock issuable upon conversion of such Notes (assuming, for such purposes, a sufficient number of authorized shares of Common Stock available to convert all such Notes) immediately prior to such reclassification, change, consolidation, merger, combination, sale or conveyance assuming such holder of Common Stock did not 79 exercise his rights of election, if any, as to the kind or amount of securities, cash or other property receivable upon such consolidation, merger, statutory exchange, sale or conveyance (PROVIDED that, if the kind or amount of securities, cash or other property receivable upon such consolidation, merger, statutory exchange, sale or conveyance is not the same for each share of Common Stock in respect of which such rights of election shall not have been exercised ("NON-ELECTING SHARE"), then for the purposes of this Section 15.06 the kind and amount of securities, cash or other property receivable upon such consolidation, merger, statutory exchange, sale or conveyance for each non-electing share shall be deemed to be the kind and amount so receivable per share by a plurality of the non-electing shares). Such supplemental indenture shall provide for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Article. The Company shall cause notice of the execution of such supplemental indenture to be mailed to each holder of Notes, at its address appearing on the Note register provided for in Section 2.05 of this Indenture, within twenty (20) days after execution thereof. Failure to deliver such notice shall not affect the legality or validity of such supplemental indenture. The above provisions of this Section shall similarly apply to successive reclassifications, changes, consolidations, mergers, combinations, sales and conveyances. Notwithstanding the premises of Section 15.05, if this Section 15.06 applies to any event or occurrence, Section 15.05 shall not apply. SECTION 15.07. TAXES ON SHARES ISSUED. The issue of stock certificates on conversions of Notes shall be made without charge to the converting Noteholder for any tax in respect of the issue thereof. The Company shall not, however, be required to pay any tax which may be payable in respect of any transfer involved in the issue and delivery of stock in any name other than that of the holder of any Note converted, and the Company shall not be required to issue or deliver any such stock certificate unless and until the Person or Persons requesting the issue thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid. SECTION 15.08. RESERVATION OF SHARES; SHARES TO BE FULLY PAID; COMPLIANCE WITH GOVERNMENTAL REQUIREMENTS; LISTING OF COMMON STOCK. The Company shall provide, free from preemptive rights, out of its authorized but unissued shares or shares held in treasury, sufficient shares of Common Stock to provide for the conversion of the Notes from time to time as such Notes are presented for conversion. 80 Before taking any action which would cause an adjustment reducing the Conversion Price below the then par value, if any, of the shares of Common Stock issuable upon conversion of the Notes, the Company will take all corporate action which may, in the opinion of its counsel, be necessary in order that the Company may validly and legally issue shares of such Common Stock at such adjusted Conversion Price. The Company covenants that all shares of Common Stock which may be issued upon conversion of Notes will upon issue be fully paid and non-assessable by the Company and free from all unpaid taxes, liens and charges with respect to the issue thereof. The Company covenants that if any shares of Common Stock to be provided for the purpose of conversion of Notes hereunder require registration with or approval of any governmental authority under any federal or state law before such shares may be validly issued upon conversion, the Company will in good faith and as expeditiously as possible endeavor to secure such registration or approval, as the case may be. The Company further covenants that if at any time the Common Stock shall be listed on the Nasdaq National Market or any other national securities exchange or automated quotation system the Company will, if permitted by the rules of such exchange or automated quotation system, list and keep listed, so long as the Common Stock shall be so listed on such exchange or automated quotation system, all Common Stock issuable upon conversion of the Notes; PROVIDED that if rules of such exchange or automated quotation system permit the Company to defer the listing of such Common Stock until the first conversion of the Notes into Common Stock in accordance with the provisions of this Indenture, the Company covenants to list such Common Stock issuable upon conversion of the Notes in accordance with the requirements of such exchange or automated quotation system at such time. SECTION 15.09. RESPONSIBILITY OF TRUSTEE. The Trustee and any other conversion agent shall not at any time be under any duty or responsibility to any holder of Notes to determine the Conversion Price or whether any facts exist which may require any adjustment of the Conversion Price, or with respect to the nature or extent or calculation of any such adjustment when made, or with respect to the method employed, or herein or in any supplemental indenture provided to be employed, in making the same. The Trustee and any other conversion agent shall not be accountable with respect to the validity or value (or the kind or amount) of any shares of Common Stock, or of any securities or property, which may at any time be issued or delivered upon the conversion of any Note; and the Trustee and any other conversion agent make no representations with respect 81 thereto. Neither the Trustee nor any conversion agent shall be responsible for any failure of the Company to issue, transfer or deliver any shares of Common Stock or stock certificates or other securities or property or cash upon the surrender of any Note for the purpose of conversion or to comply with any of the duties, responsibilities or covenants of the Company contained in this Article. Without limiting the generality of the foregoing, neither the Trustee nor any conversion agent shall be under any responsibility to determine the correctness of any provisions contained in any supplemental indenture entered into pursuant to Section 15.06 relating either to the kind or amount of shares of stock or securities or property (including cash) receivable by Noteholders upon the conversion of their Notes after any event referred to in such Section 15.06 or to any adjustment to be made with respect thereto, but, subject to the provisions of Section 8.01, may accept as conclusive evidence of the correctness of any such provisions, and shall be protected in relying upon, the Officers' Certificate (which the Company shall be obligated to file with the Trustee prior to the execution of any such supplemental indenture) with respect thereto. SECTION 15.10. NOTICE TO HOLDERS PRIOR TO CERTAIN ACTIONS. In case: (a) the Company shall declare a dividend (or any other distribution) on its Common Stock that would require an adjustment in the Conversion Price pursuant to Section 15.05; or (b) the Company shall authorize the granting to the holders of all or substantially all of its Common Stock of rights or warrants to subscribe for or purchase any share of any class or any other rights or warrants; or (c) of any reclassification or reorganization of the Common Stock of the Company (other than a subdivision or combination of its outstanding Common Stock, or a change in par value, or from par value to no par value, or from no par value to par value), or of any consolidation or merger to which the Company is a party and for which approval of any stockholders of the Company is required, or of the sale or transfer of all or substantially all of the assets of the Company or any Significant Subsidiary; or (d) of the voluntary or involuntary dissolution, liquidation or winding up of the Company or any Significant Subsidiary; the Company shall cause to be filed with the Trustee and to be mailed to each holder of Notes at its address appearing on the Note register provided for in Section 2.05 of this Indenture, as promptly as possible but in any event at least fifteen (15) days prior to the applicable date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, 82 distribution or rights or warrants, or, if a record is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such dividend, distribution or rights are to be determined, or (y) the date on which such reclassification, consolidation, merger, sale, transfer, dissolution, liquidation or winding up is expected to become effective or occur, and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their Common Stock for securities or other property deliverable upon such reclassification, consolidation, merger, sale, transfer, dissolution, liquidation or winding up. Failure to give such notice, or any defect therein, shall not affect the legality or validity of such dividend, distribution, reclassification, consolidation, merger, sale, transfer, dissolution, liquidation or winding up. ARTICLE 16 MISCELLANEOUS PROVISIONS SECTION 16.01. PROVISIONS BINDING ON COMPANY'S SUCCESSORS. All the covenants, stipulations, promises and agreements by the Company contained in this Indenture shall bind its successors and assigns whether so expressed or not. SECTION 16.02. OFFICIAL ACTS BY SUCCESSOR CORPORATION. Any act or proceeding by any provision of this Indenture authorized or required to be done or performed by any board, committee or officer of the Company shall and may be done and performed with like force and effect by the like board, committee or officer of any corporation that shall at the time be the lawful sole successor of the Company. SECTION 16.03. ADDRESSES FOR NOTICES, ETC. Any notice or demand which by any provision of this Indenture is required or permitted to be given or served by the Trustee or by the holders of Notes on the Company shall be deemed to have been sufficiently given or made, for all purposes, if given or served by being deposited postage prepaid by registered or certified mail in a post office letter box addressed (until another address is filed by the Company with the Trustee) to priceline.com Incorporated, Five High Ridge Park, Stamford, Connecticut 06905, Attention: Vice President, General Counsel and Secretary. Any notice, direction, request or demand hereunder to or upon the Trustee shall be deemed to have been sufficiently given or made, for all purposes, if given or served by being deposited postage prepaid by registered or certified mail in a post office letter box addressed to the Corporate Trust Office, which office is, at the date as of which this Indenture is dated, located at Wilmington Trust Company, Rodney Square North, 1100 North Market Street, Wilmington, Delaware 19890. 83 The Trustee, by notice to the Company, may designate additional or different addresses for subsequent notices or communications. Any notice or communication mailed to a Noteholder shall be mailed to him by first class mail, postage prepaid, at his address as it appears on the Note register and shall be sufficiently given to him if so mailed within the time prescribed. Failure to mail a notice or communication to a Noteholder or any defect in it shall not affect its sufficiency with respect to other Noteholders. If a notice or communication is mailed in the manner provided above, it is duly given, whether or not the addressee receives it. SECTION 16.04. GOVERNING LAW. This Indenture and each Note shall be deemed to be a contract made under the laws of the State of New York, and for all purposes shall be construed in accordance with and governed by the laws of the State of New York. SECTION 16.05. EVIDENCE OF COMPLIANCE WITH CONDITIONS PRECEDENT; CERTIFICATES TO TRUSTEE. Upon any application or demand by the Company to the Trustee to take any action under any of the provisions of this Indenture, the Company shall furnish to the Trustee an Officers' Certificate stating that all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with, and an Opinion of Counsel stating that, in the opinion of such counsel, all such conditions precedent have been complied with. Each certificate or opinion provided for in this Indenture and delivered to the Trustee with respect to compliance with a condition or covenant provided for in this Indenture shall include (1) a statement that the Person making such certificate or opinion has read such covenant or condition; (2) a brief statement as to the nature and scope of the examination or investigation upon which the statement or opinion contained in such certificate or opinion is based; (3) a statement that, in the opinion of such Person, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and (4) a statement as to whether or not, in the opinion of such Person, such condition or covenant has been complied with. SECTION 16.06. LEGAL HOLIDAYS. In any case where the date of maturity of interest on or principal of the Notes or the date fixed for redemption of any Note is not a Business Day, then payment of such interest on or principal of the Notes need not be made on such date, but may be made on the next succeeding Business 84 Day with the same force and effect as if made on the date of maturity or the date fixed for redemption, and no interest shall accrue for the period from and after such date. SECTION 16.07. TRUST INDENTURE ACT. This Indenture is hereby made subject to, and shall be governed by, the provisions of the Trust Indenture Act required to be part of and to govern indentures qualified under the Trust Indenture Act; PROVIDED that, unless otherwise required by law, notwithstanding the foregoing, this Indenture and the Notes issued hereunder shall not be subject to the provisions of subsections (a)(1), (a)(2), and (a)(3) of Section 314 of the Trust Indenture Act as now in effect or as hereafter amended or modified; PROVIDED, FURTHER, that this Section 16.07 shall not require this Indenture or the Trustee to be qualified under the Trust Indenture Act prior to the time such qualification is in fact required under the terms of the Trust Indenture Act, nor shall it constitute any admission or acknowledgment by any party to such supplemental indenture that any such qualification is required prior to the time such qualification is in fact required under the terms of the Trust Indenture Act. If any provision hereof limits, qualifies or conflicts with another provision hereof which is required to be included in an indenture qualified under the Trust Indenture Act, such required provision shall control. SECTION 16.08. NO SECURITY INTEREST CREATED. Nothing in this Indenture or in the Notes, expressed or implied, shall be construed to constitute a security interest under the Uniform Commercial Code or similar legislation, as now or hereafter enacted and in effect, in any jurisdiction where property of the Company or its subsidiaries is located. SECTION 16.09. BENEFITS OF INDENTURE. Nothing in this Indenture or in the Notes, expressed or implied, shall give to any Person, other than the parties hereto, any paying agent, any authenticating agent, any Note registrar and their successors hereunder, the holders of Notes and the holders of Senior Indebtedness, including any Representative, any benefit or any legal or equitable right, remedy or claim under this Indenture. SECTION 16.10. TABLE OF CONTENTS, HEADINGS, ETC. The table of contents and the titles and headings of the articles and sections of this Indenture have been inserted for convenience of reference only, are not to be considered a part hereof, and shall in no way modify or restrict any of the terms or provisions hereof. SECTION 16.11. AUTHENTICATING AGENT. The Trustee may appoint an authenticating agent which shall be authorized to act on its behalf and subject to its direction in the authentication and delivery of Notes in connection with the original issuance thereof and transfers and exchanges of Notes hereunder, 85 including under Sections 2.04, 2.05, 2.06, 2.07, 3.03 and 3.05, as fully to all intents and purposes as though the authenticating agent had been expressly authorized by this Indenture and those Sections to authenticate and deliver Notes. For all purposes of this Indenture, the authentication and delivery of Notes by the authenticating agent shall be deemed to be authentication and delivery of such Notes "by the Trustee" and a certificate of authentication executed on behalf of the Trustee by an authenticating agent shall be deemed to satisfy any requirement hereunder or in the Notes for the Trustee's certificate of authentication. Such authenticating agent shall at all times be a Person eligible to serve as trustee hereunder pursuant to Section 8.09. Any corporation into which any authenticating agent may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, consolidation or conversion to which any authenticating agent shall be a party, or any corporation succeeding to the corporate trust business of any authenticating agent, shall be the successor of the authenticating agent hereunder, if such successor corporation is otherwise eligible under this Section 16.11, without the execution or filing of any paper or any further act on the part of the parties hereto or the authenticating agent or such successor corporation. Any authenticating agent may at any time resign by giving written notice of resignation to the Trustee and to the Company. The Trustee may at any time terminate the agency of any authenticating agent by giving written notice of termination to such authenticating agent and to the Company. Upon receiving such a notice of resignation or upon such a termination, or in case at any time any authenticating agent shall cease to be eligible under this Section, the Trustee shall either promptly appoint a successor authenticating agent or itself assume the duties and obligations of the former authenticating agent under this Indenture, and upon such appointment of a successor authenticating agent, if made, shall give written notice of such appointment of a successor authenticating agent to the Company and shall mail notice of such appointment of a successor authenticating agent to all holders of Notes as the names and addresses of such holders appear on the Note register. The Trustee agrees to pay to the authenticating agent from time to time reasonable compensation for its services (to the extent pre-approved by the Company in writing), and the Trustee shall be entitled to be reimbursed for such pre-approved payments, subject to Section 8.06. The provisions of Sections 8.02, 8.03, 8.04, 9.03 and this Section 16.11 shall be applicable to any authenticating agent. 86 SECTION 16.12. EXECUTION IN COUNTERPARTS. This Indenture may be executed in any number of counterparts, each of which shall be an original, but such counterparts shall together constitute but one and the same instrument. Wilmington Trust Company, hereby accepts the trusts in this Indenture declared and provided, upon the terms and conditions hereinabove set forth. 87 IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed. priceline.com Incorporated By: ------------------------------------ Name: Title: Wilmington Trust Company, as Trustee By: ----------------------------------- Name: Title: 88 EXHIBIT A [For Global Notes only: UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY (55 WATER STREET, NEW YORK, NEW YORK) (THE "DEPOSITARY," WHICH TERM INCLUDES ANY SUCCESSOR DEPOSITARY FOR THE CERTIFICATES) TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITARY AND ANY PAYMENT HEREON IS MADE TO CEDE & CO. (OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITARY), ANY TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL SINCE THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.] A-1 PRICELINE.COM INCORPORATED __% CONVERTIBLE SUBORDINATED NOTE DUE 2006 $---------------- No:____ CUSIP:______ priceline.com Incorporated, a corporation duly organized and validly existing under the laws of the State of Delaware (herein called the "COMPANY"), which term includes any successor corporation under the Indenture referred to on the reverse hereof, for value received hereby promises to pay to [CEDE & CO.]** [____________________________] or registered assigns, [the principal sum set forth on Schedule I hereto]* [the principal sum of __________________ ($____________)] on August 1, 2006, at the office or agency of the Company maintained for that purpose in accordance with the terms of the Indenture, in such coin or currency of the United States of America as at the time of payment shall be legal tender for the payment of public and private debts, and to pay interest, semi-annually on February 1 and August 1, of each year, commencing February 1, 2000, on said principal sum at said office or agency, in like coin or currency, at the rate per annum of __% from August __, 1999 and thereafter to maturity to holders of record on the immediately preceding January 15 and July 15, respectively. Interest on the Notes will accrue from the date to which interest has most recently been paid or provided for, or, if no interest has been paid or provided for, from August ___, 1999. Notwithstanding the foregoing, if the date hereof is after any January 15 or July 15, as the case may be, and before the following February 1 or August 1, this Note shall bear interest from such February 1 or August 1; PROVIDED that if the Company shall default in the payment of interest due on such February 1 or August 1, then this Note shall bear interest from the next preceding February 1 or August 1, to which interest has been paid or duly provided for or, if no interest has been paid or duly provided for on such Note, from August __, 1999. The Company shall pay interest on overdue principal, and on overdue premium, if any, and overdue interest, to the extent lawful, at the rate borne by the Note. Except as otherwise provided in the Indenture, the interest payable on the Note pursuant to the Indenture on any February 1 or August 1 will be paid to the Person entitled thereto as it appears in the Note register at the close of business on the record date, which shall be the January 15 or July 15 (whether or not a Business Day) next preceding such February 1 or August 1, as provided in the Indenture; PROVIDED that any such interest not punctually paid or duly provided for shall be payable as provided in - ------------------- ** For Global Notes only. A-2 the Indenture. Interest may, at the option of the Company, be paid either (i) by check mailed to the registered address of such Person or (ii) by transfer to an account maintained by such Person located in the United States is such Person has notified the Company of the details of such account at least seven (7) days prior to a scheduled interest payment date; PROVIDED that payments to The Depository Trust Company, New York, New York will be made by wire transfer of immediately available funds to the account of The Depository Trust Company or its nominee. Notwithstanding the foregoing, if this Note shall be surrendered for conversion during the period from the close of business on any record date for the payment of interest to the close of business on the Business Day preceding the interest payment date and such Note has been called for redemption on a redemption date which occurs during such period, the Company shall not be required to pay interest on such interest payment date in respect of this Note. Reference is made to the further provisions of this Note set forth on the reverse hereof, including, without limitation, provisions subordinating the payment of principal of and premium, if any, and interest on the Notes to the prior payment in full of all Senior Indebtedness, as defined in the Indenture, provisions relating to redemption of the Notes and provisions giving the holder of this Note the right to convert this Note into Common Stock on the terms and subject to the limitations referred to on the reverse hereof and as more fully specified in the Indenture. Such further provisions shall for all purposes have the same effect as though fully set forth at this place. This Note shall be deemed to be a contract made under the laws of the State of New York, and for all purposes shall be construed in accordance with and governed by the laws of the State of New York. This Note shall not be valid or become obligatory for any purpose until the certificate of authentication hereon shall have been manually signed by the Trustee or a duly authorized authenticating agent under the Indenture. A-3 IN WITNESS WHEREOF, the Company has caused this Note to be duly executed. priceline.com Incorporated By: ------------------------------------ Name: Title: By: ------------------------------------ Name: Title: TRUSTEE'S CERTIFICATE OF AUTHENTICATION This is one of the Notes described in the within-named Indenture. Wilmington Trust Company as Trustee By: --------------------------------------- Authorized Signatory By: --------------------------------------- As Authenticating Agent (if different from Trustee) Dated: ------------------ A-4 [FORM OF REVERSE OF NOTE] PRICELINE.COM INCORPORATED ____% CONVERTIBLE SUBORDINATED NOTE DUE 2006 This Note is one of a duly authorized issue of Notes of the Company, designated as its ___% Convertible Subordinated Notes Due 2006 (herein called the "NOTES"), limited to the aggregate principal amount of $287,500,000 all issued or to be issued under and pursuant to an indenture dated as of August __, 1999 (herein called the "INDENTURE"), between the Company and Wilmington Trust Company, as trustee (herein called the "TRUSTEE"), to which Indenture and all indentures supplemental thereto reference is hereby made for a description of the rights, limitations of rights, obligations, duties and immunities thereunder of the Trustee, the Company and the holders of the Notes. In case an Event of Default, as defined in the Indenture, shall have occurred and be continuing, the principal of, premium, if any, and accrued interest on all Notes may be declared, and upon said declaration shall become, due and payable, in the manner, with the effect and subject to the conditions provided in the Indenture. The Indenture contains provisions permitting the Company and the Trustee, with the consent of the holders of not less than a majority in aggregate principal amount of the Notes at the time outstanding, evidenced as in the Indenture provided, to execute supplemental indentures adding any provisions to or changing in any manner or eliminating any of the provisions of the Indenture or of any supplemental indenture or modifying in any manner the rights of the holders of the Notes; PROVIDED that no such supplemental indenture shall (i) extend the fixed maturity of any Note, or reduce the rate or extend the time of payment of interest thereon, or reduce the principal amount thereof or premium, if any, thereon, or reduce any amount payable on redemption thereof, or impair the right of any Noteholder to institute suit for the payment thereof, or make the principal thereof or interest or premium, if any, thereon payable in any coin or currency other than that provided in the Note, or modify the provisions of the Indenture with respect to the subordination of the Notes in a manner adverse to the Noteholders in any material respect, or change the obligation of the Company to redeem any Note upon the happening of a Fundamental Change in a manner adverse to the holder of the Notes, or impair the right to convert the Notes into Common Stock subject to the terms set forth in the Indenture, in each case, without the consent of the holder of each Note so affected or (ii) reduce the aforesaid percentage of Notes, the holders of which are required to consent to any A-5 such supplemental indenture, without the consent of the holders of all Notes then outstanding. It is also provided in the Indenture that, prior to any declaration accelerating the maturity of the Notes, the holders of a majority in aggregate principal amount of the Notes at the time outstanding may on behalf of the holders of all of the Notes waive any past default or Event of Default under the Indenture and its consequences except a default in the payment of interest or any premium on or the principal of any of the Notes, a default in the payment of redemption price pursuant to Article 3 of the Indenture or a failure by the Company to convert any Notes into Common Stock. Any such consent or waiver by the holder of this Note (unless revoked as provided in the Indenture) shall be conclusive and binding upon such holder and upon all future holders and owners of this Note and any Notes which may be issued in exchange or substitution hereof, irrespective of whether or not any notation thereof is made upon this Note or such other Notes. The indebtedness evidenced by the Notes is, to the extent and in the manner provided in the Indenture, expressly subordinate, junior and subject in right of payment to the prior payment in full of all Senior Indebtedness of the Company, as defined in the Indenture, whether outstanding at the date of the Indenture or thereafter incurred, and this Note is issued subject to the provisions of the Indenture with respect to such subordination. Each holder of this Note, by accepting the same, agrees to and shall be bound by such provisions and authorizes the Trustee on its behalf to take such action as may be necessary or appropriate to effectuate the subordination so provided and appoints the Trustee his attorney-in-fact for such purpose. No reference herein to the Indenture and no provision of this Note or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of and any premium and interest on this Note at the place, at the respective times, at the rate and in the coin or currency herein prescribed. Interest on the Notes shall be computed on the basis of a 360-day year of twelve 30-day months. The Notes are issuable in registered form without coupons in denominations of $1,000 and any integral multiple of $1,000. At the office or agency of the Company referred to on the face hereof, and in the manner and subject to the limitations provided in the Indenture, without payment of any service charge but with payment of a sum sufficient to cover any tax, assessment or other governmental charge that may be imposed in connection with any registration or exchange of Notes, Notes may be exchanged for a like aggregate principal amount of Notes of other authorized denominations. A-6 The Notes will not be redeemable at the option of the Company prior to August 6, 2002. At any time on or after August 6, 2002, and prior to maturity, the Notes may be redeemed at the option of the Company as a whole, or from time to time in part, upon mailing a notice of such redemption not less than 30 nor more than 60 days before the date fixed for redemption to the holders of Notes at their last registered addresses, all as provided in the Indenture, at the following optional redemption prices (expressed as percentages of the principal amount), together in each case with accrued interest to, but excluding, the date fixed for redemption: If redeemed during the period beginning August 6, 2002 and ending on July 31, 2003, the Notes will be redeemable at a redemption price of _______%, and if redeemed during the 12-month period beginning August 1, the Notes will be redeemable at:
YEAR REDEMPTION PRICE ---- ---------------- 2003.................................. % 2004.................................. % 2005.................................. %
and 100% at August 1, 2006; PROVIDED that if the date fixed for redemption is on February 1 or August 1, then the interest payable on such date shall be paid to the holder of record on the next preceding January 15 or July 15, respectively. The Notes are not subject to redemption through the operation of any sinking fund. If a Fundamental Change (as defined in the Indenture) occurs at any time prior to August 1, 2006, the Notes will be redeemable on the 30th day after notice thereof at the option of the holder. Such repayment shall be made at a price equal to 100% of the principal amount to be redeemed. The Company shall also pay accrued interest, if any, on such Notes to, but excluding, the Repurchase Date; PROVIDED that if such Repurchase Date is February 1 or August 1, then the interest payable on such date shall be paid to the holder of record of the Note on the next preceding January 15 or July 15. The Company shall mail to all holders of record of the Notes a notice of the occurrence of a Fundamental Change and of the redemption right arising as a result thereof on or before the 10th day after the occurrence of such Fundamental Change. For a Note to be so redeemed at the option of the holder, the Company must receive at the office or agency of the Company maintained for that purpose in accordance with the terms of the Indenture, such Note with the form entitled "Option to Elect Repayment Upon a Fundamental Change" on the reverse thereof duly completed, together with such Notes duly endorsed for transfer, on or before the close of business on the 30th A-7 day after the date of such notice (or if such 30th day is not a Business Day, the immediately preceding Business Day). Subject to the provisions of the Indenture, the holder hereof has the right, at its option, at any time after the date of original issuance hereof through the close of business on August 1, 2006, or, as to all or any portion hereof called for redemption, prior to the close of business on the Business Day immediately preceding the date fixed for redemption (unless the Company shall default in payment due upon redemption thereof), to convert the principal hereof or any portion of such principal which is $1,000 or an integral multiple thereof into that number of shares of the Company's Common Stock, as said shares shall be constituted at the date of conversion, obtained by dividing the principal amount of this Note or portion thereof to be converted by the Conversion Price of $_____ or such Conversion Price as adjusted from time to time as provided in the Indenture, upon surrender of this Note, together with a conversion notice as provided in the Indenture, to the Company at the office or agency of the Company maintained for that purpose in accordance with the terms of the Indenture, and, unless the shares issuable on conversion are to be issued in the same name as this Note, duly endorsed by, or accompanied by instruments of transfer in form satisfactory to the Company duly executed by, the holder or by his duly authorized attorney. No adjustment in respect of interest on any Note converted or dividends on any shares issued upon conversion of such Note will be made upon any conversion; PROVIDED that if this Note shall be surrendered for conversion during the period from the close of business on any record date for the payment of interest to the close of business on the Business Day preceding the interest payment date and has not been called for redemption during this period, this Note must be accompanied by payment, in immediately available funds or other funds acceptable to the Company, of an amount equal to the interest otherwise payable on such interest payment date on the principal amount being converted; PROVIDED that no such payment need be made to the extent any overdue interest shall exist at the time of conversion with respect to such Note. No fractional shares will be issued upon any conversion, but an adjustment and payment in cash will be made, as provided in the Indenture, in respect of any fraction of a share which would otherwise be issuable upon the surrender of any Note or Notes for conversion. A Note in respect of which a holder is exercising its right to require redemption upon a Fundamental Change may be converted only if such holder withdraws its election to exercise such right in accordance with the terms of the Indenture. A-8 Any Notes called for redemption, unless surrendered for conversion on or before the close of business on the Business Day preceding the date fixed for redemption, may be deemed to be redeemed from the holders of such Notes for an amount equal to the applicable redemption price, together with accrued but unpaid interest to (but excluding) the date fixed for redemption, by one or more investment bankers or other purchasers who may agree with the Company to purchase such Notes from the holders thereof and convert them into Common Stock and to make payment for such Notes as aforesaid to the Trustee in trust for such holders. Upon due presentment for registration of transfer of this Note at the office or agency of the Company maintained for that purpose in accordance with the terms of the Indenture, a new Note or Notes of authorized denominations for an equal aggregate principal amount will be issued to the transferee in exchange thereof, subject to the limitations provided in the Indenture, without charge except for any tax, assessment or other governmental charge imposed in connection therewith. The Company, the Trustee, any authenticating agent, any paying agent, any conversion agent and any Note registrar may deem and treat the registered holder hereof as the absolute owner of this Note (whether or not this Note shall be overdue and notwithstanding any notation of ownership or other writing hereon made by anyone other than the Company or any Note registrar), for the purpose of receiving payment hereof, or on account hereof, for the conversion hereof and for all other purposes, and neither the Company nor the Trustee nor any other authenticating agent nor any paying agent nor any other conversion agent nor any Note registrar shall be affected by any notice to the contrary. All payments made to or upon the order of such registered holder shall, to the extent of the sum or sums paid, satisfy and discharge liability for monies payable on this Note. No recourse for the payment of the principal of or any premium or interest on this Note, or for any claim based hereon or otherwise in respect hereof; and no recourse under or upon any obligation, covenant or agreement of the Company in the Indenture or any supplemental indenture thereto or in any Note, or because of the creation of any indebtedness represented thereby, or otherwise shall be had against any incorporator, stockholder, employee, agent, officer or director or subsidiary, as such, past, present or future, of the Company or of any successor corporation, either directly or through the Company or any successor corporation, whether by virtue of any constitution, statute or rule of law or by the enforcement of any assessment or penalty or otherwise, all such liability being, by the acceptance hereof and as part of the consideration for the issue hereof, expressly waived and released. A-9 This Note shall be deemed to be a contract made under the laws of New York, and for all purposes shall be construed in accordance with the laws of New York, without regard to principles of conflicts of laws. Terms used in this Note and defined in the Indenture are used herein as therein defined. A-10 [For Global Notes only] SCHEDULE I
PRINCIPAL ENDORSEMENT OF AMOUNT DATE TRUSTEE OR CUSTODIAN --------- ---- --------------------
A-11 ABBREVIATIONS The following abbreviations, when used in the inscription of the face of this Note, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM - as tenants in common UNIF GIFT MIN ACT-- Custodian -------- --------- (Cust) (Minor) TEN ENT - as tenant by the entireties under Uniform Gifts to Minors Act JT TEN - as joint tenants with right of survivorship and not as tenants in ---------------------------------------------- common (State) Additional abbreviations may also be used though not in the above list. A-12 CONVERSION NOTICE To: priceline.com Incorporated The undersigned registered owner of this Note hereby irrevocably exercises the option to convert this Note, or the portion hereof (which is $1,000 or an integral multiple thereof) below designated, into shares of Common Stock of priceline.com Incorporated in accordance with the terms of the Indenture referred to in this Note, and directs that the shares issuable and deliverable upon such conversion, together with any check in payment for fractional shares and any Notes representing any unconverted principal amount hereof, be issued and delivered to the registered holder hereof unless a different name has been indicated below. If shares or any portion of this Note not converted are to be issued in the name of a Person other than the undersigned, the undersigned will provide the appropriate information below and pay all transfer taxes payable with respect thereto. Any amount required to be paid by the undersigned on account of interest in accordance with the terms of the Indenture accompanies this Note. Dated: ---------------- ---------------------------------------------------- ---------------------------------------------------- Signature(s) ---------------------------------------------------- Signature Guarantee*** - ------------------------ *** Notice: The Signature must be guaranteed by an institution which is a member of one of the following recognized signature guarantee program: (1) The Securities Transfer Agent Medallion Program (STAMP) (2) The New York Stock Exchange Medallion Stamp Program (MSP) (3) The Stock Exchange Medallion Program (SEMP) A-13 Fill in registration of shares of Common Stock if to be issued, and Notes if to be delivered, other than to and in the name of the registered holder: - -------------------------------------------- (Name) - -------------------------------------------- (Street Address) - -------------------------------------------- (City, State and Zip Code) Please print name and address Principal amount to be converted (if less than all): $____________ Social Security or Other Taxpayer Identification Number:________________ A-14 OPTION TO ELECT REPAYMENT UPON A FUNDAMENTAL CHANGE TO: PRICELINE.COM INCORPORATED The undersigned registered owner of this Note hereby irrevocably acknowledges receipt of a notice from priceline.com Incorporated (the "COMPANY") as to the occurrence of a Fundamental Change with respect to the Company and requests and instructs the Company to repay the entire principal amount of this Note, or the portion hereof (which is $1,000 or an integral multiple thereof) below designated, in accordance with the terms of the Indenture referred to in this Note at the price of 100% of such entire principal amount or portion hereof, together with accrued interest to, but excluding, such repayment date, to the registered holder hereof. Dated: ---------------------- -------------------------------------------- -------------------------------------------- Signature(s) NOTICE: The above signatures of the holder(s) hereof must correspond with the name as written upon the face of the Note in every particular without alteration or enlargement or any change whatever. Principal amount to be repaid (if less than all): $---------- -------------------------------------------- Social Security or Other Taxpayer Identification Number ASSIGNMENT For value received ______________________________ hereby sell(s), assign(s) and transfer(s) unto -------------------------------------------------------- (Please insert social security or other Taxpayer Identification Number of assignee) the within Note, and hereby irrevocably constitutes and appoints ---------------------------------------------------------- Attorney to transfer the said Note on the books of the Company, with full power of substitution in the premises. Dated: ---------------------- -------------------------------------------- -------------------------------------------- Signature(s) -------------------------------------------- Signature Guarantee**** NOTICE: The signature on the conversion notice, the option to elect repayment upon a Fundamental Change or the assignment must correspond with the name as written upon the face of the Note in every particular without alteration or enlargement or any change whatever. - ----------------------- **** Notice: The Signature must be guaranteed by an institution which is a member of one of the following recognized signature guarantee program: (1) The Securities Transfer Agent Medallion Program (STAMP) (2) The New York Stock Exchange Medallion Stamp Program (MSP) (3) The Stock Exchange Medallion Program (SEMP) CROSS-REFERENCE TARGET LIST --------------------------- --------------------------- NOTE: DUE TO THE NUMBER OF TARGETS SOME TARGET NAMES MAY NOT APPEAR IN THE TARGET PULL-DOWN LIST. (This list is for the use of the wordprocessor only, is not a part of this document and may be discarded.)
ARTICLE/SECTION TARGET NAME - --------------- ----------- - --------------- ----------- 1........................def.art 1.01.....................def.sec 2........................iss.des 2.01.....................des.amt 2.02....................frm.note 2.03.................dt.den.note 2.04....................exe.note 2.05................exc.reg.note 2.05(b)................glob.note 2.06................mut.des.note 2.07...................temp.note 2.08...................canc.note 2.09.......................cusip 3.......................rdm.note 3.01...................rdm.price 3.02....................not.redm 3.03....................pmt.note 3.04.....................cnv.arr 3.05..................rdm.op.hld 3.05(a)................rep.price 3.05(b)...................co.not 3.05(e)..................mod.ind 4.......................sub.note 4.01.....................agt.sub 4.02....................pmt.nhld 4.03...................subr.note 4.04....................auth.eff 4.05....................not.ttee 4.06....................ttee.rel 4.07......................no.imp 4.08....................cer.cnvs 4.09.....................art.app 4.10......................sr.ind 4.11.....................rel.jud 5.......................par.covs 5.01....................pmt.prin 5.02.....................mnt.off 5.03....................app.fill 5.04....................prov.pay 5.05.......................exist 5.06....................mnt.prop 5.07.....................pmt.clm 5.08........................stay 5.09....................comp.cer 6.........................nh.lrs 6.01.....................nh.list 6.02...................pres.disc 6.02(a).................pres.inf 6.02(b)...................commun 6.02(c).................rec.hold 6.03...................rpts.ttee 6.03(a).................transmit 6.03(b)...................st.exc 6.04.....................rpts.co ARTICLE/SECTION TARGET NAME - --------------- ----------- - --------------- ----------- 7.........................remedy 7.01.....................evt.def 7.01(a)...............def.instal 7.01(b)..................premium 7.01(d).................liq.reor 7.02.....................pmt.def 7.03.....................app.mon 7.04.....................proc.nh 7.05.....................proc.tt 7.06.....................rem.cum 7.07....................dir.proc 7.08.....................not.def 7.09.....................und.pay 8..........................re.tt 8.01..................dut.res.tt 8.01(a)................prior.occ 8.01(b)...................liable 8.01(c).....................omis 8.01(d)..................protect 8.01(e)..................rt.amnt 8.01(f).................fail.del 8.02....................rel.docs 8.03.....................no.resp 8.04....................tt.pa.ca 8.05....................mon.held 8.06....................comp.exp 8.07....................off.cert 8.08....................conf.int 8.09.....................elig.tt 8.10....................resig.tt 8.10(a)..................tt.writ 8.11.....................acc.stt 8.12....................succ.mer 8.13....................pref.col 8.14.....................tt.appl 9..........................re.nh 9.01......................act.nh 9.02....................proof.ex 9.03......................who.ao 9.04.....................coo.not 9.05....................revc.con 10.......................nh.mtgs 10.01..................purp.mtgs 10.02..................call.mtgs 10.03...............call.mtgs.co 10.04...................qual.vot 10.05.......................regs 10.06.....................voting 10.07...................no.delay 11......................supp.ind 11.01................supp.ind.wo 11.02.................supp.ind.w 11.03.....................eff.si 11.04...................not.note 11.05....................ev.comp ARTICLE/SECTION TARGET NAME - --------------- ----------- - --------------- ----------- 12...........................cms 12.01.....................co.may 12.02....................succ.co 12.03.......................op.c 13......................sat.disc 13.01...................disc.ind 13.02....................dep.mon 13.03...................pa.repay 13.04...................ret.uncl 13.05......................reins 14.........................immun 14.01..................corp.obgs 15....................conv.notes 15.01....................rt.conv 15.02..................exer.conv 15.03.......................cash 15.04..................conv.pric 15.05.....................adj.cp 15.05(a).....................div 15.05(b)....................wars 15.05(c)....................subd 15.05(d)....................secs 15.05(e)...................distr 15.05(f)................purc.shs 15.05(g).................off.exp 15.05(h)...................terms 15.05(h)(i)...........clos.price 15.05(h)(ii).................cmp 15.05(h)(iii)................fmv 15.05(h)(iv)..................rd 15.05(h)(v)...................td 15.05(i)...................reduc 15.05(j)..................no.adj 15.05(k)..................cp.adj 15.05(l)...................defer 15.05(m)..................no.shs 15.06.................eff.reclas 15.07..................taxes.shs 15.08....................res.shs 15.09........................rot 15.10....................not.hrs 16.....................misc.prov 16.01....................binding 16.02...................official 16.03....................address 16.04....................gov.law 16.05.....................comply 16.06...................holidays 16.07........................tia 16.08.................no.sec.int 16.09....................benefit 16.10........................toc 16.11.................auth.agent 16.12...................counterp
ARTICLE/SECTION TARGET NAME ARTICLE SECTION TARGET NAME ARTICLE/SECTION TARGET NAME ARTICLE/SECTIONTARGET NAME - --------------- ----------- --------------- ----------- --------------- ----------- --------------------------
A-2 EX-5.1 5 OPINION OF SKADDEN, ARPS Exhibit 5.1 Skadden, Arps, Slate, Meagher & Flom LLP 919 Third Avenue New York, New York 10022 August 10, 1999 priceline.com Incorporated Five High Ridge Park Stamford, Connecticut 06905 Re: priceline.com Incorporated REGISTRATION STATEMENT ON FORM S-1 Ladies and Gentlemen: We have acted as special counsel to priceline.com Incorporated, a Delaware corporation (the "Company"), in connection with the public offering by the Company and certain selling stockholders of the Company (the "Selling Stockholders") of up to 6,325,000 shares (the "Shares") of the Company's common stock, par value $0.008 per share (the "Common Stock"). Of the Shares, 2,000,000 shares of Common Stock (the "Primary Shares") are being sold by the Company and up to 4,325,000 shares of Common Stock (the "Secondary Shares") are being sold by the Selling Stockholders, including up to 825,000 shares of Common Stock to be sold by the Selling Stockholders to the extent that the Stock Underwriters (as defined below) exercise their over-allotment option. We also have acted as special counsel to the Company in connection with the public offering by the Company of up to $287,500,000 aggregate principal amount of the Company's ___% Convertible Subordinated Notes due 2006 (the "Notes"), including up to $37,500,000 aggregate principal amount of Notes to be sold to the extent that the Notes Underwriters (as defined below) exercise their over-allotment option. The Notes are convertible into shares of Common Stock ("Conversion Shares"). This opinion is being furnished in accordance with the requirements of Item 601(b)(5) of Regulation S-K under the Securities Act of 1933, as amended (the "Act"). In connection with this opinion, we have exam ined originals or copies, certified or otherwise identified to our satisfaction, of (i) the Registration Statement on Form S-1 (File No. 333-83513) relating to the Shares, the Notes and the Conversion Shares as filed with the Securities and Exchange Commission (the "Commission") on July 23, 1999 under the Act; (ii) Amendment No. 1 to the Registration Statement as filed with the Commission on August 2, 1999 under the Act; (iii) Amendment No. 2 to the Registration Statement as filed with the Commission on August 10, 1999 under the Act (such Registration Statement, as so amended, being hereinafter referred to as the "Registration Statement"); (iv) the form of Underwriting Agreement (the "Stock Underwriting Agreement") proposed to be entered into by and among the Company, the Selling Stockholders and Morgan Stanley & Co. Incorporated, Goldman, Sachs & Co., Allen & Company Incorporated, BancBoston Robertson Stephens Inc., Donaldson, Lufkin & Jenrette Securities Corporation and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as representatives of the several U.S. underwriters named therein (the "U.S. Stock Underwriters"), and Morgan Stanley & Co. International Limited, Goldman Sachs International, Allen & Company Incorporated, BancBoston Robertson Stephens International Limited, Donaldson, Lufkin & Jenrette International and Merrill Lynch International, as representatives of the several international underwriters (the "International Stock Underwriters" and together with the U.S. Stock Underwriters, the "Stock Underwriters"), relating to the sale of the Shares; (v) the form of Underwriting Agreement (the "Notes Underwriting Agreement") proposed to be entered into by and among the Company and Morgan Stanley & Co. Incorporated, Goldman, Sachs & Co., Allen & Company, Incorporated, BancBoston Robertson Stephens Inc., Donaldson, Lufkin & Jenrette Securities Corporation and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as representatives of the several underwriters named therein (the "Notes Underwriters"), relating to the sale of the Notes; (vi) a form of global certificate representing the Notes; (vii) a specimen 2 certificate representing Common Stock; (viii) the form of the Indenture for the Notes (the "Indenture") to be entered into by and between the Company and Wilmington Trust Company as trustee for the holders of the Notes (the "Trustee"); (ix) the Form T-1 of the Trustee filed as an exhibit to the Registration Statement; (x) the Certificate of Incorporation of the Company, as currently in effect; (xi) the By-Laws of the Company, as currently in effect; and (xii) certain resolutions of the Board of Directors of the Company, dated July 29, 1999, and drafts of certain resolutions (the "Draft Resolutions") of the Pricing Committee of the Board of Directors of the Company (the "Pricing Committee"), relating to the issuance of the Primary Shares, the Notes and the Conversion Shares and the sale of the Secondary Shares and related matters. We also have examined originals or copies, certified or otherwise identified to our satisfaction, of such records of the Company and such agreements, certificates of public officials, certificates of officers or other representatives of the Company and others, and such other documents, certificates and records as we have deemed necessary or appropriate as a basis for the opinions set forth herein. In our examination, we have assumed the legal capacity of all natural persons, the genuineness of all signatures, the authenticity of all documents submitted to us as originals, the conformity to original documents of all documents submitted to us as certified, conformed or photostatic copies and the authenticity of the originals of such latter documents. In making our examination of documents executed or to be executed, we have assumed that the parties thereto, other than the Company, had or will have the power, corporate or other, to enter into and perform all obligations thereunder and have also assumed the due authorization by all requisite action, corporate or other, and execution and delivery by such parties of such documents and the validity and binding effect thereof on such parties. As to any facts material to the opinions expressed herein which we have not independently established or verified, we have relied upon statements and representations of officers and other representatives of the Company and others. In rendering the opinions set forth in paragraphs 1 and 3 below, we have assumed that the certificates representing the Primary Shares and the Conversion Shares will be manually signed by one of the authorized officers of the Transfer Agent and Registrar for the Common Stock and registered by such Transfer Agent and Registrar and will conform 3 to the specimen certificate representing Common Stock examined by us. Our opinions set forth herein are limited to Delaware corporate law and the laws of the State of New York which are normally applicable to transactions of the type contemplated by the Indenture and the Notes and, to the extent that judicial or regulatory orders or decrees or con sents, approvals, licenses, authorizations, validations, filings, recordings or registrations with governmental authorities are relevant, to those required under such laws (all of the foregoing being referred to as "Opined on Law"). We do not express any opinion with respect to the law of any jurisdiction other than Opined on Law or as to the effect of any non-Opined on Law on the opinions herein stated. Based upon and subject to the foregoing, we are of the opinion that when (i) the Registration Statement becomes effective under the Act and the Indenture has been qualified under the Trust Indenture Act of 1939, as amended; (ii) the price at which the Shares are to be sold to the Stock Underwriters pursuant to the Stock Underwriting Agreement and other matters relating to the issuance and sale of the Primary Shares have been approved by the Pricing Committee in accordance with the Draft Resolutions; (iii) the Stock Underwriting Agreement has been duly executed and delivered; (iv) the Primary Shares have been delivered to and paid for by the Stock Underwriters at a price per share not less than the per share par value of the Common Stock as contemplated by the Stock Underwriting Agreement; (v) the interest rate, maturity, redemption, conversion and other terms of the Notes, as well as the price at which the Notes are to be sold to the Note Underwriters pursuant to the Note Underwriting Agreement and other matters relating to the issuance and sale of the Notes, have been approved by the Pricing Committee in accordance with the Draft Resolu tions; (vi) the Notes Underwriting Agreement has been duly executed and delivered; (vii) the Indenture has been duly executed and delivered; and (viii) the Notes have been duly executed and authenticated in accordance with the terms of the Indenture and delivered to and paid for by the Notes Underwriters as contemplated by the Notes Under writing Agreement: (1) The Primary Shares will be validly issued, fully paid and nonassessable. 4 (2) The Notes will constitute valid and binding obligations of the Company, entitled to the benefits of the Indenture and enforceable against the Company in accordance with their terms, except to the extent that enforcement thereof may be limited by (a) bankruptcy, insolvency (including, without limitation, all laws relating to fraudulent transfers), reorganiza tion, moratorium or other similar laws now or hereafter in effect relating to creditors' rights generally and (b) general principles of equity (regardless of whether enforcement is considered in a proceeding in equity or at law) and, except that the waiver contained in Section 5.08 of the Indenture may be unenforceable; (3) The shares of Common Stock initially issuable upon conversion of the Notes, if and when the Notes are converted into shares of Common Stock in accordance with their terms and the terms of the Indenture, will be validly issued, fully paid and nonassessable. In rendering the opinions set forth above, we have assumed that the execution and delivery by the Company of the Notes and the Indenture and the performance by the Company of its obligations thereunder do not and will not violate, conflict with or constitute a default under any agreement or instrument to which the Company or its properties is subject, except for those agreements and instruments which were identified to us by the Company as being material to it and which are included as exhibits to the Registration Statement. We hereby consent to the filing of this opinion with the Commission as Exhibit 5.1 to the Registration Statement. We also consent to the reference to us under the caption "Legal Matters" in the Registration State ment. In giving this consent, we do not thereby admit that we are included in the category of persons whose consent is required under Section 7 of the Act or the rules and regulations of the Commission. Very truly yours, /s/ Skadden, Arps, Slate, Meagher & Flom LLP 5 EX-5.2 6 OPINION OF MELISSA A. TAUB Exhibit 5.2 August 10, 1999 priceline.com Incorporated Five High Ridge Park Stamford, Connecticut 06905 Re: priceline.com Incorporated REGISTRATION STATEMENT ON FORM S-1 Ladies and Gentlemen: I am Senior Vice President, General Counsel and Secretary of priceline.com Incorporated, a Delaware corporation (the "Company"), and have acted as general counsel to the Company in relation to the public offering by the Company and certain selling stockholders of the Company (the "Selling Stockholders") of up to 6,325,000 shares (the "Shares") of the Company's common stock, par value $0.008 per share (the "Common Stock"). Of the Shares, 2,000,000 shares of Common Stock (the "Primary Shares") are being sold by the Company and up to 4,325,000 shares of Common Stock (the "Secondary Shares") are being sold by the Selling Stockholders, including 825,000 shares of Common Stock to be sold by the Selling Stockholders if the underwriters (the "Underwriters") exercise their over-allotment option. This opinion is being furnished in accordance with the requirements of Item 601(b)(5) of Regulation S-K under the Securities Act of 1933, as amended (the "Act"). In connection with this opinion, I have examined originals or copies, certified or otherwise identified to my satisfaction, of (i) the Registration Statement on Form S-1 (File No. 333-83513) as filed with the Securities and Exchange Commission (the "Commission") on July 23, 1999 under the Act; (ii) Amendment No. 1 to the Registration Statement as filed with the Commission on August 2, 1999 under the Act; (iii) Amendment No. 2 to the Registration Statement as filed with the Commission on August 10, 1999 under the Act (such Registration Statement, as so amended, being hereinafter referred to as the "Registration Statement"); (iv) a specimen certificate representing Common Stock; (v) the Certificate of Incorporation of the Company, as currently in effect and as in effect at the time of original issuance and sale of the Secondary Shares; (vi) the By-Laws of the Company, as currently in effect and as in effect at the time of original issuance and sale of the Secondary Shares; (vii) certain resolutions of the Board of Directors of the Company, relating to the original issuance and sale of the Secondary Shares and related matters; (viii) the Participation Warrant Agreement, dated August 31, 1998, between the Company and Delta Air Lines, Inc. ("Delta"), as amended on December 31, 1998 (the "Delta Warrant"); and (ix) cross receipts, acknowledgments and other documents evidencing receipt by the Company of the original issue price for the Secondary Shares, but excluding the Secondary Shares (the "Delta Secondary Shares") to be issued on exercise by Delta of warrants pursuant to the Delta Warrant immediately prior to sale of the Secondary Shares to the Underwriters. I also have examined originals or copies, certified or otherwise identified to my satisfaction, of such records of the Company and such agreements, certificates of public officials, certificates of officers or other representatives of the Company and others, and such other documents, certificates and records as I have deemed necessary or appropriate as a basis for the opinions set forth herein. In my examination, I have assumed the legal capacity of all natural persons, the genuineness of all signatures, the authenticity of all documents submitted to me as originals, the conformity to original documents of all documents submitted to me as certified, conformed or photostatic copies and the authenticity of the originals of such latter documents. In making my examination of executed documents, I have assumed that the parties thereto, other than the Company, had the power, corporate or other, to enter into and perform all obligations thereunder and have also assumed the due authorization by all requisite action, corporate or other, and execution and delivery by such parties of such documents and the validity and binding effect thereof on such parties. As to any facts material to the opinions expressed herein which I have not independently established or verified, I have relied upon statements and representations of officers and other representatives of the Company and others. In rendering the opinion set forth in paragraph 2 below, I have also assumed, with your consent, that the certificates representing the Delta Secondary Shares will be manually signed by one of the authorized officers of the Transfer Agent and Registrar for the Common Stock and registered by such Transfer Agent and Registrar and will conform to the specimen thereof examined by me. I am the Senior Vice President, General Counsel and Secretary of the Company, and have held such position since September 1998. I am admitted to the bar in the State of Connecticut and I do not express any opinion as to the laws of any other jurisdiction other than the General Corporation Law of the State of Delaware. Based upon and subject to the foregoing, I am of the opinion that 1. The original issuance and sale of the Secondary Shares (other than the Delta Secondary Shares) has been duly authorized by the Company, and such Secondary Shares are validly issued, fully paid and nonassessable shares of Common Stock. 2. The issuance and sale of the Delta Secondary Shares has been duly authorized by the Company and when Delta has duly exercised its warrants for the issuance of the Delta Secondary Shares and paid the exercise price for such warrants to the Company and the Company has issued and delivered Common Stock comprising the Delta Secondary Shares to Delta, in each case in accordance with the Delta Warrant, the Delta Secondary Shares will have been validly issued, fully paid and nonassessable shares of Common Stock. I hereby consent to the filing of this opinion with the Commission as Exhibit 5.2 to the Registration Statement. I also consent to the reference to me under the caption "Legal Matters" in the Registration Statement. In giving this consent, I do not thereby admit that I am included in the category of persons whose consent is required under Section 7 of the Act or the rules and regulations of the Commission. Very truly yours, EX-23.3 7 CONSENT OF DELOITTE & TOUCHE Exhibit 23.3 INDEPENDENT ACCOUNTANTS' CONSENT We consent to the use in this Amendment No. 2 to Registration Statement No. 333-83513 of priceline.com Incorporated on Form S-1 of our report dated February 10, 1999, March 25, 1999 as to Note 12 and March 8, 1999 as to Note 13 (which expresses an unqualified opinion and includes an explanatory paragraph relating to the restatement described in Note 13), relating to the combined financial statements of priceline.com Incorporated and Priceline Travel, Inc. appearing in the Prospectus, which is part of such Registration Statement. We also consent to the reference to us under the heading "Experts" in such Prospectus. /s/ Deloitte & Touche LLP Stamford, Connecticut August 10, 1999 EX-25.1 8 EXHIBIT 25.1 Registration No. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM T-1 STATEMENT OF ELIGIBILITY UNDER THE TRUST INDENTURE ACT OF 1939 OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF A TRUSTEE PURSUANT TO SECTION 305(b)(2) WILMINGTON TRUST COMPANY (Exact name of trustee as specified in its charter) Delaware 51-0055023 (State of incorporation) (I.R.S. employer identification no.) Rodney Square North 1100 North Market Street Wilmington, Delaware 19890 (Address of principal executive offices) Cynthia L. Corliss Vice President and Trust Counsel Wilmington Trust Company Rodney Square North Wilmington, Delaware 19890 (302) 651-8516 (Name, address and telephone number of agent for service) PRICELINE.COM INCORPORATED (Exact name of obligor as specified in its charter) Delaware 06-1528493 (State of incorporation) (I.R.S. employer identification no.) Five High Ridge Park Stamford, Connecticut 06905 (Address of principal executive offices) (Zip Code) % Convertible Subordinated Notes Due 2006 (Title of the indenture securities) ITEM 1. GENERAL INFORMATION. Furnish the following information as to the trustee: (a) Name and address of each examining or supervising authority to which it is subject. Federal Deposit Insurance Co. State Bank Commissioner Five Penn Center Dover, Delaware Suite #2901 Philadelphia, PA (b) Whether it is authorized to exercise corporate trust powers. The trustee is authorized to exercise corporate trust powers. ITEM 2. AFFILIATIONS WITH THE OBLIGOR. If the obligor is an affiliate of the trustee, describe each affiliation: Based upon an examination of the books and records of the trustee and upon information furnished by the obligor, the obligor is not an affiliate of the trustee. ITEM 3. LIST OF EXHIBITS. List below all exhibits filed as part of this Statement of Eligibility and Qualification. A. Copy of the Charter of Wilmington Trust Company, which includes the certificate of authority of Wilmington Trust Company to commence business and the authorization of Wilmington Trust Company to exercise corporate trust powers. B. Copy of By-Laws of Wilmington Trust Company. C. Consent of Wilmington Trust Company required by Section 321(b) of Trust Indenture Act. D. Copy of most recent Report of Condition of Wilmington Trust Company. Pursuant to the requirements of the Trust Indenture Act of 1939, as amended, the trustee, Wilmington Trust Company, a corporation organized and existing under the laws of Delaware, has duly caused this Statement of Eligibility to be signed on its behalf by the undersigned, thereunto duly authorized, all in the City of Wilmington and State of Delaware on the 5th day of August, 1999. WILMINGTON TRUST COMPANY [SEAL] Attest: /s/ Patricia A. Evans By: /s/ Norma P. Closs Assistant Secretary Name: Norma P. Closs Title: Vice President 2 EXHIBIT A AMENDED CHARTER WILMINGTON TRUST COMPANY WILMINGTON, DELAWARE AS EXISTING ON MAY 9, 1987 AMENDED CHARTER OR ACT OF INCORPORATION OF WILMINGTON TRUST COMPANY WILMINGTON TRUST COMPANY, originally incorporated by an Act of the General Assembly of the State of Delaware, entitled "An Act to Incorporate the Delaware Guarantee and Trust Company", approved March 2, A.D. 1901, and the name of which company was changed to "WILMINGTON TRUST COMPANY" by an amendment filed in the Office of the Secretary of State on March 18, A.D. 1903, and the Charter or Act of Incorporation of which company has been from time to time amended and changed by merger agreements pursuant to the corporation law for state banks and trust companies of the State of Delaware, does hereby alter and amend its Charter or Act of Incorporation so that the same as so altered and amended shall in its entirety read as follows: FIRST: - The name of this corporation is WILMINGTON TRUST COMPANY. SECOND: - The location of its principal office in the State of Delaware is at Rodney Square North, in the City of Wilmington, County of New Castle; the name of its resident agent is WILMINGTON TRUST COMPANY whose address is Rodney Square North, in said City. In addition to such principal office, the said corporation maintains and operates branch offices in the City of Newark, New Castle County, Delaware, the Town of Newport, New Castle County, Delaware, at Claymont, New Castle County, Delaware, at Greenville, New Castle County Delaware, and at Milford Cross Roads, New Castle County, Delaware, and shall be empowered to open, maintain and operate branch offices at Ninth and Shipley Streets, 418 Delaware Avenue, 2120 Market Street, and 3605 Market Street, all in the City of Wilmington, New Castle County, Delaware, and such other branch offices or places of business as may be authorized from time to time by the agency or agencies of the government of the State of Delaware empowered to confer such authority. THIRD: - (a) The nature of the business and the objects and purposes proposed to be transacted, promoted or carried on by this Corporation are to do any or all of the things herein mentioned as fully and to the same extent as natural persons might or could do and in any part of the world, viz.: (1) To sue and be sued, complain and defend in any Court of law or equity and to make and use a common seal, and alter the seal at pleasure, to hold, purchase, 1 convey, mortgage or otherwise deal in real and personal estate and property, and to appoint such officers and agents as the business of the Corporation shall require, to make by-laws not inconsistent with the Constitution or laws of the United States or of this State, to discount bills, notes or other evidences of debt, to receive deposits of money, or securities for money, to buy gold and silver bullion and foreign coins, to buy and sell bills of exchange, and generally to use, exercise and enjoy all the powers, rights, privileges and franchises incident to a corporation which are proper or necessary for the transaction of the business of the Corporation hereby created. (2) To insure titles to real and personal property, or any estate or interests therein, and to guarantee the holder of such property, real or personal, against any claim or claims, adverse to his interest therein, and to prepare and give certificates of title for any lands or premises in the State of Delaware, or elsewhere. (3) To act as factor, agent, broker or attorney in the receipt, collection, custody, investment and management of funds, and the purchase, sale, management and disposal of property of all descriptions, and to prepare and execute all papers which may be necessary or proper in such business. (4) To prepare and draw agreements, contracts, deeds, leases, conveyances, mortgages, bonds and legal papers of every description, and to carry on the business of conveyancing in all its branches. (5) To receive upon deposit for safekeeping money, jewelry, plate, deeds, bonds and any and all other personal property of every sort and kind, from executors, administrators, guardians, public officers, courts, receivers, assignees, trustees, and from all fiduciaries, and from all other persons and individuals, and from all corporations whether state, municipal, corporate or private, and to rent boxes, safes, vaults and other receptacles for such property. (6) To act as agent or otherwise for the purpose of registering, issuing, certificating, countersigning, transferring or underwriting the stock, bonds or other obligations of any corporation, association, state or municipality, and may receive and manage any sinking fund therefor on such terms as may be agreed upon between the two parties, and in like manner may act as Treasurer of any corporation or municipality. (7) To act as Trustee under any deed of trust, mortgage, bond or other instrument issued by any state, municipality, body politic, corporation, association or person, either alone or in conjunction with any other person or persons, corporation or corporations. 2 (8) To guarantee the validity, performance or effect of any contract or agreement, and the fidelity of persons holding places of responsibility or trust; to become surety for any person, or persons, for the faithful performance of any trust, office, duty, contract or agreement, either by itself or in conjunction with any other person, or persons, corporation, or corporations, or in like manner become surety upon any bond, recognizance, obligation, judgment, suit, order, or decree to be entered in any court of record within the State of Delaware or elsewhere, or which may now or hereafter be required by any law, judge, officer or court in the State of Delaware or elsewhere. (9) To act by any and every method of appointment as trustee, trustee in bankruptcy, receiver, assignee, assignee in bankruptcy, executor, administrator, guardian, bailee, or in any other trust capacity in the receiving, holding, managing, and disposing of any and all estates and property, real, personal or mixed, and to be appointed as such trustee, trustee in bankruptcy, receiver, assignee, assignee in bankruptcy, executor, administrator, guardian or bailee by any persons, corporations, court, officer, or authority, in the State of Delaware or elsewhere; and whenever this Corporation is so appointed by any person, corporation, court, officer or authority such trustee, trustee in bankruptcy, receiver, assignee, assignee in bankruptcy, executor, administrator, guardian, bailee, or in any other trust capacity, it shall not be required to give bond with surety, but its capital stock shall be taken and held as security for the performance of the duties devolving upon it by such appointment. (10) And for its care, management and trouble, and the exercise of any of its powers hereby given, or for the performance of any of the duties which it may undertake or be called upon to perform, or for the assumption of any responsibility the said Corporation may be entitled to receive a proper compensation. (11) To purchase, receive, hold and own bonds, mortgages, debentures, shares of capital stock, and other securities, obligations, contracts and evidences of indebtedness, of any private, public or municipal corporation within and without the State of Delaware, or of the Government of the United States, or of any state, territory, colony, or possession thereof, or of any foreign government or country; to receive, collect, receipt for, and dispose of interest, dividends and income upon and from any of the bonds, mortgages, debentures, notes, shares of capital stock, securities, obligations, contracts, evidences of indebtedness and other property held and owned by it, and to exercise in respect of all such bonds, mortgages, debentures, notes, shares of capital stock, securities, obligations, contracts, evidences of indebtedness and other property, any and all the rights, powers and privileges of individual owners thereof, including the right to vote thereon; to invest and deal in and with any of the moneys of the Corporation upon such securities and in such manner as 3 it may think fit and proper, and from time to time to vary or realize such investments; to issue bonds and secure the same by pledges or deeds of trust or mortgages of or upon the whole or any part of the property held or owned by the Corporation, and to sell and pledge such bonds, as and when the Board of Directors shall determine, and in the promotion of its said corporate business of investment and to the extent authorized by law, to lease, purchase, hold, sell, assign, transfer, pledge, mortgage and convey real and personal property of any name and nature and any estate or interest therein. (b) In furtherance of, and not in limitation, of the powers conferred by the laws of the State of Delaware, it is hereby expressly provided that the said Corporation shall also have the following powers: (1) To do any or all of the things herein set forth, to the same extent as natural persons might or could do, and in any part of the world. (2) To acquire the good will, rights, property and franchises and to undertake the whole or any part of the assets and liabilities of any person, firm, association or corporation, and to pay for the same in cash, stock of this Corporation, bonds or otherwise; to hold or in any manner to dispose of the whole or any part of the property so purchased; to conduct in any lawful manner the whole or any part of any business so acquired, and to exercise all the powers necessary or convenient in and about the conduct and management of such business. (3) To take, hold, own, deal in, mortgage or otherwise lien, and to lease, sell, exchange, transfer, or in any manner whatever dispose of property, real, personal or mixed, wherever situated. (4) To enter into, make, perform and carry out contracts of every kind with any person, firm, association or corporation, and, without limit as to amount, to draw, make, accept, endorse, discount, execute and issue promissory notes, drafts, bills of exchange, warrants, bonds, debentures, and other negotiable or transferable instruments. (5) To have one or more offices, to carry on all or any of its operations and businesses, without restriction to the same extent as natural persons might or could do, to purchase or otherwise acquire, to hold, own, to mortgage, sell, convey or otherwise dispose of, real and personal property, of every class and description, in any State, District, Territory or Colony of the United States, and in any foreign country or place. 4 (6) It is the intention that the objects, purposes and powers specified and clauses contained in this paragraph shall (except where otherwise expressed in said paragraph) be nowise limited or restricted by reference to or inference from the terms of any other clause of this or any other paragraph in this charter, but that the objects, purposes and powers specified in each of the clauses of this paragraph shall be regarded as independent objects, purposes and powers. FOURTH: - (a) The total number of shares of all classes of stock which the Corporation shall have authority to issue is forty-one million (41,000,000) shares, consisting of: (1) One million (1,000,000) shares of Preferred stock, par value $10.00 per share (hereinafter referred to as "Preferred Stock"); and (2) Forty million (40,000,000) shares of Common Stock, par value $1.00 per share (hereinafter referred to as "Common Stock"). (b) Shares of Preferred Stock may be issued from time to time in one or more series as may from time to time be determined by the Board of Directors each of said series to be distinctly designated. All shares of any one series of Preferred Stock shall be alike in every particular, except that there may be different dates from which dividends, if any, thereon shall be cumulative, if made cumulative. The voting powers and the preferences and relative, participating, optional and other special rights of each such series, and the qualifications, limitations or restrictions thereof, if any, may differ from those of any and all other series at any time outstanding; and, subject to the provisions of subparagraph 1 of Paragraph (c) of this Article FOURTH, the Board of Directors of the Corporation is hereby expressly granted authority to fix by resolution or resolutions adopted prior to the issuance of any shares of a particular series of Preferred Stock, the voting powers and the designations, preferences and relative, optional and other special rights, and the qualifications, limitations and restrictions of such series, including, but without limiting the generality of the foregoing, the following: (1) The distinctive designation of, and the number of shares of Preferred Stock which shall constitute such series, which number may be increased (except where otherwise provided by the Board of Directors) or decreased (but not below the number of shares thereof then outstanding) from time to time by like action of the Board of Directors; (2) The rate and times at which, and the terms and conditions on which, dividends, if any, on Preferred Stock of such series shall be paid, the extent of the preference or relation, if any, of such dividends to the dividends payable on any other class or classes, or series of the same or other class of stock and whether such dividends shall 5 be cumulative or non-cumulative; (3) The right, if any, of the holders of Preferred Stock of such series to convert the same into or exchange the same for, shares of any other class or classes or of any series of the same or any other class or classes of stock of the Corporation and the terms and conditions of such conversion or exchange; (4) Whether or not Preferred Stock of such series shall be subject to redemption, and the redemption price or prices and the time or times at which, and the terms and conditions on which, Preferred Stock of such series may be redeemed. (5) The rights, if any, of the holders of Preferred Stock of such series upon the voluntary or involuntary liquidation, merger, consolidation, distribution or sale of assets, dissolution or winding-up, of the Corporation. (6) The terms of the sinking fund or redemption or purchase account, if any, to be provided for the Preferred Stock of such series; and (7) The voting powers, if any, of the holders of such series of Preferred Stock which may, without limiting the generality of the foregoing include the right, voting as a series or by itself or together with other series of Preferred Stock or all series of Preferred Stock as a class, to elect one or more directors of the Corporation if there shall have been a default in the payment of dividends on any one or more series of Preferred Stock or under such circumstances and on such conditions as the Board of Directors may determine. (c) (1) After the requirements with respect to preferential dividends on the Preferred Stock (fixed in accordance with the provisions of section (b) of this Article FOURTH), if any, shall have been met and after the Corporation shall have complied with all the requirements, if any, with respect to the setting aside of sums as sinking funds or redemption or purchase accounts (fixed in accordance with the provisions of section (b) of this Article FOURTH), and subject further to any conditions which may be fixed in accordance with the provisions of section (b) of this Article FOURTH, then and not otherwise the holders of Common Stock shall be entitled to receive such dividends as may be declared from time to time by the Board of Directors. (2) After distribution in full of the preferential amount, if any, (fixed in accordance with the provisions of section (b) of this Article FOURTH), to be distributed to the holders of Preferred Stock in the event of voluntary or involuntary liquidation, distribution or sale of assets, dissolution or winding-up, of the Corporation, the 6 holders of the Common Stock shall be entitled to receive all of the remaining assets of the Corporation, tangible and intangible, of whatever kind available for distribution to stockholders ratably in proportion to the number of shares of Common Stock held by them respectively. (3) Except as may otherwise be required by law or by the provisions of such resolution or resolutions as may be adopted by the Board of Directors pursuant to section (b) of this Article FOURTH, each holder of Common Stock shall have one vote in respect of each share of Common Stock held on all matters voted upon by the stockholders. (d) No holder of any of the shares of any class or series of stock or of options, warrants or other rights to purchase shares of any class or series of stock or of other securities of the Corporation shall have any preemptive right to purchase or subscribe for any unissued stock of any class or series or any additional shares of any class or series to be issued by reason of any increase of the authorized capital stock of the Corporation of any class or series, or bonds, certificates of indebtedness, debentures or other securities convertible into or exchangeable for stock of the Corporation of any class or series, or carrying any right to purchase stock of any class or series, but any such unissued stock, additional authorized issue of shares of any class or series of stock or securities convertible into or exchangeable for stock, or carrying any right to purchase stock, may be issued and disposed of pursuant to resolution of the Board of Directors to such persons, firms, corporations or associations, whether such holders or others, and upon such terms as may be deemed advisable by the Board of Directors in the exercise of its sole discretion. (e) The relative powers, preferences and rights of each series of Preferred Stock in relation to the relative powers, preferences and rights of each other series of Preferred Stock shall, in each case, be as fixed from time to time by the Board of Directors in the resolution or resolutions adopted pursuant to authority granted in section (b) of this Article FOURTH and the consent, by class or series vote or otherwise, of the holders of such of the series of Preferred Stock as are from time to time outstanding shall not be required for the issuance by the Board of Directors of any other series of Preferred Stock whether or not the powers, preferences and rights of such other series shall be fixed by the Board of Directors as senior to, or on a parity with, the powers, preferences and rights of such outstanding series, or any of them; provided, however, that the Board of Directors may provide in the resolution or resolutions as to any series of Preferred Stock adopted pursuant to section (b) of this Article FOURTH that the consent of the holders of a majority (or such greater proportion as shall be therein fixed) of the outstanding shares of such series voting thereon shall be required for the issuance of any or all other series of Preferred Stock. 7 (f) Subject to the provisions of section (e), shares of any series of Preferred Stock may be issued from time to time as the Board of Directors of the Corporation shall determine and on such terms and for such consideration as shall be fixed by the Board of Directors. (g) Shares of Common Stock may be issued from time to time as the Board of Directors of the Corporation shall determine and on such terms and for such consideration as shall be fixed by the Board of Directors. (h) The authorized amount of shares of Common Stock and of Preferred Stock may, without a class or series vote, be increased or decreased from time to time by the affirmative vote of the holders of a majority of the stock of the Corporation entitled to vote thereon. FIFTH: - (a) The business and affairs of the Corporation shall be conducted and managed by a Board of Directors. The number of directors constituting the entire Board shall be not less than five nor more than twenty-five as fixed from time to time by vote of a majority of the whole Board, provided, however, that the number of directors shall not be reduced so as to shorten the term of any director at the time in office, and provided further, that the number of directors constituting the whole Board shall be twenty-four until otherwise fixed by a majority of the whole Board. (b) The Board of Directors shall be divided into three classes, as nearly equal in number as the then total number of directors constituting the whole Board permits, with the term of office of one class expiring each year. At the annual meeting of stockholders in 1982, directors of the first class shall be elected to hold office for a term expiring at the next succeeding annual meeting, directors of the second class shall be elected to hold office for a term expiring at the second succeeding annual meeting and directors of the third class shall be elected to hold office for a term expiring at the third succeeding annual meeting. Any vacancies in the Board of Directors for any reason, and any newly created directorships resulting from any increase in the directors, may be filled by the Board of Directors, acting by a majority of the directors then in office, although less than a quorum, and any directors so chosen shall hold office until the next annual election of directors. At such election, the stockholders shall elect a successor to such director to hold office until the next election of the class for which such director shall have been chosen and until his successor shall be elected and qualified. No decrease in the number of directors shall shorten the term of any incumbent director. (c) Notwithstanding any other provisions of this Charter or Act of Incorporation or the By-Laws of the Corporation (and notwithstanding the fact that some lesser percentage may be specified by law, this Charter or Act of Incorporation or the ByLaws of the Corporation), any director or the entire Board of Directors of the Corporation may be removed at any time 8 without cause, but only by the affirmative vote of the holders of two-thirds or more of the outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors (considered for this purpose as one class) cast at a meeting of the stockholders called for that purpose. (d) Nominations for the election of directors may be made by the Board of Directors or by any stockholder entitled to vote for the election of directors. Such nominations shall be made by notice in writing, delivered or mailed by first class United States mail, postage prepaid, to the Secretary of the Corporation not less than 14 days nor more than 50 days prior to any meeting of the stockholders called for the election of directors; provided, however, that if less than 21 days' notice of the meeting is given to stockholders, such written notice shall be delivered or mailed, as prescribed, to the Secretary of the Corporation not later than the close of the seventh day following the day on which notice of the meeting was mailed to stockholders. Notice of nominations which are proposed by the Board of Directors shall be given by the Chairman on behalf of the Board. (e) Each notice under subsection (d) shall set forth (i) the name, age, business address and, if known, residence address of each nominee proposed in such notice, (ii) the principal occupation or employment of such nominee and (iii) the number of shares of stock of the Corporation which are beneficially owned by each such nominee. (f) The Chairman of the meeting may, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the foregoing procedure, and if he should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded. (g) No action required to be taken or which may be taken at any annual or special meeting of stockholders of the Corporation may be taken without a meeting, and the power of stockholders to consent in writing, without a meeting, to the taking of any action is specifically denied. SIXTH: - The Directors shall choose such officers, agent and servants as may be provided in the By-Laws as they may from time to time find necessary or proper. SEVENTH: - The Corporation hereby created is hereby given the same powers, rights and privileges as may be conferred upon corporations organized under the Act entitled "An Act Providing a General Corporation Law", approved March 10, 1899, as from time to time amended. EIGHTH: - This Act shall be deemed and taken to be a private Act. 9 NINTH: - This Corporation is to have perpetual existence. TENTH: - The Board of Directors, by resolution passed by a majority of the whole Board, may designate any of their number to constitute an Executive Committee, which Committee, to the extent provided in said resolution, or in the By-Laws of the Company, shall have and may exercise all of the powers of the Board of Directors in the management of the business and affairs of the Corporation, and shall have power to authorize the seal of the Corporation to be affixed to all papers which may require it. ELEVENTH: - The private property of the stockholders shall not be liable for the payment of corporate debts to any extent whatever. TWELFTH: - The Corporation may transact business in any part of the world. THIRTEENTH: - The Board of Directors of the Corporation is expressly authorized to make, alter or repeal the By-Laws of the Corporation by a vote of the majority of the entire Board. The stockholders may make, alter or repeal any By-Law whether or not adopted by them, provided however, that any such additional By-Laws, alterations or repeal may be adopted only by the affirmative vote of the holders of two-thirds or more of the outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors (considered for this purpose as one class). FOURTEENTH: - Meetings of the Directors may be held outside of the State of Delaware at such places as may be from time to time designated by the Board, and the Directors may keep the books of the Company outside of the State of Delaware at such places as may be from time to time designated by them. FIFTEENTH: - (a) (1) In addition to any affirmative vote required by law, and except as otherwise expressly provided in sections (b) and (c) of this Article FIFTEENTH: (A) any merger or consolidation of the Corporation or any Subsidiary (as hereinafter defined) with or into (i) any Interested Stockholder (as hereinafter defined) or (ii) any other corporation (whether or not itself an Interested Stockholder), which, after such merger or consolidation, would be an Affiliate (as hereinafter defined) of an Interested Stockholder, or (B) any sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of related transactions) to or with any Interested Stockholder or any Affiliate of any Interested Stockholder of any assets of the Corporation or any Subsidiary having an aggregate fair market value of $1,000,000 or more, or 10 (C) the issuance or transfer by the Corporation or any Subsidiary (in one transaction or a series of related transactions) of any securities of the Corporation or any Subsidiary to any Interested Stockholder or any Affiliate of any Interested Stockholder in exchange for cash, securities or other property (or a combination thereof) having an aggregate fair market value of $1,000,000 or more, or (D) the adoption of any plan or proposal for the liquidation or dissolution of the Corporation, or (E) any reclassification of securities (including any reverse stock split), or recapitalization of the Corporation, or any merger or consolidation of the Corporation with any of its Subsidiaries or any similar transaction (whether or not with or into or otherwise involving an Interested Stockholder) which has the effect, directly or indirectly, of increasing the proportionate share of the outstanding shares of any class of equity or convertible securities of the Corporation or any Subsidiary which is directly or indirectly owned by any Interested Stockholder, or any Affiliate of any Interested Stockholder, shall require the affirmative vote of the holders of at least two-thirds of the outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors, considered for the purpose of this Article FIFTEENTH as one class ("Voting Shares"). Such affirmative vote shall be required notwithstanding the fact that no vote may be required, or that some lesser percentage may be specified, by law or in any agreement with any national securities exchange or otherwise. (2) The term "business combination" as used in this Article FIFTEENTH shall mean any transaction which is referred to any one or more of clauses (A) through (E) of paragraph 1 of the section (a). (b) The provisions of section (a) of this Article FIFTEENTH shall not be applicable to any particular business combination and such business combination shall require only such affirmative vote as is required by law and any other provisions of the Charter or Act of Incorporation of By-Laws if such business combination has been approved by a majority of the whole Board. (c) For the purposes of this Article FIFTEENTH: (1) A "person" shall mean any individual firm, corporation or other entity. (2) "Interested Stockholder" shall mean, in respect of any business combination, any person (other than the Corporation or any Subsidiary) who or which as of the record date for the 11 determination of stockholders entitled to notice of and to vote on such business combination, or immediately prior to the consummation of any such transaction: (A) is the beneficial owner, directly or indirectly, of more than 10% of the Voting Shares, or (B) is an Affiliate of the Corporation and at any time within two years prior thereto was the beneficial owner, directly or indirectly, of not less than 10% of the then outstanding voting Shares, or (C) is an assignee of or has otherwise succeeded in any share of capital stock of the Corporation which were at any time within two years prior thereto beneficially owned by any Interested Stockholder, and such assignment or succession shall have occurred in the course of a transaction or series of transactions not involving a public offering within the meaning of the Securities Act of 1933. (3) A person shall be the "beneficial owner" of any Voting Shares: (A) which such person or any of its Affiliates and Associates (as hereafter defined) beneficially own, directly or indirectly, or (B) which such person or any of its Affiliates or Associates has (i) the right to acquire (whether such right is exercisable immediately or only after the passage of time), pursuant to any agreement, arrangement or understanding or upon the exercise of conversion rights, exchange rights, warrants or options, or otherwise, or (ii) the right to vote pursuant to any agreement, arrangement or understanding, or (C) which are beneficially owned, directly or indirectly, by any other person with which such first mentioned person or any of its Affiliates or Associates has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or disposing of any shares of capital stock of the Corporation. (4) The outstanding Voting Shares shall include shares deemed owned through application of paragraph (3) above but shall not include any other Voting Shares which may be issuable pursuant to any agreement, or upon exercise of conversion rights, warrants or options or otherwise. (5) "Affiliate" and "Associate" shall have the respective meanings given those terms in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as in effect on December 31, 1981. 12 (6) "Subsidiary" shall mean any corporation of which a majority of any class of equity security (as defined in Rule 3a11-1 of the General Rules and Regulations under the Securities Exchange Act of 1934, as in effect in December 31, 1981) is owned, directly or indirectly, by the Corporation; provided, however, that for the purposes of the definition of Investment Stockholder set forth in paragraph (2) of this section (c), the term "Subsidiary" shall mean only a corporation of which a majority of each class of equity security is owned, directly or indirectly, by the Corporation. (d) majority of the directors shall have the power and duty to determine for the purposes of this Article FIFTEENTH on the basis of information known to them, (1) the number of Voting Shares beneficially owned by any person (2) whether a person is an Affiliate or Associate of another, (3) whether a person has an agreement, arrangement or understanding with another as to the matters referred to in paragraph (3) of section (c), or (4) whether the assets subject to any business combination or the consideration received for the issuance or transfer of securities by the Corporation, or any Subsidiary has an aggregate fair market value of $1,000,000 or more. (e) Nothing contained in this Article FIFTEENTH shall be construed to relieve any Interested Stockholder from any fiduciary obligation imposed by law. SIXTEENTH: Notwithstanding any other provision of this Charter or Act of Incorporation or the By-Laws of the Corporation (and in addition to any other vote that may be required by law, this Charter or Act of Incorporation by the By-Laws), the affirmative vote of the holders of at least two-thirds of the outstanding shares of the capital stock of the Corporation entitled to vote generally in the election of directors (considered for this purpose as one class) shall be required to amend, alter or repeal any provision of Articles FIFTH, THIRTEENTH, FIFTEENTH or SIXTEENTH of this Charter or Act of Incorporation. SEVENTEENTH: (a) a Director of this Corporation shall not be liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a Director, except to the extent such exemption from liability or limitation thereof is not permitted under the Delaware General Corporation Laws as the same exists or may hereafter be amended. (b) Any repeal or modification of the foregoing paragraph shall not adversely affect any right or protection of a Director of the Corporation existing hereunder with respect to any act or omission occurring prior to the time of such repeal or modification." 13 EXHIBIT B BY-LAWS WILMINGTON TRUST COMPANY WILMINGTON, DELAWARE AS EXISTING ON JANUARY 16, 1997 BY-LAWS OF WILMINGTON TRUST COMPANY ARTICLE I STOCKHOLDERS' MEETINGS Section 1. The Annual Meeting of Stockholders shall be held on the third Thursday in April each year at the principal office at the Company or at such other date, time, or place as may be designated by resolution by the Board of Directors. Section 2. Special meetings of all stockholders may be called at any time by the Board of Directors, the Chairman of the Board or the President. Section 3. Notice of all meetings of the stockholders shall be given by mailing to each stockholder at least ten (10) days before said meeting, at his last known address, a written or printed notice fixing the time and place of such meeting. Section 4. A majority in the amount of the capital stock of the Company issued and outstanding on the record date, as herein determined, shall constitute a quorum at all meetings of stockholders for the transaction of any business, but the holders of a small number of shares may adjourn, from time to time, without further notice, until a quorum is secured. At each annual or special meeting of stockholders, each stockholder shall be entitled to one vote, either in person or by proxy, for each shares of stock registered in the stockholder's name on the books of the Company on the record date for any such meeting as determined herein. ARTICLE II DIRECTORS Section 1. The number and classification of the Board of Directors shall be as set forth in the Charter of the Bank. Section 2. No person who has attained the age of seventy-two (72) years shall be nominated for election to the Board of Directors of the Company, provided, however, that this limitation shall not apply to any person who was serving as director of the Company on September 16, 1971. Section 3. The class of Directors so elected shall hold office for three years or until their successors are elected and qualified. Section 4. The affairs and business of the Company shall be managed and conducted by the 1 Board of Directors. Section 5. The Board of Directors shall meet at the principal office of the Company or elsewhere in its discretion at such times to be determined by a majority of its members, or at the call of the Chairman of the Board of Directors or the President. Section 6. Special meetings of the Board of Directors may be called at any time by the Chairman of the Board of Directors or by the President, and shall be called upon the written request of a majority of the directors. Section 7. A majority of the directors elected and qualified shall be necessary to constitute a quorum for the transaction of business at any meeting of the Board of Directors. Section 8. Written notice shall be sent by mail to each director of any special meeting of the Board of Directors, and of any change in the time or place of any regular meeting, stating the time and place of such meeting, which shall be mailed not less than two days before the time of holding such meeting. Section 9. In the event of the death, resignation, removal, inability to act, or disqualification of any director, the Board of Directors, although less than a quorum, shall have the right to elect the successor who shall hold office for the remainder of the full term of the class of directors in which the vacancy occurred, and until such director's successor shall have been duly elected and qualified. Section 10. The Board of Directors at its first meeting after its election by the stockholders shall appoint an Executive Committee, a Trust Committee, an Audit Committee and a Compensation Committee, and shall elect from its own members a Chairman of the Board of Directors and a President who may be the same person. The Board of Directors shall also elect at such meeting a Secretary and a Treasurer, who may be the same person, may appoint at any time such other committees and elect or appoint such other officers as it may deem advisable. The Board of Directors may also elect at such meeting one or more Associate Directors. Section 11. The Board of Directors may at any time remove, with or without cause, any member of any Committee appointed by it or any associate director or officer elected by it and may appoint or elect his successor. Section 12. The Board of Directors may designate an officer to be in charge of such of the departments or division of the Company as it may deem advisable. 2 ARTICLE III COMMITTEES Section 1. Executive Committee (A) The Executive Committee shall be composed of not more than nine members who shall be selected by the Board of Directors from its own members and who shall hold office during the pleasure of the Board. (B) The Executive Committee shall have all the powers of the Board of Directors when it is not in session to transact all business for and in behalf of the Company that may be brought before it. (C) The Executive Committee shall meet at the principal office of the Company or elsewhere in its discretion at such times to be determined by a majority of its members, or at the call of the Chairman of the Executive Committee or at the call of the Chairman of the Board of Directors. The majority of its members shall be necessary to constitute a quorum for the transaction of business. Special meetings of the Executive Committee may be held at any time when a quorum is present. (D) Minutes of each meeting of the Executive Committee shall be kept and submitted to the Board of Directors at its next meeting. (E) The Executive Committee shall advise and superintend all investments that may be made of the funds of the Company, and shall direct the disposal of the same, in accordance with such rules and regulations as the Board of Directors from time to time make. (F) In the event of a state of disaster of sufficient severity to prevent the conduct and management of the affairs and business of the Company by its directors and officers as contemplated by these By-Laws any two available members of the Executive Committee as constituted immediately prior to such disaster shall constitute a quorum of that Committee for the full conduct and management of the affairs and business of the Company in accordance with the provisions of Article III of these By-Laws; and if less than three members of the Trust Committee is constituted immediately prior to such disaster shall be available for the transaction of its business, such Executive Committee shall also be empowered to exercise all of the powers reserved to the Trust Committee under Article III Section 2 hereof. In the event of the unavailability, at such time, of a minimum of two members of such Executive Committee, any three available directors shall constitute the Executive Committee for the full conduct and management of the affairs and business of the Company in accordance with the foregoing provisions of this Section. This By-Law shall be subject to implementation by Resolutions of the Board of Directors presently existing or hereafter passed from time to time for that purpose, and any provisions of these By-Laws (other than this Section) and any resolutions which are contrary to the 3 provisions of this Section or to the provisions of any such implementary Resolutions shall be suspended during such a disaster period until it shall be determined by any interim Executive Committee acting under this section that it shall be to the advantage of the Company to resume the conduct and management of its affairs and business under all of the other provisions of these By-Laws. Section 2. Trust Committee (A) The Trust Committee shall be composed of not more than thirteen members who shall be selected by the Board of Directors, a majority of whom shall be members of the Board of Directors and who shall hold office during the pleasure of the Board. (B) The Trust Committee shall have general supervision over the Trust Department and the investment of trust funds, in all matters, however, being subject to the approval of the Board of Directors. (C) The Trust Committee shall meet at the principal office of the Company or elsewhere in its discretion at such times to be determined by a majority of its members or at the call of its chairman. A majority of its members shall be necessary to constitute a quorum for the transaction of business. (D) Minutes of each meeting of the Trust Committee shall be kept and promptly submitted to the Board of Directors. (E) The Trust Committee shall have the power to appoint Committees and/or designate officers or employees of the Company to whom supervision over the investment of trust funds may be delegated when the Trust Committee is not in session. Section 3. Audit Committee (A) The Audit Committee shall be composed of five members who shall be selected by the Board of Directors from its own members, none of whom shall be an officer of the Company, and shall hold office at the pleasure of the Board. (B) The Audit Committee shall have general supervision over the Audit Division in all matters however subject to the approval of the Board of Directors; it shall consider all matters brought to its attention by the officer in charge of the Audit Division, review all reports of examination of the Company made by any governmental agency or such independent auditor employed for that purpose, and make such recommendations to the Board of Directors with respect thereto or with respect to any other matters pertaining to auditing the Company as it shall deem desirable. 4 (C) The Audit Committee shall meet whenever and wherever the majority of its members shall deem it to be proper for the transaction of its business, and a majority of its Committee shall constitute a quorum. Section 4. Compensation Committee (A) The Compensation Committee shall be composed of not more than five (5) members who shall be selected by the Board of Directors from its own members who are not officers of the Company and who shall hold office during the pleasure of the Board. (B) The Compensation Committee shall in general advise upon all matters of policy concerning the Company brought to its attention by the management and from time to time review the management of the Company, major organizational matters, including salaries and employee benefits and specifically shall administer the Executive Incentive Compensation Plan. (C) Meetings of the Compensation Committee may be called at any time by the Chairman of the Compensation Committee, the Chairman of the Board of Directors, or the President of the Company. Section 5. Associate Directors (A) Any person who has served as a director may be elected by the Board of Directors as an associate director, to serve during the pleasure of the Board. (B) An associate director shall be entitled to attend all directors meetings and participate in the discussion of all matters brought to the Board, with the exception that he would have no right to vote. An associate director will be eligible for appointment to Committees of the Company, with the exception of the Executive Committee, Audit Committee and Compensation Committee, which must be comprised solely of active directors. Section 6. Absence or Disqualification of Any Member of a Committee (A) In the absence or disqualification of any member of any Committee created under Article III of the By-Laws of this Company, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absence or disqualified member. 5 ARTICLE IV OFFICERS Section 1. The Chairman of the Board of Directors shall preside at all meetings of the Board and shall have such further authority and powers and shall perform such duties as the Board of Directors may from time to time confer and direct. He shall also exercise such powers and perform such duties as may from time to time be agreed upon between himself and the President of the Company. Section 2. THE VICE CHAIRMAN OF THE BOARD. The Vice Chairman of the Board of Directors shall preside at all meetings of the Board of Directors at which the Chairman of the Board shall not be present and shall have such further authority and powers and shall perform such duties as the Board of Directors or the Chairman of the Board may from time to time confer and direct. Section 3. The President shall have the powers and duties pertaining to the office of the President conferred or imposed upon him by statute or assigned to him by the Board of Directors in the absence of the Chairman of the Board the President shall have the powers and duties of the Chairman of the Board. Section 4. The Chairman of the Board of Directors or the President as designated by the Board of Directors, shall carry into effect all legal directions of the Executive Committee and of the Board of Directors, and shall at all times exercise general supervision over the interest, affairs and operations of the Company and perform all duties incident to his office. Section 5. There may be one or more Vice Presidents, however denominated by the Board of Directors, who may at any time perform all the duties of the Chairman of the Board of Directors and/or the President and such other powers and duties as may from time to time be assigned to them by the Board of Directors, the Executive Committee, the Chairman of the Board or the President and by the officer in charge of the department or division to which they are assigned. Section 6. The Secretary shall attend to the giving of notice of meetings of the stockholders and the Board of Directors, as well as the Committees thereof, to the keeping of accurate minutes of all such meetings and to recording the same in the minute books of the Company. In addition to the other notice requirements of these By-Laws and as may be practicable under the circumstances, all such notices shall be in writing and mailed well in advance of the scheduled date of any other meeting. He shall have custody of the corporate seal and shall affix the same to any documents requiring such corporate seal and to attest the same. Section 7. The Treasurer shall have general supervision over all assets and liabilities of the Company. He shall be custodian of and responsible for all monies, funds and valuables of the Company and for the keeping of proper records of the evidence of property or indebtedness and of all 6 the transactions of the Company. He shall have general supervision of the expenditures of the Company and shall report to the Board of Directors at each regular meeting of the condition of the Company, and perform such other duties as may be assigned to him from time to time by the Board of Directors of the Executive Committee. Section 8. There may be a Controller who shall exercise general supervision over the internal operations of the Company, including accounting, and shall render to the Board of Directors at appropriate times a report relating to the general condition and internal operations of the Company. There may be one or more subordinate accounting or controller officers however denominated, who may perform the duties of the Controller and such duties as may be prescribed by the Controller. Section 9. The officer designated by the Board of Directors to be in charge of the Audit Division of the Company with such title as the Board of Directors shall prescribe, shall report to and be directly responsible only to the Board of Directors. There shall be an Auditor and there may be one or more Audit Officers, however denominated, who may perform all the duties of the Auditor and such duties as may be prescribed by the officer in charge of the Audit Division. Section 10. There may be one or more officers, subordinate in rank to all Vice Presidents with such functional titles as shall be determined from time to time by the Board of Directors, who shall ex officio hold the office Assistant Secretary of this Company and who may perform such duties as may be prescribed by the officer in charge of the department or division to whom they are assigned. Section 11. The powers and duties of all other officers of the Company shall be those usually pertaining to their respective offices, subject to the direction of the Board of Directors, the Executive Committee, Chairman of the Board of Directors or the President and the officer in charge of the department or division to which they are assigned. ARTICLE V STOCK AND STOCK CERTIFICATES Section 1. Shares of stock shall be transferrable on the books of the Company and a transfer book shall be kept in which all transfers of stock shall be recorded. Section 2. Certificate of stock shall bear the signature of the President or any Vice President, however denominated by the Board of Directors and countersigned by the Secretary or Treasurer or 7 an Assistant Secretary, and the seal of the corporation shall be engraved thereon. Each certificate shall recite that the stock represented thereby is transferrable only upon the books of the Company by the holder thereof or his attorney, upon surrender of the certificate properly endorsed. Any certificate of stock surrendered to the Company shall be cancelled at the time of transfer, and before a new certificate or certificates shall be issued in lieu thereof. Duplicate certificates of stock shall be issued only upon giving such security as may be satisfactory to the Board of Directors or the Executive Committee. Section 3. The Board of Directors of the Company is authorized to fix in advance a record date for the determination of the stockholders entitled to notice of, and to vote at, any meeting of stockholders and any adjournment thereof, or entitled to receive payment of any dividend, or to any allotment or rights, or to exercise any rights in respect of any change, conversion or exchange of capital stock, or in connection with obtaining the consent of stockholders for any purpose, which record date shall not be more than 60 nor less than 10 days proceeding the date of any meeting of stockholders or the date for the payment of any dividend, or the date for the allotment of rights, or the date when any change or conversion or exchange of capital stock shall go into effect, or a date in connection with obtaining such consent. ARTICLE VI SEAL Section 1. The corporate seal of the Company shall be in the following form: Between two concentric circles the words "Wilmington Trust Company" within the inner circle the words "Wilmington, Delaware." ARTICLE VII FISCAL YEAR Section 1. The fiscal year of the Company shall be the calendar year. 8 ARTICLE VIII EXECUTION OF INSTRUMENTS OF THE COMPANY Section 1. The Chairman of the Board, the President or any Vice President, however denominated by the Board of Directors, shall have full power and authority to enter into, make, sign, execute, acknowledge and/or deliver and the Secretary or any Assistant Secretary shall have full power and authority to attest and affix the corporate seal of the Company to any and all deeds, conveyances, assignments, releases, contracts, agreements, bonds, notes, mortgages and all other instruments incident to the business of this Company or in acting as executor, administrator, guardian, trustee, agent or in any other fiduciary or representative capacity by any and every method of appointment or by whatever person, corporation, court officer or authority in the State of Delaware, or elsewhere, without any specific authority, ratification, approval or confirmation by the Board of Directors or the Executive Committee, and any and all such instruments shall have the same force and validity as though expressly authorized by the Board of Directors and/or the Executive Committee. ARTICLE IX COMPENSATION OF DIRECTORS AND MEMBERS OF COMMITTEES Section 1. Directors and associate directors of the Company, other than salaried officers of the Company, shall be paid such reasonable honoraria or fees for attending meetings of the Board of Directors as the Board of Directors may from time to time determine. Directors and associate directors who serve as members of committees, other than salaried employees of the Company, shall be paid such reasonable honoraria or fees for services as members of committees as the Board of Directors shall from time to time determine and directors and associate directors may be employed by the Company for such special services as the Board of Directors may from time to time determine and shall be paid for such special services so performed reasonable compensation as may be determined by the Board of Directors. ARTICLE X INDEMNIFICATION Section 1. (A) The Corporation shall indemnify and hold harmless, to the fullest extent permitted by applicable law as it presently exists or may hereafter be amended, any person who was or is made or is threatened to be made a party or is otherwise involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (a "proceeding") by reason of the fact that he, or a person for whom he is the legal representative, is or was a director, officer, employee or agent of the Corporation or is or was serving at the request of the Corporation as a director, officer, employee, fiduciary or agent of another corporation or of a partnership, joint venture, trust, enterprise or 9 non-profit entity, including service with respect to employee benefit plans, against all liability and loss suffered and expenses reasonably incurred by such person. The Corporation shall indemnify a person in connection with a proceeding initiated by such person only if the proceeding was authorized by the Board of Directors of the Corporation. (B) The Corporation shall pay the expenses incurred in defending any proceeding in advance of its final disposition, PROVIDED, HOWEVER, that the payment of expenses incurred by a Director officer in his capacity as a Director or officer in advance of the final disposition of the proceeding shall be made only upon receipt of an undertaking by the Director or officer to repay all amounts advanced if it should be ultimately determined that the Director or officer is not entitled to be indemnified under this Article or otherwise. (C) If a claim for indemnification or payment of expenses, under this Article X is not paid in full within ninety days after a written claim therefor has been received by the Corporation the claimant may file suit to recover the unpaid amount of such claim and, if successful in whole or in part, shall be entitled to be paid the expense of prosecuting such claim. In any such action the Corporation shall have the burden of proving that the claimant was not entitled to the requested indemnification of payment of expenses under applicable law. (D) The rights conferred on any person by this Article X shall not be exclusive of any other rights which such person may have or hereafter acquire under any statute, provision of the Charter or Act of Incorporation, these By-Laws, agreement, vote of stockholders or disinterested Directors or otherwise. (E) Any repeal or modification of the foregoing provisions of this Article X shall not adversely affect any right or protection hereunder of any person in respect of any act or omission occurring prior to the time of such repeal or modification. ARTICLE XI AMENDMENTS TO THE BY-LAWS Section 1. These By-Laws may be altered, amended or repealed, in whole or in part, and any new By-Law or By-Laws adopted at any regular or special meeting of the Board of Directors by a vote of the majority of all the members of the Board of Directors then in office. 10 EXHIBIT C SECTION 321(b) CONSENT Pursuant to Section 321(b) of the Trust Indenture Act of 1939, as amended, Wilmington Trust Company hereby consents that reports of examinations by Federal, State, Territorial or District authorities may be furnished by such authorities to the Securities and Exchange Commission upon requests therefor. WILMINGTON TRUST COMPANY Dated: August 5, 1999 By: /s/ Norma P. Closs --------------------------- Name: Norma P. Closs Title: Vice President EXHIBIT D NOTICE This form is intended to assist state nonmember banks and savings banks with state publication requirements. It has not been approved by any state banking authorities. Refer to your appropriate state banking authorities for your state publication requirements. R E P O R T O F C O N D I T I O N Consolidating domestic subsidiaries of the WILMINGTON TRUST COMPANY of WILMINGTON - ----------------------------------------------------- ------------------------ Name of Bank City in the State of DELAWARE , at the close of business on March 31, 1999.
ASSETS Thousands of dollars Cash and balances due from depository institutions: Noninterest-bearing balances and currency and coins................................................196,035 Interest-bearing balances.............................................................................. 0 Held-to-maturity securities................................................................................. 44,909 Available-for-sale securities.............................................................................1,396,028 Federal funds sold and securities purchased under agreements to resell......................................127,340 Loans and lease financing receivables: Loans and leases, net of unearned income............. 4,176,290 LESS: Allowance for loan and lease losses........... 68,543 LESS: Allocated transfer risk reserve............... 0 Loans and leases, net of unearned income, allowance, and reserve.................................4,107,747 Assets held in trading accounts...................................................................................0 Premises and fixed assets (including capitalized leases)....................................................139,843 Other real estate owned...................................................................................... 1,055 Investments in unconsolidated subsidiaries and associated companies...........................................1,225 Customers' liability to this bank on acceptances outstanding......................................................0 Intangible assets............................................................................................ 5,265 Other assets................................................................................................ 99,075 Total assets..............................................................................................6,118,520 CONTINUED ON NEXT PAGE 1 LIABILITIES Deposits: In domestic offices.......................................................................................4,332,124 Noninterest-bearing . . . . . . . . 959,777 Interest-bearing. . . . . . . . . . 3,372,347 Federal funds purchased and Securities sold under agreements to repurchase................................. 432,395 Demand notes issued to the U.S. Treasury.....................................................................28,906 Trading liabilities (from Schedule RC-D)..........................................................................0 Other borrowed money:......................................................................................./////// With original maturity of one year or less.........................................................715,000 With original maturity of more than one year........................................................43,000 Bank's liability on acceptances executed and outstanding..........................................................0 Subordinated notes and debentures.................................................................................0 Other liabilities (from Schedule RC-G).................................................................... 93,311 Total liabilities.........................................................................................5,644,736 EQUITY CAPITAL Perpetual preferred stock and related surplus.....................................................................0 Common Stock....................................................................................................500 Surplus (exclude all surplus related to preferred stock).....................................................62,118 Undivided profits and capital reserves......................................................................408,053 Net unrealized holding gains (losses) on available-for-sale securities....................................... 3,113 Total equity capital........................................................................................473,784 Total liabilities, limited-life preferred stock, and equity capital.......................................6,118,520
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