<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 22, 1999
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
PRICELINE.COM INCORPORATED
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C> <C>
DELAWARE 4541 06-1528493
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
Incorporation or Organization) No.)
</TABLE>
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. / /
------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER SHARE PRICE REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, par value $0.008 per share....... 6,325,000 shares (1) $89.19(2) $563,684,000(2) $156,704.15
% Convertible Subordinated Notes due 2006.... $287,500,000 (3) 100% $287,500,000(4) $79,925
Common Stock, par value $0.008 per share,
issuable upon conversion of % Convertible
Subordinated Notes due 2006 (5).............. shares N/A N/A N/A
Total.......................................... $236,629.15
</TABLE>
(1) Includes 825,000 shares of common stock that the underwriters have the
option to purchase to cover over-allotments, if any.
(2) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457(c) of the Securities Act of 1933, as amended, and
based upon the average high and low prices on July 21, 1999, as reported on
the Nasdaq National Market.
(3) Includes $37,500,000 principal amount that the underwriters have the option
to purchase to cover over-allotments, if any.
(4) Exclusive of accrued interest, if any. Estimated solely for the purpose of
computing the amount of the registration fee.
(5) The shares of common stock that may be issued from time to time upon
conversion of our % Convertible Subordinated Notes due 2006. No additional
consideration will be received for any shares of common stock issued in
connection with the exercise of the conversion right. Pursuant to Rule 416
under the Securities Act of 1933, as amended, this registration statement
also includes an indeterminate number of shares that may be subject to
issuance upon conversion of the convertible subordinated notes as a result
of anti-dilution and other provisions of the notes.
------------------------------
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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
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.
<PAGE>
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.
<PAGE>
PROSPECTUS (SUBJECT TO COMPLETION)
ISSUED JULY , 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 JULY 21, 1999, THE LAST REPORTED SALE PRICE FOR THE COMMON STOCK ON
THE NASDAQ NATIONAL MARKET WAS $88 7/32 PER SHARE.
------------------------
INVESTING IN THE COMMON STOCK INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 4.
---------------------
PRICE $ A SHARE
------------------------
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS PRICELINE.COM STOCKHOLDERS
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
PER SHARE........................... $ $ $ $
TOTAL............................... $ $ $ $
</TABLE>
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 , 1999.
------------------------
MORGAN STANLEY DEAN WITTER GOLDMAN, SACHS & CO.
ALLEN & COMPANY INCORPORATED
BANCBOSTON ROBERTSON STEPHENS
DONALDSON, LUFKIN & JENRETTE
MERRILL LYNCH & CO.
, 1999
<PAGE>
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.
<PAGE>
PROSPECTUS (Subject to Completion)
ISSUED JULY , 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 JULY 21, 1999, THE LAST REPORTED SALE PRICE FOR THE COMMON STOCK ON
THE NASDAQ NATIONAL MARKET WAS $88 7/32 PER SHARE.
------------------------
INVESTING IN THE COMMON STOCK INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 4.
---------------------
PRICE $ A SHARE
------------------------
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS PRICELINE.COM STOCKHOLDERS
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
PER SHARE........................... $ $ $ $
TOTAL............................... $ $ $ $
</TABLE>
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 , 1999.
------------------------
MORGAN STANLEY DEAN WITTER GOLDMAN SACHS INTERNATIONAL
ALLEN & COMPANY INCORPORATED
BANCBOSTON ROBERTSON STEPHENS INTERNATIONAL LIMITED
DONALDSON, LUFKIN & JENRETTE INTERNATIONAL
MERRILL LYNCH INTERNATIONAL
, 1999
<PAGE>
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
<PAGE>
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 interet rate and
points on mortgages, home equity loans and home refinancings.
3
<PAGE>
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
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary.............................
Risk Factors...................................
Special Note Regarding Forward-Looking
Statements...................................
Use of Proceeds................................
Dividend Policy................................
Capitalization.................................
Dilution.......................................
Selected Financial Data........................
Management's Discussion and Analysis of
Financial Condition and Results of
Operations...................................
Business.......................................
<CAPTION>
PAGE
-----
<S> <C>
Management.....................................
Certain Transactions...........................
Principal and Selling Stockholders.............
Description of Capital Stock...................
Certain United States Federal Tax Consequences
To Non-U.S. Investors........................
Shares Eligible for Future Sale................
Underwriters...................................
Legal Matters..................................
Experts........................................
Additional Information.........................
Index to Financial Statements.................. F-1
</TABLE>
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. See "Description of Capital Stock."
i
<PAGE>
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.
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered......................... 6,000,000 shares
2,000,000 shares by priceline.com
4,000,000 shares by the selling stockholders
Common Stock to be outstanding after the
offering................................... shares(a)
Use of proceeds.............................. For working capital and general corporate
purposes. See "Use of Proceeds."
Nasdaq National Market symbol................ PCLN
</TABLE>
- ------------------------
(a) Excludes 48,248,888 shares of common stock issuable upon the exercise of
outstanding options and warrants and shares 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
<PAGE>
SUMMARY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
JULY 18, 1997
(INCEPTION)
TO YEAR ENDED SIX MONTHS
DECEMBER 31, DECEMBER 31, ENDED
1997 1998 JUNE 30, 1999
------------- --------------- ---------------
<S> <C> <C> <C>
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(b)............................... -- 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
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 1999
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<S> <C> <C>
ACTUAL AS ADJUSTED(F)
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BALANCE SHEET DATA(A):
Cash and cash equivalents....................................................... $ 142,803,134 $
Working capital................................................................. 150,043,651
Total assets.................................................................... 204,794,892
Total liabilities............................................................... 33,485,681
Total stockholders' equity...................................................... 171,309,211
</TABLE>
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(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 a non-cash charge 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) $ from the sale of the 2,000,000 shares of common stock
offered by priceline.com in this offering, based upon an assumed public
offering price of $ per share (after deducting the estimated offering
expenses and underwriting discounts and commissions) and (y) $ 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).
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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.
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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
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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.
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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.
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 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.
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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 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
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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.
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.
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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 5.3% 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.
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.
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Since our formation in July 1997, we have expanded from 10 to 250 full-time
employees. 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.
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;
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- 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.com;
- 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.com. 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.
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
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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 distinctions that it does not fall within the scope of our patent.
For example, we are aware of Internet
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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 currently 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 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
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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 regular commercial
activities since ceasing operations in 1992. Based upon publicly available
information,
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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. On July 13, 1999, the plaintiff's new counsel filed a motion to
reinstate four related claims that previously had been dismissed with prejudice.
We intend to vigorously oppose reinstatement of these claims, and if the claims
are reinstated, to vigorously defend against these claims. Nevertheless, if
these claims are reinstated and if the plaintiffs ultimately prevail as to these
claims, we could be exposed to remedies that could negatively affect our
operating results.
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
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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.
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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;
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- 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 145,341,498
shares of common stock. Of these shares the 6,000,000 shares of common stock
sold in this offering and the 10,000,000 shares of common stock sold in our
initial public offering 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 being concurrently offered
will be freely tradeable in a similar manner. In addition to the shares of
common stock outstanding upon completion of this offering and those issuable
upon conversion of the convertible notes, 46,366,488 additional shares are
issuable upon exercise of outstanding warrants and options. We have filed a
registration statement on Form S-8 covering the shares of common stock issuable
under options granted under the 1997 Omnibus Plan and the 1999 Omnibus Plan. As
a result, those shares will be freely tradeable 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 common stock and the remaining
shares of common stock issuable upon exercise of outstanding warrants and
options will be "restricted securities" under the Securities Act, subject to
restrictions on the timing, manner and volume of sales of these shares.
The selling stockholders and officers and directors who will own an
aggregate of 158,153,353 shares of common stock, options and warrants to
purchase shares of common stock after this offering and the concurrent note
offering, 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.
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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 1,095,492 shares after the offering agreed in connection with our
initial public offering to similar restrictions until September 25, 1999. In
connection with our option exercise program, holders of options to purchase
1,021,071 shares 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, the option exercise
restrictions, the holding period requirements 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:
<TABLE>
<CAPTION>
APPROXIMATE
NUMBER OF
SHARES
ELIGIBLE FOR
DATE SALE
- --------------------------------------------------------------------------------------------------- -------------
<S> <C>
September 26, 1999................................................................................. 4,642,803
December 31, 1999.................................................................................. 13,200,429
180 days after the date of this prospectus......................................................... 74,087,360
Thereafter......................................................................................... 61,403,623
</TABLE>
Since many of these shares were purchased at prices substantially below current
market prices, we believe a significant number of these shares may be sold when
eligible for resale.
Upon consummation of this offering and subject to the foregoing lock-up
agreements, holders of up to 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. Upon the effectiveness of
this registration, all shares covered by such registration statement will be
freely transferable.
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 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
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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 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 could
require us to register as an automobile broker/dealer as a condition to offering
our new automobile service in their states. In that case, 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 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 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 mortgage 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
mortgage service could be materially and adversely affected and we may be unable
to continue to make our home mortgage 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.
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<PAGE>
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 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
22
<PAGE>
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
26,441,986 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 $11.35 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 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
23
<PAGE>
44.0 and 12.5 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.
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 in this offering are
estimated to be approximately $ million and the net proceeds of our sale of
% convertible subordinated notes in the concurrent note offering are estimated
to be approximately $ million, in each case, after deducting
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 note offering.
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<PAGE>
YOU WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION
Purchasers of common stock in this offering will suffer immediate and
substantial dilution. The dilution will be $ per share in the net tangible book
value of the common stock from the assumed public offering price of $ per
share. As of July 21, 1999, there are (1) 26,441,986 shares of common stock
issuable upon exercise of options outstanding as of July 21, 1999, with a
weighted average exercise price of approximately $11.35 per share, of which,
7,991,287 shares are not vested; (2) 18,619,402 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.
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<PAGE>
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 $ million, after deducting estimated
offering expenses and the underwriting discount 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 $
million, after deducting estimated offering expenses and the underwriting
discount 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 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:
<TABLE>
<CAPTION>
1999 HIGH LOW
- ----------------------------------------------------------------------- ---------- -----------
<S> <C> <C> <C> <C>
First Quarter (from March 29, 1999).................................... $ 87 7/8 $ 69
Second Quarter......................................................... 162 3/8 59 7/8
Third Quarter (through July 21, 1999).................................. 112 88 7/32
</TABLE>
On July 21, 1999, the last reported sale price for priceline.com common
stock on the Nasdaq National Market was $88 7/32 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.
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<PAGE>
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) $ from the
sale of the 2,000,000 shares of common stock offered by priceline.com in this
offering, based upon an assumed public offering price of $ per share (after
deducting the estimated offering expenses and underwriting discounts and
commissions) and (y) $ 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 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.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1999
-----------------------------
<S> <C> <C>
ACTUAL AS ADJUSTED
--------------- ------------
Capital Lease Obligations--net of current portion.................................. $ 12,248 $
% Convertible Subordinated Notes due 2006....................................... --
--------------- ------------
Total debt....................................................................... 12,248
Stockholders' equity:(a)
Common Stock, $0.008 par value--Authorized, 1,000,000,000 shares; issued and
outstanding, 142,320,427 and shares, actual and as adjusted,
respectively..................................................................... 1,138,564
Additional paid-in capital......................................................... 326,880,953
Accumulated deficit................................................................ (156,710,306)
--------------- ------------
Total stockholders' equity....................................................... 171,309,211
--------------- ------------
Total capitalization........................................................... $ 171,321,459 $
--------------- ------------
--------------- ------------
</TABLE>
- ------------------------
(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) 18,619,402 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) shares issuable on conversion of the %
convertible subordinated notes due being offered concurrent with
this offering.
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<PAGE>
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 discount and estimated offering
expenses), the adjusted net tangible book value of priceline.com as of June 30,
1999 would have been approximately $ million, or $ per share. This represents
an immediate increase in net tangible book value of $ per share to existing
stockholders and an immediate dilution of $ per share to new investors
purchasing shares in this offering. The following table illustrates the per
share dilution:
<TABLE>
<S> <C> <C>
Assumed public offering price per share................................. $
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.........................................................
---------
Adjusted net tangible book value per share after the offering...........
---------
Dilution per share to new investors..................................... $
---------
---------
</TABLE>
The foregoing discussion and table exclude (1) 26,441,986 shares of common
stock issuable upon exercise of options outstanding as of July 21, 1999, with a
weighted average exercise price of approximately $11.35 per share; (2) 5,786,943
additional shares of common stock reserved for issuance under the 1997 Omnibus
Plan and the 1999 Omnibus Plan; (3) 18,619,402 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) shares issuable on conversion of the % convertible
subordinated notes due being offered concurrent with this offering.
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<PAGE>
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.
<TABLE>
<CAPTION>
JULY 18, 1997 YEAR ENDED SIX MONTHS
(INCEPTION) TO DECEMBER 31, 1998 ENDED
DECEMBER 31, 1997 RESTATED(A) JUNE 30, 1999
----------------- ----------------- --------------
<S> <C> <C> <C>
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
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 1999
-----------------------------------
<S> <C> <C>
ACTUAL AS ADJUSTED(F)
-------------- -------------------
BALANCE SHEET DATA: (B)
Cash and cash equivalents................................................... $ 142,803,134 $
Working capital............................................................. 150,043,651
Total assets................................................................ 204,794,892
Long-term debt and capital lease obligation................................. 12,248
Total liabilities........................................................... 33,485,681
Total stockholders' equity.................................................. 171,309,211
</TABLE>
- ------------------------
(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 a non-cash charge 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) $ from the sale of the 2,000,000 shares of common stock
offered by priceline.com in this offering, based upon an assumed public
offering price of $ per share (after deducting the estimated offering
expenses and underwriting discounts and commissions) and (y) $ from the
sale of $ million of % convertible subordinated notes in the
concurrent note offering (after deducting the estimated offering expenses
and underwriting discounts and commissions).
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<PAGE>
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 July 20, 1999
priceline.com had 259 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
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<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------------------
JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1998 1998 1998 1999 1999 (1)
--------- ------------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C>
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................................. 11.2% 9.6% 16.2% 24.4% 42.2%
</TABLE>
- ------------------------
(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 also currently has outstanding non-qualified stock options to
purchase 26,441,986 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 $11.35 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 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.
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
32
<PAGE>
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 $90.0
million during the quarter ended 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 airline
ticket processing fees and Worldspan reservation booking 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 we received fees based upon
the submission of qualifying credit card applications, while the First USA
program ties a portion of our 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
33
<PAGE>
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 our revenues provided by our 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.
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. Because the fees
generated by adaptive marketing programs generally have involved no separate
costs, adaptive marketing revenues have had a disproportionately positive impact
on priceline.com's total gross margin for the period. 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 our gross profit for the six months ended June 30,
1999. If our transaction activity continues to grow, we expect the proportion of
our 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 product
34
<PAGE>
mix, resulting from a greater percentage of revenues being attributable to
transaction revenues rather than fee based revenues. Fee-based revenues, such as
fees from ancillary revenues, adaptive marketing 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.
35
<PAGE>
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 was $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.
In addition, priceline.com incurred operating expenses of $17.9 million,
consisting of sales and marketing expenses of $7.7 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
$18.8 million and, after consideration of interest income, a net loss of $18.7
million for the 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.
36
<PAGE>
A summary of the significant effects of the restatement is as follows:
<TABLE>
<CAPTION>
AS PREVIOUSLY
REPORTED AS RESTATED
-------------- ---------------
<S> <C> <C>
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)
</TABLE>
- ------------------------
(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.
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
37
<PAGE>
charge representing the fair value of warrants issued to certain of our
participating airlines in connection with securing the Company'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.
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
38
<PAGE>
results in any quarter are not necessarily indicative of the results that may be
expected for any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------------------------------
JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1998 1998 1998 1999 1999
------------ ------------- -------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
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%
</TABLE>
- ------------------------
* 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 consist 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, 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 fees from ancillary
revenues, adaptive marketing, 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;
39
<PAGE>
- 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 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.
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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.
Concurrent with this offering, priceline.com is making an offering of $250.0
million 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 note offering (after deducting the estimated offering expenses
and net of underwriting discounts and commissions), to be approximately
$ .
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.
In July 1999, priceline.com made a $6.0 million loan to Mr. Daniel 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 pursuant to the terms of the loan, accrued interest and
principal are payable in July 2004.
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 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
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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 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
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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 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.
NON-QUALIFIED STOCK OPTIONS
Priceline.com currently has outstanding non-qualified stock options to
purchase 26,441,986 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 $11.35 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 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. Upon exercise of outstanding options,
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.
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
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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.
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.
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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 $486.3 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
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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
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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.
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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
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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
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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.
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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
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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
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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
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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 MORTGAGES. Priceline.com introduced its home mortgage service in
January 1999. Priceline.com's mortgage 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 mortgage 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 the home
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financing services through LendingTree. See "--Strategic Alliances--Marketing
Agreement for Mortgage Services."
To obtain a home mortgage 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 Lending
Tree.
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 Lending Tree 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. Priceline.com expects to launch similar
tests in the states of Florida, California and Michigan during the third quarter
of 1999, and to become operational in the 48 contiguous states during the first
quarter of 2000. 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 regulatory approvals and authorizations
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necessary to conduct our new car sales service, priceline.com expects to provide
new car sales services on a national scale by the end of the fourth quarter of
1999.
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.
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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
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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;
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- consumers must agree to accept up to one stop or connection on both their
departing and return flights;
- 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.
In connection with priceline.com's home mortgage 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.
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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 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.
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 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.
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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;
- online and traditional mortgage and insurance brokers, including
mortgage.com, Quicken Mortgage, E-Loan and iOwn, Inc.; and
- insurance companies.
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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 power supply system and generator and redundant servers at its
Stamford, Connecticut headquarters to provide service capability if the Exodus
site fails.
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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 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.
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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 could require priceline.com to register as an automobile broker/dealer in as
a condition to offering our new automobile service in their states. In that
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case, priceline.com may be unable to continue to make its 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, 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
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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.
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
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
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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 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 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
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material legal and factual allegations contained in Marketel's second amended
complaint and believe that 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. On July 13, 1999,
the plaintiff's new counsel filed a motion to reinstate four related claims that
previously had been dismissed with prejudice. Priceline.com intends to
vigorously oppose reinstatement of these claims and, if the claims are
reinstated, to vigorously defend against these claims. Nevertheless, if these
claims are reinstated and if the plaintiffs ultimately prevail as to these
claims, priceline.com could be exposed to remedies that could negatively affect
its operating results. 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 Purchaser 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 259 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.
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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.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------------ --- ------------------------------------------------
<S> <C> <C>
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................................. 35 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
</TABLE>
- ------------------------
(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,
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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.
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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.
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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 $3.20 per share, subject to certain
restrictions described under "Shares Eligible for Future Sale."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the members of the Compensation Committee of the board of directors
is an officer or employee of priceline.com. No executive officer of
priceline.com serves as a member of the board of directors or compensation
committee of any entity that has one or more executive officers serving on
priceline.com's Compensation Committee.
SUMMARY OF COMPENSATION
The following table sets forth information concerning compensation earned in
the fiscal year ended December 31, 1998, by priceline.com's Chief Executive
Officer and its other four most highly compensated executive officers.
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SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
-------------
NUMBER OF
ANNUAL COMPENSATION SECURITIES
----------------------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) OPTIONS (#) COMPENSATION ($)
- -------------------------------------------------- --------- ----------- ----------- ------------- -------------------
<S> <C> <C> <C> <C> <C>
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
</TABLE>
- ------------------------
(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
<TABLE>
<CAPTION>
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)
- ------------------------------------- ------------------- ------------------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
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
</TABLE>
- ------------------------
(a) Options become exercisable as follows: (1) with respect to Mr. Braddock:
6,250,000 shares have vested, but are not exercisable until expiration of
the lock-up period; (2) with respect to
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Mr. Walker: (a) 1,382,500 shares are vested, but are not exercisable
until 180 days following the date of this prospectus, and (b) the
remainder of the shares vest and become exercisable on June 1, 2000; (3)
with respect to Mr. Fink: (a) 2,125,000 shares are vested, but are not
exercisable until 180 days following the date of this prospectus, and (b)
the remainder of the shares vest and become exercisable on June 1, 2000;
(4) with respect to Mr. Francis: (a) 750,000 shares are vested, but are
not exercisable until 180 days following the date of this prospectus, 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
180 days following the date of this prospectus; and (c) the remainder of
the shares vest and become exercisable on June 1, 2000.
(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
<TABLE>
<CAPTION>
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
- -------------------------------------- --------------- ----------- --------------------- -------------------
<S> <C> <C> <C> <C>
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
</TABLE>
- ------------------------
(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,
22,666,481 options covering shares of common stock were outstanding under the
1997 Omnibus Plan as of July 21, 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 3,775,505 shares of common stock
were outstanding under the 1999 Omnibus Plan as of July 21, 1999.
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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 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,
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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 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.
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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 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.
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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 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.
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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.
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,
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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 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
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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 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
July 21, 1999, options covering 3,775,505 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
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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 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
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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, all of
which are vested. The option is not exercisable until September 25, 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 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:
- currently is vested for 2,125,000 of such shares that are not exercisable
until expiration of the lock-up period; 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 his employment by
Walker Digital.
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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 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 1,476,500 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.
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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 is automatically convertible into 21,610,855 shares
of common stock upon the completion of this 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
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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
Purchaser 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.
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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. 72 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 1,021,071 shares
underlying their options are expected to be 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 8,231,967 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.
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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.
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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 July
21, 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.
<TABLE>
<CAPTION>
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
- --------------------------------------------------- ------------- ----------- ---------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Jay S. Walker(b)................................... 62,504,373 43.2% -- 62,302,060 42.5%
Richard S. Braddock(c)............................. 17,828,125 11.9 202,313 17,625,812 11.9
Jesse M. Fink(d)................................... 5,487,000 3.8 202,313 5,284,687 3.6
Timothy G. Brier(e)................................ 3,012,700 2.1 72,832 2,939,868 2.0
Paul E. Francis(f)................................. 2,138,470 1.5 30,000 2,065,638 1.4
Daniel H. Schulman(g).............................. 500,000 * -- 500,000 *
Paul A. Allaire(h)................................. 56,200 * -- 56,200 *
Ralph M. Bahna(i).................................. 344,750 * -- 344,750 *
Paul J. Blackney(j)................................ 140,008 * -- 140,008 *
William E. Ford(k)................................. 26,296,353 18.3 -- 25,648,103 17.6
Marshall Loeb(l)................................... 32,250 * -- 32,250 *
N. J. Nicholas, Jr.(m)............................. 3,906,250 2.7 -- 3,906,250 2.7
Nancy B. Peretsman(n).............................. 2,906,250 2.0 -- 2,906,250 2.0
Paul Breitenbach(o)................................ 1,591,950 1.1 72,832 1,519,118 1.0
T. Scott Case(p)................................... 2,200,000 1.5 72,832 2,127,168 1.5
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(k).................. 26,296,353 18.3 648,250 25,648,103 17.6
Vulcan Ventures Incorporated(r).................... 9,375,000 6.5 231,406 9,143,594 6.3
Yarmouth Limited Partnership(q) 312,500 * 1,851 304,787 *
Walker Digital Corporation(b)...................... 62,504,373 43.2 202,313 62,302,060 42.5
The Jay Walker Irrevocable Credit Trust(b)......... 62,504,373 43.2 -- 62,302,060 42.5
Delta(s)........................................... 18,619,402 13.0 1,523,329 17,096,073 11.8
Strypemonde Foundation(f).......................... 42,832 * 42,832 -- *
All directors and executive officers as a group (15
persons) (b)-(n)................................. 119,982,695 77.8% 1,198,540 118,784,155 76.0%
</TABLE>
- ------------------------
* 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 options
or warrants that are currently exercisable or exercisable within 60 days of
July 21, 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 includes any shares sold as a result of the
exercise by the underwriters of their over-allotment option, which if sold,
will be allocated pro rata among the selling stockholders.
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(b) Includes: (1) 7,520,833 shares held by Walker Digital Corporation, of which
Mr. Walker is Founder, Chairman and the controlling stockholder; (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 and to which Mr.
Walker disclaims beneficial ownership; (4) up to an aggregate of 4,534,800
shares as to which Mr. Walker has granted options to purchase to certain
individuals. Also includes options outstanding to purchase 1,382,500 shares
which are vested but not exercisable until 180 days after the date of this
prospectus; (5) 48,100,041 shares held by Mr. Jay S. Walker; and (6) up to
an aggregate of 228,171 shares as to which Walker Digital has granted
options to purchase to certain of its employees and consultants. Excludes
132,500 shares subject to options that are not vested or exercisable within
60 days of July 21, 1999. Shares beneficially owned after the offering takes
around of the sale of 202,312 shares by Walker Digital Corporation. The
address of Walker Digital Corporation is Five High Ridge Park, Stamford,
Connecticut 06905.
(c) Includes 5,000,000 shares held by Richard S. Braddock as Trustee of The
Richard S. Braddock 1999 Annuity Trust and options outstanding to purchase
6,250,000 shares which are vested but are not exercisable until 180 days
after the date of this prospectus. Includes options to purchase 250,000
shares that are currently exercisable for shares owned by Mr. Walker.
(d) Includes 875,000 shares held by The Jesse Fink 1998 Grantor Retained Annuity
Trust and options outstanding to purchase 2,125,000 shares which are vested
but not exercisable until 180 days after the date of this prospectus.
Excludes 318,750 shares subject to options that are not vested or
exercisable within 60 days of July 21, 1999.
(e) Includes (1) 500,000 shares held by The Tim Brier 1998 Grantor Annuity
Trust; and (2) 7,700 shares held by immediate family members of Mr. Brier
and 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 July 21, 1999.
(f) Includes: (1) 62,500 shares held by The Paul E. Francis 1998 Trust, dated
April 1, 1998; (2) 15,625 shares held by The Paul E. Francis 1998 Trust,
dated December 2, 1998; (3) 15,625 shares held by The Paul E. Francis 1999
Trust, dated February 26, 1999; and (4) 125,000 shares held by The Paul E.
Francis 1999 Annuity Trust. Includes options outstanding to purchase 750,000
shares which are vested but not exercisable until 180 days after the date of
this prospectus. Excludes 285,000 shares subject to options that are not
vested or exercisable within 60 days of July 21, 1999. Shares beneficially
owned after the offering take account of 30,000 shares sold personally by
Mr. Francis and 42,832 shares being sold by Strypemonde Foundation, a
charitable foundation controlled by Mr. Francis and his spouse.
(g) Includes options outstanding to purchase 500,000 shares which are vested but
not exercisable until expiration of the lock-up period related to the
initial public offering. Excludes 2,500,000 shares subject to options that
are not vested or exercisable within 60 days of July 21, 1999.
(h) Includes options outstanding to purchase 37,500 shares which are vested but
not exercisable until expiration of the lock-up period related to the
initial public offering.
(i) Includes options outstanding to purchase 31,250 shares which are vested but
not exercisable until expiration of the lock-up period related to the
initial public offering.
(j) Includes options outstanding to purchase 31,250 shares which are vested but
not exercisable until expiration of the lock-up period related to the
initial public offering.
(k) 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 180 days after the date of this prospectus,
which options are held by Mr. William E. Ford. Mr. Ford, a director of
priceline.com, is a managing member of General Atlantic Partners, LLC and a
general partner of
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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 referred to above. The address of General Atlantic is
3 Pickwick Plaza, Greenwich, Connecticut 06830.
(l) 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 lock-up period related to the initial public offering
and which are held by Mr. Loeb's daughter and to which Mr. Loeb disclaims
beneficial ownership.
(m) 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. 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 180 days after the date of this prospectus.
(n) 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 to purchase 571,875 shares that are exercisable for
shares, owned by Mr. Walker and are held by Allen & Company Incorporated;
(3) 959,375 shares held by Ms. Peretsman; and (4) options outstanding to
purchase 31,250 shares which are vested by not exercisable until expiration
of the lock-up period related to the initial public offering and are held by
Ms. Peretsman. Ms. Nancy B. 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.
(o) 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 July 21, 1999. Also includes options held by Mr. Breitenbach to
purchase 1,141,950 shares that are owned by Mr. Walker which are currently
exercisable. Excludes options to purchase 570,945 shares from Mr. Walker
which are not vested or exercisable within 60 days of July 21, 1999.
(p) Includes options outstanding to purchase 10,861,966 shares, which are vested
but not exercisable until 180 days after the date of this prospectus.
Excludes 3,691,458 shares subject to options that are not vested or
exercisable within 60 days of July 21, 1999. The address of all directors,
officers and other individual stockholders is Five High Ridge Park,
Stamford, Connecticut 06905.
(q) Includes (i) 75,000 shares held by Yarmouth Limited Partnership and (ii)
237,500 held by Jim 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.
(r) 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.
(s) Includes 1,523,329 shares and warrants to purchase an aggregate of
17,096,073 shares which we are not exercisabel until 180 days after the date
of this prospectus.
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CERTAIN UNITED STATES FEDERAL TAX CONSEQUENCES TO NON-U.S. INVESTORS
INTRODUCTION
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
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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
time of conversion (reduced by any basis allocable to a fractional share
interest). The holding period for common stock received on conversion will
generally include the holding period of the Note converted. However, a U.S.
holder's tax basis in shares of common stock considered 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 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, made on 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 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".
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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;
- 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 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
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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
- 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.
EFFECTIVELY CONNECTED INCOME
If a non-U.S. holder of a Note or common stock is engaged in a trade of
business in the United States and if interest on the Note, dividends on common
stock, or gain realized on the sale, exchange or other disposition of the Note
or common stock is effectively connected with the conduct of such trade or
business (and, if certain tax treaties apply, is attributable to a permanent
establishment maintained by the non-U.S. holder in the United States), the
non-U.S. holder, although exempt from U.S. withholding tax (provided that the
certification requirements discussed in the next sentence are met), will
generally be subject to U.S. federal income tax on such interest, dividends or
gain on a net income basis in the same manner as if it were a U.S. holder. Such
a non-U.S. holder will be required, under currently effective Treasury
Regulations, to provide priceline.com with a properly executed IRS Form 4224 in
order to claim an exemption from withholding tax. In addition, if such non-U.S.
holder is a foreign corporation, it may be subject to a branch profits tax equal
to 30% (or such lower rate provided by an applicable treaty) of its effectively
connected earnings and profits for the taxable year, subject to certain
adjustments.
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,
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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.
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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 145,341,498 outstanding shares of common stock,
outstanding options to purchase 26,441,986 shares of common stock and
outstanding warrants to purchase 21,806,902 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 July 21, 1999, (1) options to purchase a total of 26,441,986 shares of
common stock were outstanding; and (2) up to 5,827,943 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 July 21, 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."
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REGISTRATION RIGHTS
The holders of an aggregate of 143,983,503 shares of common stock or
securities convertible into common stock are entitled to certain registration
rights. Of such shares, shares are being sold in this offering
pursuant to such 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.
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."
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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
145,341,498 shares of common stock. Of these shares the 5,500,000 shares of
common stock sold in this offering and the 10,000,000 shares of common stock
sold in priceline.com's initial public offering 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, shares are issuable upon exercise of
outstanding warrants and options. Priceline.com has filed a registration
statement on Form S-8 covering the shares of common stock issuable under options
granted under the 1997 Omnibus Plan and the 1999 Omnibus Plan. As a result,
those shares will be freely tradeable 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 common stock and the remaining
shares of common stock issuable upon exercise of outstanding warrants and
options will be "restricted securities" under the Securities Act, subject to
restrictions on the timing, manner and volume of sales of such shares.
The selling stockholders and officers and directors who will own an
aggregate of shares of common stock after the offering and options and
warrants to purchase an additional shares after the offering have each
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, file a registration statement, in the case
of priceline.com, 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, 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; or
- file a registration statement, in the case of priceline.com, other than a
registration statement 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.
The restrictions described in this paragraph do not apply to certain
circumstances, including:
- the sale of the shares to the underwriters in this 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;
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- 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; or
- other transfers of any shares of common stock by certain of the foregoing
persons to any associate, 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.
In addition, the shareholders have agreed that, without the prior written
consent of Morgan Stanley & Co. Incorporated on behalf of the underwriters,
neither it nor any of its affiliates will, 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. Beginning 180
days after the date of this prospectus, all such shares will be eligible for
sale in the public market, subject to certain timing, manner of sale and volume
limitations pursuant to Rule 144.
In addition, holders who will own shares of common stock after this
offering and options to purchase an additional shares after the offering
agreed in connection with our initial public offering to similar restrictions
until September 26, 1999.
In connection with a recently completed option exercise program, holders of
options to purchase shares of common stock registered on priceline.com's 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 the
prospectus.
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 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 [ ] 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 will be
freely transferable. Walker Digital also owns directly approximately 5.3% 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."
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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.
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
- ----------------------------------------------------------------------------------------------------- ----------
<S> <C>
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
----------
----------
</TABLE>
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 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
101
<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 900,000 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 the directors and
executive officers of priceline.com has agreed 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 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; or
- file a registration statement in the case of priceline.com for the
registration of any shares of common stock or any security convertible
into or exercisable or exchangeable for common stock;
whether any transaction described above is to be settled by delivery of common
stock or such other securities, in cash or otherwise. The restrictions described
in this paragraph do not apply to:
- the sale of shares to the underwriters;
- the issuance by priceline.com of restricted stock awards under
priceline.com's existing employee benefit plans or of 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
recipient of such warrants or shares agrees to be bound by the foregoing
provisions;
102
<PAGE>
- the sale or other transfer of any shares of common stock by certain of the
foregoing persons to any associate (as such term is defined in Rule 12b-2
under the Exchange Act) if such person agrees to be bound by the foregoing
provisions; or
- the concurrent offering by priceline.com of its convertible subordinated
notes or the sale of the convertible notes in an underwritten offering.
In addition, the selling stockholders have agreed that, without the prior
written consent of Morgan Stanley & Co. Incorporated on behalf of the
underwriters, neither it nor any of its affiliates will, during the period
ending 180 days after the date of this 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.
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.
103
<PAGE>
LEGAL MATTERS
The validity of the issuance of the shares of common stock offered by
priceline.com 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.
104
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
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
</TABLE>
F-1
<PAGE>
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
<PAGE>
PRICELINE.COM INCORPORATED AND PRICELINE TRAVEL, INC.
COMBINED BALANCE SHEETS
AS OF DECEMBER 31, 1997 AND 1998
<TABLE>
<CAPTION>
1997 1998
------------ --------------
<S> <C> <C>
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
------------ --------------
------------ --------------
</TABLE>
See notes to combined financial statements.
F-3
<PAGE>
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
<TABLE>
<CAPTION>
JULY 18, 1997
(INCEPTION)
TO YEAR ENDED
DECEMBER 31, DECEMBER 31,
1997 1998
------------- ---------------
<S> <C> <C>
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
</TABLE>
See notes to combined financial statements.
F-4
<PAGE>
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
<TABLE>
<CAPTION>
PRICELINE.COM INCORPORATED PRICELINE TRAVEL, INC. COMBINED
------------------------------ --------------------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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)
---------- -------- ---------- -------- ------------ ------ ------ ---------- -------------
---------- -------- ---------- -------- ------------ ------ ------ ---------- -------------
<CAPTION>
<S> <C>
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
------------
------------
</TABLE>
See notes to combined financial statements.
F-5
<PAGE>
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
<TABLE>
<CAPTION>
JULY 18, 1997
(INCEPTION) YEAR ENDED
TO DECEMBER 31, DECEMBER 31,
1997 1998
--------------- ----------------------
<S> <C> <C>
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
</TABLE>
See notes to combined financial statements.
F-6
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
AMOUNT
-----------
<S> <C>
Provision charged to expense..................................................... $ 580,448
Charge offs...................................................................... (289,625)
-----------
Balance at end of period......................................................... $ 290,823
-----------
-----------
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1997 and 1998 consists of the
following:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES
(YEARS) 1997 1998
----------------- ------------ ------------
<S> <C> <C> <C>
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
------------ ------------
------------ ------------
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
1997 1998
------------- ---------------
<S> <C> <C>
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
------------- ---------------
------------- ---------------
</TABLE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
OTHER
DELTA AIRLINE
WARRANTS WARRANTS
----------- -------------
<S> <C> <C>
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%
</TABLE>
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
<PAGE>
PRICELINE.COM INCORPORATED AND PRICELINE TRAVEL, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
The following summarizes the transactions pursuant to the Plan:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE RANGE
SHARES OPTION PRICE OF SHARE
------------ ------------- -----------
<S> <C> <C> <C>
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
------------
------------
</TABLE>
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:
<TABLE>
<CAPTION>
REPORTED PRO FORMA
-------------- --------------
<S> <C> <C>
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
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
1998
--------------
<S> <C>
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....................................................... $ --
--------------
--------------
</TABLE>
The income tax benefit is different from the amount computed using
applicable statutory federal rates for the following reasons:
<TABLE>
<CAPTION>
1998
--------------
<S> <C>
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............................................................ $ --
--------------
--------------
</TABLE>
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
<PAGE>
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
<PAGE>
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 Purchaser
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
<PAGE>
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:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- -------------------------------------------------------------------------------------------------------
<S> <C>
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
---------
---------
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
AS PREVIOUSLY
REPORTED AS RESTATED
-------------- ---------------
<S> <C> <C>
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)
</TABLE>
- ------------------------
(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
<PAGE>
PRICELINE.COM INCORPORATED
CONDENSED BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND JUNE 1999
(UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
ASSETS 1998 1999
------------ ------------
<S> <C> <C>
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
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to condensed financial statements.
F-22
<PAGE>
PRICELINE.COM INCORPORATED
CONDENSED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1998 1999
-------------- --------------
<S> <C> <C>
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
</TABLE>
See accompanying notes to condensed financial statements.
F-23
<PAGE>
PRICELINE.COM INCORPORATED
CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
--------------------- --------------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
---------- --------- ---------- --------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
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
---------- --------- ---------- --------- ----------- ------------ -----------
---------- --------- ---------- --------- ----------- ------------ -----------
</TABLE>
See accompanying notes to condensed financial statements.
F-24
<PAGE>
PRICELINE.COM INCORPORATED
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1998 1999
-------------- --------------
<S> <C> <C>
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
</TABLE>
See accompanying notes to condensed financial statements.
F-25
<PAGE>
PRICELINE.COM INCORPORATED
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. BUSINESS DESCRIPTION
Priceline.com Incorporated ("priceline.com") utilizes 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
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
<PAGE>
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
<PAGE>
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. On July 13, 1999,
the plaintiff's new counsel filed a motion to reinstate four related claims that
previously had been dismissed with prejudice. Priceline.com intends to
vigorously oppose reinstatement of these claims, and if the claims are
reinstated, to vigorously defend against these claims. Nevertheless, if these
claims are reinstated and if the plaintiffs ultimately prevail as to these
claims, priceline.com could be exposed to remedies that could negatively affect
its operating results.
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
F-28
<PAGE>
PRICELINE.COM INCORPORATED
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
intellectual property rights. Such claims, even if not meritorious, could result
in the expenditure of significant financial and managerial resources.
7. SUBSEQUENT EVENTS
Common Stock and Convertible Debt Offerings--In July 1999, priceliine.com
filed a registration statement covering the sale of up to $287.5 million of
convertible subordinated notes and up to 6.3 million shares of common stock. The
common stock offering is to be comprised of 2.0 million shares of common stock
to be issued by priceline.com and up to 4.3 million shares to be sold by certain
selling stockholders.
On July 19, 1999, an option exercise program was established to enable
employees to exercise options and sell shares through a cashless exercise
program administered through a broker dealer. Priceline.com employees holding
1,021,071 options that were vested as of June 1, 1999 are permitted to sell a
portion of their option shares during the period commencing on July 20, 1999 and
ending on July 30, 1999. Any employee choosing to exercise and sell options
earlier than the 180-day post-initial public offering lock-up expiration date
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--Continental agreed to join the priceline.com service
on July 20, 1999. 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
<PAGE>
[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!
<PAGE>
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.
<PAGE>
PROSPECTUS (Subject to Completion)
ISSUED JULY , 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 98.
------------------------
OUR COMMON STOCK IS QUOTED ON THE NASDAQ NATIONAL MARKET UNDER THE SYMBOL
"PCLN." ON JULY 21, 1999, THE REPORTED LAST SALE PRICE FOR THE COMMON STOCK WAS
$88 7/32 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 5.
---------------------
PRICE % AND ACCRUED INTEREST, IF ANY
------------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS PRICELINE.COM
------------------ ------------------ ------------------
<S> <C> <C> <C>
PER NOTE........................................... % % %
TOTAL.............................................. $ $ $
</TABLE>
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
<PAGE>
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
<PAGE>
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 interet rate and
points on mortgages, home equity loans and home refinancings.
3
<PAGE>
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
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary.............................
Risk Factors...................................
Special Note Regarding Forward-Looking
Statements...................................
Use of Proceeds................................
Dividend Policy................................
Capitalization.................................
Selected Financial Data........................
Management's Discussion and Analysis of
Financial Condition and Results of
Operations...................................
Business.......................................
Management.....................................
<CAPTION>
PAGE
-----
<S> <C>
Certain Transactions...........................
Principal and Selling Stockholders.............
Description of the Notes.......................
Certain United States Federal Tax Consequences
To Non-U.S. Investors........................
Description of Capital Stock...................
Shares Eligible for Future Sale................
Underwriters...................................
Legal Matters..................................
Experts........................................
Additional Information.........................
Index to Financial Statements.................. F-1
</TABLE>
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; (3) assumes that all 1,021,071 shares eligible to be sold in
the Option Exercise Program described under "Certain Transactions--Other
Transactions" are sold pursuant to such programs and (4) assumes no exercise of
the underwriters' over-allotment option. See "Description of Capital Stock."
i
<PAGE>
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.
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Securities Offered............ $250,000,000 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
approximately $ of outstanding indebtedness that would
have constituted senior indebtedness. The notes also will be
effectively subordinated to the liabilities, including trade
payables, of any subsidiary of priceline.com and lease
obligations and all preferred stock, if any. 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 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."
</TABLE>
CONCURRENT COMMON STOCK OFFERING
Concurrent with this offering, we and certain of our stockholders are making
a public offering of 5,500,000 shares of our common stock, of which we are
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
<PAGE>
SUMMARY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
JULY 18, 1997
(INCEPTION) YEAR ENDED
TO DECEMBER 31, SIX MONTHS
DECEMBER 31, 1998 ENDED
1997 RESTATED(A) JUNE 30, 1999
------------- --------------- ---------------
<S> <C> <C> <C>
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)
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 1999
-------------------------------
<S> <C> <C>
ACTUAL AS ADJUSTED(F)
-------------- ---------------
BALANCE SHEET DATA(B):
Cash and cash equivalents......................................................... $ 142,803,134 $
Working capital................................................................... 150,043,651
Total assets...................................................................... 204,794,892
Total liabilities................................................................. 33,485,681
Total stockholders' equity........................................................ 171,309,211
</TABLE>
- ------------------------
(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 a non-cash charge 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) $ from the sale of the notes in this offering
(after deducting the estimated offering expenses and underwriting discounts
and commissions) and (y) $ from the sale of the 2,000,000 shares of
common stock offered by priceline.com in the concurrent common stock
offering, based upon an assumed public offering price of $ per
share (after deducting the estimated offering expenses and underwriting
discounts and commissions).
3
<PAGE>
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.
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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
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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.
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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.
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 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
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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 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
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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.
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.
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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 5.3% 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.
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.
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Since our formation in July 1997, we have expanded from 10 to 259 full-time
employees. 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.
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;
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- 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.
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
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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 distinctions that it does not fall within the scope of our patent.
For example, we are aware of Internet
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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 currently 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 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
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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 regular commercial
activities since ceasing operations in 1992. Based upon publicly available
information,
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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. On July 13, 1999, the plaintiff's new counsel filed a motion to
reinstate four related claims that previously had been dismissed with prejudice.
We intend to vigorously oppose reinstatement of these claims, and if the claims
are reinstated, to vigorously defend against these claims. Nevertheless, if
these claims are reinstated and if the plaintiffs ultimately prevail as to these
claims, we could be exposed to remedies that could negatively affect our
operating results.
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
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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.
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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;
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- 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 AND THE PRICE OF OUR NOTES
Sales of a substantial number of shares of common stock after the offering
could adversely affect the market price of our common stock and notes 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 and notes to decline.
Upon completion of this offering and the concurrent common stock offering,
we will have outstanding 145,341,498 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 1,021,071 shares sold pursuant to our 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,
46,366,488 shares are issuable upon exercise of outstanding warrants and
options. We have filed a registration statement on Form S-8 covering the shares
of common stock issuable under options granted under the 1997 Omnibus Plan and
the 1999 Omnibus Plan. As a result, those shares will be freely tradeable 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 common
stock and the remaining shares of common stock issuable upon exercise of
outstanding warrants and options will be "restricted securities" under the
Securities Act, subject to restrictions on the timing, manner and volume of
sales of these shares.
The selling stockholders selling shares in the concurrent common stock
offering and officers and directors who will own an aggregate of 158,153,353
shares of common stock options and warrants to
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purchase shares of common stock offer this offering and the concurrent
common stock offering 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 shares after the
offering agreed in connection with our initial public offering to similar
restrictions until September 25, 1999. If the concurrent common stock offering
is not consummated, the selling stockholders in such offering will not be
subject to the foregoing contractual restrictions on sale after September 26,
1999. In connection with our option exercise program, holders of options to
purchase 1,021,071 shares 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, the option exercise
restrictions, the holding period requirements 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:
<TABLE>
<CAPTION>
APPROXIMATE
NUMBER OF
SHARES
ELIGIBLE FOR
DATE SALE
- -------------------------------------------------------------------------------------------------- --------------
<S> <C>
September 26, 1999................................................................................ 4,642,803
December 31, 1999................................................................................. 13,200,429
180 days after the date of this prospectus........................................................ 124,087,360
Thereafter........................................................................................ 61,403,623
</TABLE>
Since many of these shares were purchased at prices substantially below current
market prices, we believe a significant number of these shares may be sold when
eligible for resale.
Upon consummation of the concurrent common stock offering and subject to the
foregoing lock-up agreements, holders of up to 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. Upon the
effectiveness of this registration, all shares covered by such registration
statement will be freely transferable.
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.
SUBORDINATION OF THE NOTES
The notes will be unsecured and subordinated in right of payment to all
existing and future senior indebtedness. 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, of any
subsidiary of priceline.com and lease obligations and all preferred stock, if
any. 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 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 approximately
$ million of senior indebtedness outstanding. We anticipate that from time
to time priceline.com will incur senior
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indebtedness and establish or acquire subsidiary entities. Any subsidiaries will
from time to time incur other additional indebtedness and liabilities. See
"Description of Notes--Subordination of Notes."
LIMITATIONS ON REDEMPTION OF NOTES UPON FUNDAMENTAL CHANGE
We may be unable to redeem the notes when that 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 other 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 Option of the Holder."
ABSENCE OF PUBLIC MARKET FOR THE NOTES
A public market may not develop for the notes. Prior to the 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.
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.
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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 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 could
require us to register as an automobile broker/dealer as a condition to offering
our new automobile service in their states. In that case, 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 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 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 mortgage 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
mortgage service could be materially and adversely affected and we may be unable
to continue to make our home mortgage service available.
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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 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.
23
<PAGE>
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
26,441,986 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 $11.35 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 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.
24
<PAGE>
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 44.0 and 12.5 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 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.
25
<PAGE>
OUR MANAGEMENT HAS BROAD DISCRETION OVER USE OF THE PROCEEDS FROM THIS OFFERING
The net proceeds of this offering are estimated to be approximately $
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
$ 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
<PAGE>
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 $
million, after deducting estimated offering expenses and the underwriting
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 $ million, after deducting
estimated offering expenses 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 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:
<TABLE>
<CAPTION>
1999 HIGH LOW
- ----------------------------------------------------------------------- ---------- -----------
<S> <C> <C> <C> <C>
First Quarter (from March 29, 1999).................................... $ 87 7/8 $ 69
Second Quarter......................................................... 162 3/8 59 7/8
Third Quarter (through July 21, 1999).................................. 112 88 7/32
</TABLE>
On July 21, 1999, the last reported sale price for priceline.com common
stock on the Nasdaq National Market was $88 7/32 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
<PAGE>
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) $ from the
sale of the notes in this offering, net of underwriting discounts and
commissions and estimated offering expenses of $ , and (y) $ from the
sale of the 2,000,000 shares of common stock offered by priceline.com in the
concurrent common stock offering, based on an assumed public offering price of
$ per share, net of underwriting discounts and commissions and estimated
offering expenses. 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.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1999
-----------------------------
<S> <C> <C>
ACTUAL AS ADJUSTED
--------------- ------------
Capital Lease Obligations--net of current portion.................................. $ 12,248 $
% Convertible Subordinated Notes due 2006....................................... --
--------------- ------------
Total debt....................................................................... 12,248
Stockholders' equity:(a)
Common Stock, $0.008 par value--Authorized, 1,000,000,000 shares; issued and
outstanding, 142,320,427 and [ ] shares, actual and as adjusted,
respectively..................................................................... 1,138,564
Additional paid-in capital......................................................... 326,880,953
Accumulated deficit................................................................ (156,710,306)
--------------- ------------
Total stockholders' equity....................................................... 171,309,211
--------------- ------------
Total capitalization........................................................... $ 171,321,459 $
--------------- ------------
--------------- ------------
</TABLE>
- ------------------------
(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) 18,619,402 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) shares issuable on conversion of the notes
being offered in this offering.
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<PAGE>
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.
<TABLE>
<CAPTION>
JULY 18, 1997 YEAR ENDED SIX MONTHS
(INCEPTION) TO DECEMBER 31, 1998 ENDED
DECEMBER 31, 1997 RESTATED(A) JUNE 30, 1999
----------------- ----------------- --------------
<S> <C> <C> <C>
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)
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 1999
-----------------------------------
<S> <C> <C>
ACTUAL AS ADJUSTED(F)
-------------- -------------------
BALANCE SHEET DATA: (B)
Cash and cash equivalents................................................... $ 142,803,134 $
Working capital............................................................. 150,043,651
Total assets................................................................ 204,794,892
Long-term debt and capital lease obligation................................. 12,248
Total liabilities........................................................... 33,485,681
Total stockholders' equity.................................................. 171,309,211
</TABLE>
- ------------------------
(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 a non-cash charge 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) $ million from the sale of the notes in this offering
(after deducting the estimated offering expenses and underwriting discounts
and commissions) and (y) $ from the sale of the 2,000,000 shares of
common stock offered by priceline.com in the concurrent common stock
offering, based upon an assumed public offering price of $ per share
(after deducting the estimated offering expenses and underwriting discounts
and commissions).
29
<PAGE>
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 July 20, 1999
priceline.com had 259 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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------------------
JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1998 1998 1998 1999 1999 (1)
--------- ------------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C>
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................................. 11.2% 9.6% 16.2% 24.4% 42.2%
</TABLE>
- ------------------------
(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 also currently has outstanding non-qualified stock options to
purchase 26,441,986 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 $11.35 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 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.
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
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<PAGE>
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 $90.0
million during the quarter ended 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 airline
ticket processing fees and Worldspan reservation booking 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 we received fees based upon
the submission of qualifying credit card applications, while the First USA
program ties a portion of our 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
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<PAGE>
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 our revenues provided by our 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.
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. Because the fees
generated by adaptive marketing programs generally have involved no separate
costs, adaptive marketing revenues have had a disproportionately positive impact
on priceline.com's total gross margin for the period. 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 our gross profit for the six months ended June 30,
1999. If our transaction activity continues to grow, we expect the proportion of
our 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 product mix, resulting
from a greater percentage of revenues being attributable to transaction revenues
rather than
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<PAGE>
fee based revenues. Fee-based revenues, such as fees from ancillary revenues,
adaptive marketing, 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.
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<PAGE>
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 was $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.
In addition, priceline.com incurred operating expenses of $17.9 million,
consisting of sales and marketing expenses of $7.7 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
$18.8 million and, after consideration of interest income, a net loss of $18.7
million for the 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.
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<PAGE>
A summary of the significant effects of the restatement is as follows:
<TABLE>
<CAPTION>
AS PREVIOUSLY
REPORTED AS RESTATED
-------------- ---------------
<S> <C> <C>
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)
</TABLE>
- ------------------------
(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.
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
37
<PAGE>
charge representing the fair value of warrants issued to certain of our
participating airlines in connection with securing the Company'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.
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
38
<PAGE>
results in any quarter are not necessarily indicative of the results that may be
expected for any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------------------------------
JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1998 1998 1998 1999 1999
------------ ------------- -------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
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%
</TABLE>
- ------------------------
* 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 consist 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, 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 fees from ancillary
revenues, adaptive marketing, 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;
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<PAGE>
- 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 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.
40
<PAGE>
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.
Concurrent with this offering, priceline.com and certain of its stockholders
are making an offering of common stock, as part of which priceline.com is
offering to sell 2,000,000 shares of common stock. Priceline.com expects the
proceeds to it from the concurrent common stock offering to be $ , based upon
an assumed public offering price of $ per share (after deducting the
estimated offering expenses and underwriting discounts and commissions).
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.
In July 1999, priceline.com made a $6.0 million loan to Mr. Daniel 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 pursuant to the terms of the loan, accrued interest and
principal are payable in July 2004.
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 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
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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 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
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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 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.
NON-QUALIFIED STOCK OPTIONS
Priceline.com currently has outstanding non-qualified stock options to
purchase 26,441,986 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 $11.35 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 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. Upon exercise of outstanding options,
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.
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
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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.
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.
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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 $486.3 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
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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
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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.
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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
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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
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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.
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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
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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
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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
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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 MORTGAGES. Priceline.com introduced its home mortgage service in
January 1999. Priceline.com's mortgage 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 mortgage 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 the home
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financing services through LendingTree. See "--Strategic Alliances--Marketing
Agreement for Mortgage Services."
To obtain a home mortgage 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 Lending
Tree.
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 Lending Tree 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. Priceline.com expects to launch similar
tests in the states of Florida, California and Michigan during the third quarter
of 1999, and to become operational in the 48 contiguous states during the first
quarter of 2000. 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 regulatory approvals and authorizations
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necessary to conduct our new car sales service, priceline.com expects to provide
new car sales services on a national scale by the end of the fourth quarter of
1999.
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.
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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
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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 will earn fees when its customers
open accounts with EarthLink and upon such accounts being open for a specified
period of time. No specified 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;
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- consumers must agree to accept up to one stop or connection on both their
departing and return flights;
- 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.
In connection with priceline.com's home mortgage 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.
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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 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.
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 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.
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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
specific period of time. No specified 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;
- online and traditional mortgage and insurance brokers, including
mortgage.com, Quicken Mortgage, E-Loan and iOwn, Inc.; and
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- 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
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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 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.
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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 could require priceline.com to register as an automobile broker/dealer in as
a condition to offering our new automobile service in their states. In that
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case, priceline.com may be unable to continue to make its 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, 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
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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.
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
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
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<PAGE>
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 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 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
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<PAGE>
material legal and factual allegations contained in Marketel's second amended
complaint and believe that 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. On July 13, 1999,
the plaintiff's new counsel filed a motion to reinstate four related claims that
previously had been dismissed with prejudice. Priceline.com intends to
vigorously oppose reinstatement of these claims and, if the claims are
reinstated, to vigorously defend against these claims. Nevertheless, if these
claims are reinstated and if the plaintiffs ultimately prevail as to these
claims, priceline.com could be exposed to remedies that could negatively affect
its operating results. 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 Purchaser 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 259 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.
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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.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------------ --- ------------------------------------------------
<S> <C> <C>
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................................. 35 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
</TABLE>
- ------------------------
(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,
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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.
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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.
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<PAGE>
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 $3.20 per share, subject to certain
restrictions described under "Shares Eligible for Future Sale."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the members of the Compensation Committee of the board of directors
is an officer or employee of priceline.com. No executive officer of
priceline.com serves as a member of the board of directors or compensation
committee of any entity that has one or more executive officers serving on
priceline.com's Compensation Committee.
SUMMARY OF COMPENSATION
The following table sets forth information concerning compensation earned in
the fiscal year ended December 31, 1998, by priceline.com's Chief Executive
Officer and its other four most highly compensated executive officers.
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<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
-------------
NUMBER OF
ANNUAL COMPENSATION SECURITIES
----------------------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) OPTIONS (#) COMPENSATION ($)
- -------------------------------------------------- --------- ----------- ----------- ------------- -------------------
<S> <C> <C> <C> <C> <C>
Richard S. Braddock(a)............................ 1998 112,500 -- 6,250,000 (c)
Chairman and Chief Executive Officer
Jay S. Walker(b).................................. 1998 250,000 -- 1,515,000 --
Vice Chairman and Founder
Jesse M. Fink(f).................................. 1998 227,083 -- 2,443,750 1,028(e)
Chief Operating Officer
Paul E. Francis................................... 1998 225,000(d) -- 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
</TABLE>
- ------------------------
(a) Mr. Braddock commenced serving as Chairman and Chief Executive Officer in
August 1998.
(b) 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.
(c) 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.
(d) Includes distributions as a member in priceline.com's predecessor,
priceline.com LLC.
(e) Represents life insurance premiums paid and, in the case of Mr. Fink,
disability insurance premiums paid for the fiscal year.
(f) 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 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
<TABLE>
<CAPTION>
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)
- ------------------------------------- ------------------- ------------------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
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
</TABLE>
- ------------------------
(a) Options become exercisable as follows: (1) with respect to Mr. Braddock:
6,250,000 shares have vested, but are not exercisable until expiration of
the lock-up period; (2) with respect to
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<PAGE>
Mr. Walker: (a) 1,382,500 shares are vested, but are not exercisable
until 180 days following the date of this prospectus, and (b) the
remainder of the shares vest and become exercisable on June 1, 2000; (3)
with respect to Mr. Fink: (a) 2,125,000 shares are vested, but are not
exercisable until 180 days following the date of this prospectus, and (b)
the remainder of the shares vest and become exercisable on June 1, 2000;
(4) with respect to Mr. Francis: (a) 750,000 shares are vested, but are
not exercisable until 180 days following the date of this prospectus, 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
180 days following the date of this prospectus; and (c) the remainder of
the shares vest and become exercisable on June 1, 2000.
(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
<TABLE>
<CAPTION>
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
- -------------------------------------- --------------- ----------- --------------------- -------------------
<S> <C> <C> <C> <C>
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
</TABLE>
- ------------------------
(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,
22,666,481 options covering shares of common stock were outstanding under the
1997 Omnibus Plan as of July 21, 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 3,775,505 shares of common stock
were outstanding under the 1999 Omnibus Plan as of July 21, 1999.
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<PAGE>
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 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,
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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 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.
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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 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.
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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 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.
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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.
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,
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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 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
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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 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
July 21, 1999, options covering 3,775,505 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
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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 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
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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. While
the option is not exercisable until September 25, 1999, upon expiration of the
180 day period following consummation of priceline.com's initial public
offering, the option vested with respect to 2,500,000 of such shares upon
consummation of priceline.com's initial public offering and with respect to the
remaining 3,750,000 shares on April 5, 1999, upon priceline.com having a public
market capitalization of $750.0 million for five consecutive trading days. Under
the terms of his employment agreement, Mr. Braddock is entitled to an initial
annual base salary of $300,000, subject to annual 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:
- currently is vested for 2,125,000 of such shares that are not exercisable
until expiration of the lock-up period; and
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- 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 his employment by
Walker Digital.
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 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.
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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 is automatically convertible into 21,610,855 shares
of common stock upon the completion of this 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
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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
Purchaser 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.
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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. 72 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 1,021,071 shares
underlying their options are expected to be 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 8,231,967 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.
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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.
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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 July
21, 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.
<TABLE>
<CAPTION>
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
- --------------------------------------------------- ------------- ----------- ---------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Jay S. Walker(b)................................... 62,504,373 43.2% -- 62,302,060 42.5%
Richard S. Braddock(c)............................. 17,828,125 11.9 202,313 17,625,812 11.9
Jesse M. Fink(d)................................... 5,487,000 3.8 202,313 5,284,687 3.6
Timothy G. Brier(e)................................ 3,012,700 2.1 72,832 2,939,868 2.0
Paul E. Francis(f)................................. 2,138,470 1.5 30,000 2,065,638 1.4
Daniel H. Schulman(g).............................. 500,000 * -- 500,000 *
Paul A. Allaire(h)................................. 56,200 * -- 56,200 *
Ralph M. Bahna(i).................................. 344,750 * -- 344,750 *
Paul J. Blackney(j)................................ 140,008 * -- 140,008 *
William E. Ford(k)................................. 26,296,353 18.3 -- 25,648,103 17.6
Marshall Loeb(l)................................... 32,250 * -- 32,250 *
N. J. Nicholas, Jr.(m)............................. 3,906,250 2.7 -- 3,906,250 2.7
Nancy B. Peretsman(n).............................. 2,906,250 2.0 -- 2,906,250 2.0
Paul Breitenbach(o)................................ 1,591,950 1.1 72,832 1,519,118 1.0
T. Scott Case(p)................................... 2,200,000 1.5 72,832 2,127,168 1.5
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(k).................. 26,296,353 18.3 648,250 25,648,103 17.6
Vulcan Ventures Incorporated(r).................... 9,375,000 6.5 231,406 9,143,594 6.3
Yarmouth Limited Partnership(q) 312,500 * 1,851 304,787 *
Walker Digital Corporation(b)...................... 62,504,373 43.2 202,313 62,302,060 42.5
The Jay Walker Irrevocable Credit Trust(b)......... 62,504,373 43.2 -- 62,302,060 42.5
Delta(s)........................................... 18,619,402 13.0 1,523,329 17,096,073 11.8
Strypemonde Foundation(f).......................... 42,832 * 42,832 -- *
All directors and executive officers as a group (15
persons) (b)-(n)................................. 119,982,695 77.8% 1,198,540 118,784,155 76.0%
</TABLE>
- ------------------------
* 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 options
or warrants that are currently exercisable or exercisable within 60 days of
July 21, 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 includes any shares sold as a result of the
exercise by the underwriters of their over-allotment option, which if sold,
will be allocated pro rata among the selling stockholders.
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(b) Includes: (1) 7,520,833 shares held by Walker Digital Corporation, of which
Mr. Walker is Founder, Chairman and the controlling stockholder; (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 and to which Mr.
Walker disclaims beneficial ownership; (4) up to an aggregate of 4,534,800
shares as to which Mr. Walker has granted options to purchase to certain
individuals. Also includes options outstanding to purchase 1,382,500 shares
which are vested but not exercisable until 180 days after the date of this
prospectus; (5) 48,100,041 shares held by Mr. Jay S. Walker; and (6) up to
an aggregate of 228,171 shares as to which Walker Digital has granted
options to purchase to certain of its employees and consultants. Excludes
132,500 shares subject to options that are not vested or exercisable within
60 days of July 21, 1999. Shares beneficially owned after the offering takes
around of the sale of 202,312 shares by Walker Digital Corporation. The
address of Walker Digital Corporation is Five High Ridge Park, Stamford,
Connecticut 06905.
(c) Includes 5,000,000 shares held by Richard S. Braddock as Trustee of The
Richard S. Braddock 1999 Annuity Trust and options outstanding to purchase
6,250,000 shares which are vested but are not exercisable until 180 days
after the date of this prospectus. Includes options to purchase 250,000
shares that are currently exercisable for shares owned by Mr. Walker.
(d) Includes 875,000 shares held by The Jesse Fink 1998 Grantor Retained Annuity
Trust and options outstanding to purchase 2,125,000 shares which are vested
but not exercisable until 180 days after the date of this prospectus.
Excludes 318,750 shares subject to options that are not vested or
exercisable within 60 days of July 21, 1999.
(e) Includes (1) 500,000 shares held by The Tim Brier 1998 Grantor Annuity
Trust; and (2) 7,700 shares held by immediate family members of Mr. Brier
and 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 July 21, 1999.
(f) Includes: (1) 62,500 shares held by The Paul E. Francis 1998 Trust, dated
April 1, 1998; (2) 15,625 shares held by The Paul E. Francis 1998 Trust,
dated December 2, 1998; (3) 15,625 shares held by The Paul E. Francis 1999
Trust, dated February 26, 1999; and (4) 125,000 shares held by The Paul E.
Francis 1999 Annuity Trust. Includes options outstanding to purchase 750,000
shares which are vested but not exercisable until 180 days after the date of
this prospectus. Excludes 285,000 shares subject to options that are not
vested or exercisable within 60 days of July 21, 1999. Shares beneficially
owned after the offering take account of 30,000 shares sold personally by
Mr. Francis and 42,832 shares being sold by Strypemonde Foundation, a
charitable foundation controlled by Mr. Francis and his spouse.
(g) Includes options outstanding to purchase 500,000 shares which are vested but
not exercisable until expiration of the lock-up period related to the
initial public offering. Excludes 2,500,000 shares subject to options that
are not vested or exercisable within 60 days of July 21, 1999.
(h) Includes options outstanding to purchase 37,500 shares which are vested but
not exercisable until expiration of the lock-up period related to the
initial public offering.
(i) Includes options outstanding to purchase 31,250 shares which are vested but
not exercisable until expiration of the lock-up period related to the
initial public offering.
(j) Includes options outstanding to purchase 31,250 shares which are vested but
not exercisable until expiration of the lock-up period related to the
initial public offering.
(k) 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 180 days after the date of this prospectus,
which options are held by Mr. William E. Ford. Mr. Ford, a director of
priceline.com, is a managing member of General Atlantic Partners, LLC and a
general partner of
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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 referred to above. The address of General Atlantic is
3 Pickwick Plaza, Greenwich, Connecticut 06830.
(l) 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 lock-up period related to the initial public offering
and which are held by Mr. Loeb's daughter and to which Mr. Loeb disclaims
beneficial ownership.
(m) 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. 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 180 days after the date of this prospectus.
(n) 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 to purchase 571,875 shares that are exercisable for
shares, owned by Mr. Walker and are held by Allen & Company Incorporated;
(3) 959,375 shares held by Ms. Peretsman; and (4) options outstanding to
purchase 31,250 shares which are vested by not exercisable until expiration
of the lock-up period related to the initial public offering and are held by
Ms. Peretsman. Ms. Nancy B. 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.
(o) 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 July 21, 1999. Also includes options held by Mr. Breitenbach to
purchase 1,141,950 shares that are owned by Mr. Walker which are currently
exercisable. Excludes options to purchase 570,945 shares from Mr. Walker
which are not vested or exercisable within 60 days of July 21, 1999.
(p) Includes options outstanding to purchase 10,861,966 shares, which are vested
but not exercisable until 180 days after the date of this prospectus.
Excludes 3,691,458 shares subject to options that are not vested or
exercisable within 60 days of July 21, 1999. The address of all directors,
officers and other individual stockholders is Five High Ridge Park,
Stamford, Connecticut 06905.
(q) Includes (i) 75,000 shares held by Yarmouth Limited Partnership and (ii)
237,500 held by Jim 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.
(r) 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.
(s) Includes 1,523,329 shares and warrants to purchase an aggregate of
17,096,073 shares which we are not exercisabel until 180 days after the date
of this prospectus.
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CERTAIN U.S. 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
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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;
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- 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
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- 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.
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DESCRIPTION OF NOTES
We will issue the notes under an indenture between priceline.com
Incorporated, and , 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
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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.
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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
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- 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.
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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 "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 "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:
<TABLE>
<CAPTION>
PERIOD REDEMPTION PRICE
- ---------------------------------------------------------------------------- -------------------
<S> <C>
Beginning August 6, 2002 and ending July 31, 2003........................... %
12-month period beginning August 1:
2003................................................................ %
2004................................................................ %
2005................................................................ %
</TABLE>
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.
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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
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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
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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
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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 $ million of Indebtedness
outstanding that would have constituted Senior Indebtedness and our subsidiaries
had approximately $ million of Indebtedness and other liabilities,
including trade and other payables, outstanding to which the notes would have
been effectively subordinated. 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 any subsidiary 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
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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 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
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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.
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 , 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.
SUBORDINATION OF THE NOTES
The notes will be unsecured and subordinated in right of payment to all
existing and future senior indebtedness. 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, of any
subsidiary of priceline.com and lease obligations and all preferred stock, if
any. 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 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 approximately
$ million of senior indebtedness outstanding. We anticipate that from time
to time priceline.com will incur senior indebtedness and establish or acquire
subsidiary entities. Any subsidiaries will from time to time incur other
additional indebtedness and liabilities. See "Description of
Notes--Subordination of Notes."
LIMITATIONS ON REDEMPTION OF NOTES UPON FUNDAMENTAL CHANGE
We may be unable to redeem the notes when that 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 other 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
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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 Option of the Holder."
ABSENCE OF PUBLIC MARKET FOR THE NOTES
A public market may not develop for the notes. Prior to the 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.
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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 145,341,498 outstanding
shares of common stock, outstanding options to purchase 26,441,986 shares of
common stock and outstanding warrants to purchase 21,806,902 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 July 21, 1999, (1) options to purchase a total of 26,441,986 shares of
common stock were outstanding; and (2) up to 5,786,943 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 July 21, 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."
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REGISTRATION RIGHTS
The holders of an aggregate of 143,983,503 shares of common stock or
securities convertible into common stock are entitled to certain registration
rights. Of such shares, shares are being sold in the concurrent common
stock offering pursuant to such 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.
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."
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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 145,341,498 shares of common stock. Of these
shares, the 5,500,000 shares of common stock sold in the concurrent common stock
offering and the 10,000,000 shares of common stock sold in priceline.com's
initial public offering 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 being offered in
this offering will be freely tradeable in a similar manner. In addition,
shares are issuable upon exercise of outstanding warrants and options.
Priceline.com has filed a registration statement on Form S-8 covering the shares
of common stock issuable under options granted under the 1997 Omnibus Plan and
the 1999 Omnibus Plan. As a result, those shares will be freely tradeable 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
common stock and the remaining shares of common stock issuable upon exercise of
outstanding warrants and options will be "restricted securities" under the
Securities Act, subject to restrictions on the timing, manner and volume of
sales of such shares.
The selling stockholders selling shares in the concurrent common stock
offering and officers and directors who will own an aggregate of shares of
common stock, in the event the concurrent stock offering is consummated, and
options and warrants to purchase an additional shares after such offering,
have each 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, file a registration statement, in the case
of priceline.com, 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, 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; or
- file a registration statement, in the case of priceline.com, other than a
registration statement 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.
The restrictions described in this paragraph do not apply to 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;
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- 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; or
- other transfers of any shares of common stock by certain of the foregoing
persons to any associate, 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.
In addition, the shareholders have agreed that, without the prior written
consent of Morgan Stanley & Co. Incorporated on behalf of the underwriters,
neither it nor any of its affiliates will, 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. Beginning 180
days after the date of this prospectus, all such shares will be eligible for
sale in the public market, subject to certain timing, manner of sale and volume
limitations pursuant to Rule 144.
In addition, holders who will own shares of common stock after this
offering and options to purchase an additional shares after the offering
agreed in connection with our initial public offering to similar restrictions
until September 26, 1999.
In connection with a recently completed option exercise program, holders of
options to purchase shares of common stock registered on priceline.com's 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 the
prospectus.
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 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 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 will be freely transferable. Walker Digital also owns
directly approximately 5.3% 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
<PAGE>
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:
<TABLE>
<CAPTION>
PRINCIPAL
NAME AMOUNT
- -------------------------------------------------------------------------------------------------- --------------
<S> <C>
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
--------------
--------------
</TABLE>
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 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.
112
<PAGE>
Priceline.com and each of the directors and executive officers of
priceline.com has agreed 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 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; or
- file a registration statement in the case of priceline.com for the
registration of any shares of common stock or any security convertible
into or exercisable or exchangeable for common stock;
whether any transaction described above is to be settled by delivery of common
stock or such other securities, in cash or otherwise. The restrictions described
in this paragraph do not apply to:
- the sale of the notes to the underwriters in this offering or the sale of
common stock in the concurrent common stock offering;
- the issuance by priceline.com of restricted stock awards under
priceline.com's existing employee benefit plans or of 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
recipient of such warrants or shares agrees to be bound by the foregoing
provisions;
- the sale or other transfer of any shares of common stock by certain of the
foregoing persons to any associate (as such term is defined in Rule 12b-2
under the Exchange Act) if such person agrees to be bound by the foregoing
provisions; or
- the concurrent offering by priceline.com and selling stockholders of
shares of common stock or the sale of the shares in an underwritten
offering.
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. 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.
113
<PAGE>
LEGAL MATTERS
The validity of the issuance of the notes offered by priceline.com, 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.
114
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
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
</TABLE>
F-1
<PAGE>
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
<PAGE>
PRICELINE.COM INCORPORATED AND PRICELINE TRAVEL, INC.
COMBINED BALANCE SHEETS
AS OF DECEMBER 31, 1997 AND 1998
<TABLE>
<CAPTION>
1997 1998
------------ --------------
<S> <C> <C>
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
------------ --------------
------------ --------------
</TABLE>
See notes to combined financial statements.
F-3
<PAGE>
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
<TABLE>
<CAPTION>
JULY 18, 1997
(INCEPTION)
TO YEAR ENDED
DECEMBER 31, DECEMBER 31,
1997 1998
------------- ---------------
<S> <C> <C>
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
</TABLE>
See notes to combined financial statements.
F-4
<PAGE>
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
<TABLE>
<CAPTION>
PRICELINE.COM INCORPORATED PRICELINE TRAVEL, INC. COMBINED
------------------------------ --------------------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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)
---------- -------- ---------- -------- ------------ ------ ------ ---------- -------------
---------- -------- ---------- -------- ------------ ------ ------ ---------- -------------
<CAPTION>
<S> <C>
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
------------
------------
</TABLE>
See notes to combined financial statements.
F-5
<PAGE>
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
<TABLE>
<CAPTION>
JULY 18, 1997
(INCEPTION) YEAR ENDED
TO DECEMBER 31, DECEMBER 31,
1997 1998
--------------- ----------------------
<S> <C> <C>
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
</TABLE>
See notes to combined financial statements.
F-6
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
AMOUNT
-----------
<S> <C>
Provision charged to expense..................................................... $ 580,448
Charge offs...................................................................... (289,625)
-----------
Balance at end of period......................................................... $ 290,823
-----------
-----------
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1997 and 1998 consists of the
following:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES
(YEARS) 1997 1998
----------------- ------------ ------------
<S> <C> <C> <C>
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
------------ ------------
------------ ------------
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
1997 1998
------------- ---------------
<S> <C> <C>
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
------------- ---------------
------------- ---------------
</TABLE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
OTHER
DELTA AIRLINE
WARRANTS WARRANTS
----------- -------------
<S> <C> <C>
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%
</TABLE>
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
<PAGE>
PRICELINE.COM INCORPORATED AND PRICELINE TRAVEL, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
The following summarizes the transactions pursuant to the Plan:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE RANGE
SHARES OPTION PRICE OF SHARE
------------ ------------- -----------
<S> <C> <C> <C>
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
------------
------------
</TABLE>
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:
<TABLE>
<CAPTION>
REPORTED PRO FORMA
-------------- --------------
<S> <C> <C>
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
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
1998
--------------
<S> <C>
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....................................................... $ --
--------------
--------------
</TABLE>
The income tax benefit is different from the amount computed using
applicable statutory federal rates for the following reasons:
<TABLE>
<CAPTION>
1998
--------------
<S> <C>
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............................................................ $ --
--------------
--------------
</TABLE>
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
<PAGE>
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
<PAGE>
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 Purchaser
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
<PAGE>
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:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- -------------------------------------------------------------------------------------------------------
<S> <C>
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
---------
---------
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
AS PREVIOUSLY
REPORTED AS RESTATED
-------------- ---------------
<S> <C> <C>
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)
</TABLE>
- ------------------------
(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
<PAGE>
PRICELINE.COM INCORPORATED
CONDENSED BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND JUNE 1999
(UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
ASSETS 1998 1999
------------ ------------
<S> <C> <C>
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
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to condensed financial statements.
F-22
<PAGE>
PRICELINE.COM INCORPORATED
CONDENSED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1998 1999
-------------- --------------
<S> <C> <C>
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
</TABLE>
See accompanying notes to condensed financial statements.
F-23
<PAGE>
PRICELINE.COM INCORPORATED
CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
--------------------- --------------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
---------- --------- ---------- --------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
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
---------- --------- ---------- --------- ----------- ------------ -----------
---------- --------- ---------- --------- ----------- ------------ -----------
</TABLE>
See accompanying notes to condensed financial statements.
F-24
<PAGE>
PRICELINE.COM INCORPORATED
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1998 1999
-------------- --------------
<S> <C> <C>
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
</TABLE>
See accompanying notes to condensed financial statements.
F-25
<PAGE>
PRICELINE.COM INCORPORATED
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. BUSINESS DESCRIPTION
Priceline.com Incorporated ("priceline.com") utilizes 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
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
<PAGE>
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
<PAGE>
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. On July 13, 1999,
the plaintiff's new counsel filed a motion to reinstate four related claims that
previously had been dismissed with prejudice. Priceline.com intends to
vigorously oppose reinstatement of these claims, and if the claims are
reinstated, to vigorously defend against these claims. Nevertheless, if these
claims are reinstated and if the plaintiffs ultimately prevail as to these
claims, priceline.com could be exposed to remedies that could negatively affect
its operating results.
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
F-28
<PAGE>
PRICELINE.COM INCORPORATED
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
intellectual property rights. Such claims, even if not meritorious, could result
in the expenditure of significant financial and managerial resources.
7. SUBSEQUENT EVENTS
Common Stock and Convertible Debt Offerings--In July 1999, priceliine.com
filed a registration statement covering the sale of up to $287.5 million of
convertible subordinated notes and up to 6.3 million shares of common stock. The
common stock offering is to be comprised of 2.0 million shares of common stock
to be issued by priceline.com and up to 4.3 million shares to be sold by certain
selling stockholders.
On July 19, 1999, an option exercise program was established to enable
employees to exercise options and sell shares through a cashless exercise
program administered through a broker dealer. Priceline.com employees holding
1,021,071 options that were vested as of June 1, 1999 are permitted to sell a
portion of their option shares during the period commencing on July 20, 1999 and
ending on July 30, 1999. Any employee choosing to exercise and sell options
earlier than the 180-day post-initial public offering lock-up expiration date
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--Continental agreed to join the priceline.com service
on July 20, 1999. 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
<PAGE>
[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!
<PAGE>
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.
<TABLE>
<S> <C>
SEC registration fee........................................................... $236,629.15
NASD Filing fee................................................................ *
Nasdaq National Market listing fee............................................. *
Printing and engraving expenses................................................ *
Legal fees and expenses........................................................ *
Accounting fees and expenses................................................... *
Blue sky fees and expenses..................................................... *
Transfer agent fees............................................................ *
Miscellaneous fees and expenses................................................ *
----------
Total........................................................................ $
----------
----------
</TABLE>
- ------------------------
* To be filed by amendment.
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- --------- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
1.1 *** Form of Underwriting Agreement relating to common stock offering.
1.2 *** Form of Underwriting Agreement relating to convertible noteoffering.
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.
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.
</TABLE>
II-3
<PAGE>
(A) EXHIBITS: (CONTINUED)
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- --------- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
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.
10.22.2 *+ Amendment No. 1, dated as of February 4, 1999, to Warrant Participation Agreement, dated as of
December 31, 1999.
</TABLE>
II-4
<PAGE>
(A) EXHIBITS: (CONTINUED)
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- --------- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
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 Deloitte & Touche LLP.
24.1 Power of Attorney (reference is hereby made to the signature page).
25.1 *** Statement of Eligibility of the Trustee on Form T-1.
</TABLE>
- ------------------------
* 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.
*** To be filed by amendment.
+ 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.
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
II-5
<PAGE>
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
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Stamford, State of
Connecticut, on July 22, 1999.
<TABLE>
<S> <C> <C>
PRICELINE.COM INCORPORATED
By:
-----------------------------------------
Melissa M. Taub
SENIOR VICE PRESIDENT,
GENERAL COUNSEL AND SECRETARY
</TABLE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature appears
below constitutes and appoints Paul E. Francis, Melissa M. Taub, and Thomas P.
D'Angelo, and each of them, his true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement (or any
other registration statement for the same offering that is to be effective upon
filing pursuant to Rule 462(b) under the Securities Act), and to file the same,
with all exhibits thereto, and all documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully and to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents or any of them, or their or his substitute or substitutes, may lawfully
do or cause to be done by virtue hereof. This power of attorney may be executed
in counterparts.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
<C> <S> <C>
Chairman and Chief
/s/ RICHARD S. BRADDOCK Executive Officer
- ------------------------------ (Principal Executive July 22, 1999
Richard S. Braddock Officer)
/s/ JAY S. WALKER Vice Chairman, Founder and
- ------------------------------ Director July 22, 1999
Jay S. Walker
/s/ PAUL E. FRANCIS Chief Financial Officer
- ------------------------------ (Principal Financial July 22, 1999
Paul E. Francis Officer)
/s/ MELISSA M. TAUB Senior Vice President,
- ------------------------------ General Counsel and July 22, 1999
Melissa M. Taub Secretary
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
<C> <S> <C>
/s/ THOMAS P. D'ANGELO Vice President Finance and
- ------------------------------ Controller (Principal July 22, 1999
Thomas P. D'Angelo Accounting Officer)
/s/ PAUL A. ALLAIRE Director
- ------------------------------ July 22, 1999
Paul A. Allaire
/s/ RALPH M. BAHNA Director
- ------------------------------ July 22, 1999
Ralph M. Bahna
/s/ PAUL J. BLACKNEY Director
- ------------------------------ July 22, 1999
Paul J. Blackney
/s/ WILLIAM E. FORD Director
- ------------------------------ July 22, 1999
William E. Ford
/s/ MARSHALL LOEB Director
- ------------------------------ July 22, 1999
Marshall Loeb
/s/ N.J. NICHOLAS, JR. Director
- ------------------------------ July 22, 1999
N.J. Nicholas, Jr.
/s/ NANCY B. PERETSMAN Director
- ------------------------------ July 22, 1999
Nancy B. Peretsman
/s/ DANIEL H. SCHULMAN Director
- ------------------------------ July 22, 1999
Daniel H. Schulman
</TABLE>
II-8
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- --------- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
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.
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.
10.11.2 *+ Airline Participation Agreement, dated August 31, 1998, by and among the Registrant, Priceline
Travel, Inc. and Delta Air Lines, Inc.
</TABLE>
II-9
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<TABLE>
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EXHIBIT DESCRIPTION
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<S> <C> <C>
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.
[23.1 *** Consent of Skadden, Arps, Slate, Meagher & Flom, LLP (included in Exhibit 5.1).]
23.2 Consent of Deloitte & Touche LLP.
</TABLE>
II-10
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<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
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<S> <C> <C>
24.1 Power of Attorney (reference is hereby made to the signature page).
25.1 *** Statement of Eligibility of the Trustee on Form T-1.
</TABLE>
- ------------------------
* 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.
*** To be filed by amendment.
+ Certain portions of this document have been omitted pursuant to a
confidential treatment request.
II-11
<PAGE>
Exhibit 10.11.4
July 16, 1999
Delta Air Lines, Inc.
1030 Delta Boulevard
Hartsfield Atlanta International Airport
Atlanta, GA 30320
Attention: Edward H. West
Senior Vice President
Strategy & Business Development
Gentlemen:
This letter shall be deemed an amendment ("Amendment") to the Airline
Participation Agreement, the General Agreement, and the Participation Warrant
Agreement dated as of August 31, 1998, each as amended through the date hereof,
by and between Delta Air Lines, Inc. ("Delta") and priceline.com Incorporated
("Priceline"). This Amendment will be effective as of the date hereof. Unless
otherwise defined herein, capitalized terms in this Amendment shall have the
meanings set forth in the Airline Participation Agreement, the General
Agreement, and the Participation Warrant Agreement, as applicable.
Delta and Priceline agree to amend the Airline Participation Agreement, the
General Agreement, and the Participation Warrant Agreement as follows:
1. INCLUSION OF CONTINENTAL. Delta hereby grants its consent, pursuant to
Section 3.1 of the General Agreement, to the addition of Continental
Airlines to the Priceline Service subject to Section 3.1(g). of the General
Agreement.
2. SECTION 3.1 (g) The following provision is added as Section 3.1(g) of the
General Agreement:
Priceline agrees that it will not issue tickets (i) on Continental Airlines
in the following markets: (x) to or from ATL, BOS, DFW, CVG, SLC, or
airports in the States of Georgia and Alabama, except for (A) flights
originating from CLE, EWR IAH and HOU and (B) flights in O&D markets not
served by Delta or a carrier
<PAGE>
operating a flight under Delta's two letter designator code, and (y) in any
international city pair where the passenger origin or destination is not
within the 50 States of the United States, Canada or Mexico, except for (A)
offers originating from CLE, EWR IAH and HOU and (B) offers in O&D markets
not served by Delta or a carrier operating a flight under Delta's two letter
designator code; or (ii) on any carrier operating a flight under
Continental's two letter designator code except for Continental commuter
carriers. Delta agrees to discuss with Priceline the possible removal of the
restrictions in this Section 3.1(g) six months following Continental's
participation in the Priceline Service. For purposes of Section 3.1, an O&D
market shall be considered to be served by Delta or a carrier operating a
flight under Delta's two letter designator code at any time scheduled
service is offered for sale by one or more such carriers.
3. SECTION 3.1(b) Notwithstanding anything to the contrary in Section 3.1(b) of
the General Agreement, Priceline may sell tickets under Continental's two
letter "CO" designator code for flights operated by Continental's Domestic
Partners; provided, that (i) Priceline has effective controls in place to
ensure that the Domestic Partner flights ticketed under Continental's "CO"
designator code do not include the O&D markets listed in Section 3.1(b)(x)
and (y), and such controls have been approved in writing by Delta, which
approval shall not be unreasonably withheld, (ii) Priceline will not reduce
or adjust the first look allocations to Delta pursuant to the Priceline
ticket allocation methodology as a result of Priceline's ability to ticket
Domestic Partner operated flights under the "CO" two letter designator code;
and (iii) Priceline shall review and obtain Delta's prior written consent to
any adjustment to first look allocations to Continental as a result of its
ability to sell Domestic Partner operated flights ticketed under the "CO
designator code. For purposes of this Section 3.1(b), a "Domestic Partner"
shall mean a person, corporation or other entity that (x) holds air
transportation certificate authority issued by the United States Department
of Transportation (or its predecessor, the Civil Aeronautics Board) pursuant
to 49 U.S.C. Section 41102 or Section 41103.to operate flights within the
United States, (y) has signed a Participating Carrier Agreement with
Priceline, and (z) has a code-share arrangement with Continental for flights
operating within the United States whereby Continental places its two letter
"CO" code on the domestic U.S. flights operated by such person.
4. INCLUSION OF UNITED AIRLINES. Priceline agrees to include United Airlines in
the Priceline Service on terms and conditions that are no less favorable
than those offered to Continental Airlines at any time within the next 45
days.
5. DELTA SALES. For purposes of calculating "Qualifying Ticket Volume" under
the Participation Warrant Agreement, Priceline's adaptive marketing revenues
associated with Delta ticket sales will be included in determining
Qualifying Ticket Volume. Priceline represents that all Delta ticket sales
through the Priceline Service to date have earned a Gross Margin of at least
3%, and thus have met the Qualifying Ticket Volume criteria.
<PAGE>
Except as modified by this letter, all other terms and conditions of the Airline
Participation Agreement, the General Agreement and the Participation Warrant
Agreement shall remain in full force and effect. In the event any term or
provision of the Airline Participation Agreement, the General Agreement or the
Participation Warrant Agreement is contrary to or inconsistent with this letter,
the terms of this letter shall control.
If the above language is acceptable, please acknowledge your consent by signing
where indicated below and returning your signed original to me.
Sincerely,
PRICELINE.COM
By: /s/ Paul E. Francis
------------------------------
Name: Paul E. Francis
Title: Chief Financial Officer
ACCEPTED AND AGREED TO:
DELTA AIR LINES, INC.
By: /s/ Mark A.P. Druch
--------------------------------------------
Name: Mark A.P. Druch
Title: Senior Vice President - Network Management
<PAGE>
Exhibit 10.26
CONFIDENTIAL
TREATMENT HAS BEEN REQUESTED FOR CERTAIN PORTIONS OF
THIS DOCUMENT. CONFIDENTIAL PORTIONS HAVE BEEN FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION.
FIRST AMENDMENT TO INTERACTIVE MARKETING AGREEMENT
This FIRST AMENDMENT TO INTERACTIVE MARKETING AGREEMENT (this
"Amendment"), dated as of April 26, 1999, modifies the Interactive Marketing
Agreement dated March 31, 1999, by and between PRICELINE.COM INCORPORATED and
FIRST USA BANK, N.A. (the "Agreement"). All capitalized terms used in this
Amendment but not defined herein shall have the meanings set forth in the
Agreement.
For good and valuable consideration, the receipt and sufficiency of
which is hereby acknowledged, the parties agree that the Agreement is hereby
amended as follows:
SECTION 1: FEES. Schedule B to the Agreement is hereby amended as
follows:
(a) ACCOUNT ORIGINATION FEE. Paragraph 1 is hereby amended to
read in its entirety as follows:
"1. ACCOUNT ORIGINATION FEES. Subject to Paragraph 2 of this
SCHEDULE B, FUSA shall pay to the Company a fee (the "Account
Origination Fee") for every FUSA Account opened for which (a)
the application was generated by the marketing programs
conducted through Company Services and (b) at least one
statement with a balance due has been sent to the Company
Customer for such Account (each, a "Company-Sourced Account").
The Account Origination Fee for each Company-Sourced Account
shall be (x) [**] for each of the first [**]
Company-Sourced Accounts, (y) [**] for each of the next
[**] Company-Sourced Accounts, and (z) [**] for each
Company-Sourced Account over the first [**] Company
Sourced-Accounts. Account Origination Fees shall be paid in
accordance with the provisions of Section 5.3."
(b) APPLICATION VOLUME. Paragraph 3(a) is hereby amended by
deleting the phrase "Account Origination Fees under Paragraph
1" appearing in the first sentence of Paragraph 3(a), and
replacing the same with the phrase "Value-Added Payment under
Paragraph 5".
(c) VALUE ADDED PAYMENT. Paragraph 5 is hereby amended by deleting
the first sentence thereof and replacing the same with the
following:
"In addition to any other payment the Company is entitled to
under this Agreement, FUSA shall make to the Company a payment
(a "Value-Added Payment") for every approved Account
application at the time such
- ---------
[**] = Confidential treatment requested for redacted portion.
<PAGE>
Account application is approved by FUSA. The Value Added
Payment to be paid for each approved Account shall be (x)
[**] for each of the first [**] approved Account
applications, (y) [**] for each of the next [**] approved
Account applications, and (z) [**] for each approved Account
application over the first [**] approved applications."
SECTION 2: FRAUD PAYMENT. Article V of the Agreement is hereby amended
to include the following new Section 5.7:
"Section 5.7 FRAUD PAYMENT. Company shall pay FUSA one dollar
($1.00) for each account approved by FUSA pursuant to the terms of this
Agreement. The amount of the payment pursuant to this Section 5.7 shall offset
against fees earned by Company and shown on the monthly reconciliation report
required by Section 5.3 hereof."
SECTION 3: PAYMENT TERMS. Section 5.3 of the Agreement is hereby
amended by adding the following after the second sentence and before the third
sentence thereof:
"Any amount owing to FUSA and payable pursuant to the terms of
this Article V shall be paid within fifteen (15) days following the end of each
Quarter."
SECTION 4: NO FURTHER AMENDMENTS. Except as expressly amended herein,
all other terms of the Agreement shall remain unchanged and shall continue in
full force and effect.
IN WITNESS WHEREOF, each of the parties has caused this Amendment to be executed
on its behalf by its duly authorized officer on the date set forth below.
FIRST USA BANK PRICELINE.COM INCORPORATED
("FUSA") ("Company")
By: /s/ Kurt M. Campisano By: /s/ Paul E. Francis
------------------------- -------------------------
Name: Kurt M. Campisano Name: Paul E. Francis
Title: Senior Vice President Title: Chief Financial Officer
Date: 6/30/99 Date: 6/30/99
- ---------
[**] = Confidential treatment requested for redacted portion.
<PAGE>
Exhibit 10.27
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT, dated as of June 14, 1999, by and between,
Priceline.com Incorporated, a Delaware corporation, with its principal United
States office at Five High Ridge Park, Stamford, Connecticut 06905-11325 (the
"Company"), and Daniel H. Schulman, residing at 27 Valleyview Road, Warren, New
Jersey 07059 ("Executive").
W I T N E S S E T H:
WHEREAS, the Company desires to employ the Executive as President
and Chief Operating Officer of the Company;
WHEREAS, the Company and Executive desire to enter into this
agreement (the "Agreement") as to the terms of his employment by the Company;
NOW, THEREFORE, in consideration of the premises and mutual
covenants contained herein and for other good and valuable consideration, the
parties agree as follows:
1. TERM OF EMPLOYMENT. Except for earlier termination as
provided in Section 9 hereof, Executive's employment under this Agreement shall
be for an approximately five (5) year term (the "Initial Employment Term")
commencing on June 14, 1999 (the "Commencement Date") and ending on June 30,
2004. Subject to Section 9 hereof, the Initial Employment Term shall be
automatically extended for additional terms of successive one (1) year periods
(the "Additional Employment Term") unless the Company or Executive gives written
notice to the other at least ninety (90) days prior to the expiration of the
then Initial Employment Term or Additional Employment Term of the termination of
Executive's employment hereunder at the end of such Employment Term. The Initial
Employment Term and the Additional Employment Term shall be referred to herein
as the "Employment Term."
2. POSITIONS. (a) Commencing July 1, 1999, Executive shall serve
as the President and Chief Operating Officer of the Company. Prior thereto
Executive shall be an employee but not an officer of the Company. The Company
will also nominate Executive during the Employment Term as a member of the Board
of Directors of the Company (the "Board"). Executive shall also serve, if
requested by the Board, or the Chief Executive Officer, as an executive officer
and director of subsidiaries and a director of associated companies of the
Company and shall comply with the policy of the Compensation Committee of the
Company's Board (the "Compensation Committee") with regard to retention or
forfeiture of director's fees.
(b) Executive shall report directly to the Chief Executive
Officer of the Company and, shall have such duties and authority, consistent
with his then position as shall be assigned to him from time to time by the
Board or the Chief Executive Officer of the Company.
(c) During the Employment Term, Executive shall devote
substantially all of his business time and efforts to the performance of his
duties hereunder; provided, however, that Executive shall be allowed, to the
extent that such activities do not materially interfere with the performance of
his duties and responsibilities hereunder, to manage his personal financial and
legal affairs and to serve on corporate, civic, charitable industry boards or
committees Notwithstanding the foregoing, the Executive shall only serve on
corporate boards of directors if approved in advance by the Board.
3. BASE SALARY. During the Employment Term, the Company shall
pay Executive a base salary at the annual rate of not less than $300,000. Base
salary shall be payable in accordance with the usual payroll practices of the
Company. Executive's Base Salary shall be subject to annual review by
<PAGE>
the Board or the Compensation Committee during the Employment Term and may be
increased, but not decreased, from time to time by the Board or the Compensation
Committee. The base salary as determined as aforesaid from time to time shall
constitute "Base Salary" for purposes of this Agreement.
4. INCENTIVE COMPENSATION. (a) BONUS. Executive shall be
eligible to participate in any annual bonus plan the Company may implement at
any time during Executive's Employment Term for senior executives at a level
commensurate with his position.
(b) LONG TERM COMPENSATION. For each fiscal year or portion
thereof during the Employment Term, Executive shall be eligible to participate
in any long-term incentive compensation plan generally made available to senior
executives of the Company at a level commensurate with his position in
accordance with and subject to the terms of such plan.
(c) EQUITY. (i) OPTIONS. Executive is being granted
simultaneously herewith a stock option (the "Option") under the Priceline.com
Incorporated 1999 Omnibus Plan (the "Plan") to purchase three million
(3,000,000) shares of the Company's issued and outstanding common stock (the
"Common Stock"). The Option shall terminate on the tenth (10) anniversary of the
date of grant or, if earlier, eighteen (18) months after a termination of
Executive's employment with the Company. The exercise price with respect to each
share of Common Stock subject to the Option shall be $76.875. The Option will
become exercisable as to one sixth (1/6) of the Option upon the Commencement
Date, as to one sixth (1/6) of the Option on December 31, 1999, as to one-third
(1/3) of the Option on December 31, 2000 and as to the final one-third (1/3) of
the Option on December 31, 2001, provided that Executive is employed by the
Company on such vesting date. Vesting shall be accelerated as follows: (i) upon
a Termination without Cause or a Termination for Good Reason, the Option will
immediately vest (to the extent not then vested) as follows: two million
(2,000,000) shares if the termination takes place prior to the first anniversary
of the Commencement Date; two million five hundred thousand (2,500,000) shares
if the termination takes place within on or after the first anniversary of the
Commencement Date and prior to the second anniversary of the Commencement Date;
and three million (3,000,000) shares if the termination takes place thereafter;
or (ii) upon death or Termination for a Disability, the Option will immediately
vest as to fifty percent (50%) of Executive's then unvested shares; and (iii) in
the event of a Change in Control the Option will vest (to the extent not then
vested): two million (2,000,000) shares if the Change in Control takes place
prior to the first anniversary of the Commencement Date; two million five
hundred thousand (2,500,000) shares if the Change in Control takes place on or
after the first anniversary of the Commencement Date and prior to the second
anniversary of the Commencement Date; and three million (3,000,000) shares if
the Change in Control takes place thereafter; provided that the remaining shares
unvested shall vest (to the extent not otherwise vested prior thereto by the
other terms hereof) six (6) months after the Change in Control if the Executive
is then employed by the Company or, if earlier, upon a Termination without
Cause, Termination for Good Reason, death, Termination for Disability or the
Option not being continued or assumed upon the Change in Control.
(d) OTHER COMPENSATION. The Company may, upon recommendation of
the Compensation Committee, award to the Executive such other bonuses and
compensation as it deems appropriate and reasonable.
5. LOAN. The Company shall lend Executive six million dollars
($6,000,000) (the "Loan") on the Commencement Date or as soon thereafter as
practical. The Loan shall accrue interest annually at the applicable Federal
rate, pursuant to Section 1274(d) of the Internal Revenue Code, as amended, and
shall be a full recourse loan. The Loan shall mature five (5) years after the
date of the Loan at which time the interest and principal will become payable.
Executive shall be required to make prepayments of the principal and accrued
interest in an amount equal to twenty-five percent (25%) of Executive's pre-tax
profits over ten million dollars ($10,000,000) from the exercise of the Option
prior to
2
<PAGE>
five (5) years from the Commencement Date. Notwithstanding any provision to the
contrary, any outstanding principal and interest on the Loan shall be forgiven
upon a Change in Control, death, Termination for Disability, Termination without
Cause, or Termination for Good Reason or at the end of the five (5) year term
(if Executive has not been terminated for Cause or resigned without Good Reason
prior thereto).
6. EMPLOYEE BENEFITS AND VACATION. (a) During the Employment
Term, Executive shall be entitled to participate in all benefit plans and
arrangements and fringe benefits and perquisite programs generally provided to
comparable senior executives of the Company.
(b) During the Employment Term, Executive shall be entitled to
vacation each year in accordance with the Company's policies in effect from time
to time, but in no event less than four (4) weeks paid vacation per calendar
year. The Executive shall also be entitled to such periods of sick leave as is
customarily provided by the Company for its senior executive employees.
7. BUSINESS EXPENSES. The Company shall reimburse Executive for
the travel, entertainment and other business expenses incurred by Executive in
the performance of his duties hereunder, in accordance with the Company's
policies as in effect from time to time.
8. MOVING EXPENSES. The Company shall reimburse Executive for
all reasonable expenses and costs associated with establishing and maintaining a
temporary residence near the Company's office in Stamford, Connecticut on a
fully grossed up basis such that on an after tax basis Executive shall have no
after tax cost for the establishment and maintenance of such residence. In the
event that within one (1) year after the Commencement Date the Executive elects
to relocate to the area of the Company's office, the Company shall pay all
moving and relevant expenses incurred by Executive in relocating on a fully
grossed up basis such that Executive shall have no after tax cost for such
relocation.
9. TERMINATION. (a) The employment of Executive under this
Agreement shall terminate upon the earliest to occur of any of the following
events:
(i) the death of the Executive;
(ii) the termination of the Executive's employment by the
Company due to the Executive's Disability pursuant to Section 9(b)
hereof;
(iii) the termination of the Executive's employment by the
Executive for Good Reason pursuant to Section 9(c) hereof;
(iv) the termination of the Executive's employment by the
Company without Cause;
(v) the termination of employment by the Executive without
Good Reason upon sixty (60) days prior written notice; or
(vi) the termination of the Executive's employment by the
Company for Cause pursuant to Section 9(e).
(b) DISABILITY. If by reason of the same or related physical or
mental illness or incapacity, the Executive is unable to carry out his material
duties pursuant to this Agreement for more than six (6) consecutive months, the
Company may terminate Executive's employment for Disability. Such termination
shall be upon thirty (30) days written notice by a Notice of Disability
Termination, at any time thereafter while Executive consecutively continues to
be unable to carry out his duties as a result of the same or related physical or
mental illness or incapacity. A Termination for Disability hereunder
3
<PAGE>
shall not be effective if Executive returns to the full time performance of his
material duties within such thirty (30) day period.
(c) TERMINATION FOR GOOD REASON. A Termination for Good Reason
means a termination by Executive by written notice given within ninety (90) days
after the occurrence of the Good Reason event, unless such circumstances are
fully corrected prior to the date of termination specified in the Notice of
Termination for Good Reason (as defined in Section 9(d) hereof). For purposes of
this Agreement, "Good Reason" shall mean the occurrence or failure to cause the
occurrence, as the case may be, without Executive's express written consent, of
any of the following circumstances: (i) any material diminution of Executive's
positions, duties or responsibilities hereunder (except in each case in
connection with the termination of Executive's employment for Cause or
Disability or as a result of Executive's death, or temporarily as a result of
Executive's illness or other absence), or, the assignment to Executive of duties
or responsibilities that are inconsistent with Executive's then position; (ii)
removal of, or the nonreelection of, the Executive from officer positions with
the Company specified herein without election to a higher position or removal of
the Executive from any of his then officer positions; (iii) a relocation of the
Company's executive office in Connecticut to a location more than thirty-five
(35) miles from its current location or more than thirty-five (35) miles further
from the Executive's residence at the time of relocation; (iv) a failure by the
Company (A) to continue any bonus plan, program or arrangement in which
Executive is entitled to participate (the "Bonus Plans"), provided that any such
Bonus Plans may be modified at the Company's discretion from time to time but
shall be deemed terminated if (x) any such plan does not remain substantially in
the form in effect prior to such modification and (y) if plans providing
Executive with substantially similar benefits are not substituted therefor
("Substitute Plans"), or (B) to continue Executive as a participant in the Bonus
Plans and Substitute Plans on at least the same basis as to potential amount of
the bonus as Executive participated in prior to any change in such plans or
awards, in accordance with the Bonus Plans and the Substitute Plans; (v) any
material breach by the Company of any provision of this Agreement, including
without limitation Section 14 hereof; (vi) Executive's removal from or failure
to be elected or reelected to the Board; or (vii) failure of any successor to
the Company (whether direct or indirect and whether by merger, acquisition,
consolidation or otherwise) to assume in a writing delivered to Executive upon
the assignee becoming such, the obligations of the Company hereunder.
(d) NOTICE OF TERMINATION FOR GOOD REASON. A Notice of
Termination for Good Reason shall mean a notice that shall indicate the specific
termination provision in Section 9(c) relied upon and shall set forth in
reasonable detail the facts and circumstances claimed to provide a basis for
Termination for Good Reason. The failure by Executive to set forth in the Notice
of Termination for Good Reason any facts or circumstances which contribute to
the showing of Good Reason shall not waive any right of Executive hereunder or
preclude Executive from asserting such fact or circumstance in enforcing his
rights hereunder. The Notice of Termination for Good Reason shall provide for a
date of termination not less than ten (10) nor more than sixty (60) days after
the date such Notice of Termination for Good Reason is given, provided that in
the case of the events set forth in Sections 9(c)(i) or (ii) or the date may be
five (5) days after the giving of such notice.
(e) CAUSE. Subject to the notification provisions of Section 9(f)
below, Executive's employment hereunder may be terminated by the Company for
Cause. For purposes of this Agreement, the term "Cause" shall be limited to (i)
willful misconduct by Executive with regard to the Company which has a material
adverse effect on the Company; (ii) the willful refusal of Executive to attempt
to follow the proper written direction of the Board or a more senior officer of
the Company, provided that the foregoing refusal shall not be "Cause" if
Executive in good faith believes that such direction is illegal, unethical or
immoral and promptly so notifies the Board or the more senior officer (whichever
is applicable); (iii) substantial and continuing willful refusal by the
Executive to attempt to perform the
4
<PAGE>
duties required of him hereunder (other than any such failure resulting from
incapacity due to physical or mental illness) after a written demand for
substantial performance is delivered to the Executive by the Board or a more
senior officer of the Company which specifically identifies the manner in which
it is believed that the Executive has substantially and continually refused to
attempt to perform his duties hereunder; or (iv) the Executive being convicted
of a felony (other than a felony involving a traffic violation or as a result of
vicarious liability). For purposes of this paragraph, no act, or failure to act,
on Executive's part shall be considered "willful" unless done or omitted to be
done, by him not in good faith and without reasonable belief that his action or
omission was in the best interests of the Company. A notice by the Company of a
non-renewal of the Employment Term pursuant to Section 1 hereof shall be deemed
an involuntary termination of Executive by the Company without Cause as of the
end of the then Employment Term, but Executive may terminate at any time after
the receipt of such notice and shall be treated as if he was terminated without
Cause as of such date.
(f) NOTICE OF TERMINATION FOR CAUSE. A Notice of Termination for
Cause shall mean a notice that shall indicate the specific termination provision
in Section 9(e) relied upon and shall set forth in reasonable detail the facts
and circumstances which provide for a basis for Termination for Cause. Further,
a Notification for Cause shall be required to include a copy of a resolution
duly adopted by at least two-thirds (_) of the entire membership of the Board at
a meeting of the Board which was called for the purpose of considering such
termination and which Executive and his representative had the right to attend
and address the Board, finding that, in the good faith of the Board, Executive
engaged in conduct set forth in the definition of Cause herein and specifying
the particulars thereof in reasonable detail. The date of termination for a
Termination for Cause shall be the date indicated in the Notice of Termination.
Any purported Termination for Cause which is held by a court not to have been
based on the grounds set forth in this Agreement or not to have followed the
procedures set forth in this Agreement shall be deemed a Termination by the
Company without Cause.
10. CONSEQUENCES OF TERMINATION OF EMPLOYMENT.
(a) DEATH. If, Executive's employment is terminated by reason of
Executive's death, the employment period under this Agreement shall terminate
without further obligations to the Executive's legal representatives under this
Agreement except for: (i) any compensation earned but not yet paid, including
and without limitation, any bonus if declared or earned but not yet paid for a
completed fiscal year, any amount of Base Salary earned but unpaid, any accrued
vacation pay payable pursuant to the Company's policies, and any unreimbursed
business expenses payable pursuant to Section 7 (collectively "Accrued
Amounts"), which amounts shall be promptly paid in a lump sum to Executive's
estate; (ii) any other amounts or benefits owing to the Executive under the then
applicable employee benefit plans, long term incentive plans or equity plans and
programs of the Company which shall be paid or treated in accordance with
Section 4(c) hereof with regard to the Option and otherwise in accordance with
the terms of such plans and programs; (iii) continuation of Executive's health
benefits for Executive's dependents at the same level and cost as if Executive
was an employee of the Company for twelve (12) months; and (iv) if a bonus plan
is in place, the product of (x) the target annual bonus for the fiscal year of
Executive's death, multiplied by (y) a fraction, the numerator of which is the
number of days of the current fiscal year during which Executive was employed by
the Company, and the denominator of which is 365, which bonus shall be paid when
bonuses for such period are paid to the other executives.
(b) DISABILITY. If Executive's employment is terminated by reason
of Executive's Disability, Executive shall be entitled to receive the payments
and benefits to which his representatives would be entitled in the event of a
termination of employment by reason of his death plus, to the extent not
duplicative of the foregoing, Executive shall be entitled to continuation of the
benefits (including
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without limitation to health, life, disability and pension) as if Executive had
been an employee of the Company for twelve (12) months.
(c) TERMINATION BY EXECUTIVE FOR GOOD REASON OR TERMINATION BY
THE COMPANY WITHOUT CAUSE. If (i) Executive terminates his employment hereunder
for Good Reason during the Employment Term or (ii) Executive's employment with
the Company is terminated by the Company without Cause, Executive shall be
entitled to receive, (A) over a period of twelve (12) months after such
termination an amount equal to two (2) times the sum of his Base Salary and
target bonus, if any, for the year in which such termination occurs (provided,
however, in the event that the Base Salary or target bonus, if any, has been
decreased in the twelve (12) months prior to the termination, the amount to be
used shall be the highest Base Salary and target bonus, if any, during such
twelve (12) month period); (B) any Accrued Amounts at the date of termination;
(C) any other amounts or benefits owing to Executive under the then applicable
employee benefit, long term incentive or equity plans and programs of the
Company, which shall be paid or treated in accordance with Section 4(c) hereof
with regard to the Option and otherwise in accordance with the terms of such
plans and programs; (D) continuation of the benefits (including without
limitation to health, life, disability and pension) as if Executive was an
employee of the Company for twelve (12) months, provided that, if such
termination is after a Change in Control, the period of benefit continuation
shall be twenty-four (24) months; and (E) if a bonus plan is in place, the
product of (x) the target annual bonus for the fiscal year of Executive's death,
multiplied by (y) a fraction, the numerator of which is the number of days of
the current fiscal year during which Executive was employed by the Company, and
the denominator of which is 365, which bonus shall be paid when bonuses for such
period are paid to the other executives.
(d) TERMINATION WITH CAUSE OR VOLUNTARY RESIGNATION WITHOUT GOOD
REASON OR RETIREMENT. If, Executive's employment hereunder is terminated (i) by
the Company for Cause or (ii) by Executive without Good Reason, the Executive
shall be entitled to receive only his Base Salary through the date of
termination, and any unreimbursed business expenses payable pursuant to Section
7 and, if such termination is by Executive without Good Reason, any bonus that
has been declared or earned but not yet paid for a completed fiscal year.
Executive's rights under all benefits plans and equity grants shall be
determined in accordance with the Company's plans, programs and grants, except
as provided in Section 4(c) hereof with respect to the Option.
11. NO MITIGATION; NO SET-OFF. In the event of any termination of
employment hereunder, Executive shall be under no obligation to seek other
employment and there shall be no offset against any amounts due Executive under
this Agreement on account of any remuneration attributable to any subsequent
employment that Executive may obtain. The amounts payable hereunder shall not be
subject to setoff, counterclaim, recoupment, defense or other right which the
Company may have against the Executive or others, except upon obtaining by the
Company of a final unappealable judgment against Executive.
12. CHANGE IN CONTROL. (a) For purposes of this Agreement, the
term "Change in Control" shall mean the occurrence of any one of the following
events:
(i) any Person is or becomes the Beneficial Owner, directly
or indirectly, of securities of the Company (not including in the
securities beneficially owned by such person any securities
acquired directly from the Company or its Affiliates) representing
twenty-five percent (25%) or more of the combined voting power of
the Company's then outstanding voting securities;
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(ii) the following individuals cease for any reason to
constitute a majority of the number of directors then serving:
individuals who, on the Commencement Date, constitute the Board
and any new director (other than a director whose initial
assumption of office is in connection with an actual or threatened
election contest, including but not limited to a consent
solicitation, relating to the election of directors of the
Company) whose appointment or election by the Board or nomination
for election by the Company's stockholders was approved or
recommended by a vote of the at least two-thirds (_) of the
directors then still in office who either were directors on the
Commencement Date or whose appointment, election or nomination for
election was previously so approved or recommended;
(iii) there is a consummated merger or consolidation of the
Company or any direct or indirect subsidiary of the Company with
any other corporation, other than (A) a merger or consolidation
which would result in the voting securities of the Company
outstanding immediately prior thereto continuing to represent
(either by remaining outstanding or by being converted into voting
securities of the surviving or parent entity) more than fifty
percent (50%) of the combined voting power of the voting
securities of the Company or such surviving or parent equity
outstanding immediately after such merger or consolidation or (B)
a merger or consolidation effected to implement a recapitalization
of the Company (or similar transaction) in which no Person,
directly or indirectly, acquired twenty-five percent (25%) or more
of the combined voting power of the Company's then outstanding
securities (not including in the securities beneficially owned by
such person any securities acquired directly from the Company or
its Affiliates); or
(iv) the stock holders of the Company approve a plan of
complete liquidation of the Company or there is consummated on
agreement for the sale or disposition by the Company of all or
substantially all of the Company's assets (or any transaction
having a similar effect), other than a sale or disposition by the
Company of all or substantially all of the Company's assets to an
entity, at least fifty percent (50%) of the combined voting power
of the voting securities of which are owned by stockholders of the
Company in substantially the same proportions as their ownership
of the Company immediately prior to such sale.
(b) For purposes of this Section 12, the following terms shall
have the following meanings:
(i) "Affiliate" shall mean an affiliate of the Company, as
defined in Rule 12b-2 promulgated under Section 12 of the
Securities Exchange Act of 1934, as amended from time to time (the
"Exchange Act");
(ii) "Beneficial Owner" shall have the meaning set forth in
Rule 13d-3 under the Exchange Act;
(iii) "Person" shall have the meaning set forth in Section
3(a)(9) of the Exchange Act, as modified and used in Sections
13(d) and 14(d) thereof, except that such term shall not include
(1) the Company, (2) a trustee or other fiduciary holding
securities under an employee benefit plan of the Company, (3) an
underwriter temporarily holding securities pursuant to an offering
of such securities or (4) a corporation owned, directly or
indirectly, by the stockholders of the Company in substantially
the same proportions as their ownership of shares of Common Stock
of the Company.
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13. CONFIDENTIAL INFORMATION. (a) Executive acknowledges that as
a result of his employment by the Company, Executive will obtain confidential
information as to the Company and its affiliates and the Company and its
affiliates will suffer substantial damage, which would be difficult to
ascertain, if Executive should use such confidential information and that
because of the nature of the information that will be known to Executive it is
necessary for the Company and its affiliates to be protected by the
Confidentiality restrictions set forth herein.
(b) During and after the Employment Term, Executive shall not use
for his own benefit or disclose confidential information, knowledge or data
relating to the Company and its affiliates, and their respective businesses,
including any confidential information as to customers of the Company and its
affiliates obtained by Executive during his employment by the Company and its
affiliates and not (i) otherwise public knowledge or known within the applicable
industry or (ii) in connection with performance of his duties hereunder as he
deems in good faith to be necessary or desirable. Executive shall not, without
prior written consent of the Company, unless compelled pursuant to the order of
a court or other governmental or legal body having jurisdiction over such
matter, communicate or divulge any such information, knowledge or data to anyone
other than the Company and those designated by it. In the event Executive is
compelled by order of a court or other governmental or legal body to communicate
or divulge any such information, knowledge or data to anyone other than the
foregoing, he shall promptly notify the Company of any such order so it may seek
a protective order.
(c) Upon termination of his employment with the Company and its
affiliates, or at any time as the Company may request, Executive will promptly
deliver to the Company, as requested, all documents (whether prepared by the
Company, an affiliate, Executive or a third party) relating to the Company, an
affiliate or any of their businesses or property which he may possess or have
under his direction or control other than documents provided to Executive in his
capacity as a participant in any employee benefit plan, policy or program of the
Company or any agreement by and between Executive and the Company with regard to
Executive's employment or severance.
(d) In the event of a breach or potential breach of this Section
13, Executive acknowledges that the Company and its affiliates will be caused
irreparable injury and that money damages may not be an adequate remedy and
agree that the Company and its affiliates shall be entitled to injunctive relief
(in addition to its other remedies at law) to have the provisions of this
Section 13 enforced. It is hereby acknowledged that the provisions of this
Section 13 are for the benefit of the Company and all of the affiliates of the
Company and each such entity may enforce the provisions of this Section 13 and
only the applicable entity can waive the rights hereunder with respect to its
confidential information and employees.
14. INDEMNIFICATION. The Company shall indemnify and hold
harmless Executive to the fullest extent permitted by law for any action or
inaction of Executive while serving as an officer and director of the Company
or, at the Company's request, as an officer or director of any other entity or
as a fiduciary of any benefit plan. The Company shall cover the Executive under
directors and officers liability insurance both during and, while potential
liability exists, after the Employment Term in the same amount and to the same
extent as the Company covers its other officers and directors.
15. LEGAL FEES.
(a) The Company shall pay the Executive's reasonable legal fees
and costs associated with entering into this Agreement.
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(b) All disputes and controversies arising under or in connection
with this Agreement, other than the seeking of injunctive or other equitable
relief pursuant to Section 13 hereof, shall be settled by arbitration conducted
before a panel of three (3) arbitrators sitting in New York City, New York, or
such other location agreed by the parties hereto, in accordance with the rules
for expedited resolution of commercial disputes of the American Arbitration
Association then in effect. The determination of the majority of the arbitrators
shall be final and binding on the parties. Judgment may be entered on the award
of the arbitrator in any court having proper jurisdiction. All expenses of such
arbitration, including the fees and expenses of the counsel of the Executive,
shall be borne by the Company unless the arbitrators determine that Executive's
position was overall frivolous or otherwise taken in bad faith, in which case
the arbitrators may determine that Executive shall bear his own legal fees.
(c) In the event after a Change in Control either party files for
arbitration to resolve any dispute as to whether a termination is for Cause or
Good Reason, until such dispute is determined by the arbitrators, the Executive
shall continue to be treated economically and benefit wise in the manner
asserted by him in the arbitration effective as of the date of the filing of the
arbitration, subject to the Executive promptly refunding any amounts paid to
him, paying the cost of any benefits provided to him and paying to the Company
the profits in any stock option or other equity awards exercised or otherwise
realized by him during the pendency of the arbitration which he is ultimately
held not to be entitled to; provided the arbitrators may terminate such payments
and benefits in the event that they determine at any point that the Executive is
intentionally delaying conclusion of the arbitration.
16 MISCELLANEOUS.
(a) GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware without reference
to principles of conflict of laws.
(b) ENTIRE AGREEMENT/AMENDMENTS. This Agreement and the
instruments contemplated herein, contain the entire understanding of the parties
with respect to the employment of Executive by the Company from and after the
Commencement Date and supersedes any prior agreements between the Company and
Executive. There are no restrictions, agreements, promises, warranties,
covenants or undertakings between the parties with respect to the subject matter
herein other than those expressly set forth herein and therein. This Agreement
may not be altered, modified, or amended except by written instrument signed by
the parties hereto.
(c) NO WAIVER. The failure of a party to insist upon strict
adherence to any term of this Agreement on any occasion shall not be considered
a waiver of such party's rights or deprive such party of the right thereafter to
insist upon strict adherence to that term or any other term of this Agreement.
Any such waiver must be in writing and signed by Executive or an authorized
officer of the Company, as the case may be.
(d) ASSIGNMENT. This Agreement shall not be assignable by
Executive. This Agreement shall be assignable by the Company only to an acquirer
of all or substantially all of the assets of the Company, provided such acquirer
promptly assumes all of the obligations hereunder of the Company in a writing
delivered to the Executive and otherwise complies with the provisions hereof
with regard to such assumption.
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(e) SUCCESSORS; BINDING AGREEMENT; THIRD PARTY BENEFICIARIES.
This Agreement shall inure to the benefit of and be binding upon the personal or
legal representatives, executors, administrators, successors, heirs,
distributees, devisees legatees and permitted assignees of the parties hereto.
(f) COMMUNICATIONS. For the purpose of this Agreement, notices
and all other communications provided for in this Agreement shall be in writing
and shall be deemed to have been duly given (i) when faxed or delivered, or (ii)
two (2) business days after being mailed by United States registered or
certified mail, return receipt requested, postage prepaid, addressed to the
respective addresses set forth on the initial page of this Agreement, provided
that all notices to the Company shall be directed to the attention of the
Secretary of the Company, or to such other address as any party may have
furnished to the other in writing in accordance herewith. Notice of change of
address shall be effective only upon receipt.
(g) WITHHOLDING TAXES. The Company may withhold from any and all
amounts payable under this Agreement such Federal, state and local taxes as may
be required to be withheld pursuant to any applicable law or regulation.
(h) SURVIVORSHIP. The respective rights and obligations of the
parties hereunder, including without limitation Section 14 hereof, shall survive
any termination of Executive's employment to the extent necessary to the agreed
preservation of such rights and obligations.
(i) COUNTERPARTS. This Agreement may be signed in counterparts,
each of which shall be an original, with the same effect as if the signatures
thereto and hereto were upon the same instrument.
(j) HEADINGS. The headings of the sections contained in this
Agreement are for convenience only and shall not be deemed to control or affect
the meaning or construction of any provision of this Agreement.
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IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the day and year first above written.
Priceline.com Incorporated
By: /s/ Paul E. Francis
------------------------------
Name: Paul E. Francis
Title: Chief Financial Officer
/s/ Daniel H. Schulman
-------------------------------
Daniel H. Schulman
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Exhibit 10.28
AIRLINE PARTICIPATION AGREEMENT
THIS AGREEMENT (this "Agreement"), dated July 16, 1999, is by and
between priceline.com Incorporated, a Delaware corporation with an address at
Five High Ridge Park, Stamford, Connecticut 06905 ("Priceline"), and the
undersigned airline, whose principal place of business is set forth in the
notice provision of this Agreement ("Airline").
PRELIMINARY STATEMENT:
Priceline provides a service that allows consumers to purchase airline
tickets at an offer price determined by the consumer (the "Priceline Service").
The consumer identifies the departure and return dates for travel and the price
the consumer is willing to pay for the airline ticket(s). Priceline then
determines if it is able to fulfill the customer's offer and, if it is able to
do so, Priceline issues a ticket to the customer on the applicable carrier.
Airline desires to participate in the Priceline Service and, in
connection therewith, will provide Priceline with unpublished fares subject to
the Restrictions (defined herein) for select origin and destination city pairs
(each, an "O&D") identified by Airline in accordance with the terms and
conditions set forth in this Agreement.
Priceline desires to include Airline as a participating carrier in the
Priceline Service and to have access to such unpublished fares in accordance
with the terms and conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the covenants and agreements set
forth in this Agreement, the parties agree as follows:
I. TICKET RESTRICTIONS AND RELATED MATTERS
1. Airline shall make available unpublished fares to Priceline for
O&Ds identified by Airline in accordance with the terms and
conditions set forth in this Agreement. Unpublished fares provided
to Priceline must be issued in accordance with rules and
restrictions provided to Priceline by Airline from time to time.
By way of example, unpublished fares on certain O&D's may require
specific routings or be flight/day specific. At all times during
the term of this Agreement, Airline will exclusively control and
determine the unpublished fares and levels of inventory provided
to Priceline. It is expressly understood and agreed that Airline
makes no commitment whatsoever regarding the level of inventory,
number of O&Ds or the level of unpublished fares that will be
provided to Priceline.
2. All tickets issued by Priceline for carriage on Airline (each, a
"Priceline Ticket") shall be subject to the following restrictions
(the "Restrictions"):
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(a) Except as otherwise provided in Section IV.4 hereof, all
Priceline Tickets will be non-refundable, non-endorsable and
non-changeable;
(b) All travel will be round-trip with no stopovers or open-jaw
travel permitted;
(c) Frequent Flyer mileage and upgrades will not be permitted;
provided, Airline may offer such benefits to the extent that
it is impractical to impose such frequent flyer restrictions
on Priceline Tickets;
(d) Priceline customers must agree to (i) make up to one stop or
connection on both their departing and return flights, (ii)
accept a ticket on any Participating Carrier, and (iii)
travel on any flight on the specified date of travel (x) for
domestic U.S. flights, departing during the 6 a.m. - 10 p.m.
time period unless the customer has specified a request to
include flights departing outside those periods, and (y) for
international flights, at any time (i.e., 12:01 a.m. to 11:59
p.m.);
(e) All Priceline travel reservations and bookings shall be made
without Priceline customers specifying a preferred (or
requested) carrier, flight or time of day travel
preference(s) on the specified date(s) of travel;
(f) All Priceline Tickets require instant ticketing guaranteed
with a major credit card if Priceline is able to provide an
airline ticket within the customer's requested price,
departure and return date parameters;
(g) Priceline Ticket reservations are limited to no more than
eight persons traveling in the same itinerary; and
(h) Except as otherwise provided herein, in any seven-day
calendar period, a Priceline customer shall be limited to
making one offer price for airline ticket(s) for a Trip. A
"Trip" is defined as travel between the same airports on the
same dates of travel. A Priceline customer may, within a
seven-calendar day period, make an offer for travel in a
different airport pair or on different dates of travel.
Priceline will not knowingly sell a ticket to a Priceline
customer in response to a second (or subsequent) offer for a
Trip within a seven calendar day period; provided, that
Priceline may sell a ticket in connection with a second offer
if the Priceline customer (i) accepts, as part of the second
offer, (x) a travel package which includes a hotel or rental
car offer, or (y) a product or service co-marketed by
Priceline such as a credit card or long distance telephone
service or other co-marketing program.
3. Airline may include, in addition to the Restrictions, other fare
rules and conditions for Priceline Tickets issued on Airline such
as advance purchase or Saturday night stay requirements. Priceline
also reserves the right after written notice to Airline to impose
additional restrictions on Priceline Tickets, including a Saturday
night stay requirement, as part of the Restrictions.
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4. The Restrictions will be communicated by Priceline to the customer
via the Internet (or through Priceline's customer service
representatives if the consumer contacts Priceline through its
toll free customer service number), and will be set forth on
ticketing and/or itinerary documentation issued by Priceline.
5. All Priceline Tickets issued for carriage on Airline shall be
subject to the published conditions of carriage and the fare rules
of Airline, to the extent such conditions and fare rules are not
inconsistent with the Restrictions. Airline will honor all
Priceline Tickets issued for travel on Airline in accordance with
the Restrictions and other rules and conditions established by
Airline for Priceline Tickets.
II. PRICELINE TICKET RESERVATIONS, BOOKINGS, PAYMENT AND FULFILLMENT
1. Airline will file unpublished fares and rules for Priceline
Tickets with the computer reservation system ("CRS") used by
Priceline.
2. Priceline will determine the price at which tickets are sold based
on customer offers received through the Priceline Service.
Priceline shall not advertise prices or fares below Airline's
published or unpublished fares.
3. All unpublished fares made available by Airline for sale through
the Priceline Service shall not be commissionable and shall be
inclusive, where applicable, of the applicable domestic federal
transportation excise tax. All such unpublished fares shall be
exclusive of any domestic federal segment taxes, and any domestic
or international fuel, departure, arrival, passenger facility,
airport, terminal and/or security taxes or surcharges which, when
applicable, must be added to the fare amount collected from the
passenger and shown on the Priceline Ticket.
4. Upon locating an unpublished fare with inventory availability
satisfying a Priceline customer's ticket request, Priceline shall
immediately ticket the customer's ticket price against a valid
credit card provided by the Priceline customer.
5. In all Priceline Ticket transactions, Priceline will be the
merchant of record and will pay all associated merchant credit
card fees. All Priceline tickets sold on Airline will be settled
through Airline Reporting Corporation ("ARC").
6. All tickets of Airline issued through the Priceline Service will
be issued by Priceline using Agency ARC: 07-50854-6. In collecting
payment for Priceline Tickets, Priceline will act as the agent of
Airline pursuant to Agent's ARC Agent Reporting Agreement with
ARC.
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7. Unless otherwise directed by a Priceline customer, all Priceline
Tickets issued on Airline will be issued electronically. After
issuance, Priceline will promptly forward to the customer a
receipt of proof of purchase, conditions of carriage on Airline
and a copy of the Restrictions (including any additional
restrictions imposed by Airline). In the event a Priceline
customer requests Airline to provide a separate electronic ticket
receipt for an electronic ticket, the price shown on Airline's
receipt will reflect that such ticket is a "bulk" electronic
ticket.
8. Priceline will encourage its customers to accept electronic
ticketing for all Priceline Ticket requests by imposing an
additional charge for the issuance of paper tickets and
maintaining the issuance of electronic tickets as the default
option on the Priceline Service.
9. Subject to the provisions of Paragraph II.5 above, all Priceline
paper tickets for carriage on Airline will be issued by Priceline
on standard ARC traffic documents and will be validated with
Airline's validation in accordance with ARC requirements. The
passenger coupon will show "bulk" for the fare amount and will
include all additional collections noted in Paragraph II.3 above.
The auditor's coupon will show the Airline's unpublished fare
authorized for Priceline.
10. In the event that Priceline is unable to fulfill a Priceline
ticket request from unpublished fares and seat inventory provided
from airlines participating in the Priceline Service, Priceline
reserves the right to sell tickets on Airline using published
fares used by travel agents generally as reflected in CRSs, in
accordance with the rules and conditions associated with such
fares.
III PRICELINE TICKET ALLOCATION METHODOLOGY
Priceline shall establish an allocation methodology that
determines when participating airlines will be given the first
opportunity to fill a customer ticket request, and may give
preference to one or more participants in establishing such
methodology. Priceline will work in good faith with each
participating airline to assist such airline in achieving its
objective for the Priceline Service within the context of the
allocation system.
IV. PRICELINE CUSTOMER SERVICE
1. Priceline will provide twenty-four hour customer support services
to all Priceline customers through a toll-free number at the
customer support center designated by Priceline from time to time.
The customer support center will be adequately staffed with
personnel trained to take Priceline Ticket requests by phone and
respond to all customer inquiries for related service and support.
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2. Priceline will use commercially reasonable efforts to ensure that
its customer service representatives provide quality customer
service and support to Priceline customers in a prompt, reliable
and courteous manner.
3. Priceline will respond to Priceline customer questions and issues
pertaining to special handling requirements for Priceline Tickets
including processing any special customer handling requirements in
respect of Priceline Tickets issued on Airline.
4. The ticket Restrictions will apply to all tickets issued through
the Priceline Service on Airline. Airline may waive, at its own
cost and expense, one or more of the Restrictions set forth in
Sections I.2 (a)-(f) pursuant to a direct arrangement made by
Airline with the applicable customer holding a Priceline Ticket.
On an exception basis where necessary or appropriate to address an
escalating customer service issue of any individual customer,
Priceline may refund the price of a Priceline Ticket applicable to
such customer. At Airlines' request, Priceline shall provide
Airline with a monthly report detailing the number and amount of
refunded Priceline Tickets involving air transportation services
on Airline. Priceline and Airline will jointly develop the
guidelines upon which such exception refunds will be governed.
V. CONFIDENTIALITY
1. Priceline and Airline will each hold in confidence and, without
the prior written consent of the other, will not reproduce,
distribute, transmit, transfer or disclose, directly or
indirectly, in any form, by any means or for any purpose, any
Confidential Information of the other party. As used herein, the
term "Confidential Information" shall mean this Agreement and its
subject matter, and proprietary information that is provided to or
obtained from one party to the other party including any
information which derives economic value, actual or potential,
from not being generally known to, and not generally ascertainable
by proper means by, other persons, including the unpublished fares
provided by Airline to Priceline pursuant to this Agreement. The
recipient of Confidential Information may only disclose such
information to its employees on a need-to-know basis.
2. The obligations of a recipient party with respect to Confidential
Information shall remain in effect during and after the term of
this Agreement (including any renewals or extensions hereof) and
for a period of one (1) year thereafter, except to the extent such
data:
(a) is or becomes generally available to the public other than as
a result of a disclosure by the recipient, or its directors,
officers, employees, agents or advisors;
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(b) becomes available to the recipient on a non-confidential
basis from a source other than the disclosing party or its
affiliated companies, provided that such source is not bound
by any confidentiality obligations to the disclosing party or
its affiliated companies (as applicable); or
(c) is necessary to comply with applicable law or the order or
other legal process of any court, governmental or similar
authority having jurisdiction over the recipient. Airline
acknowledges that Priceline may be required to file this
Agreement with the Securities and Exchange Commission
("SEC"), as required by federal securities laws, and that
such filing shall not be deemed a violation of the provisions
of this Article V.
3. Except as otherwise specifically provided in Section 2(c) of this
Article V with respect to Priceline's filing requirements with the
SEC, in the event that the recipient becomes legally compelled to
disclose any of such Confidential Information by any governmental
body or court, recipient will provide the disclosing party with
prompt notice so that the disclosing party may seek a protective
order or other appropriate remedy and/or waive compliance (in
writing) with the provisions hereof. In the event that such
protective order or other remedy is not obtained, or the
disclosing party waives (in writing) compliance with the
provisions hereof, recipient will furnish only that portion of
such Confidential Material which is legally required and will
exercise its reasonable business efforts to obtain appropriate
assurance that confidential treatment will be accorded such
Confidential Information
4. The recipient of Confidential Information will exercise reasonable
commercial care in protecting the confidentiality of the other
party's Confidential Information.
5. Priceline will not disclose (including, without limitation, by
sale) to any third party information obtained through the
Priceline Service or otherwise concerning a customer who has
acquired a ticket on Airline using the Priceline Service.
6. Nothing contained herein shall be construed to prevent Airline
from competing, directly or indirectly, with Priceline. Priceline
shall not provide any Confidential Information to Airline that
would in any way prohibit or inhibit such competition.
VI. PROPRIETARY MARKS
During the term of this Agreement neither Priceline nor Airline
shall use the other party's trademarks, trade names, service
marks, logos, emblems, symbols or other brand identifiers in
advertising or marketing materials, unless it has obtained the
6
<PAGE>
prior written approval of the other party. The consent required by
this Paragraph VI shall extend to the content of the specific
advertising or marketing items as well as the placement and
prominence of the applicable trademark, trade name, service mark,
logo, emblem, symbol or other brand identifier of the other party.
Priceline or Airline, as applicable, shall cause the withholding,
discontinuance, recall or cancellation, as appropriate, of any
advertising or promotional material not approved in writing by the
other party, that differs significantly from that approved by the
other party, or that is put to a use or used in a media not
approved by the other party.
VII. REPORTING
Priceline will provide monthly reports in a format designated by
Airline summarizing (i) information concerning each ticket issued
by Priceline on Airline; (ii) aggregate information (i.e. non
airline specific) for all tickets issued by Priceline in each O&D
that Airline participates; and (iii) aggregate information for all
Priceline offers from customers not ticketed in each O&D that
Airline participates.
VIII. TERM OF AGREEMENT
1. Subject to the provisions of this Paragraph VIII, this Agreement
will commence on the date set forth on the first page of this
Agreement (the "Commencement Date") and will continue indefinitely
thereafter. Notwithstanding the foregoing, Priceline or Airline
may terminate this Agreement with or without cause on 30 days'
prior written notice to the other party.
2. The obligations of the parties under Paragraphs V and IX of this
Agreement shall indefinitely (except as otherwise limited to a
certain term therein) survive the termination of this Agreement.
3. In the event of written notice of termination of this Agreement in
accordance with the terms of this Paragraph VIII, all Priceline
Tickets issued on Airline prior to the effective date of
termination specified in such notice will be honored by Airline
under the terms of this Agreement.
IX. INDEMNIFICATION
1. Priceline will indemnify, defend and hold harmless Airline, its
officers, directors, employees and agents, from and against all
damages, losses and causes of action including, without
limitation, damage to property or bodily injury, to the extent
caused by Priceline's breach of this Agreement or the ARC Agent
Reporting
7
<PAGE>
Agreement, or by the negligence or willful acts of Priceline or
any of its employees or agents.
2. Airline will indemnify, defend and hold harmless Priceline and its
officers, directors, employees and agents from and against all
damages, losses and causes of action including, without
limitation, damage to property or bodily injury, to the extent
caused by Airline's breach of this Agreement or by the negligence
or willful acts of Airline or any of its employees or agents.
X. NO EXCLUSIVITY
The relationship by and between Airline and Priceline as set forth
in this Agreement shall be non-exclusive. As such, Airline may
participate in other programs similar to the Priceline Service or
in any line of business.
XI. GENERAL PROVISIONS
1. No waiver or breach of any of the provisions of this Agreement
shall be construed as a waiver of any other breach of the same or
any other provision.
2. If any paragraph, sentence or clause of this Agreement shall be
adjudged illegal, invalid or unenforceable, such illegality,
invalidity or unenforceability shall not affect the legality,
validity or enforceability of this Agreement as a whole or of any
paragraph, sentence or clause hereof not so adjudged.
3. Any notice required or permitted hereunder shall be deemed
sufficient if given in writing and delivered personally, by
facsimile transmission, by reputable overnight courier service or
United States mail, postage prepaid return receipt requested, to
the addresses shown below or to such other addresses as are
specified by similar notice, and shall be deemed received upon
personal delivery, upon confirmed facsimile receipt, two (2) days
following deposit with such courier service, or three (3) days
from deposit in the United States mails, in each case as herein
provided:
If to Priceline: If to Airline:
Priceline.com Incorporated Continental Airlines, Inc.
Five High Ridge Park 1600 Smith Street
Stamford, CT 06905 Houston TX, 77002
8
<PAGE>
Attention: Paul Francis Attention: James Compton
Chief Financial Officer Vice President - Pricing
Phone: (203)-705-3000 Phone: 713-324-6693
Fax: (203)-595-8344 Fax: 713-324-2141
With a copy to: With a copy to:
Priceline.com Incorporated Continental Airlines, Inc.
Five High Ridge Park Dept. HQS-EO
Stamford, CT 06905 1600 Smith Street
Houston, TX 77002
Attention: Timothy G. Brier Attention: General Counsel
Phone: (203)-705-3000 Phone: 713-324-2948
Fax: (203)-595-8343 Fax: 713-324-2687
A party may change its address and the name of its designated
recipient of copies of notices for purposes of this Agreement by
giving the other parties written notice of the new name and the
address, phone and facsimile number of its designated recipient in
accordance with this Paragraph XI(3).
4. This Agreement supersedes and replaces all previous understandings
or agreement, whether oral or in any written form, with respect to
the subject matter addressed herein. The captions in this
Agreement are for convenience only and do not alter any terms of
this Agreement.
5. This Agreement may be amended or modified only by a written
amendment executed by the parties.
6. The formation, construction, performance and validity of this
Agreement shall be governed by the internal laws of the State of
Delaware . Each party agrees that any civil suit or action brought
against it as a result of any of its obligations under this
Agreement may be brought against it either in the state or federal
courts of the principal place of business of either party, and
each party hereby irrevocably submits to the jurisdiction of such
courts and irrevocably waives, to the fullest extent permitted by
law, any objections that it may now or hereafter have to the
laying of the venue of such civil suit or action and any claim
that such civil suit or action has been brought in an inconvenient
forum, and each party further agrees that final judgment in any
such civil suit or action shall be conclusive and binding
9
<PAGE>
upon it and shall be enforceable against it by suit upon such
judgment in any court of competent jurisdiction.
7. This Agreement may be executed in counterparts, each of which
shall be deemed an original, and together, shall constitute one
and the same instrument. Execution may be effected by delivery of
facsimiles of signature pages (and the parties shall follow such
delivery by prompt delivery of originals of such pages).
8. No party will in any manner or by any device, either directly or
indirectly, act in violation of any applicable law, governmental
order or regulation, including, but not limited to, those
concerning advertisement of air transportation services. Priceline
shall comply at all times with the provisions of Airline's tariffs
(except where such tariffs are specifically amended by Airline
under the terms of this Agreement) and the terms of the ARC Agent
Reporting Agreement and any addenda thereto.
9. Priceline agrees to notify Airline promptly, in writing, in the
event there is a change of control in the ownership of Priceline.
For purposes of this Agreement, a "change of control" means (i)
the acquisition by any other person or group (within the meaning
of Section 13(d)(3) of the Securities Exchange Act (except an
employee group of such party, any of its subsidiaries or a holding
company of such party)), of the beneficial ownership of securities
representing 20% or more of the combined voting power of the
securities entitled to vote generally in the election of the board
of directors of the applicable party, or (ii) the sale, mortgage,
lease or other transfer of assets or earning power constituting
more than 50% of the assets or earning power of such party (other
than ordinary course financing); provided that in no event shall a
"change of control" be defined to include (i) an initial public
offering of shares of the party's capital stock, (ii) the
formation by a party of a holding company, or (iii) an
intra-corporate transaction with a company under common control
with a party.
10. No party hereto shall assign or transfer or permit the assignment
or transfer of this Agreement without the prior written consent of
the other party.
11. This Agreement shall not be deemed to create any partnership or
joint venture between Airline and Priceline, or to create any
rights in favor of any person or entity other than the parties
hereto. This Agreement is for the sole benefit of the parties and
nothing herein expressed or implied shall give or be construed to
give any other person any legal or equitable rights hereunder
12. NO PARTY WILL BE LIABLE TO THE OTHER FOR ANY OF THE OTHER PARTY'S
INCIDENTAL OR CONSEQUENTIAL DAMAGES, INCLUDING LOST REVENUES, LOST
PROFITS, OR LOST PROSPECTIVE ECONOMIC
10
<PAGE>
ADVANTAGE, ARISING FROM THIS AGREEMENT OR ANY BREACH HEREOF.
13 The Parties agree that irreparable damage would occur in the event
any provision of this Agreement is not performed in accordance
with the terms hereof and that the Parties shall be entitled to an
injunction or injunctions to prevent breaches of this Agreement
and to enforce specifically the terms and provisions of this
Agreement.
14. Each party has participated in the negotiation and drafting of
this Agreement. In the event any ambiguity or question of intent
or interpretation arises, this Agreement shall be construed as if
drafted jointly by the parties, and no presumption or burden of
proof shall arise favoring or disfavoring any party by virtue of
the authorship of any of the provisions of this Agreement.
IN WITNESS WHEREOF, the parties have executed and delivered this
Agreement on the date indicated above.
PRICELINE.COM INCORPORATED CONTINENTAL AIRLINES, INC.
By: /s/ Timothy G. Brier By: /s/ Jeffrey Smisek
--------------------------------------- -------------------------------
Name: Timothy G. Brier Name: Jeffrey Smisek
Title: Executive Vice President, Travel Title: Executive Vice President
11
<PAGE>
Exhibit 10.29
THE WARRANT ISSUED PURSUANT TO THIS PARTICIPATION WARRANT AGREEMENT HAS NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE SECURITIES LAWS. IT MAY
NOT BE SOLD OR OFFERED FOR SALE, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED
IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER SAID ACT AND
APPLICABLE STATE SECURITIES LAWS UNLESS THE COMPANY HAS RECEIVED AN OPINION OF
COUNSEL REASONABLY SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT
REQUIRED TO EFFECTUATE SUCH TRANSACTION.
PARTICIPATION WARRANT AGREEMENT
To Purchase Shares of Common Stock
Dated as of July 16, 1999
PRICELINE.COM INCORPORATED
a Delaware Corporation
Issue Date: July 16, 1999
THIS CERTIFIES THAT, Continental Airlines, Inc. (the "Warrant Holder"), with a
place of business at 1600 Smith Street, Houston Texas 77002, for value received,
is entitled, upon the terms and subject to the conditions of this Participation
Warrant Agreement (this "Warrant Agreement"), to subscribe for and purchase
fully-paid and non-assessable shares of common stock, par value $.008 per share
(the "Common Stock"), of priceline.com Incorporated, a Delaware corporation (the
"Company").
1. ISSUANCE OF WARRANTS. On the Issue Date, the Company will issue to
the Warrant Holder warrants (the "Warrants") to acquire One Million (1,000,000)
shares of the Common Stock (the "Shares"), subject to adjustment as hereinafter
provided pursuant to Section 10 herein.
2. EXERCISE PRICE. The Warrants have an exercise price of $97.40625 per
share of Common Stock, as adjusted pursuant to the provisions of Section 10 of
this Warrant Agreement (the "Exercise Price").
3. TERM. The Warrants are fully vested on the Issue Date. Except as
otherwise provided for herein, the term of the Warrants and the right to
purchase Shares as granted herein shall be exercisable, at any time and from
time to time, during the period commencing 210 days following April 1, 1999, the
date of completion of the Company's initial public offering of shares of Common
Stock, and terminating at 5:00 p.m. New York City local time on the fifth (5th)
anniversary of the Issue Date; provided, further, that if any of the Warrants
first become exercisable on the fifth (5th) anniversary of the Issue Date, the
Warrant Holder will have an additional six months thereafter to exercise its
purchase rights
<PAGE>
in respect of those Warrants (the end of such five year period and additional
six months, if applicable, being referred to herein as the "Termination Date").
4. EXERCISE EVENTS.
(A) GENERAL. Unless otherwise exercisable at an earlier date,
in accordance with this Section 4, all of the Warrants shall be fully
exercisable commencing of the fifth anniversary of the Issue Date.
(B) EARLY EXERCISE RIGHTS.
(i) The Warrant Holder will earn the right to
exercise Warrants for the first 500,000 Shares,
subject to adjustment as provided in Section 10
hereof, from and after the date during any Measuring
Period (as identified in Section 4(c) hereof) that
the Company has sold during such Measuring Period at
least $50 million of tickets issued for travel on the
Warrant Holder, its subsidiaries and/or on the
Warrant Holder's code share partners using Warrant
Holder's code (such amount being measured by the
amount paid by the Company to the Warrant Holder and
its code share partners net of federal excise taxes
on such amount, PFCs and related collections)
("Warrant Holder Net Fares").
(ii) The Warrant Holder will earn the right to
exercise Warrants for the full amount of the second
500,000 Shares, subject to adjustment as provided in
Section 10 hereof, from and after the date during any
Measuring Period (other than the Measuring Period
during which Warrant Holder shall have earned the
right to exercise Warrants for the first 500,000
Shares) that the Company has sold during such
Measuring Period at least $95 million of Warrant
Holder Net Fares. If, upon completion of the
Measuring Period immediately following the Measuring
Period for which Warrant Holder earned the right to
exercise Warrants for the first 500,000 Shares, the
Company has sold more than $50 million but less than
$95 million of Warrant Holder Net Fares during such
immediately following Measuring Period, Warrant
Holder will earn (upon completion of such immediately
following Measuring Period) the right to exercise
that number of Warrants for a portion of the second
500,000 Shares, subject to adjustment as provided in
Section 10 hereof, equal to the product of (i)
500,000 (subject to adjustment as provided in Section
10 hereof) MULTIPLIED by (ii) a fraction, the
numerator of which shall
<PAGE>
be the Warrant Holder Net Fares in excess of $50
million sold by the Company during such immediately
following Measuring Period, and the denominator of
which shall be $45 million. Thereafter, subject to
the provisions of Section 4(a), the Warrant Holder
will earn the right to exercise Warrants for any
remaining Shares only from and after the date during
any Measuring Period that the Company has sold during
such Measuring Period at least $95 million of Warrant
Holder Net Fares.
(iii) Warrant Holder Net Fares will be measured
separately, not cumulatively. For example, if the
Company has sold Warrant Holder Net Fares of $50
million during the first Measuring Period, $85
million during the second Measuring Period, and $90
million during the third Measuring Period, then the
Warrant Holder will earn the right to exercise
Warrants for the first 500,000 Shares upon the date
the Company has first sold $50 million of Warrant
Holder Net Fares during the first Measuring Period,
the right to exercise Warrants for 388,888 Shares
(500,000 x 35/45) upon completion of the second
Measuring Period, and no additional Shares at any
time during or upon completion of the third Measuring
Period. For purposes of this example, it is assumed
that no adjustment pursuant to Section 10 hereof has
occurred.
(C) MEASURING PERIODS. Each Measuring Period shall be a 12
month period, with the first Measuring Period commencing on the date the Warrant
Holder first provides tickets for sale by the Company (the "First Ticket Date")
and ending on the first anniversary of such date. Subsequent Measuring Periods
will expire on the second, third, fourth and fifth anniversary of the First
Ticket Date, respectively; provided that the last Measuring Period will expire
on the fifth anniversary of the Issue Date.
5. EXERCISE OF PURCHASE RIGHTS.
(a) Subject to the provisions of Section 4 of this Warrant
Agreement, the purchase rights represented by this Warrant Agreement are
exercisable by the Warrant Holder, in whole or in part, at any time, or from
time to time during the period set forth in Section 3 above, by tendering to the
Company at its principal office a duly completed and executed notice of exercise
in the form attached hereto as EXHIBIT A (the "Notice of Exercise"), the
Warrants and the Exercise Price. Upon receipt of such items, the Company shall
issue to the Warrant Holder a certificate for the number of shares of Common
Stock purchased. The Warrant Holder, upon exercise of the Warrants, shall be
deemed to have
<PAGE>
become the holder of the Shares represented thereby
(and such Shares shall be deemed to have been issued)
immediately prior to the close of business on the
date or dates upon which the Warrants are exercised.
In the event of any exercise of the rights
represented by the Warrants, certificates for the
Shares so purchased shall be delivered to the Warrant
Holder or its designee as soon as practical and in
any event within ten (10) business days after receipt
of such notice and, unless the Warrants have been
fully exercised or expired, new Warrants representing
the remaining portion of the Warrants and the
underlying Shares, if any, with respect to which this
Warrant Agreement shall not then have been exercised
shall also be issued to the Warrant Holder as soon as
possible and in any event within such ten-day period.
(B) NET ISSUE EXERCISE. Notwithstanding any provisions herein
to the contrary, if the fair market value of one share of the Company's Common
Stock is greater than the Exercise Price (at the date of calculation as set
forth below), in lieu of exercising the Warrants for cash, the Warrant Holder
may elect to receive shares equal to the value (as determined below) of the
Warrants (or portion thereof being canceled) by surrender of the Warrants at the
principal office of the Company together with the duly executed Notice of
Exercise in which event the Company shall issue to the Warrant Holder a number
of shares of Common Stock computed using the following formula: X=Y(A-B)/ A
WHERE X= the number of shares of Common Stock to be issued to the Warrant
Holder; Y= the number of shares of the Common Stock purchasable under the
Warrants or, if only a portion of the Warrants is being exercised, the portion
of the Warrants being canceled (at the date of such calculation); A= the fair
market value of one share of the Company's Common Stock (at the date of such
calculation); and B= Exercise Price (at the date of such calculation). For
purposes of the above calculation, fair market value of one share of the Common
Stock shall be equal to the closing trading price of the Company's Common Stock
on the day immediately prior to the date the Notice of Exercise is tendered to
the Company.
6. RESERVATION OF SHARES. The Company will at all times have authorized
and reserved a sufficient number of shares of Common Stock to provide for the
exercise of the rights to purchase the Shares as provided in this Warrant
Agreement. All of the Shares shall be duly authorized and, when issued upon such
exercise, shall be validly issued, fully paid and nonassessable, and free and
clear of all preemptive rights.
7. NO FRACTIONAL SHARES. No fractional shares or scrip representing
fractional shares shall be issued upon the exercise of the Warrant Holder's
rights to purchase the Shares.
8. NO RIGHTS AS SHAREHOLDER. This Warrant Agreement does not entitle
the Warrant Holder to any voting rights or other rights as a shareholder of the
Company prior
<PAGE>
to the exercise of the Warrant Holder's rights to purchase the Shares as
provided for herein.
9. REDEMPTION. The Warrants represented by this Warrant Agreement are
not redeemable by the Company.
10. ADJUSTMENT RIGHTS. The Exercise Price and the number of shares of
Common Stock purchasable hereunder are subject to adjustment from time to time,
as follows:
(a) MERGER. If at any time there shall be a merger or
consolidation of the Company with or into another corporation when the Company
is not the surviving corporation, then, as part of such merger or consolidation,
lawful provision shall be made so that the holder of the Warrants evidenced
hereby shall thereafter be entitled to receive upon exercise of rights herein
granted, during the period specified herein and upon payment of the aggregate
Exercise Price, the number of shares of stock or other securities or property of
the successor corporation resulting from such merger or consolidation, to which
a holder of the stock deliverable upon exercise of the rights granted in this
Warrant Agreement would have been entitled in such merger or consolidation if
such rights had been exercised immediately before such merger or consolidation.
In any such case, appropriate adjustment shall be made in the application of the
provisions of this Warrant Agreement with respect to the rights and interests of
the holder after the merger or consolidation. The Company will not effect any
such merger or consolidation unless, prior to the consummation thereof, the
successor corporation shall assume, by written instrument reasonably
satisfactory in form and substance to the Warrant Holder, the obligations of the
Company under the Warrants.
(b) RECLASSIFICATION, ETC. If the Company at any time shall,
by subdivision, combination or reclassification of securities or otherwise,
change any of the securities as to which purchase rights under this Warrant
Agreement exist into the same or a different number of securities of any other
class or classes, this Warrant Agreement shall thereafter represent the right to
acquire such number and kind of securities as would have been issuable as the
result of such change with respect to the securities which were subject to the
purchase rights under this Warrant Agreement immediately prior to such
subdivision, combination, reclassification or other change.
(C) SPLIT, SUBDIVISION OR COMBINATION OF SHARES. If the
Company at any time shall split or subdivide its Common Stock, the Exercise
Price shall be proportionately decreased and the number of Shares issuable
pursuant to this Warrant Agreement shall be proportionately increased. If the
Company at any time shall combine or reverse split its Common Stock, the
Exercise Price shall be proportionately increased and the number of Shares
issuable pursuant to this Warrant Agreement shall be proportionately decreased.
<PAGE>
(D) STOCK DIVIDENDS. If the Company at any time shall pay a
dividend payable in Common Stock, then the Exercise Price shall be adjusted,
from and after the date of determination of stockholders entitled to receive
such dividend, to that price determined by multiplying the Exercise Price in
effect immediately prior to such date of determination by a fraction (i) the
numerator of which shall be the total number of shares of Common Stock
outstanding immediately prior to such dividend and (ii) the denominator of which
shall be the total number of shares of Common Stock outstanding immediately
after such dividend. The Warrant Holder shall thereafter be entitled to
purchase, at the Exercise Price resulting from such adjustment, the number of
shares of Common Stock (calculated to the nearest whole share) obtained by
multiplying (i) the Exercise Price in effect immediately prior to such
adjustment by (ii) the number of shares of Common Stock issuable upon the
exercise hereof immediately prior to such adjustment and dividing the product
thereof by the Exercise Price resulting from such adjustment.
(E) OTHER CHANGES. If any change in the outstanding Common
Stock of the Company or any other event occurs as to which the other provisions
of this Section 10 are not strictly applicable or if strictly applicable, would
not fairly protect the purchase rights of the Warrant Holder in accordance with
such provisions, then the Board of Directors of the Company shall make an
adjustment in the number of and class of shares available under the Warrants,
the Exercise Price or the application of such provisions, so as to protect the
purchase rights of the Warrant Holder. The adjustment shall be such as will give
the Warrant Holder upon exercise for the same aggregate Exercise Price the total
number, class and kind of shares or other property as the Warrant Holder would
have owned had the Warrants been exercised prior to the event and had the
Warrant Holder continued to hold such shares until after the event requiring
adjustment.
(f) NOTICE OF ADJUSTMENTS; NOTICES. Whenever the Exercise
Price or number of shares purchasable hereunder shall be adjusted pursuant to
Section 10 hereof, the Company shall issue a certificate signed by its Chief
Executive Officer or Chief Financial Officer setting forth, in reasonable
detail, the event requiring the adjustment, the amount of the adjustment, the
method by which such adjustment was calculated and the Exercise Price and number
of shares purchasable hereunder after giving effect to such adjustment, and
shall cause a copy of such certificate to be mailed (by first class mail,
postage prepaid) to the holder of this Warrant. The Company shall give written
notice to the Warrant Holder at least 10 days prior to the date on which the
Company closes its books or takes a record for determining rights to receive any
dividends or distributions. The Company shall also give written notice to the
Warrant Holder at least 30 business days prior to the date on which a merger or
consolidation of the Company with or into another corporation when the Company
is not the surviving corporation shall take place.
(g) NO CHANGE OF WARRANT NECESSARY. Irrespective of any
adjustment in the Exercise Price or in the number or kind of securities issuable
upon exercise of the Warrant, unless the Warrant Holder otherwise requests, this
Warrant Agreement may continue to express the same price and number and kind of
shares of Common Stock as are
<PAGE>
stated in this Warrant Agreement as initially executed.
11. REPRESENTATIONS AND WARRANTIES OF THE WARRANT HOLDER.
The Warrant Holder hereby represents and warrants to the Company as
follows:
(a) EXISTENCE AND POWER. The Warrant Holder is a (i) is a
corporation duly organized, validly existing and in good standing under the laws
of the jurisdiction of its incorporation and (ii) has the corporate power and
authority to execute, deliver and perform its obligations under this Warrant
Agreement.
(b) AUTHORIZATION; NO CONTRAVENTION. The execution, delivery
and performance by the Warrant Holder of this Warrant Agreement and the
transactions contemplated hereby (i) have been duly authorized by all necessary
corporate action of the Warrant Holder and (ii) do not contravene the terms of
the Certificate of Incorporation or By-laws of the Warrant Holder, each as
amended as of and through the Issue Date.
(c) GOVERNMENTAL AUTHORIZATION; THIRD PARTY CONSENTS. No
approval, consent, compliance, exemption or authorization of any governmental
authority or agency, or of any other person or entity, is necessary or required
in connection with the execution, delivery or performance by, or enforcement
against, the Warrant Holder of this Warrant Agreement or the transactions
contemplated hereby.
(d) BINDING EFFECT. This Warrant Agreement has been duly
executed and delivered by the Warrant Holder and constitutes the valid and
binding obligations of the Warrant Holder, enforceable against it in accordance
with its terms, except as enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, fraudulent conveyance or transfer,
moratorium or similar laws affecting the enforcement of creditors' rights
generally or by equitable principles relating to enforceability (regardless of
whether considered in a proceeding at law or in equity).
(e) PURCHASE FOR OWN ACCOUNT. The Warrants issued to the
Warrant Holder pursuant to this Warrant Agreement, and the Shares to be issued
upon vesting and exercise thereof, are being or will be acquired for the Warrant
Holder's own account and with no intention of distributing or reselling such
securities or any part thereof in any transaction that would be in violation of
the securities laws of the United States of America, or any state.
(f) RESTRICTED SECURITIES. The Warrant Holder understands that
the Warrants and the Shares issuable upon vesting and exercise of the Warrants,
will not be registered at the time of their issuance under the Securities Act
for the reason that the sale provided for in this Agreement is exempt pursuant
to Section 4(2) of the Securities Act and that reliance of the Company on such
exemption is predicated in part on such
<PAGE>
Warrant Holder's representations set forth herein. The Warrant Holder represents
that it is experienced in evaluating companies such as the Company, has such
knowledge and experience in financial and business matters as to be capable of
evaluating the merits and risks of its investment and has the ability to suffer
the total loss of the investment. The Warrant Holder further represents that it
has had the opportunity to ask questions of and receive answers from the Company
concerning the terms and conditions of the Warrants, the business of the
Company, and to obtain additional information to such Warrant Holder's
satisfaction.
(g) ACCREDITED INVESTOR. The Warrant Holder is an "Accredited
Investor" within the meaning of Rule 501 of Regulation D under the Securities
Act, as presently in effect.
12. COMPLIANCE WITH SECURITIES ACT; TRANSFERABILITY OF WARRANT OR
SHARES OF COMMON STOCK.
(a) COMPLIANCE WITH SECURITIES ACT. The Warrant Holder, by
acceptance hereof, agrees that the Warrants, and the shares of Common Stock to
be issued upon exercise of the Warrants, are being acquired for investment and
that such Warrant Holder will not offer, sell or otherwise dispose of the
Warrants, or any shares of Common Stock to be issued upon exercise of the
Warrants except under circumstances which will not result in a violation of the
Securities Act of 1933, as amended (the "Securities Act"), or any applicable
state securities laws. The Warrants and all shares of Common Stock issued upon
exercise of the Warrants (unless registered under) the Securities Act and any
applicable state securities laws) shall be stamped or imprinted with a legend in
substantially the following form:
"THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAW.
THEY MAY NOT BE SOLD OR OFFERED FOR SALE, PLEDGED, HYPOTHECATED
OR OTHERWISE TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT RELATED THERETO UNDER SAID ACT AND
APPLICABLE STATE SECURITIES LAWS OR UNLESS THE COMPANY HAS
RECEIVED AN OPINION OF COUNSEL THAT SUCH REGISTRATION IS NOT
REQUIRED TO EFFECTUATE SUCH TRANSACTION."
(b) EXCHANGE, TRANSFER, ASSIGNMENT. The Warrants cannot be exchanged,
transferred or assigned otherwise than in accordance with applicable law. Upon
compliance
<PAGE>
with applicable law and surrender of the Warrants to the Company with the
Assignment Form annexed hereto as EXHIBIT B duly executed, and funds sufficient
to pay any transfer tax, the Company shall, without charge, execute and deliver
a new Warrant Agreement in the name of the heir, devisee or assignee named in
such instrument of assignment and this Warrant Agreement shall promptly be
canceled. Subject to the terms hereof, the Warrants may be assigned in whole or
in part.
13. RESTRICTED SECURITIES. The Warrant Holder understands that
the Warrants and the Shares issuable upon vesting and exercise of the Warrants,
will not be registered at the time of their issuance under the Securities Act
for the reason that the sale provided for in this Agreement is exempt pursuant
to Section 4(2) of the Securities Act based on the representations of the
warrant Holder set forth herein. The Warrant Holder represents that it is
experienced in evaluating companies such as the Company, has such knowledge and
experience in financial and business matters as to be capable of evaluating the
merits and risks of its investment and has the ability to suffer the total loss
of the investment. The Warrant Holder further represents that it has had the
opportunity to ask questions of and receive answers from the Company concerning
the terms and conditions of the Warrants, the business of the Company, and to
obtain additional information to such Warrant Holder's satisfaction. The Warrant
Holder is an "Accredited Investor" within the meaning of Rule 501 of Regulation
D under the Securities Act, as presently in effect.
14. REGISTRATION RIGHTS. Upon the parties' execution of this Warrant
Agreement and the Acknowledgment and Agreement to the Amended and Restated
Registration Rights Agreement attached hereto as Exhibit C, Warrant Holder shall
be made a party to that certain Amended and Restated Registration Rights
Agreement, dated as of December 8, 1998, by and among the Company, the
stockholders of the Company named therein and such other stockholders and
warrant holders of the Company made a party thereto. In addition, within 30 days
of the execution of this Warrant Agreement, the Company agrees to enter into an
agreement with Warrant Holder, in form and substance reasonably satisfactory to
Warrant Holder, which shall grant Warrant Holder the right to transfer its
registration rights pursuant to such Amended and Restated Registration Rights
Agreement dated as of December 8, 1998 to any assignee or assignees of all or
any part of this Warrant or the Shares issuable upon exercise hereof, which
assignees, upon their execution and delivery of an Acknowledgment and Agreement
to the Amended and Restated Registration Rights Agreement substantially in the
form of Exhibit C hereto (with appropriate changes therein) shall each have all
the rights and obligations of a Demand Stockholder (as defined in such
Agreement) under such Agreement; provided that no registration statement with
respect to less than a minimum of 250,000 Shares shall be required to be
effected by the Company thereunder for the benefit of any such assignee.
15. MISCELLANEOUS.
(a) NO CONSEQUENTIAL DAMAGES. No party hereto shall be
entitled to
<PAGE>
consequential damages as a result of any breach of a covenant, representation or
warranty contained herein.
(b) NOTICES. All notices, demands and other communications
provided for or permitted hereunder shall be made in writing and shall be by
registered or certified first-class mail, return receipt requested, telecopier,
courier service or personal delivery:
(i) if to the Company, to:
priceline.com Incorporated
Five High Ridge Park
Stamford, CT 06905
Telecopy: (203) 595-8345
Attention: Melissa M. Taub, Esq.
and to:
Skadden, Arps, Slate, Meagher, & Flom, L.L.P.
One Rodney Square
Wilmington, DE 19801
Telecopy: (302) 651-3001
Attention: Patricia Moran Chuff, Esq.
(ii) if to the Warrant Holder, to:
Continental Airlines, Inc.
1600 Smith Street
Houston, TX 77002
Telecopy: (713) 324-2141
Attention: Jim Compton
Vice President - Pricing
and to:
Continental Airlines, Inc.
1600 Smith Street
Dept. HQS-EO
Houston, TX 77002
Telecopy: (713) 324-2687
Attention: General Counsel
All such notices and communications shall be deemed to have
been duly
<PAGE>
given when delivered by hand, if personally delivered; when delivered by
courier, if delivered by commercial courier service; five (5) business days
after being deposited in the mail, postage prepaid, if mailed; and when receipt
is mechanically acknowledged, if telecopied.
(d) SUCCESSORS AND ASSIGNS; THIRD PARTY BENEFICIARIES. This
Agreement shall inure to the benefit of and be binding upon the successors and
permitted assigns of the parties hereto. No person, other than the parties
hereto and their successors and permitted assigns, is intended to be a
beneficiary of this Agreement.
(e) AMENDMENT AND WAIVER.
(i) No failure or delay on the part of the Company,
or the Warrant Holder in exercising any right, power or remedy hereunder shall
operate as a waiver thereof, nor shall any single or partial exercise of any
such right, power or remedy preclude any other or further exercise thereof or
the exercise of any other right, power or remedy. The remedies provided for
herein are cumulative and are not exclusive of any remedies that may be
available to the Company and the Warrant Holder at law, in equity or otherwise.
(ii) Any amendment, supplement or modification of or
to any provision of this Warrant Agreement, any waiver of any provision of this
Warrant Agreement, and any consent to any departure by the Company or the
Warrant Holder from the terms of any provision of this Agreement, shall be
effective only if it is made or given in writing and signed by the Company and
the Warrant Holder.
(f) COUNTERPARTS. This Warrant Agreement may be executed in
any number of counterparts and by the parties hereto in separate counterparts,
each of which when so executed shall be deemed to be an original and all of
which taken together shall constitute one and the same agreement.
(g) HEADINGS. The headings in this Warrant Agreement are for
convenience of reference only and shall not limit or otherwise affect the
meaning hereof.
(h) GOVERNING LAW. THIS WARRANT AGREEMENT SHALL BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE, WITHOUT
REGARD TO THE PRINCIPLES OF CONFLICTS OF LAW OF ANY JURISDICTION.
(i) SEVERABILITY. If any one or more of the provisions
contained herein, or the application thereof in any circumstance, is held
invalid, illegal or unenforceable in any respect for any reason, the validity,
legality and enforceability of any such provision in
<PAGE>
every other respect and of the remaining provisions hereof shall not be in any
way impaired, unless the provisions held invalid, illegal or unenforceable shall
substantially impair the benefits of the remaining provisions hereof.
(j) ENTIRE AGREEMENT. This Warrant Agreement, together with
the exhibits hereto is intended by the parties as a final expression of their
agreement and intended to be a complete and exclusive statement of the agreement
and understanding of the parties hereto in respect of the subject matter
contained herein. This Warrant Agreement, together with the exhibits hereto,
supersedes all prior agreements and understandings between the parties with
respect to such subject matter.
(k) PUBLICITY. Except as may be required by law, none of the
parties hereto shall issue a publicity release or public announcement or
otherwise make any disclosure concerning this Warrant Agreement or the
transactions contemplated hereby, without prior approval by the other party
(which approval shall not be unreasonably withheld); PROVIDED, HOWEVER, that
nothing in this Warrant Agreement shall restrict the Warrant Holder from
disclosing information (a) that is already publicly available and (b) to its
attorneys, accountants, consultants and other advisors to the extent necessary
to obtain their services in connection with the Warrant Holder's investment or
participation in the Company. If any announcement is required by law to be made
by any party hereto concerning this Warrant Agreement or the transactions
contemplated hereby, prior to making such announcement such party will deliver a
draft of such announcement to the other parties and shall give the other parties
an opportunity to comment thereon.
(l) CHARGES; TAXES AND EXPENSES. Issuance of certificates for
shares upon the exercise of the Warrants shall be made without charge to the
Warrant Holder for any issue or transfer tax or other incidental expense in
respect of the issuance of such certificates, all of which taxes and expenses
shall be paid by the Company.
(m) SATURDAYS, SUNDAYS, HOLIDAYS, ETC. If the last or
appointed day for the taking of any action or the expiration of any right
required or granted herein shall be a Saturday, Sunday or a legal holiday, then
such action may be taken or such right may be exercised on the next succeeding
day not a Saturday, Sunday or a legal holiday.
(n) LOST WARRANTS. The Company covenants to the Warrant Holder
that, upon receipt of evidence reasonably satisfactory to the Company of the
loss, theft, destruction or mutilation of this Warrant Agreement and, in the
case of any such loss, theft or destruction, upon receipt of an indemnity
reasonably satisfactory to the Company, or in the case of any such mutilation,
upon surrender and cancellation of this Warrant Agreement, the Company will make
and deliver a new Warrant Agreement of like tenor, in lieu of the lost, stolen,
destroyed or mutilated document.
<PAGE>
(o) FURTHER ASSURANCES. Each of the parties shall execute such
documents and perform such further acts (including, without limitation,
obtaining any consents, exemptions, authorizations or other actions by, or
giving any notices to, or making any filings with, any governmental authority or
any other person, and otherwise fulfilling, or causing the fulfillment of, the
various obligations made herein), as may be reasonably required or desirable to
carry out or to perform the provisions of this Warrant Agreement and to
consummate and make effective as promptly as possible the transactions
contemplated by this Warrant Agreement.
<PAGE>
IN WITNESS WHEREOF, this Warrant Agreement has been duly executed and delivered
by the authorized officers of each of the undersigned.
PRICELINE.COM INCORPORATED
By: /s/ Paul E Francis
-------------------------------
Name: Paul E. Francis
Title: Chief Financial Officer
CONTINENTAL AIRLINES, INC.
By: /s/ Jeffrey Smisek
--------------------------------
Name: Jeffrey Smisek
Title: Executive Vice President
<PAGE>
EXHIBIT A
NOTICE OF EXERCISE
To: priceline.com Incorporated
1. ___ The undersigned hereby elects to purchase __________
shares of the Common Stock of priceline.com Incorporated pursuant to the terms
of the Warrant Participation Agreement, dated as of _________________, 1999, by
and between priceline.com Incorporated and the undersigned (the "Warrant
Agreement"), and tenders herewith payment of the purchase price of such shares
in full.
___ The undersigned hereby elects to convert
___________ percent (____%) of the value of the Warrants pursuant to the
provisions of Section 5(b) of the Warrant Agreement.
2. Please issue a certificate or certificates representing
said shares in the name of the undersigned.
CONTINENTAL AIRLINES, INC.
By:
--------------------------------
-----------------------------------
(Print Name of Signatory)
-----------------------------------
(Title of Signatory)
Date:
--------------------
<PAGE>
EXHIBIT B
ASSIGNMENT FORM
TO: priceline.com Incorporated
The undersigned hereby assigns and transfers unto _____________________________
of _________________________________________________________________
(Please typewrite or print in block letters)
the right to purchase ____________ shares of the common stock of priceline.com
Incorporated subject to the Warrant Participation Agreement, dated as of
________________, 1999, by and between priceline.com Incorporated and the
undersigned (the "Warrant Agreement").
This assignment complies with the provisions of Section 12(b) of the Warrant
Agreement and is accompanied by funds sufficient to pay all applicable transfer
taxes.
CONTINENTAL AIRLINES, INC.
By:
--------------------------------
-----------------------------------
(Print Name of Signatory)
-----------------------------------
(Title of Signatory)
Date:
------------------------------
<PAGE>
EXHIBIT C
ACKNOWLEDGMENT AND AGREEMENT
TO THE AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT
WHEREAS, pursuant to a Participation Warrant Agreement, the undersigned
received a warrant to purchase 1,000,000 shares of common stock, par value $.008
per share (the "Shares"), of priceline.com Incorporated, a Delaware corporation
(the "Company"); and
WHEREAS, the undersigned wishes to receive certain registration rights with
respect to such Shares; and
WHEREAS, the undersigned has reviewed a copy of that certain Amended
and Restated Registration Rights Agreement, dated as of December 8, 1998 (the
"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 and has been given a copy of the Agreement and
afforded ample opportunity to read and to have counsel review it, and the
undersigned is thoroughly familiar with its terms.
NOW, THEREFORE, in consideration of the mutual premises contained
herein and in the Agreement and for other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, the undersigned hereby
acknowledges and agrees that (i) the undersigned has been given a copy of the
Agreement and afforded ample opportunity to read and to have counsel review it,
and the undersigned is thoroughly familiar with its terms, (ii) the Shares are
subject to terms and conditions set forth in the Agreement, (iii) the
undersigned does hereby agree fully to be bound by the Agreement as a "Demand
Stockholder" (as therein defined), and upon the execution and delivery of this
Acknowledgment and Agreement by the Company, the undersigned shall have all the
rights and obligations under the Agreement as a Demand Stockholder, and (iv) the
undersigned does hereby name Jeffery A. Smisek to serve as their representative
under the Agreement.
This ___ day of July, 1999.
Acknowledged and agreed: CONTINENTAL AIRLINES, INC.
PRICELINE.COM INCORPORATED
<PAGE>
By: By:
--------------------------- ------------------------
Name: Name:
Title: Title:
<PAGE>
Exhibit 12.1
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
Period From
July 18, 1997 Year Six Months
(Inception) to Ended Ended
December 31, December 31, June 30,
1997 1998 1999
<S> <C> <C> <C>
Net loss $ (2,513,482) $ (112,242,499) $ (31,416,928)
Plus fixed charges -
Interest expense including
amortization of debt
issuance costs 835 84,920 76,173
------------- --------------- --------------
Adjusted earnings (loss) (2,512,647) (112,157,579) (31,340,755)
Fixed charges 835 84,920 76,173
------------- --------------- --------------
Deficiency of earnings
available to cover fixed
charges $ (2,513,482) $ (112,242,499) $ (31,416,928)
============= =============== ==============
</TABLE>
<PAGE>
Exhibit 23.2
INDEPENDENT ACCOUNTANTS' CONSENT
We consent to use in this Registration Statement 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 this Registration Statement. We also
consent to the reference to us under the heading "Experts" in such Prospectus.
/s/ Deloitte & Touche LLP
Stamford, Connecticut
July 22, 1999
