SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to __________
Commission File Number 0-25581
PRICELINE.COM INCORPORATED
(Exact name of Registrant as specified in its charter)
Delaware 06-1528493
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
Five High Ridge Park
Stamford, Connecticut 06905
- -------------------------------------------------------------------------------
(Address of principal executive offices)
(203) 705-3000
- -------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
N/A
- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed, since
last report.)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports) and (2) has
been subject to such filing requirements for the past 90 days. YES__. NO X .
Number of shares of Common Stock outstanding at March 31, 1999:
Common Stock, par value $0.008 per share 142,320,427
- ----------------------------------------------- -----------------
(Class) (Number of Shares)
PRICELINE.COM INCORPORATED
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1999
Part I - FINANCIAL INFORMATION PAGE
Item 1. Condensed Financial Statements (Unaudited)
Condensed Balance Sheets - December 31, 1998 and
March 31, 1999.................................................3
Condensed Statements of Operations - Three Months Ended
March 31, 1998 and 1999........................................4
Condensed Statements of Cash Flow - Three Months Ended
March 31, 1998 and 1999........................................5
Condensed Statements of Changes in Stockholders' Equity -
Three Months Ended March 31, 1999..............................6
Notes to Condensed Financial Statements........................7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................11
Item 3. Quantitative and Qualitative Disclosures About Market
Risk...........................................................30
Part II - OTHER INFORMATION
Item 1. Legal Proceedings..............................................32
Item 2. Changes in Securities and Use of Proceeds......................33
Item 3. Defaults Upon Senior Securities................................33
Item 4. Submission of Matters to a Vote of Security Holders............34
Item 5. Other Information..............................................34
Item 6. Exhibits and Reports On Form 8-K...............................34
Signatures ...........................................................35
PART I - FINANCIAL INFORMATION
Item 1. Condensed Financial Statements.
<TABLE>
<CAPTION>
PRICELINE.COM INCORPORATED
CONDENSED BALANCE SHEETS
(UNAUDITED)
December 31, March 31,
ASSETS 1998 1999
----------------- ------------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 53,593,026 $ 30,593,613
Proceeds receivable from sale of common stock - 149,040,000
Accounts receivable, net of allowance for uncollectible
accounts of $290,823 and $494,210 at December 31, 1998
and March 31,1999, respectively 4,176,980 9,916,344
Related party receivable - 1,273,632
Prepaid expenses and other current assets 2,433,542 6,565,647
----------------- ------------------
Total current assets 60,203,548 197,389,236
PROPERTY AND EQUIPMENT - net 5,926,877 10,009,654
OTHER ASSETS 442,060 2,340,036
----------------- ------------------
TOTAL ASSETS $ 66,572,485 209,738,926
================= ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 5,268,430 $ 13,051,723
Related party payable 32,447 -
Accrued expenses 4,258,641 8,913,257
Other current liabilities 722,030 135,221
----------------- ------------------
Total current liabilities 10,281,548 22,100,201
LONG-TERM DEBT - net 989,018 989,657
CAPITAL LEASE OBLIGATIONS 26,074 19,277
----------------- ------------------
Total liabilities 11,296,640 23,109,135
----------------- ------------------
COMMITMENTS AND CONTINGENCIES (note 6)
STOCKHOLDERS' EQUITY
Preferred stock 311,262 -
Common stock 745,802 1,138,564
Additional paid-in capital 171,158,186 327,944,914
Accumulated deficit (116,939,405) (142,453,687)
----------------- ------------------
Total stockholders' equity 55,275,845 186,629,791
----------------- ------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 66,572,485 $ 209,738,926
================= ==================
</TABLE>
See accompanying notes to condensed financial statements.
<TABLE>
<CAPTION>
PRICELINE.COM INCORPORATED
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
March 31, March 31,
1998 1999
------------------ ------------------
<S> <C> <C>
Revenues $ - $ 49,410,542
Cost of Revenues:
Product costs - 43,659,184
Supplier warrant costs - 380,759
------------------ ---------------------
Total cost of revenues - 44,039,943
Gross profit - 5,370,599
------------------ ---------------------
Expenses:
Sales and marketing 1,129,408 17,138,145
General and administrative 1,697,241 3,666,624
Systems and business development 1,926,053 2,183,911
------------------ ---------------------
Total expenses 4,752,702 22,988,680
------------------ ---------------------
Operating loss (4,752,702) (17,618,081)
Interest income, net 49,641 457,772
------------------ ---------------------
Net loss (4,703,061) (17,160,309)
Accretion on preferred stock - (8,353,973)
------------------ ---------------------
Net loss applicable to common shareholders $ (4,703,061) $ (25,514,282)
================== =====================
Basic and diluted net loss applicable to
common shareholders per common share $ (0.08) $ (0.27)
================== =====================
Weighted average common shares outstanding 55,487,311 94,939,486
</TABLE>
See accompanying notes to condensed financial statements.
- -----------------------
Note: Shares outstanding as of March 31, 1999 totaled 142,320,427 shares.
<TABLE>
<CAPTION>
PRICELINE.COM INCORPORATED
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
March 31, March 31,
1998 1999
------------------- -------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (4,703,061) $ (17,160,309)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation and amortization 247,459 748,345
Provision for uncollectible accounts - 398,662
Supplier warrant costs - 380,759
Changes in assets and liabilities:
Receivables (22,473) (6,614,334)
Prepaid expenses and other current assets (1,475,475) (1,268,108)
Accounts payable and accrued expenses 6,817,305 7,757,244
Other (302,363) (1,369,094)
------------------- -------------------
Net cash provided by (used in) operating
activities 561,392 (17,126,835)
INVESTING ACTIVITIES:
Purchase of property and equipment (4,240,712) (4,830,483)
------------------- -------------------
Net cash used in investing activities (4,240,712) (4,830,483)
FINANCING ACTIVITIES:
Principal payments under capital lease
obligations (5,206) (5,949)
Issuance of common stock and subscription
units 18,470,363 -
Payment received on stockholder note 250,000 -
Deferred offering costs
- (1,036,146)
------------------- -------------------
Net cash provided by (used in)financing
activities 18,715,157 (1,042,095)
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 15,035,837 (22,999,413)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 16,459 53,593,026
------------------- -------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 15,052,296 $ 30,593,613
=================== ===================
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for interest 3,017 1,649
Proceeds from sale of common stock received
on April 1, 1999 149,040,000
</TABLE>
See accompanying notes to condensed financial statements.
<TABLE>
<CAPTION>
PRICELINE.COM INCORPORATED
CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
ADDITIONAL
PREFERRED STOCK Common Stock 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 $ 93,225,200 $ 745,802 $ 171,158,186 $ (116,939,405) $ 55,275,845
Conversion of Series A
convertible preferred
stock (17,288,684) (172,887) 21,610,852 172,887 - - -
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 80,000 145,338,182 - 145,418,182
Exercise of warrants - - 187,500 1,500 48,500 - 50,000
Issuance of airline
participation warrants - - - - 3,046,073 - 3,046,073
Net loss, quarter ended
March 31, 1999 - - - - - (17,160,309) (17,160,309)
----------- --------- -------------- ---------- -------------- ------------- ---------------
Balance, March 31, 1999 - $ - $142,320,427 $1,138,564 $ 327,944,914 $(142,453,687) $186,629,791
=========== ========= ============== ========== ============== ============== ===============
</TABLE>
See accompanying notes to condensed financial statements.
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. 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 the instructions to Form 10-Q and Article 10
of 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 three months ended March
31, 1999 are not necessarily indicative of the results that may be expected
for the full year ending December 31, 1999. For further information, refer
to the financial statements and notes thereto, included in priceline.com's
Registration Statement on Form S-1 (File No. 333-69657), as amended, and
priceline.com's final prospectus dated March 29, 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 $4.8 million in related
expenses, were approximately $144.0 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 March 31, 1999, approximately 142.3 million shares of
common stock were outstanding. Priceline.com's balance sheet as of March
31, 1999 reflected a receivable of $149.0 million in respect of the
offering proceeds it received on April 1, 1999.
4. Net Loss Per Share
Priceline.com 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. 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 commencing 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 (using the treasury stock method).
At March 31, 1999, options and warrants to purchase 44,999,782 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 first quarter
ended March 31, 1999 was $25.5 million as a result of a non-recurring,
non-cash charge associated with the accretion on the Series A and Series B
convertible preferred stock that was outstanding during such period. Based
on the weighted average number of 94.9 million shares of common stock
outstanding during such calendar quarter, the net loss applicable to common
stockholders was $0.27 per share.
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 during the quarter ended March 31, 1999, priceline.com capitalized
approximately $2.4 million of computer software developed or obtained for
internal use.
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 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, 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, to the amended complaint, in which they
denied the material allegations of liability in the second amended
complaint. 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. On April 22, 1999, Marketel's legal counsel filed a motion to
withdraw as counsel on the following grounds: (1) Marketel has failed to
cooperate with its counsel in the preparation and prosecution of the case;
(2) Marketel and its counsel have been unable to reach agreement as to
compensation; and (3) Marketel and its counsel have a fundamental
disagreement over the handling of the litigation. Marketel has filed an
opposition to the withdrawal of its counsel. A hearing has been scheduled
on this issue for May 28, 1999.
Priceline.com intends to defend vigorously against the action.
Defending the lawsuit may involve significant expense and, due to the
inherent uncertainties of litigation, there can be no certainty as to the
ultimate outcome. Pursuant to the indemnification obligations contained in
the Purchase and Intercompany Services Agreement with Walker Digital,
Walker Digital has agreed to indemnify, defend and hold harmless
priceline.com for damages, liabilities and legal expenses incurred in
connection with the Marketel litigation.
From time to time priceline.com 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. Such claims, even if not meritorious, could
result in the expenditure of significant financial and managerial
resources.
7. Adaptive Marketing Alliances
Adaptive marketing revenues represented in excess of 10% of total
revenues, substantially all of which was attributable to priceline.com's
third party credit card marketing program with Capital One.
On March 3, 1999, Capital One notified priceline.com of its
intention to cease accepting credit card applications through priceline.com
effective May 1, 1999. On March 10, 1999, priceline.com entered into an
agreement in principle with First USA Bank, a leading national credit card
issuer, under which First USA would replace Capital One as priceline.com's
strategic partner in its credit card adaptive marketing program. A
definitive agreement was entered into by priceline.com and First USA on
March 31, 1999. Priceline.com implemented its credit card program with
First USA in late April 1999. The First USA agreement has a term of five
years, subject to certain earlier termination and repricing rights of First
USA.
PRICELINE.COM INCORPORATED
FORM 10-Q
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" contains forward-looking statements. In some cases,
readers 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. These statements
involve known and unknown risks, uncertainties and other factors that may
cause priceline.com's 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
set forth under "Overview," "Liquidity and Capital Resources," and
"Additional Factors that May Affect Future Results" included in this
section, and those set forth in the "Risk Factors" section of
priceline.com's Registration Statement on Form S-1 (File No. 333-69657), as
amended, and priceline.com's final prospectus dated March 29, 1999.
Although management of priceline.com believes that the expectations
reflected in the forward-looking statements are reasonable, priceline.com
cannot guarantee future results, levels of activity, performance, or
achievements. Priceline.com undertakes no duty to update any of the
forward-looking statements, whether as a result of new information, future
events or otherwise.
OVERVIEW
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 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. 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 through a third party mortgage service in January 1999. In
addition to home mortgages, priceline.com's home financing services now
include home equity loans and refinancing services. The number of full-time
employees of priceline.com increased from 10 at inception to 194 as of
March 31, 1999.
Priceline.com earns revenues upon the completion of successful
transactions through the priceline.com service, which in certain cases
includes revenues generated through adaptive marketing programs offered
through the priceline.com service. The manner in which priceline.com earns
revenues varies, however, depending on the product or service sold. With
respect to airline ticket and hotel reservation services, priceline.com
earns the spread between the customer's named price and the fare or rate
charged by the seller. With respect to the automobile service, it earns a
fixed fee from both the customer and the seller after the transaction is
consummated. With respect to the home financing service, it receives a
payment 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 and through other ancillary fees paid to priceline.com by third
parties. Consumer fees are payable 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 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 amount billed to the
customer, net of certain transportation taxes and fees. Airline and hotel
revenues also may include fees from third parties for adaptive marketing
programs. With respect to automobile and home financing 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, revenues 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 home financing services
revenues also may include fees from third parties for adaptive marketing
programs.
During the three month period from January 1, 1999 through March
31, 1999, priceline.com collected guaranteed offers for approximately
1,396,719 airline tickets, representing approximately $293.8 million in
total consumer demand. This demand resulted in sales of approximately
186,250 airline tickets, representing approximately $38.8 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 three-month period ended March 31, 1999 was approximately 65%. The
186,250 tickets sold through priceline.com during the three-month period
represented approximately 24% 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 27% of all reasonable requests fulfilled
for the same three-month period. The percentage of reasonable offers that
priceline.com is able to fill can also vary depending on the particular
route.
Since its inception, priceline.com has incurred net losses in each
fiscal quarter. Priceline.com incurred net losses of $17.2 million during
the first quarter of 1999. As of March 31, 1999, priceline.com had an
accumulated deficit of $142.5 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. 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.
Priceline.com is in the process of recruiting a chief operating
officer. Priceline.com anticipates that compensation to such chief
operating officer would include the grant of options to purchase shares of
its common stock at fair market value on the date of grant. However,
pursuant to prior board authorization, priceline.com has the authority to
issue any such options at an exercise price of $16.00, the offering price
in the company's initial public offering. In this event, priceline.com
would recognize compensation expense over the vesting period of the options
to the extent of the excess of the fair value of the underlying stock over
the exercie price. Priceline.com expects the majority of such options to be
granted in the year ending December 31, 1999.
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. Priceline Travel merged with and
into priceline.com as of March 24, 1999. Accordingly, the financial
statements include the financial position and results of operations of
Priceline Travel for all periods presented.
Results of Operations
Quarter Ended March 31, 1999
Priceline.com was formed in July 1997, but did not commence
operations until April 1998. Accordingly, comparisons with prior periods
are not meaningful.
Revenues
Total revenues for the quarter ended March 31, 1999 were $49.4
million. Revenues for the period were comprised primarily of the selling
price of airline tickets and hotel room reservations, fee income from
adaptive marketing programs offered in connection with priceline.com's
product offerings and other ancillary revenues, and fee income from
priceline.com's auto and home financing programs.
Cost of Revenues and Gross Profit
Cost of revenues for the quarter ended March 31, 1999 totaled $44.0
million, consisting of product costs of $43.7 million and supplier warrant
costs of $381,000. 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 include 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 issued 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 $381,000 in
each of the next seven fiscal quarters.
Gross profit, which is comprised of revenues less cost of revenues,
was $5.4 million for the quarter ended March 31, 1999. Gross margin was
10.9% for the period. Excluding the effect of non-cash supplier warrant
costs, priceline.com would have had gross profit of $5.8 million and gross
margin of 11.6% for the quarter ended March 31, 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.
During the first quarter of 1999, priceline.com entered into an
agreement with First USA Bank, a leading national credit card issuer, under
which First USA replaced Capital One as its strategic partner in its credit
card adaptive marketing program. In April 1999, priceline.com implemented
its adaptive marketing program with First USA and, since that time,
adaptive marketing revenues from third party credit card programs were
primarily attributable to the First USA adaptive marketing program. The
impact of this change will not be reflected until the second quarter of
1999 and thereafter. Capital One paid a fee for each qualifying credit card
application submitted over the priceline.com service. 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. See
"Additional Factors that May Affect Future Results -- Priceline.com is
Dependent on Adaptive Marketing Programs."
Operating Expenses
Sales and Marketing. Sales and marketing expenses for the quarter
ended March 31, 1999 totaled $17.1 million, or 34.7% of revenues.
Approximately 76% 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 quarter ended March 31, 1999 totaled $3.7 million, or 7.4% 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 quarter ended March 31, 1999 totaled $2.2 million, or 4.4%
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.
Interest Income, Net
Interest income, net for the quarter ended March 31, 1999 totaled
$457,772, reflecting approximately $475,000 of interest income earned by
priceline.com on its cash balances, net of interest expense for the period.
Quarter Ended March 31, 1998
During the quarter ended March 31, 1998, priceline.com was engaged
in start-up activities and incurred $4.8 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 March 31, 1998, priceline.com had a cumulative net loss of $7.2
million.
Liquidity and Capital Resources
Since its inception, priceline.com has financed its operations
primarily through the sale of equity securities. As of March 31, 1999,
priceline.com had approximately $30.6 million in cash and cash equivalents,
and an IPO proceeds receivable of $149.0 million representing prospective
initial public offering proceeds. 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 $4.8
million in related expenses, were approximately $144.0 million.
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.
Net cash used in operating activities was $17.1 million for the
quarter ended March 31, 1999. Net cash used in operating activities was
primarily attributable to net losses.
Net cash used in investing activities was $4.8 million for the
quarter ended March 31, 1999. Net cash used in investing activities was
primarily related to purchases of property and equipment.
Net cash used in financing activities was $1.0 million for the
quarter ended March 31, 1999. Net cash used in financing activities
resulted primarily from the expenses paid in connection with
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.
Additional expenses of approximately $3.0 million are expected to be paid
in the second quarter of 1999.
Priceline.com had no material commitments for capital expenditures
as of March 31, 1999, but capital expenditures were $4.8 for the first
quarter of 1999, and priceline.com expects such expenditures to be at least
$20.0 million in 1999. As a result of its rapid growth, priceline.com
expects to increase capital expenditures for purchased software, internally
developed software, computer equipment and leasehold improvements.
Priceline.com believes that, based upon its current operating plan, its
existing cash and cash equivalents, the net proceeds from its initial
public offering 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.
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 is effective for fiscal years beginning after December 15, 1998. This
SOP provides guidance on capitalizing the cost of computer software
developed or obtained for internal use. Priceline.com adopted this
statement on January 1, 1999 and, during the quarter ended March 31, 1999,
priceline.com capitalized approximately $2.4 million of computer software
developed or obtained for internal use.
Tax Matters
Net Operating Loss Carryforwards
Priceline.com has not generated any taxable income to date and
therefore has not paid any federal income taxes since inception.
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.
Federal Air Transportation Tax on Airline Ticket Sales
Currently, a federal air transportation tax is imposed upon the
sale of airline tickets and generally is collected by the airlines selling
the tickets. Because of the unique pricing structures employed in the
priceline.com service, it is not clear how this federal tax should be
calculated when sales occur 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 $274,230
in additional taxes as of March 31, 1999. Priceline.com has accrued for
such potential liability in its condensed balance sheet as of March 31,
1999 and is providing for such potential liability on an ongoing basis. See
" -- Additional Factors that May Affect Future Results -- Priceline.com's
Business is Subject to Tax Uncertainties."
Non-Qualified Stock Options
Priceline.com currently has outstanding non-qualified stock options
to purchase 24,192,880 shares issued to various employees, consultants and
directors pursuant to the 1997 Omnibus Plan and the 1999 Omnibus Plan. Each
option entitles its holder to purchase a share of common stock at a
weighted average exercise price of approximately $1.55 per share, subject
to adjustment in accordance with the 1997 Omnibus Plan and the 1999 Omnibus
Plan. On exercise of an option, priceline.com will be entitled to an income
tax deduction equal to the difference between the exercise price of the
option and the then fair market value of the common stock. As the exercise
of options is in the sole discretion of the holder of the options, the
timing of the corresponding income tax deduction is outside 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 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 March 31, 1999. Such amounts
have not been material. The additional costs to make any other products or
services Year 2000 compliant by mid-1999 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 not yet developed a contingency plan to address
situations that may result if it is unable to achieve Year 2000 compliance.
The cost of developing and implementing such a plan, if necessary, could be
material.
Additional Factors That May Affect Future Results
Priceline.com's Limited Operating History Makes Evaluating Its Business
Difficult
Priceline.com was formed in July 1997 and began operations on April
6, 1998. As a result, priceline.com has only a limited operating history on
which you can base an evaluation of its business and prospects.
Priceline.com's 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,
priceline.com must, among other things:
o attract leading sellers and consumers to the priceline.com service;
o maintain and enhance its brand, and expand its product and service
offerings;
o attract, integrate, retain and motivate qualified personnel; and
o adapt to meet changes in its markets and competitive developments.
Priceline.com may not be successful in accomplishing these objectives.
Priceline.com Is Not Profitable and Expects to Continue to Incur Losses
Priceline.com has incurred net losses of $63.3 million during the
period from July 18, 1997 (inception) through March 31, 1999, before giving
effect to $68.3 million of non-cash charges arising from equity issuances
to a number of its participating airlines, its chief executive officer and
other parties, which resulted in total net losses of $131.6 million for the
period. Priceline.com has not achieved profitability and expects to
continue to incur losses for at least the next two years. The principal
causes of its losses are likely to continue to be significant brand
development costs, marketing and promotion costs and technology and systems
development costs.
Almost all of priceline.com's revenues to date have been derived
from airline ticket sales and related adaptive marketing programs. In order
to increase airline and adaptive marketing revenues, build a record of
successful transactions and enhance the priceline.com brand, priceline.com
has sold a substantial portion of its airline tickets below cost. In
addition, as its business model evolves, priceline.com expects to introduce
a number of new products and services. With respect to both current and
future product and service offerings, priceline.com expects to increase
significantly its operating expenses in order to increase its customer
base, enhance its brand image and support its growing infrastructure. For
priceline.com to make a profit, its revenues and gross profit margins will
need to increase sufficiently to cover these and other future costs.
Otherwise, priceline.com may never make a profit.
Priceline.com Is Dependent on Adaptive Marketing Programs
Priceline.com's 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 priceline.com by sponsors offering
the promotions generate significant revenues. Since these fees have
historically involved no direct costs, they have had a disproportionately
positive impact on priceline.com's gross profit margins. A significant
reduction in consumer acceptance of its adaptive marketing programs, costs
that priceline.com may incur in connection with adaptive marketing programs
or any material decline in such programs could result in a material
reduction in priceline.com's revenues and its gross profit. Priceline.com
may not be able to replace such revenues through other programs or through
product sales.
During the first quarter of 1999, priceline.com's adaptive
marketing revenues were primarily derived 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. On March 3, 1999, Capital One notified priceline.com of its
intention to cease accepting credit card applications through priceline.com
effective May 1, 1999.
On March 10, 1999, priceline.com entered into an agreement in
principle with First USA Bank, a leading national credit card issuer, under
which First USA replaced Capital One as priceline.com's strategic partner
in its credit card adaptive marketing program. A definitive agreement was
entered into by priceline.com and First USA on March 31, 1999. 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. Priceline.com earns fees in a
variety of ways, including (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. A
portion of the fees earned under the First USA program is required to be
reinvested in program incentives. 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.
Potential Fluctuations in Priceline.com's Financial Results Makes Financial
Forecasting Difficult
Priceline.com expects its revenues and operating results to vary
significantly from quarter to quarter. As a result, quarter to quarter
comparisons of its revenues and operating results may not be meaningful. In
addition, due to priceline.com's limited operating history and its new and
unproven business model, priceline.com cannot predict its future revenues
or results of operations accurately. It is likely that in one or more
future quarters its operating results will fall below the expectations of
securities analysts and investors. If this happens, the trading price of
its common stock would almost certainly be materially and adversely
affected.
Priceline.com's business has no backlog and almost all of its net
revenues for a particular quarter are derived from transactions that are
both initiated and completed during that quarter. Its current and future
expense levels are based largely on its investment plans and estimates of
future revenues and are, to a large extent, fixed. Accordingly,
priceline.com 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 its planned expenditures could have an
immediate adverse effect on its business and results of operations.
Priceline.com's limited operating history and rapid growth makes it
difficult 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 its travel
products, demand for leisure travel may increase over summer vacations and
holiday periods, while Internet usage may decline during the summer months.
Its 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. 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 tend to decrease in economic downturns.
Priceline.com is Dependent on the Airline Industry and Certain Airlines
Priceline.com's near term, and possibly long term, prospects are
significantly dependent upon its sale of leisure airline tickets. Sales of
leisure airline tickets represented 78% of total revenue for the quarter
ended March 31, 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, its business also is likely to be affected by those events.
Significantly reducing its dependence on the airline and travel industries
is likely to take a long time and there can be no guarantee that
priceline.com will succeed in reducing that dependence.
Sales of airline tickets from priceline.com's four largest airline
suppliers accounted for approximately 93% of airline ticket revenue for the
quarter ended March 31, 1999. As a result, currently priceline.com is
substantially dependent upon the continued participation of these four
airlines in the priceline.com service in order to maintain and continue to
grow its total airline ticket revenues. Priceline.com currently has 19
participating airlines. However, its airline participation agreements:
o do not require the airlines to make tickets available for any
particular routes;
o do not require the airlines to provide any specific quantity
of airline tickets;
o do not require the airlines to provide particular prices or
levels of discount;
o do not require the airlines to deal exclusively with it in
the public sale of discounted airline tickets; and
o 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. In addition, its
agreement with Delta Air Lines requires, subject to various exceptions,
Delta's approval of the addition of new carriers to the priceline.com
service and the routes for which tickets may be offered by specified
carriers through the priceline.com service. Accordingly, Delta could limit
priceline.com's ability to expand its business through the introduction of
new carriers or the expansion of the routes for which priceline.com offers
tickets.
Due to its dependence on the airline industry, priceline.com could
be severely affected by changes in that industry, and, in many cases,
priceline.com 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,
its 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
it with tickets. Alternatively, the airlines could attempt to establish
their own buyer-driven commerce service or other similar service to compete
with us. Priceline.com 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 its airline participants.
Priceline.com's Business Model is Novel and Unproven
The priceline.com service is based on a novel and unproven business
model. Priceline.com 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 its 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 priceline.com 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 it to achieve profitability.
Priceline.com Needs to Sell New Products and Services
Priceline.com is unlikely to make significant profits unless
priceline.com makes new or complementary products and services and a
broader range of existing products and services available through the
priceline.com service. Priceline.com will incur substantial expenses and
use significant resources in trying to expand the type and range of the
products and services that priceline.com offers. However, priceline.com may
not be able to attract sellers to provide such products and services or
consumers to purchase such products and services through the priceline.com
service. In addition, if priceline.com launches new products or services
and they are not favorably received by consumers, its reputation and the
value of the priceline.com brand could be damaged.
Almost all of priceline.com's 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 priceline.com has only limited experience in selling
"non-expiring" inventories on the priceline.com service, such as new cars
or financial services, it cannot predict whether the priceline.com business
model can be successfully applied to such products and services.
Priceline.com May Be Unable to Effectively Manage Its Rapid Growth
Priceline.com has rapidly and significantly expanded its operations
and anticipates that further expansion will be required to realize its
growth strategy. Its rapid growth has placed significant demands on its
management and other resources which, given its expected future growth
rate, is likely to continue. To manage its future growth, priceline.com
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 its growing employee base.
If Priceline.com Loses Its Key Personnel or Cannot Recruit Additional
Personnel, Its Business May Suffer
Competition for personnel with experience in Internet commerce is
intense. If priceline.com does not succeed in attracting new employees or
retaining and motivating its current and future employees, its business
could suffer significantly.
Since its formation in July 1997, priceline.com has expanded from
10 to 194 full-time employees as of March 31, 1999. Priceline.com also has
employed many key personnel since its launch in April 1998, including its
Chief Executive Officer, and a number of key managerial, marketing,
planning, financial, technical and operations personnel. In addition,
priceline.com currently is engaged in recruiting a new chief operating
officer. Priceline.com expects to continue to add additional key personnel
in the near future. Priceline.com does not have "key person" life insurance
policies on any of its key personnel.
Priceline.com believes its performance is substantially dependent
on:
o its ability to retain and motivate its senior management and
other key employees; and
o its ability to identify, attract, hire, train, retain and
motivate other highly skilled technical, managerial,
marketing and customer service personnel.
Priceline.com Relies on Third-Party Systems
Priceline.com relies on certain third-party computer systems or
third-party service providers, including;
o the computerized central reservation systems of the airline
and hotel industries to satisfy demand for airline tickets
and hotel room reservations;
o the computer systems of LendingTree, Inc. to satisfy offers
for home mortgages;
o Exodus Communications to host its systems infrastructure,
web and database servers; and
o CallTech Communications Incorporated to operate its call center.
Any interruption in these third-party services, or a deterioration
in their performance, could be disruptive to its business. Priceline.com
currently does not have any contractual arrangement with Exodus
Communications and its agreements with CallTech Communications and
LendingTree are terminable upon short notice. In the event its arrangement
with any of such third parties is terminated, priceline.com 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 Priceline.com's Market Share and Harm
Its Financial Performance
The markets for the products and services offered on the
priceline.com service are intensely competitive. Priceline.com competes
with both traditional distribution channels and online services. Increased
competition could diminish its ability to become profitable or result in
loss of market share and damage the priceline.com brand.
Priceline.com currently or potentially competes with a variety of
companies with respect to each product or service priceline.com offers.
With respect to travel products, these competitors include:
o Internet travel agents such as Travelocity, Preview Travel
and Microsoft's Expedia.com;
o traditional travel agencies;
o consolidators and wholesalers of airline tickets and other
travel products;
o individual airlines, hotels, rental car companies, cruise
operators and other travel service providers; and
o operators of travel industry reservation databases such as
Worldspan and Sabre.
Its current or potential competitors with respect to new automobiles
include traditional and online auto dealers, including newly developing
auto superstores such as Auto Nation, Auto-by-Tel and Microsoft's CarPoint.
With respect to financial service products, its competitors include:
o banks and other financial institutions;
o online and traditional mortgage and insurance brokers,
including Quicken Mortgage, E-Loan and Home Shark; and
o insurance companies.
Priceline.com also potentially faces competition from a number of
large online services that have expertise in developing online commerce and
in facilitating Internet traffic. These potential competitors include
America Online, Microsoft and Yahoo!, who could choose to compete with it
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.
Many of its competitors have significant competitive advantages.
For example, airlines, hotels, financial institutions and other suppliers
also sell their products and services directly to consumers and have
established Web sites. Internet directories, search engines and large
traditional retailers have significantly greater operating histories,
customer bases, technical expertise, brand recognition and/or online
commerce experience than us. In addition, certain competitors may be able
to devote significantly greater resources than it to:
o marketing and promotional campaigns;
o attracting traffic to their Web sites;
o attracting and retaining key employees; and
o Web site and systems development.
Priceline.com's Success Depends on Its Ability to Protect Its Intellectual
Property
Priceline.com has developed a comprehensive program for securing
and protecting rights in patentable inventions, trademarks, trade secrets
and copyrightable materials. If priceline.com is not successful in
protecting its intellectual property, there could be a material adverse
effect on its business.
Patents
Priceline.com currently holds one issued United States patent
directed to a unique Internet-based buyer-driven commerce method and system
underlying its business model. Priceline.com also holds one issued United
States patent directed to a method and system for pricing and selling
airline ticket options and one allowed patent application directed to
methods and systems for generating airline-specified time tickets. In
addition, priceline.com has pending eighteen United States and one
international patent applications directed to different aspects of its
technology and business processes. Priceline.com also has 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:
o its core buyer-driven commerce patent and any other issued
patents could be successfully challenged by one or more
third parties, which could result in its 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;
o because of variations in the application of its business
model to each of its products and services, its 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;
o its ability to practice its core buyer-driven commerce
patent through offering one or more of its 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 its core
buyer-driven commerce patent;
o its pending patent applications may not result in the
issuance of patents; and
o current and future competitors could devise new methods of
competing with its business that are not covered by its
issued patents or patent applications.
While priceline.com's 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 its
patented buyer-driven commerce system, but which has sufficient
distinctions that it does not fall within the scope of its patent. For
example, priceline.com is aware of more than one Internet travel service
that appears to use a customer offer based transaction model, but based on
the information priceline.com has obtained to date, may not infringe its
patent.
Priceline.com is currently subject to an interference action
relating to its core buyer-driven commerce patent. See Note 6 of the Notes
to Condensed Financial Statements.
Trademarks, Copyrights and Trade Secrets
Priceline.com regards the protection of its copyrights, service
marks, trademarks, trade dress and trade secrets as critical to its future
success. Priceline.com relies on a combination of laws and contractual
restrictions, such as confidentiality agreements to establish and protect
its proprietary rights. However, laws and contractual restrictions may not
be sufficient to prevent misappropriation of its technology or deter others
from developing similar technologies. Priceline.com also 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 obtainable and/or available in every
country in which its services are made available online.
Pending Litigation
Current pending litigation against priceline.com and others 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. See Note 6 of the Notes to the Condensed Financial Statements.
Domain Names
Priceline.com currently holds 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, priceline.com may not acquire or
maintain the "priceline.com" domain name in all of the countries in which
priceline.com conducts business.
The relationship between regulations governing domain names and
laws protecting trademarks and similar proprietary rights is unclear.
Therefore, priceline.com 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.
Licenses
In the future, priceline.com may license portions of its
intellectual property, including its issued patents, to third parties. To
date, priceline.com has granted a small business providing online travel
services immunity from suit under its 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, priceline.com would need to institute proceedings
to enforce its rights either under the immunity agreement or under the
patent.
Priceline.com May Not Be Able to Keep Up With the Rapid Technological and
Other Changes
The markets in which priceline.com competes are characterized by
rapidly changing technology, evolving industry standards, frequent new
service and product announcements, introductions and enhancements and
changing consumer demands. Priceline.com 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, priceline.com's future success will depend on its
ability to adapt to rapidly changing technologies, to adapt its services to
evolving industry standards and to continually improve the performance,
features and reliability of its 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 it to incur substantial expenditures to modify or adapt its
services or infrastructure.
Year 2000 Risks May Harm Priceline.com's Business
The risks posed by Year 2000 issues could adversely affect
priceline.com's business in a number of other significant ways. Although
priceline.com believes that its internally developed systems and technology
are Year 2000 compliant, its information technology systems nevertheless
could be substantially impaired or cease to operate due to Year 2000
problems. Additionally, priceline.com relies on information technology
supplied by third parties, and its participating sellers also are heavily
dependent on information technology systems and on their own third party
vendors' systems. Year 2000 problems experienced by it or any of such third
parties could materially adversely affect its business. Additionally, the
Internet could face serious disruptions arising from the Year 2000 problem.
Priceline.com is evaluating its internal information technology
systems and contacting its information technology suppliers and
participating sellers to ascertain their Year 2000 status. However,
priceline.com cannot guarantee that its own systems will be Year 2000
compliant in a timely manner, that any of its 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. Priceline.com also cannot guarantee that
consumers will be able to visit its Web site without serious disruptions
arising from the Year 2000 problem. Given the pervasive nature of the Year
2000 problem, priceline.com cannot guarantee that disruptions in other
industries and market segments will not adversely affect its business.
Further, the costs related to Year 2000 compliance could be significant.
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.
Online Security Breaches Could Harm Priceline.com's 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 its
system or other Internet-based systems could significantly harm its
business. Priceline.com currently requires buyers to guarantee their offers
with their credit card, either online or through its toll-free telephone
service. Priceline.com relies 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 it to protect customer
transaction data.
Priceline.com incurs substantial expense to protect against and
remedy security breaches and their consequences. A party that is able to
circumvent its security systems could steal proprietary information or
cause interruptions in its operations. Security breaches also could damage
its reputation and expose it to a risk of loss or litigation and possible
liability. Its insurance policies carry low coverage limits, which may not
be adequate to reimburse it for losses caused by security breaches.
Priceline.com cannot guarantee that its security measures will prevent
security breaches.
Priceline.com also faces 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.
Priceline.com's Stock Price Could Be Highly Volatile
The market prices for stocks of Internet-related and technology
companies, particularly following an initial public offering, frequently
increase to levels that bear no relationship to the operating performance
of such companies. Such market prices generally are not sustainable and are
subject to wide variations. If priceline.com's common stock trades to such
levels, it likely will thereafter experience a material decline.
In the past, securities class action litigation has often been
brought against a company following periods of volatility in the market
price of their securities. Priceline.com may in the future be the target of
similar litigation. Securities litigation could result in substantial costs
and divert management's attention and resources.
Priceline.com's Business is Subject to Tax Uncertainties
Potential Federal Air Transportation Tax Liability
Currently, 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 it 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 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, priceline.com has submitted a written request to the
United States Internal Revenue Service seeking a determination of its
federal air transportation tax obligations. Such determination may not be
favorable and may require it 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, priceline.com could owe approximately $274,230 in additional
taxes as of March 31, 1999. Priceline.com has accrued for such potential
liability in its condensed balance sheet as of March 31, 1999 and is
providing for such potential liability on an ongoing basis. Priceline.com
has agreed to indemnify and hold harmless certain of its participating
airlines from any liability with respect to such taxes, as well as to
secure the payment of such taxes by a letter of credit.
State Taxes
Priceline.com files tax returns in such states as required by law
based on principles applicable to traditional businesses. In addition,
priceline.com does 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 its 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 priceline.com's ability to become profitable.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
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 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.
PART II - OTHER INFORMATION
Item 1. 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
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. While
the interference process is still at an early stage, among other things,
priceline.com believes that the Woolston patent application does not
disclose the inventions covered by the priceline.com patent claims and
believes that it has meritorious defenses to Woolston's claim, which it
intends to pursue vigorously.
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, to
the amended complaint, in which they denied the material allegations of
liability in the second amended complaint. 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. On April 22, 1999, Marketel's
legal counsel filed a motion to withdraw as counsel on the following
grounds: (1) Marketel has failed to cooperate with its counsel in the
preparation and prosecution of the case; (2) Marketel and its counsel have
been unable to reach agreement as to compensation; and (3) Marketel and its
counsel have a fundamental disagreement over the handling of the
litigation. Marketel has filed an opposition to the withdrawal of its
counsel. A hearing has been scheduled on this issue for May 28, 1999.
Priceline.com intends to defend vigorously against the action.
Defending the lawsuit may involve significant expense and, due to the
inherent uncertainties of litigation, there can be no certainty as to the
ultimate outcome. Pursuant to the indemnification obligations contained in
the Purchase and Intercompany Services Agreement with Walker Digital,
Walker Digital has agreed to indemnify, defend and hold harmless
priceline.com for damages, liabilities and legal expenses incurred in
connection with the Marketel litigation.
From time to time 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.
Item 2. Changes in Securities and Use of Proceeds.
On April 1, 1999, priceline.com completed an initial public
offering in which it sold 10,000,000 shares of its common stock, $0.008 par
value. The managing underwriters in the offering were Morgan Stanley & Co.
Incorporated, Merrill Lynch, Pierce, Fenner & Smith Incorporated,
BancBoston Robertson Stephens Inc. and Donaldson, Lufkin & Jenrette
Securities Corporation. The shares of common stock sold in the offering
were registered under the Securities Act of 1933, as amended, on a
Registration Statement on Form S-1 (the "Registration Statement") (Reg. No.
333-69657) that was declared effective by the Securities and Exchange
Commission on March 29, 1999. All 10,000,000 shares of common stock
registered under the Registration Statement were sold at a price of $16.00
per share for gross proceeds of $160.0 million. Offering proceeds to
priceline.com, net of approximately $11.2 million in aggregate underwriter
discounts and commissions and $4.8 million in other related expenses, were
approximately $144.0 million.
As of March 31, 1999, priceline.com's balance sheet reflected a
receivable of $149.0 million in respect of the offering proceeds it
received on April 1, 1999, and accordingly, as of March 31, 1999, none of
the net offering proceeds to priceline.com had been applied. The net
proceeds from the initial public offering will be used for general
corporate purposes, including working capital to fund anticipated operating
losses, expenses associated with its advertising campaigns, brand-name
promotions and other marketing efforts and capital expenditures.
Priceline.com also may use a portion of the net proceeds, currently
intended for general corporate purposes, to acquire or invest in
businesses, technologies, products or services, although no specific
acquisitions are planned and no portion of the net proceeds has been
allocated for any acquisition. None of the net offering proceeds of
priceline.com have been or will be paid directly or indirectly to any
director, officer, general partner of priceline.com or their associates,
persons owning 10% or more of any class of priceline.com's equity
securities, or an affiliate of priceline.com.
Simultaneous with the effectiveness of the registration statement
relating to the initial public offering, each outstanding share of
priceline.com's Series A and Series B convertible preferred stock was
automatically converted into 1.25 shares of priceline.com's common stock.
Item 3. Defaults Upon Senior Securities.
Not Applicable.
Item 4. Submission of Matters to Vote of Security Holders.
Not Applicable.
Item 5. Other Information.
Not Applicable.
Item 6. Exhibits and Reports On Form 8-K.
(a) Exhibits
Exhibit
Number Description
------- -----------
10.1+ Interactive Marketing Agreement, dated March 31,
1999, by and between priceline.com Incorporated and
First USA Bank, N.A.
27.1 Financial Data Schedule.
- ---------------------
+ Certain portions of this document have been omitted pursuant to a
confidential treatment request.
(b) Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
Date: May 17, 1999 PRICELINE.COM INCORPORATED
(Registrant)
By: /s/ Richard S. Braddock
-----------------------------
Name: Richard S. Braddock
Title: Chairman and Chief Executive
Officer
Date: May 17, 1999 By: /s/ Paul E. Francis
--------------------------------
Name: Paul E. Francis
Title: Chief Financial Officer
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
10.1+ Interactive Marketing Agreement, dated March 31, 1999, by
and between priceline.com Incorporated and First USA Bank,
N.A.
27.1 Financial Data Schedule.
- -----------------
+ Certain portions of this document have been omitted pursuant to a
confidential treatment request.
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR CERTAIN
PORTIONS OF THIS DOCUMENT. CONFIDENTIAL PORTIONS
HAVE BEEN FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION.
EXECUTION COPY
INTERACTIVE MARKETING AGREEMENT
This INTERACTIVE MARKETING AGREEMENT (this "Agreement"), made this
31st day of March, 1999, by and between PRICELINE.COM INCORPORATED, a
Delaware corporation having its principal office at Five High Ridge Park,
Stamford, Connecticut 06905 (the "Company"), and FIRST USA BANK, N.A., a
national banking association having its principal office at Three Christina
Centre, 201 North Walnut Street, Wilmington, Delaware 19801 ("FUSA",
together with the Company, the "Parties" and each individually a "Party").
RECITALS
WHEREAS, FUSA desires to make its consumer credit card products and
related services (hereinafter referred to as "Credit Card(s)") available to
the on-line visitors, telephone callers and customers of the Company (the
"Company Customers") through the Internet and/or Websites currently or
hereafter owned, maintained, managed or controlled by or on behalf of the
Company (the "Company Site(s)") and through the Company's inbound and
outbound telephone services (the "Company Phone Services" and, together
with the Company Site(s), the "Company Services"); and
WHEREAS, the Company has agreed to actively market and offer Credit
Card(s) and other credit related products to and among Company Customers,
subject to the terms and conditions hereinafter contained.
NOW, THEREFORE, in consideration of the mutual covenants and
agreements of the Parties herein contained and other good and valuable
consideration, the receipt and sufficiency of which are hereby
acknowledged, the Parties hereby agree as follows:
ARTICLE I
DEFINITIONS
Section 1.1 Defined Terms. Unless the context requires otherwise, the
capitalized terms set forth herein shall have the meanings set forth on
Schedule A hereto.
Section 1.2 Interpretation. Definitions in this Agreement shall apply
equally to the singular and plural forms of the defined terms. The words
"include" and "including" shall be deemed to be followed by the phrase
"without limitation" where such phrase does not otherwise appear. The words
"herein", "hereof", "hereinafter" and words of similar import refer to this
Agreement as a whole and not to any particular Articles or Sections of this
Agreement. Except as otherwise specifically indicated, all references in
this Agreement to Articles and Sections refer to Articles and Sections of
this Agreement, and all references to Exhibits or Schedules refer to
Exhibits or Schedules attached hereto, and all such Exhibits and Schedules
are incorporated herein by reference.
ARTICLE II
CO-MARKETING PROGRAM
For the Initial Term and any Renewal Term of this Agreement, and in
accordance with the terms and conditions of this Agreement, the Company
shall implement and support a program (the "Program") to market FUSA Credit
Cards to Company Customers, and FUSA shall make available certain
promotional, informational and application materials required by the
Company to implement and support the Program and shall review applications
from, and issue FUSA Credit Cards to, Company Customers qualifying for such
Credit Cards.
ARTICLE III
COMPANY RIGHTS AND OBLIGATIONS
Section 3.1 Company Direct Promotions. In furtherance of the Program,
the Company shall, subject to FUSA's standard policies and to reasonable
restrictions set forth by FUSA, solicit applications, directly and
indirectly, for FUSA Credit Cards from Company Customers ("Company Direct
Promotions"). The Company shall submit any marketing materials developed by
the Company for Company Direct Promotions in writing to FUSA, and FUSA
shall promptly review and approve such materials as FUSA deems acceptable
in FUSA's sole discretion for marketing to Company Customers, prior to
their use by the Company; provided, however, that any Credit Card
applications used in connection with the Program must be supplied to the
Company by FUSA, and FUSA shall use commercially reasonable efforts to
provide the Company with a Credit Card application form that is
functionally efficient for customer use. The Company shall be authorized to
solicit Account applications from Company Customers whether or not such
customers hold FUSA accounts, and FUSA shall make its Account approval
decisions with respect to such Account applications consistent with FUSA's
normal credit approval standards and safe and sound banking practices,
subject to normal multi-account limits imposed by FUSA with regard to
customers who already hold FUSA accounts. Unless otherwise agreed to by
FUSA in FUSA's sole discretion, all expenses incurred by the Company in
connection with Company Direct Promotions shall be borne solely by the
Company.
Section 3.2 Company Programs and Value-Added Enhancements. The
Company shall, in the Company's discretion, fund, develop and support
premium and other incentive programs (including any promotional subsidies
that the Company may determine to offer) specifically targeted at
generating FUSA Credit Card applications, FUSA Credit Card usage, card
value-added offers and card balance-building activities, and the Company
shall use commercially reasonable efforts to maximize Company Customer
acceptance of such program offerings. The Parties shall also market test a
variety of value-added enhancements, as mutually agreed to by the Parties,
which such value-added enhancements may include cash rebate offers and
"Instant Rewards" programs. The aggregate retail value of such programs and
rewards shall be equal to at least (i) [**] during the first 12-month
billing cycle for each such Account and (ii) the amount of the Usage Fee
paid with respect to each such Company-Sourced Account for each 12-month
billing cycle thereafter.
Section 3.3 Company Customer Information. (a) The Company may, at its
option, provide to FUSA the names and addresses of those Company Customers
who fail to apply for FUSA Credit Cards upon visiting the Company Site(s)
or through Company Phone Services for the sole purpose of FUSA's screening
such Company Customers for subsequent pre-approved credit offers. Those
Company Customers that pass such screening may be subject to market-test
programs designed to provide such Company Customers with incentives to
return to a Company Site(s), apply for a pre-approved FUSA Credit Card and
receive a Company benefit or reward (paid for by the Company). The terms of
any such test-market program or promotion shall be the subject of a
separate agreement between the Parties containing a mutually agreed
performance-based payment structure.
FUSA and the Company mutually acknowledge that, given the nature of
the industry, additional or various marketing vehicles not specifically
addressed in this Agreement may require additional Company Customer
information. As a result, the Company and FUSA shall each use commercially
reasonable efforts to provide the other with all necessary and relevant
Company Customer information as requested by either Party from time to
time, subject to such Party's privacy policy and all legal and regulatory
requirements and restrictions.
Section 3.4 License to Use Marks. (a) During the Initial Term and any
Renewal Term of this Agreement, to the extent required by FUSA in
connection with the performance of its obligations under this Agreement or
any additional marketing activity contemplated by Article VII, the Company
grants to FUSA the right and license to use the current and future
respective name, trademarks, service marks, copyrights and logo of the
Company (collectively, the "Company Marks"), subject to the review and
prior approval of the Company, solely in connection with the Program and
any transactions contemplated by Article VII. Such right and license shall
be restricted to the products and services described or contemplated herein
and shall not apply or extend to any other product or service offered by
FUSA. Except for amounts paid to the Company pursuant to Article V and
Schedule B hereto, FUSA shall not be required to pay any additional amounts
to the Company, or on account of the Company, in connection with the use of
the Company Marks in conjunction with the Program. Subject to and
consistent with the rules and regulations of Visa and MasterCard, FUSA
shall comply with the standards established by the Company with respect to
the form of the Company Marks and their usage.
(b) Notwithstanding the provisions of Section 3.4(a), the Company is
and shall remain the owner of all rights in and to its name and logo and
all other intellectual property owned or licensed by the Company, as the
same now exist or as they may hereafter be modified, including all rights
in and to any copyright, trademark, service mark and similar rights
pertaining thereto. Any and all rights to Company Marks and other Company
intellectual property not herein specifically granted and licensed to FUSA
are reserved to the Company. Except as otherwise specifically provided for
herein, upon the termination of this Agreement, all rights conveyed by the
Company to FUSA with respect to the use of the Company Marks and other
Company intellectual property shall cease, and all such rights shall revert
to the Company. Upon termination of this Agreement, FUSA shall have no
further right to utilize the Company Marks; provided, however, that nothing
contained herein shall require FUSA, upon termination of this Agreement, to
cancel any Account or to terminate or replace any Credit Card issued in
connection with this Agreement.
- --------------
[**] = Confidential treatment requested for redacted portion.
ARTICLE IV
FUSA RIGHTS AND OBLIGATIONS
Section 4.1 Offering and Issuance of Credit Cards. In furtherance of
the Program, FUSA shall offer Credit Card(s) to Company Customers in
accordance with the following provisions:
Subject to Section 4.1(d), FUSA shall assist the Company with the
design and development of such marketing, promotion and solicitation
materials as the Parties mutually agree are appropriate to promote the
Program among Company Customers, it being understood and acknowledged by
the Parties that FUSA shall be given the opportunity, and the Company shall
cooperate and assist FUSA with respect thereto, to market FUSA Credit Cards
at any and all points and potential points during a Company Customer's
visit to any location upon any Company Site(s), subject to the mutual
agreement of the Parties, which agreement shall not be unreasonably
withheld, and in a manner and form subject to testing and refinement by
mutual agreement of the Parties. FUSA reserves the right to limit its
solicitation materials to those Company Customers deemed to be creditworthy
in accordance with FUSA's normal credit criteria and credit practices and
with safe and sound banking practices.
Subject to federal, state and local law and any other rules and
regulations applicable to FUSA, including MasterCard or Visa operating
regulations, the holders of all approved Accounts shall receive Credit
Card(s) issued by FUSA which contain marks or design elements that would
distinguish such Credit Cards from other Credit Cards issued by FUSA not in
connection with the Program. FUSA shall have the right to designate on all
of its Credit Cards, including, without limitation, all Credit Cards issued
in connection with this Program, such information as FUSA shall, in its
sole discretion, deem appropriate.
(c) FUSA reserves the right to, and may in FUSA's sole discretion,
communicate such information to the Credit Card holders that FUSA normally
sends to its other cardmembers, without having to obtain the prior approval
of the Company.
(d) Credit Cards issued by FUSA pursuant to the Program shall be
governed by the terms of the cardmember agreement to be entered into
between each such person and FUSA.
Each such cardmember agreement shall specify that the laws of the State of
Delaware, and as applicable, Federal law, shall govern the terms and
conditions of such Account and the extension of credit by FUSA to the
cardmember. Notwithstanding anything to the contrary contained herein, FUSA
shall have the right to amend such cardmember agreements at any time in
accordance with applicable law, including, without limitation, changing the
basic pricing on individual Accounts at any time, including, without
limitation, in the event of late payments, non-payments, delinquency,
payment by checks that fail to clear, default, bankruptcy or other
consistent or substantial failure by any Program cardmember to perform in
accordance with the terms of the cardmember agreement; provided that such
amendments are not made in a manner that is inconsistent with the manner in
which FUSA determines to amend FUSA cardmember agreements that are not
generated through the Program.
(e) The Parties acknowledge that the Company does not intend to issue
Credit Cards or act as a banking institution pursuant to this Agreement.
The Parties further acknowledge that if, at any time during the Initial
Term or any Renewal Term of this Agreement, the obligations of the Company
under this Agreement subject the Company to any rule, regulation or statute
governing Credit Card issuers or banking institutions, the Company shall
not be required (subject to Section 14.2(b)) to fulfill any such
obligation, and the Parties shall negotiate in good faith to amend this
Agreement to the extent necessary to permit the Company to be able to
fulfill its obligations under this Agreement without having to be subject
to any such rule, regulation or statute.
Section 4.2 On-line Credit Approval. Both Parties shall use
commercially reasonable efforts to implement a system whereby FUSA is able
to provide prompt on-line, credit approval decisions to Account applicants
during a Company Site visit, such that any Company Customer whose
application is approved during such visit is able to open an Account and,
immediately after such Account is opened, charge Company Site purchases to
such Account (subject to the terms and conditions of such Account and the
related cardmember agreement, including, without limitation, the credit
limit established with respect to such Account). Subject to any legal or
regulatory requirements or restrictions, FUSA shall use commercially
reasonable efforts to provide the Company with technical support and
regular updates that will allow the Company on a real-time basis to
determine (subject to receipt of such updates) whether a Company Customer
using a Non-FUSA Credit Card for a Company Site purchase also holds a FUSA
account, and, if so, (a) whether sufficient credit is available to charge
the current purchase on such FUSA Credit Card; (b) whether sufficient
credit is available for a balance transfer; (c) whether such Company
Customer's FUSA account is active or dormant; and (d) what the valid
account number is for such FUSA account. The Company agrees that (i) its
use of the information provided pursuant to the previous sentence shall be
solely for the purposes set forth herein and (ii) the Company's use of such
information shall be subject to the confidentiality provisions set forth in
Article XII. In addition, FUSA agrees to perform a more detailed review and
scoring of any Account application that has been rejected through the
on-line approval process to determine if such application should be
subsequently approved consistent with FUSA's normal credit approval
standards and safe and sound banking practices. When on-line account
approval capabilities have been established in connection with the Company
Site(s), the Company shall use commercially reasonable efforts to persuade
Company Customers to charge their Company Site purchases or any other
charge to a Company-Sourced Account.
Section 4.3 License to Use Marks. (a) During the Initial Term and any
Renewal Term of this Agreement, FUSA hereby grants to the Company the right
and license to use the current and future respective name, trademarks,
service marks, copyrights and logo of FUSA (collectively, the "FUSA
Marks"), subject to the review and prior approval of FUSA, solely in
connection with the Program and any transactions contemplated by Article
VII. Such right and license are restricted to the products and services
described and contemplated herein and shall not apply or extend to any
other product or service offered by the Company. The Company shall not be
required to pay any amount to FUSA, or on account of FUSA, in connection
with the use of the FUSA Marks in conjunction with the Program. Subject to
and consistent with the rules and regulations of Visa and MasterCard, the
Company shall comply with the standards established by FUSA with respect to
the form of the FUSA Marks and their usage.
(b) Notwithstanding the provision of Section 4.3(a), FUSA is and
shall remain the owner of all rights in and to its name and logo and all
other intellectual property owned or licensed by FUSA, as the same now
exist or as they may hereafter be modified, including all rights in and to
any copyright, trademark, service mark and similar rights pertaining
thereto. Any and all rights to FUSA Marks and other FUSA intellectual
property not herein specifically granted and licensed to the Company are
reserved to FUSA. Except as otherwise specifically provided for herein,
upon the termination of this Agreement, all rights conveyed by FUSA to the
Company with respect to the use of the FUSA Marks and other FUSA
intellectual property shall cease, and all such rights shall revert to
FUSA. Upon termination of this Agreement, the Company shall have no further
right to utilize the FUSA Marks; provided, however, that nothing contained
herein shall require FUSA, upon termination of this Agreement, to cancel
any Account or to terminate or replace any Credit Card issued in connection
with this Agreement.
Section 4.4 Statement Messages/Inserts. (a) Subject to reasonable
space, weight, size, content and scheduling restrictions, and upon FUSA's
prior review and approval, FUSA may periodically include Company
informational inserts or statement messages ("Messages/Inserts") in
Company-Sourced Account cardmember statements mailed by FUSA to its FUSA
brand cardholders (as opposed to cardholders of credit cards issued in
conjunction with a third party).
(b) The Company shall bear the costs of preparing and producing the
actual Messages/Inserts. FUSA shall pay for the normal cost of mailing
Messages/Inserts; provided, however, that if the Messages/Inserts increase
the postal expense incurred by FUSA to mail statements with such
Messages/Inserts, then FUSA shall inform the Company in advance and, if the
Company agrees to reimburse FUSA for such incremental postage expense, FUSA
shall use commercially reasonable efforts to include such Messages/Inserts
in such mailing.
ARTICLE V
COMPENSATION AND PAYMENT
Section 5.1 Fees. During the Initial Term and any Renewal Term of
this Agreement, and subject to the terms and conditions set forth herein,
FUSA shall pay to the Company certain fees, commissions and bonuses
(collectively, the "Fees") as set forth on Schedule B hereto.
Section 5.2 Substitute Accounts. Notwithstanding anything else
contained herein, FUSA shall not be obligated to pay to the Company any
duplicate Account Origination Fee or duplicate Value-Added Payment in the
event that any account that forms the basis upon which such Account
Origination Fee or Value-Added Payment is calculated represents a
substitute account, which includes, without limitation, any account
established due to the loss or theft of a cardmember's existing Credit Card
and any account established as a result of former joint cardmembers'
requesting individual accounts.
Section 5.3 Payment Terms. FUSA shall provide the Company with a
reconciliation report within 15 days following the end of each month
setting forth the amount of Fees earned by the Company during such month.
Any amounts owing to the Company and payable pursuant to the terms of this
Article V shall be paid to the Company within 15 days following the end of
each calendar quarter. The Parties shall meet periodically to discuss
payment methodologies and mechanisms that reflect estimated payments based
on mutually agreed payment criteria and metrics. If any such methodology
proves not accurately to reflect the Parties' actual payment experience,
the Parties shall negotiate revisions in future payments and estimated
payments to reflect such actual experience.
Section 5.4 Payment Upon Termination. FUSA's obligation to pay any
Fees to the Company shall cease immediately upon the expiration or
termination of this Agreement for any reason whatsoever; provided that such
Fees shall be reconciled and paid with respect to all amounts earned by the
Company up to the effective date of such expiration or termination; and
provided further that FUSA shall continue to pay Usage Fees to the Company
in accordance with Paragraph 6 of Schedule B following the expiration or
termination of this Agreement, but (a) only to the extent, and in the
amount, that such Usage Fees are directly used by the Company to support
value-added enhancements implemented pursuant to Section 3.2 prior to such
termination or expiration and (b) only for so long as FUSA has a positive
return on the Company-Sourced Account Portfolio.
Section 5.5 Marketing Costs. Other than the Fees provided for in
Schedule B hereto, FUSA shall not be obligated to pay the Company any
advertising costs or fees or any payments related to promotional visibility
or premium cost reimbursement or any up-front payments whatsoever, it being
understood and agreed to by the Parties that the Company will bear all
marketing costs incurred by the Company (including, without limitation,
premium costs related to ticket subsidies and rebates) in connection with
the generation of Credit Card applications from Company Customers under
this Agreement. Notwithstanding the foregoing, FUSA may, if FUSA chooses,
in FUSA's sole discretion, reimburse the Company for any or all costs
related to the Company's Program testing and management or to support
marketing efforts proposed by the Company.
Section 5.6 Fee Adjustments. (a) Upon written notice from FUSA to the
Company given at any time after the one-year anniversary of the Effective
Date, the Parties shall attempt to renegotiate, in good faith, (i) any or
all of the Fees set forth in Schedule B and (ii) the terms of this Article
V.
(b) In addition, it is the Parties' intent that (i) the five-year
average Return on Average Outstandings, as measured based on the Pro Forma
Vintage Profit and Loss Statement for the Company Program (the "ROO"), be
greater than or equal to 3%, as measured by FUSA on a consistent basis with
the methodology used on other similar accounts, and (ii) the NPV/CPA Ratio
be greater than or equal to the NPV/CPA Ratio of alternative competitive
investment opportunities for FUSA, as measured by FUSA on a consistent
basis with the methodology used on other similar accounts ("Competitive
Opportunities"). Calculation of the ROO shall take into account all sources
of revenue, including late-fee income, fee-based services and association
income, as well as any traditional avoided costs, including lower
chargeoffs. In the event that, upon the one-year anniversary of the
Effective Date, (x) the ROO, as measured by FUSA on a consistent basis with
the methodology used on other similar accounts, falls below this 3% minimum
or (y) the NPV/CPA Ratio, as measured by FUSA on a consistent basis with
the methodology used on other similar accounts, falls below the NPV/CPA
Ratio of Competitive Opportunities, the Company and FUSA shall negotiate
promptly in an effort to reach agreement on the modification of one or more
terms of future compensation in an effort to return the ROO and the NPV/CPA
Ratio to acceptable levels. If, on the other hand, the ROO, as measured by
FUSA, is in excess of 3%, FUSA shall increase, in good faith, the
compensation metrics to the Company by an amount corresponding to such
excess, such that the Company and FUSA share equally in such excess.
(c) Any Fee adjustment made pursuant to this Agreement, including
pursuant to this Section 5.6 or Exhibit B hereto, shall be made on a
prospective basis only.
(d) In the event the Parties are unable to negotiate in good faith
any Fee adjustment provided for herein within 30 days of a written request
by FUSA for such adjustment, FUSA shall have the right, in FUSA's sole
discretion, to terminate this Agreement in accordance with Section 10.6.
ARTICLE VI
OWNERSHIP RIGHTS
Section 6.1 Account Ownership. The Company shall not possess or claim
any ownership interest in Credit Cards issued or accounts established
pursuant to this Agreement and all rights related thereto (collectively,
the "Accounts") or in any FUSA Customer Financial Information. Without
limiting the foregoing, any and all outstanding balances with respect to
the Accounts, including, without limitation, all amounts owing for the
payments of goods and services, periodic finance charges, late and other
charges and all documents and records developed and retained by FUSA in
connection therewith, including, without limitation, all FUSA Customer
Financial Information, shall be the sole property of FUSA or its assigns,
and the Company shall have no rights or interests therein. Notwithstanding
the foregoing, and subject to the provisions of Sections 7.3 and 14.1, (a)
the Company shall retain the right to offer to any Company Customer whose
Account application has been rejected by FUSA, Credit Cards issued by other
issuers, including issuers specializing in high-risk issuance; and (b) the
Company shall have the right to offer to any Company Customer that has
chosen not to apply for a FUSA MasterCard or Visa Credit Card after the
Company's first two clearly presented and discrete offers of such FUSA
MasterCard or Visa Credit Card to such Company Customer during such Company
Customer's visit(s) to a Company Site, no more than four other credit or
charge cards not offered by FUSA, including such cards issued by American
Express or Discover ("Other Credit Cards") upon such Company Customer's
subsequent visit(s) to any Company Site(s), up to a maximum of two offers
of each of the four such Other Credit Cards; provided that the Company
shall not offer any Other Credit Card in a manner that features such Other
Credit Card more prominently located or displayed than, or in a position
superior to, the Company's offer of any FUSA Credit Card; and provided
further that in no event shall the Company have the right to offer to any
Company Customer (other than a Company Customer described in Section 6.1(a)
or pursuant to Section 7.3(c)), at any time during the Initial Term or any
Renewal Term of this Agreement, any Visa or MasterCard credit or charge
card product that is not provided by FUSA; and provided further that if a
Company Customer that is offered any Other Credit Card by the Company
pursuant to Section 6.1(b) chooses not to apply for any such Other Credit
Card upon the Company's first two offers of each of the four Other Credit
Card(s) to such Company Customer, the Company shall be required to comply
again with the procedures for offering FUSA MasterCard and Visa Credit
Cards set forth in Section 6.1(b) above. It is the intention of the parties
that the Company will not offer Other Credit Cards to Account holders and
will not use FUSA Customer Financial Information or a list of Account
holders provided to the Company for the purpose of marketing Other Credit
Cards. The Company will use commercially reasonable efforts to design and
implement systems technology that will enable the Company to exclude
Account holders from promotions for Other Credit Cards and to prevent the
use of FUSA Customer Financial Information or a list of Account holders in
the promotion of Other Credit Cards.
Section 6.2 Customer Lists and Data. FUSA and its affiliates may
maintain separately all information that is submitted or obtained as a
result of an Account relationship or an application for an Account
relationship with a Company Customer (collectively, "Customer Data").
"Customer Data" includes, without limitation, information provided to FUSA
or any of its agents by a Company Customer for storage and subsequent use
by a Company Customer on the Internet, including a Company Customer's
identity, address, credit card number(s), personal information, purchasing
preferences or history and similar information and all FUSA Customer
Financial Information. Customer Data obtained by FUSA pursuant to this
Program shall be owned solely by FUSA and shall become a part of FUSA's own
records and files.
ARTICLE VII
ADDITIONAL PRODUCT MARKETING
In addition to the Parties' obligations under the Program and the
market test programs described in Section 3.3, the Parties may offer or
support additional products and marketing efforts, including those set
forth in this Article VII, as part of the Program or as stand-alone
activities, subject to separate agreements:
Section 7.1 Co-branding. The Parties acknowledge that the Company
does not currently have, nor does the Company have any plans to create, a
co-branded credit or charge card. If the Company determines, in its sole
discretion, to offer such a co-branded credit or charge card during the
Initial Term or any Renewal Term of this Agreement, FUSA shall have the
exclusive right to provide such co-branded credit or charge card; provided
that if FUSA determines, in its sole discretion, not to provide such
co-branded credit or charge card, the Company shall be permitted to seek a
co-branded credit or charge card from another provider, subject to a right
of first refusal by FUSA. If, during the Initial Term or any Renewal Term,
the Company and FUSA determine to offer a co-branded credit or charge card
to Company Customers as provided for herein, this Agreement shall be
amended accordingly.
Section 7.2 No-Fee Products. The Company understands and acknowledges
that FUSA may choose to offer to Company Customers a wide range of
market-competitive, no-fee consumer products that will enable FUSA to
achieve the highest possible Account approval rates. The Company agrees
further that any such no-fee product that is not market-competitive may be
market-tested to Company Customers subject to the Company's prior approval
of such market testing, which approval shall not be unreasonably withheld;
provided, however, that neither (a) any application for any such no-fee
product that is not market-competitive nor (b) FUSA's approval of any such
application, shall be included in the calculation of the 50% approval rate
that FUSA is required to achieve pursuant to Paragraph 3 of Schedule B
hereto. In addition, unless otherwise agreed to by the Parties, FUSA shall
not offer any product to Company Customers that includes a fee for balance
transfers.
Section 7.3 Additional Programs and Marketing. (a) The parties intend
to seek mutually acceptable ways to expand their business relationship to
include additional relevant products and service categories. Without
limiting the generality of the foregoing, the Company shall work in good
faith with FUSA and its affiliates to enable FUSA and/or such affiliates
(i) to participate in all financial service products offered by the Company
or through the Company Services, including, without limitation, automobile
loans, home equity loans, home mortgages and mortgage refinancings and
other loan products and (ii) to make the FUSA Wallet available to Company
Customers. In addition, in the event the Company decides to introduce any
current, new or unaddressed product, service, property or entity relating
to credit products, banking products or related services (the "New
Product(s)"), by itself or through another entity, the Company shall give
FUSA prompt notice of the same, and the Parties shall negotiate in good
faith an agreement whereby FUSA shall have the right to provide some or all
of the New Products as a preferred provider through or on behalf of the
Company. Notwithstanding the foregoing, nothing contained in this Section
7.3(a) shall be deemed to give FUSA preferred status in any such programs,
and FUSA's participation in such programs shall be subject to the execution
of a separate agreement with respect to each such program. FUSA
acknowledges that the Company operates a promotion with a third party
pursuant to which the Company makes available to users of the Company
Services certain mortgage loan, home equity loan and home equity line of
credit products (which products do not include Credit Cards) and that
nothing in this Agreement shall preclude the Company from continuing to
fulfill its obligations under that promotion.
(b) Without limiting the generality of the foregoing, if and when
FUSA develops a corporate credit card product, the Company shall use
commercially reasonable efforts to identify corporate Company Customers and
shall target corporate credit card offers to such corporate Company
Customers.
(c) Without limiting the generality of the foregoing, in the event
that the Company decides to offer to Company Customers a "name-your-price"
balance transfer or debt consolidation product, FUSA and the Company shall
negotiate in good faith to include FUSA as a preferred provider with
respect thereto.
(d) The Parties understand and acknowledge that, as of the date of
this Agreement, the Company does not permit advertising on any Company
Site(s), except that, as an adaptive marketing sponsor, FUSA shall be
identified clearly by name on the Company Site(s), including by means of a
FUSA logo. If, at any time during the Initial Term or any Renewal Term of
this Agreement, the Company determines to permit advertising on any Company
Site or through any Company Phone Services, or any such advertising
otherwise is permitted on any Company Site or through any Company Phone
Services, FUSA shall have a right of first offer to be the exclusive credit
card issuer to advertise on such Company Site or through such Company Phone
Services, and the Company shall, on an on-going basis, provide FUSA with
advertising space on such Company Site(s) and through such Company Phone
Services in accordance with terms to be mutually agreed to by the Parties
at such time; provided, however, that if FUSA determines not to advertise
on such Company Site or through such Company Phone Services or the Parties
are unable to agree in good faith on acceptable terms pursuant to which
FUSA shall advertise on such Company Site or through such Company Phone
Services, the Company shall be permitted to offer advertising space to
Other Credit Card issuers, subject to FUSA's right of first refusal.
(e) The Parties understand and acknowledge that participation in each
such product offering or marketing effort described or referred to in this
Section 7.3 shall be implemented under separate agreement and shall not be
part of the Program.
ARTICLE VIII
COMPANY REPRESENTATIONS AND WARRANTIES
The Company represents and warrants to FUSA as of the date of this
Agreement as follows:
Section 8.1 Organization and Qualification. The Company is a
corporation duly organized, validly existing and in good standing under the
laws of the jurisdiction in which it is organized, is duly qualified and in
good standing as a foreign corporation in every state in which the
character of its business requires such qualification (except where the
failure to obtain such foreign qualification would not have a material
adverse effect on the Company's business) and has the power to own its
property and carry on its business as now conducted.
Section 8.2 Due Authorization. The execution and delivery by the
Company of this Agreement, the performance by the Company of the
transactions contemplated hereby and compliance by the Company with the
terms of this Agreement, (a) are within the Company's power and authority
and (b) have been duly authorized by all necessary action. This Agreement
has been duly executed and delivered by the Company and constitutes a valid
and binding agreement of the Company, enforceable in accordance with its
terms.
Section 8.3 Consents. Neither the execution and delivery of this
Agreement by the Company nor the performance by the Company of its
obligations hereunder requires any consent, authorization, approval, notice
to or other action by or in respect of, or filing with, any third party or
any governmental body or agency.
Section 8.4 No Conflicts. Neither the execution, delivery and
performance by the Company of this Agreement nor compliance by the Company
with the terms of this Agreement shall contravene, violate or conflict
with, or constitute a default or breach under, any provision of any law,
statute, rule or regulation to which the Company or any of its properties
is subject, or under any governing documents, charter or bylaw or any
agreement, judgment, injunction, order, decree or other instrument binding
on the Company.
Section 8.5 Intellectual Property Rights. The Company owns, or has
the right to use under valid and enforceable agreements, the Company Marks
and all other intellectual property necessary to conduct the Company's
business, and, except as set forth on Schedule D hereto, the Company is not
currently aware of any material claims, and is not currently involved in
any material litigation, challenging the Company's ownership of, or
claiming infringement with respect to, the Company Marks or any other
intellectual property necessary to conduct the Company's business.
Section 8.6 Litigation. Except as set forth on Schedule D hereto, the
Company is not aware of any claims, and is not currently involved in any
litigation, challenging the Company's access to the WorldWide Web or the
Internet.
ARTICLE IX
FUSA REPRESENTATIONS AND WARRANTIES
FUSA represents and warrants to the Company as of the date of this
Agreement as follows:
Section 9.1 Organization and Qualification. FUSA is a national
banking association duly organized, validly existing and in good standing
under the laws of the jurisdiction in which it is organized, is duly
qualified and in good standing as a foreign corporation in every state in
which the character of its business requires such qualification (except
where the failure to obtain such qualification would not have a material
adverse effect on FUSA's business) and has the power to own its property
and carry on its business as now conducted.
Section 9.2.Due Authorization. The execution, delivery and
performance by FUSA of this Agreement and compliance by FUSA with the terms
of this Agreement (a) are within FUSA's corporate power and authority and
(b) have been duly authorized by all necessary corporate action. This
Agreement has been duly executed and delivered by FUSA and constitutes a
valid and binding agreement of FUSA, enforceable in accordance with its
terms.
Section 9.3 Consents. Neither the execution and delivery of this
Agreement by FUSA nor the performance by FUSA of its obligations hereunder
require any consent, authorization, approval, notice to or other action by
or in respect of, or filing with, any third party or governmental body or
agency (other than informational filings required by MasterCard or Visa).
Section 9.4 No Conflicts. Neither the execution and delivery of this
Agreement by FUSA nor the performance by FUSA of its obligations hereunder
shall contravene, violate or conflict with, or constitute a default or
breach under, any provision of any law, statute, rule or regulation to
which FUSA or any of its properties is subject or of the charter or by-laws
of FUSA or of any agreement, judgment, injunction, order, decree or other
instrument binding upon FUSA.
Section 9.5 Intellectual Property Rights. FUSA owns, or has the right
to use under valid and enforceable agreements, the FUSA Marks and all other
intellectual property necessary to conduct FUSA's business, and FUSA is not
currently aware of any material claims, and is not currently involved in
any material litigation, challenging FUSA's ownership of, or claiming
infringement with respect to, the FUSA Marks or any other intellectual
property necessary to conduct FUSA's business.
ARTICLE X
TERM AND TERMINATION
Section 10.1 Term. The term of this Agreement shall commence as of the
date of this Agreement and shall continue, subject to the provisions of
this Article X, for five years therefrom (the "Initial Term"). Promptly
upon the execution of this Agreement, the Parties shall work together and
shall use their commercially reasonable efforts to enable the Effective
Date to commence immediately upon the termination of the Company's
promotion with Capital One Bank, which promotion the Company acknowledges
is the only preferred status arrangement that the Company has with any
Other Credit Card issuer as of the date of this Agreement. Subject to the
provisions of this Article X, upon the expiration of the Initial Term, this
Agreement shall be automatically renewed for successive renewal terms of
two years each (the "Renewal Terms"), unless, at least 180 days prior to
the expiration of the Initial Term or the then current Renewal Term, either
Party shall have notified the other in writing of its decision not to renew
this Agreement.
Section 10.2 Termination for Breach. If there is a material breach by
either Party of this Agreement, and such breach shall continue uncured for
a period of 30 days after receipt by the breaching Party of written notice
thereof from the non-breaching Party (setting forth in detail the nature of
such breach), then this Agreement shall terminate at the option of the non-
breaching Party as of the 31st day following the receipt of such written
notice. If, however, the breach cannot be remedied within such 30-day
period, such time period shall be extended for an additional period of not
more than 30 days, so long as the breaching Party has notified the non-
breaching Party in writing and in detail of its plans to initiate
substantive steps to cure the breach and diligently thereafter pursues the
same to completion within such additional 30-day period. Notwithstanding
the foregoing, in the event any representation or warranty set forth in
this Agreement is breached, the non-breaching Party shall have the right to
terminate this Agreement immediately upon written notice to the breaching
Party.
Section 10.3 Termination for Bankruptcy. This Agreement shall be
deemed immediately terminated, without the requirement of further action or
notice by either Party, in the event that either Party, or a direct or
indirect holding company of either Party, shall become subject to voluntary
or involuntary bankruptcy, insolvency, receivership, conservatorship or
similar proceedings (including, without limitation, the takeover of such
Party by the applicable regulatory agency) pursuant to applicable state or
Federal law.
Section 10.4 Change in Law. In the event that any change in any
federal, state or local law, statute, operating rule or regulation or any
change in any operating rule or regulation of either MasterCard or Visa,
makes the continued performance of this Agreement under the then current
terms and conditions commercially unreasonable, then FUSA shall have the
right to terminate this Agreement upon 90-days' prior written notice to the
Company. Such written notice shall include a detailed explanation and
evidence of the burden imposed as a result of such change.
Section 10.5 Sale or Business Combination. (a)(i) In the event that
the Company enters into any merger, acquisition, transfer of control or
sale of substantially all of its assets to, or any similar transaction
with, any competitor of FUSA or any entity that owns a competitor of FUSA,
then FUSA shall have the right to terminate this Agreement immediately upon
written notice to the Company. (ii) In the event that the Company enters
into any merger, acquisition, transfer of control or sale of substantially
all of its assets to, or any similar transaction with, any entity that, due
to its products, services or reputation, creates a demonstrable and
material conflict of interest for FUSA, then FUSA shall have the right to
terminate this Agreement upon 90-days' prior written notice to the Company.
(b)(i) In the event that FUSA enters into any merger, acquisition,
transfer of control or sale of substantially all of its assets to, or any
similar transaction with, any competitor of the Company or any entity that
owns a competitor of the Company, then the Company shall have the right to
terminate this Agreement immediately upon written notice to FUSA. (ii) In
the event that FUSA enters into any merger, acquisition, transfer of
control or sale of substantially all of its assets to, or any similar
transaction with, any entity that, due to its products, services or
reputation, creates a demonstrable and material conflict of interest for
the Company, then the Company shall have the right to terminate this
Agreement upon 90-days' prior written notice to FUSA.
Section 10.6 Failure to Renegotiate Fees. In the event that the
Parties are unable to renegotiate in good faith the Fees to be paid by FUSA
to the Company, as provided for in Section 5.6, and Paragraph 2 of Schedule
B, within the time period specified in such Section or Paragraph, FUSA
shall have the right, in FUSA's sole discretion, after the expiration of
such time period, to terminate this Agreement upon 60-days' prior written
notice to the Company. During any Fee renegotiation provided for in this
Agreement, the Fees to be paid the Company shall remain unchanged until the
earlier to occur of (a) the Parties' agreement to adjust any of such Fees
and (b) the date of the termination of this Agreement.
Section 10.7 Procedures Upon Termination. Upon the expiration or
earlier termination of this Agreement for any reason whatsoever, (a) the
Company and FUSA shall work together to ensure an orderly termination of
the Program; (b) the Company and FUSA shall each promptly return to the
other all materials, if any, that have been supplied by each to the other;
and (c) all Accounts that have been opened pursuant to the terms hereof,
together with all Accounts for which applications have been received but
not yet processed by FUSA as of the effective date of such expiration or
termination, shall remain the sole and exclusive property of FUSA. Except
for those provisions which by their terms shall survive the expiration or
termination of this Agreement, all obligations of FUSA to the Company shall
cease after the effective date of such expiration or termination.
ARTICLE XI
INDEMNIFICATION
Section 11.1 Company Indemnification. The Company shall indemnify,
defend and hold FUSA and its affiliates, and their successors and assigns,
harmless from and against all claims (including, without limitation,
third-party claims), actions, suits or other proceedings, and any and all
losses, judgments, damages, expenses or other costs (including, without
limitation, reasonable attorneys' fees and disbursements), arising from or
in any way relating to (a) any actual or alleged breach or inaccuracy of
any representation or warranty of the Company contained in this Agreement,
(b) any actual or alleged infringement of any trademark, copyright, trade
name or other proprietary ownership interest resulting from the use by FUSA
of the Company Marks as contemplated by this Agreement, (c) any third-party
action, suit or other proceeding to which FUSA is made a party alleging
infringement by the Company of any proprietary ownership right in
connection with the Company's business (other than as provided for in
Section 11.2(b)), (d) any matter set forth on Schedule D hereto and (e) any
negligent or grossly negligent act or omission or willful misconduct of the
Company or its directors, officers, employees, agents or assigns in
connection with the entry into or performance of this Agreement.
Section 11.2 FUSA Indemnification. FUSA shall indemnify, defend and
hold the Company, its affiliates and their successors and assigns, harmless
from and against all claims (including, without limitation, third-party
claims), actions, suits or other proceedings, and any and all losses,
judgments, damages, expenses or other costs (including reasonable
attorneys' fees and disbursements), arising from or in any way relating to
(a) any actual or alleged breach or inaccuracy of any representation or
warranty of FUSA contained in this Agreement, (b) any actual or alleged
infringement of any trademark, copyright, trade name or other proprietary
ownership interest resulting from the use by the Company of the FUSA Marks
as contemplated by this Agreement, (c) any act or omission of FUSA in
connection with the issuance of Credit Card(s) or the administration of
Accounts which constitutes a violation of state or Federal banking or
consumer credit laws or regulations, (d) any third-party action, suit or
other proceeding to which the Company is made a party alleging infringement
by FUSA of any proprietary ownership right in connection with the FUSA's
business (other than as provided for in Section 11.1(b)) and (e) any
negligent or grossly negligent act or omission or willful misconduct of
FUSA or its directors, officers, employees, agents or assigns in connection
with the entry into or performance of this Agreement.
Section 11.3 Indemnification Procedures. If a Party (the "Indemnified
Party") seeks indemnification under this Article XI, (a) the Indemnified
Party shall notify in writing the indemnifying party (the "Indemnifying
Party") within 30 days after learning of the occurrence of any event that
is asserted to be an indemnifiable event pursuant to this Agreement (a
"Claim Notice"). If such event involves the claim of any third party and
the Indemnifying Party confirms in writing its responsibility for such
liability, if established, the Indemnifying Party shall be entitled to
participate in and, to the extent it desires, assume control over (in which
case the Indemnifying Party shall assume all expense with respect to) the
defense, settlement, adjustment or compromise of such claim.
(b) The Indemnified Party shall have the right to employ separate
counsel in any action or claim and to participate in the defense thereof at
the expense of the Indemnifying Party (i) if the retention of such counsel
has been specifically authorized by the Indemnifying Party or (ii) if such
counsel is retained because the Indemnifying Party does not notify the
Indemnified Party within 20 days after receipt of a Claim Notice that it
elects to undertake the defense thereof. The Indemnified Party shall have
the right to employ counsel at the Indemnified Party's own expense and to
participate in such action or claim, including settlement or trial, so long
as such participation does not substantially interfere with the
Indemnifying Party's defense of such claim or action.
(c) The Indemnifying Party shall obtain the prior written approval of
the Indemnified Party before entering into any settlement, adjustment or
compromise of such claim or ceasing to defend against such claim, if,
pursuant to or as a result of such settlement, adjustment, compromise or
cessation, (i) injunctive or other relief would be imposed against the
Indemnified Party or (ii) such settlement, adjustment, compromise or
cessation does not include a complete and unconditional release of the
Indemnified Party with respect to such claim.
(d) If the Indemnifying Party does not assume control over the
defense of such claim as provided in Section 11.3(a), the Indemnified Party
shall have the right to defend the claim in such manner as it may deem
appropriate, at the cost and expense of the Indemnifying Party, and with
the consent of the Indemnifying Party, to settle, adjust or compromise such
claim. The Indemnified Party may settle, adjust or compromise any such
claim without the consent of the Indemnifying Party if the Indemnified
Party waives indemnification for such claim.
(e) The Indemnifying Party shall remit payment for the amount of a
valid and substantiated claim for indemnification hereunder promptly upon
receipt of written notice therefor from the Indemnified Party. Upon the
payment in full of any claim hereunder, the Indemnifying Party shall be
subrogated to the rights of the Indemnified Party against any person with
respect to the subject matter of such claim.
(f) In the event that the Indemnifying Party reimburses the
Indemnified Party for any third-party claim, the Indemnified Party shall
remit to the Indemnifying Party any reimbursement that the Indemnified
Party subsequently receives for such third-party claim.
ARTICLE XII
CONFIDENTIALITY
Section 12.1 Protection. (a) The Parties acknowledge and agree
that the terms of this Agreement and all information provided or disclosed
to or in connection with either Party's performance under this Agreement or
to which a Party gains access in connection with this Agreement shall be
deemed confidential and proprietary information ("Confidential
Information") and shall not be disclosed by a Party receiving any such
Confidential Information (the "Receiving Party") to any third party without
the prior written consent of the Party providing or disclosing the
Confidential Information (the "Disclosing Party"). Confidential Information
shall include, without limitation: (i) names, addresses and demographic,
behavioral and credit information relating to FUSA cardmembers or potential
FUSA cardmembers; (ii) cardmember communication materials and issuance
strategies or methods; (iii) business objectives, assets and properties;
and (iv) programming techniques and technical, developmental, cost and
processing information.
(b) For the term of this Agreement and for a period of two years
thereafter, the Receiving Party shall: (i) receive all Confidential
Information in confidence; (ii) use reasonable efforts to maintain the
confidentiality of such Confidential Information and not disclose such
Confidential Information to any third party (except for the Receiving
Party's employees, representatives, authorized agents and contractors or
subcontractors who have a need to know, are under a duty of non-disclosure
and are acting for the sole benefit of the Receiving Party), which efforts
shall accord such Confidential Information at least the same level of
protection against unauthorized use and disclosure that the receiving party
customarily accords its own information of a similar nature; (iii) use or
permit the use of such Confidential Information solely in accordance with
the terms of this Agreement; and (iv) promptly notify the Disclosing Party
in writing of any loss or unauthorized use, disclosure of or access to the
Disclosing Party's Confidential Information of which the Receiving Party
becomes aware and take all steps reasonably requested by the Disclosing
Party to limit, stop or otherwise remedy such misappropriation, disclosure
or unauthorized use. Each party shall abide by and reproduce and include
any restrictive legends or confidential rights notices (although such
restrictive legends or confidential rights notices are not required for
Confidential Information to be afforded the protection provided for under
this Section) that appear in or on any Confidential Information of the
other Party which it is authorized to reproduce. Neither party shall
remove, alter, cover or distort any confidential rights notices, legends,
symbols or labels appearing in any Confidential Information of the other
Party. For purposes of this Agreement, a "need to know" means that the
employee, representative, authorized agent, contractor or subcontractor
requires the Confidential Information to perform his or her
responsibilities in connection with the Program.
Section 12.2 Exclusions. The restrictions on disclosure set forth in
this Article XII shall not apply when, and to the extent that, the
Confidential Information: (a) is or becomes generally available to the
public through no fault of the Receiving Party (or any person or entity
acting on its behalf); (b) was previously rightfully known to the Receiving
Party free of any obligation to keep it confidential; (c) is subsequently
disclosed to the Receiving Party by a third party who may rightfully
transfer and disclose such information without restriction and free of any
obligation to keep it confidential; (d) is independently developed by the
Receiving Party or a third party without reference to the Disclosing
Party's Confidential Information; or (e) is required to be disclosed by the
Receiving Party as a matter of law or by valid court or governmental agency
order or request; provided that the Receiving Party shall use all
reasonable efforts to provide the Disclosing Party with at least 10-days'
prior written notice of such disclosure and the Receiving Party shall only
disclose that portion of the Confidential Information that is legally
required to be furnished pursuant to the opinion of legal counsel of the
Receiving Party, it being understood and acknowledged by FUSA that the
Company has disclosed, and shall continue to be permitted to disclose, the
existence of this Agreement in its filings with the Securities and Exchange
Commission (and will file this Agreement as an exhibit to such filings),
without requiring the Company to provide an opinion of legal counsel with
respect to any disclosures made pursuant to such filings.
Section 12.3 Equitable Relief. Each Party agrees that any unauthorized
use or disclosure of Confidential Information may cause immediate and
irreparable harm to the Disclosing Party for which money damages may not
constitute an adequate remedy. In that event, each Party agrees that
injunctive relief may be warranted in addition to any other remedies the
Disclosing Party may have.
Section 12.4 Disposition of Confidential Information. Upon either
Party's demand, or upon the termination or expiration of this Agreement,
the Parties shall comply with each other's reasonable instructions
regarding the disposition of Confidential Information, which instructions
may include the prompt return or destruction of any and all Confidential
Information, without the retention of any copies or reproductions thereto.
Upon the request of either Party, such compliance shall be certified in
writing to the other Party, including a statement that no copies of
Confidential Information have been kept.
Section 12.5 Use of Name. Except as necessary for its performance
under this Agreement or as required by law, neither party shall use the
name of the other party, its affiliates or subsidiaries in connection with
any representation, publication or advertisement, or make any public
statement relating to the other party, its affiliates or subsidiaries,
without the prior full disclosure of same to the other party and the prior
written consent of the other party.
Section 12.6 Survival of Obligations. The obligations set forth in
this Article XI shall survive the termination of this Agreement for a
period of two years.
ARTICLE XIII
DISPUTE RESOLUTION
Any dispute, controversy, claim or disagreement between the Parties
arising from, relating to or in connection with this Agreement, any
agreement, certificate or other document referred to herein or delivered in
connection herewith or the relationships of the parties hereunder or
thereunder, including questions regarding the interpretation, meaning or
performance of this Agreement, and including claims based on contract,
tort, common law, equity, statute, regulation, order or otherwise (a
"Dispute") shall be resolved in accordance with Schedule C.
ARTICLE XIV
MISCELLANEOUS
Section 14.1 Rights of First Offer and First Refusal. Except as
otherwise expressly provided herein, during the Initial Term and any
Renewal Term of this Agreement, FUSA shall have the right of first offer
and the right of first refusal with respect to the performance and
provision of the credit card services contemplated by this Agreement,
including, without limitation, the right of first offer and the right of
first refusal with respect to the offering, review and processing of all
Credit Card applications generated by the Company through any marketing
program, including, without limitation, through any Company Phone Services.
Section 14.2 Records. (a) During the Initial Term and any Renewal Term
of this Agreement, FUSA shall maintain accurate records with respect to all
Accounts established pursuant to this Agreement and copies of all documents
and other material related to FUSA's obligations to the Company under this
Agreement. Within 10 days of the Company's written request to FUSA, the
Company, by its duly authorized agents and representatives, shall have the
right to inspect such records, documents and material from time to time
during ordinary business hours and to make copies of such records,
documents and other materials, subject to (i) such security procedures as
FUSA may reasonably impose and (ii) such limitations as may be required
under applicable rules, regulations or statutes governing the conduct of
FUSA's business; provided, however, that FUSA shall have no obligation to
disclose to the Company, and the Company shall not have any right to
inspect or copy, or any other right of access to, any FUSA Customer
Financial Information or any records, documents or other material subject
to FUSA's corporate privacy policy, except with respect to any disclosure
required by any regulatory agency with jurisdiction over the Company.
(b) During the Initial Term and any Renewal Term of this Agreement,
the Company shall keep full and accurate books of account and copies of all
documents and other material related to the Company's obligations to FUSA
under this Agreement at the Company's principal office. Within 10 days of
FUSA's written request to the Company, FUSA, by its duly authorized agents
and representatives, shall have the right to audit such books, documents
and other material from time to time and shall have access thereto during
ordinary business hours, and shall be at liberty to make copies of such
books, documents and other material, subject to (i) such security
procedures as the Company may reasonably impose and (ii) such limitations
as may be required under applicable rules, regulations or statutes
governing the conduct of the Company's business; provided, however, that
the Company shall have no obligation to disclose to FUSA, and FUSA shall
not have the right to audit, or any other right of access thereto any
information, records, documents or other material subject to the Company's
corporate privacy policy, except with respect to any disclosure required by
any regulatory agency with jurisdiction over FUSA.
Section 14.3 Non-Competition. Except as otherwise expressly provided
in this Agreement, with respect to all Accounts established pursuant to
this Agreement, the Company agrees that neither the Company nor any entity
that the Company controls shall by itself or in conjunction with others,
directly or indirectly, during the Initial Term or any Renewal Term of this
Agreement, and for a period of one year following the expiration or earlier
termination of this Agreement, for any reason specifically target any offer
of a credit or charge card or credit or charge card related product to any
cardmember possessing an Account, which offer the Company does not also
simultaneously make to all Company Customers.
Section 14.4 Personnel. Each Party shall provide appropriately trained
and experienced dedicated personnel to support the success of the Program
and perform its obligations under this Agreement in a commercially
reasonable manner, and FUSA further shall provide personnel support, the
nature and level of which shall be at FUSA's sole discretion. Nothing in
this Agreement shall be construed to create an employment relationship
between either of the Parties and employees of the other Party, and each
Party shall comply with all laws, statutes, rules, regulations,
administrative orders and applicable judicial decisions relating to
insurance, hours at labor, wages, working conditions and other
employer-employee related subjects.
Section 14.5 Notices. Unless otherwise specifically provided in this
Agreement, every notice or other communications required or permitted under
this Agreement shall be valid only if in writing and shall be delivered
either by personal delivery; by facsimile, telegram, mailgram or telecopy;
by nationally recognized overnight courier service; or by certified or
registered mail, return receipt requested, addressed as follows:
If to FUSA, to:
FIRST USA BANK, N.A.
Three Christina Centre
201 North Walnut Street
Wilmington, DE 19801
Attention: Kurt Campisano
Senior Vice President
Fax. No. (302) 282-2014
with a copy to:
General Counsel
Fax No. (302) 884-8361
If to the Company, to:
PRICELINE.COM INCORPORATED
Five High Ridge Park
Stamford, CT 06905
Attention: Jim Accomando
Senior Vice President
Fax No. (203) 595-0160
with a copy to:
General Counsel
Fax No. (203) 595-8345
or to such other person or address as either Party shall have previously
designated to the other by written notice given in the manner set forth
above. With respect to any notice that requires a response in 10 or fewer
business days, such notice shall be sent by hand delivery, facsimile,
overnight courier or telecopy only. Notices shall be deemed given (a) one
day after sent if sent by facsimile, telegram, mailgram, telecopy or by
overnight courier; (b) upon printed confirmation of delivery to the correct
facsimile number if sent by facsimile; (c) when delivered and receipted for
if hand delivered; or (d) when receipted for (or upon the date of attempted
delivery when delivery is refused) if sent by certified or registered mail,
return receipt requested.
Section 14.6 Entire Agreement; Amendment. This Agreement, including the
Exhibits and Schedules hereto, constitutes the entire understanding between
the Parties with respect to the subject matter hereof and supersedes all
prior written and oral proposals, understandings, agreements and
representations, all of which are merged herein. No amendment to or
modification of this Agreement shall be effective unless in writing and
executed by both Parties.
Section 14.7 Non-Waiver of Default. The failure of either Party to
insist, in any one or more instances, on the performance of any term or
condition of this Agreement shall not be construed as a waiver or
relinquishment of any rights granted hereunder or of the future performance
of any such term or condition, and the obligations of the non-performing
Party with respect thereto shall continue in full force and effect.
Section 14.8 Relationship. Nothing in this Agreement is intended to or
shall be construed to constitute or establish an agency, joint venture,
partnership or fiduciary relationship between the Parties, and neither
Party shall have the right or authority to act for or on behalf of the
other Party.
Section 14.9 Severability. In the event that any term, provision or
restriction of this Agreement, or any Exhibit or Schedule hereto, shall,
for any reason, be deemed to be invalid, void or unenforceable, the
remaining provisions, terms and restrictions of this Agreement and such
Exhibits and Schedules shall remain in full force and effect and shall in
no way be affected, impaired or invalidated.
Section 14.1 Governing Law. This Agreement shall be governed by,
interpreted under and construed and enforced in accordance with, the laws
of the State of Delaware, without giving effect to any conflicts of law
principles thereof.
Section 14.1 Assignment. Neither Party may assign this Agreement
without the prior written consent of the other Party; provided, however,
that either Party may assign this Agreement, and all of its rights and
obligations hereunder, to a parent, subsidiary or affiliate of such Party
without the prior written consent of the other Party.
Section 14.1 Further Assurances. Each Party agrees to take, or cause
to be taken, all such further or other actions as may be reasonably
necessary to make effective, consummate or perform the undertakings and
obligations contemplated by this Agreement.
Section 14.1 Headings. The headings used in this Agreement are for
convenience only and are not be construed to have any legal significance.
Section 14.1 Public Statements. Except as may be required by law,
regulation or any governmental authority or as otherwise expressly
permitted pursuant to Section 12.2, neither the Company nor any of its
affiliates or their representatives shall issue a press release or make any
public statement, announcement or disclosure to any third party regarding
the existence of this Agreement, the terms hereof or the transactions
contemplated hereby without the prior written consent of FUSA.
[Execution page follows]
IN WITNESS WHEREOF, the Parties have duly executed this Agreement as
of the day and year first above written.
PRICELINE.COM INCORPORATED
By: /s/ Jay S. Walker
--------------------------------
Name: Jay S. Walker
Title: Vice Chairman
FIRST USA BANK, N.A.
By: /s/ Kurt M. Campisano
-------------------------------
Name: Kurt M. C ampisano
Title: Senior Vice President
SCHEDULE A
DEFINITIONS
"AAA" shall mean the American Arbitration Association.
"AAA Rules" shall have the meaning set forth in Paragraph 4(b) of
Schedule C.
"Account Origination Fee" shall have the meaning set forth in
Paragraph 1 of Schedule B.
"Account Reactivation Fee" shall have the meaning set forth in
Paragraph 10 of Schedule B.
"Accounts" shall have the meaning set forth in Section 6.1.
"Acquisition Balance Transfer Commission" shall have the meaning
set forth in Paragraph 7 of Schedule B.
"Acquisition Bonus Payment" shall have the meaning set forth in
Paragraph 4 of Schedule B.
"Agreement" shall mean this Interactive Marketing Agreement, dated as
of the day and year first above written, by and between the Company and
FUSA, as the same may be amended from time to time.
"Application Volume" shall have the meaning set forth in
Paragraph 3 of Schedule B.
"Arbitrators" shall have the meaning set forth in Paragraph 4(c)
of Schedule C.
"Balance Transferring Account" shall have the meaning set forth
in Paragraph 4 of Schedule B.
"Basic Qualifications" shall have the meaning set forth in
Paragraph 4(c) of Schedule C.
"Claim Notice" shall have the meaning set forth in Section 11.3.
"Company" shall mean priceline.com Incorporated, a Delaware
corporation.
"Company Customers" shall have the meaning set forth in the
Recitals.
"Company Direct Promotions" shall have the meaning set forth in
Section 3.1.
"Company Marks" shall have the meaning set forth in Section 3.4.
"Company Phone Services" shall have the meaning set forth in the
Recitals.
"Company Services" shall have the meaning set forth in the Recitals.
"Company Site(s)" shall have the meaning set forth in the Recitals.
"Company-Sourced Account" shall have the meaning set forth in
Paragraph 1 of Schedule B.
"Company-Sourced Account Portfolio" shall have the meaning set forth
in Paragraph 2 of Schedule B.
"Competitive Opportunities" shall have the meaning set forth in
Section 5.6.
"Confidential Information" shall have the meaning set forth in
Section 12.1.
"CPA" shall mean the "cost per account", which, for the Company, is
measured by dividing the total cost of acquiring a given tranche of
Company-Sourced Accounts by the total number of Company Sourced Accounts in
such tranche.
"Credit Card(s)" shall have the meaning set forth in the Recitals.
"Customer Data" shall have the meaning set forth in Section 6.2.
"Disclosing Party" shall have the meaning set forth in Section 12.1.
"Dispute" shall have the meaning set forth in Article XIII.
"Effective Date" shall mean the date upon which a FUSA Credit Card is
first offered by the Company to any Company Customer, which offer shall be
made by the Company as soon as reasonably practicable following the
execution of this Agreement.
"Fees" shall have the meaning set forth in Section 5.1.
"FUSA" shall mean First USA Bank, N.A., a national banking association.
"FUSA Customer Financial Information" shall mean information
submitted by a Company Customer or any other customer (each a "Customer")
which FUSA has acquired from a third party (other than the Company)
reflecting FUSA's or any of its affiliates transactions with a customer or
which is otherwise generated or developed by FUSA, to the extent that such
information relates to (a) such Customer's application for a FUSA Credit
Card, (b) credit bureau data and other information or analysis used to
determine whether such Customer will be issued a FUSA Credit Card, (c) the
credit limit for any FUSA Credit Card issued to a Customer, (d) FUSA's
internal credit scoring with respect to such Customer usage history (other
than usage related to the Company's services), (e) such Customer's
transaction and payment history, (f) FUSA's internal profitability
analysis, (g) FUSA's pricing strategies, (h) FUSA's marketing and incentive
strategies, (i) customer service and customer dispute information, (j) any
other aspects of FUSA's credit card business or any other services provided
by FUSA or any affiliate (whether under this Agreement or otherwise) and
(k) any other similar information with respect to Customers or FUSA's
Credit Card business, including, without limitation, any information
derived or generated from, or related to, any such Customer or FUSA
information.
"FUSA Marks" shall have the meaning set forth in Section 4.3.
"FUSA Wallet" shall mean an electronic wallet to be branded by FUSA
or its wallet partners, as FUSA may determine from time to time.
"Incident Rate" shall have the meaning set forth in Paragraph 4 of
Schedule B.
"Indemnified Party" shall have the meaning set forth in Section 11.3.
"Indemnifying Party" shall have the meaning set forth in Section 11.3.
"Initial Term" shall have the meaning set forth in Section 10.1.
"Level 1 Dispute Review" shall have the meaning set forth in
Paragraph 1 of Schedule C.
"Level 1 Dispute Termination Date" shave have the meaning set
forth in Paragraph 2 of Schedule C.
"Level 2 Dispute Review" shall have the meaning set forth in
Paragraph 2 of Schedule C.
"Level 2 Dispute Termination Date" shall have the meaning set forth
in Paragraph 3 of Schedule C.
"Messages/Inserts" shall have the meaning set forth in Section
4.4.
"Minimum Fee" shall have the meaning set forth in Paragraph 3 of
Schedule B.
"New Product(s)" shall have the meaning set forth in Section 7.3.
"Nominal Account" shall have the meaning set forth in Paragraph 2 of
Schedule B.
"NPV" shall mean the Present Value of the Pro Forma Vintage Profit
and Loss Statement, less the CPA, using FUSA's prevailing discount rate
across FUSA's business.
"NPV/CPA Ratio" shall mean the ratio obtained by dividing the NPV of
a given tranche of Company-Sourced Accounts by the CPA of the same tranche
of Company-Sourced Accounts.
"Other Credit Cards" shall have the meaning set forth in Section
6.1.
"Panel" shall have the meaning set forth in Paragraph 4(c) of
Schedule C.
"Party" shall mean each of FUSA and the Company and, taken together,
the "Parties".
"Portfolio Balance Transfer Commission" shall have the meaning
set forth in Paragraph 8 of Schedule B.
"Present Value" shall mean the calculation of the present value of
the Pro Forma Vintage Profit and Loss Statement, using FUSA's prevailing
discount rate across FUSA's business.
"Pro Forma Vintage Profit and Loss Statement" shall mean the pro
forma profit and loss statement of the Program with respect to a given
tranche of similar-aged Accounts, as such statement is calculated and
prepared by FUSA.
"Program" shall have the meaning set forth in Article II.
"Rate of Return Shortfall Remedial Period" shall have the meaning set
forth in Paragraph 2 of Schedule B.
"Reactivated Account" shall have the meaning set forth in
Paragraph 10 of Schedule B.
"Receiving Party" shall have the meaning set forth in Section 12.1.
"Renewal Terms" shall have the meaning set forth in Section 10.1.
"ROO" shall have the meaning set forth in shall Section 5.6.
"Usage Fee" shall have the meaning set forth in Paragraph 6 of
Schedule B.
"Value-Added Payment" shall have the meaning set forth in Paragraph
5 of Schedule B.
SCHEDULE B
FEES
During the Initial Term and any Renewal Term of this
Agreement, FUSA agrees to pay to the Company the following Fees, in
accordance with the terms of the Agreement and this Schedule B:
1. Account Origination Fees. Subject to Paragraphs 2 and 3 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 marketing programs conducted through the
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"). Such payments shall be made in accordance with the provisions of
Section 5.3.
2. Nominal Accounts. In the event that FUSA, from time to time at
any time after the Effective Date, makes a good faith determination that
Account Origination Fees payable to the Company with respect to any
Company-Sourced Account (a) (i) initially statemented with a balance of
less than $[**] or (ii) for which the Company Customer has paid in full the
amount due on the initial statement and (b) that is not used again for a
period of three months immediately following the cutoff date of the initial
statement for such Company-Sourced Account (each such account described in
subsection (a)(i) or (ii) and (b) hereof, a "Nominal Account"), are
adversely affecting the profitability to FUSA of the portfolio of
Company-Sourced Accounts (the "Company-Sourced Account Portfolio") such
that the ROO, as measured by FUSA, falls below 3% or the NPV/CPA Ratio, as
measured by FUSA, falls below the NPV/CPA Ratio of Competitive
Opportunities, FUSA shall so notify the Company in writing. The Company
shall have 30 days (the "Rate of Return Shortfall Remedial Period") from
receipt of such notice to implement remedial program(s) in order to reduce
the number of Nominal Accounts and to increase the ROO and the NPV/CPA
Ratio. If, (i) after expiration of 60 days from the implementation of any
such remedial program or (ii) after expiration of the Rate of Return
Shortfall Remedial Period in the event that no such remedial program is
implemented, the ROO has not increased to 3% or the NPV/CPA Ratio is not
greater than or equal to the NPV/CPA Ratio of Competitive Opportunities,
the Parties shall in good faith, and within 30 days thereafter, negotiate a
reasonable modification to the Account Origination Fee or other
modification to the Fees going forward such that the ROO and the NPV/CPA
Ratio are at acceptable levels. If such Fee modification(s) is not mutually
agreed to within such 30-day period, FUSA shall have the right, in FUSA's
sole discretion, to terminate this Agreement in accordance with Section
10.6.
3. Application Volume. (a) In the event that the Company generates
at least [**] completed and valid Account applications, net of
duplications, for no-fee, unsecured Credit Cards per calendar quarter for
review by FUSA (the "Application Volume") but FUSA does not approve at
least 50% of such applications, the total amount owed to the Company in
Account Origination Fees under Paragraph 1 of this Schedule B for such
calendar quarter shall be calculated to equal the amount that would have
been payable to the Company if 50% of such applications had been approved
by FUSA and had resulted in Company-Sourced Account (the "Minimum Fee"). In
the event of such occurrence, FUSA agrees to use commercially reasonable
efforts subsequently to increase its credit approval rates, including,
without limitation, through more detailed review and scoring of Account
applications.
- -------------
[**] = Confidential treatment requested for redacted portion.
(b) If the Company does not achieve the Application Volume for any
calendar quarter, the Company shall not be entitled to the Minimum Fee
provided for in Paragraph 3(a) of this Schedule B for the subsequent
calendar quarter. If the Company fails to achieve the Application Volume
for two or more consecutive calendar quarters or if the ROO falls below 3%,
FUSA shall have the right to eliminate the 50% application approval
threshold and related Minimum Fee provision set forth in Paragraph 3(a) of
this Schedule B for all quarterly periods thereafter; provided, however,
that FUSA's exercise of such right shall simultaneously relieve the Company
of its preference and first refusal obligations to FUSA set forth in this
Agreement.
(c) Notwithstanding the foregoing, FUSA shall be solely responsible
for all approval and other credit decisions relating to the applications
sourced by the Company, and nothing set forth herein shall be deemed to
require FUSA to make any approval or credit decision that is not consistent
with FUSA's normal credit approval standards and safe and sound banking
practices.
4. Acquisition Bonus Payment. In addition to any other payment to
which the Company is entitled under this Agreement, FUSA shall pay to the
Company a $[**] bonus (the "Acquisition Bonus Payment") for every
Company-Sourced Account as to which the Account obligor has transferred,
from any source, an outstanding balance for payment due (a "Balance
Transferring Account"); provided, however, that (a) the Company shall not
be entitled to any such Acquisition Bonus Payment unless and until the
percentage found by dividing (i) the total number of Balance Transferring
Accounts over the previous 12 consecutive billing cycles by (ii) the total
number of Company-Sourced Accounts over such previous 12 consecutive
billing cycles (the "Incident Rate"), is greater than or equal to 40% and
(b) the Acquisition Bonus Payment shall only be paid with respect to the
number of Balance Transferring Accounts that exceed such 40% Incident Rate.
5. Value-Added Payment. In addition to any other payment the Company
is entitled to under this Agreement, FUSA shall make to the Company a
payment of $[**] (a "Value-Added Payment") for every approved Account
application at the time such Account application is approved by FUSA. Such
Value-Added Payment shall be paid to the Company in lieu of the Usage Fee
otherwise payable (pursuant to Paragraph 6 of this Schedule B) for the
first 12 billing cycles after any such Company-Sourced Account is opened;
provided, however, that the Company shall be entitled to such Value-Added
Payment only with respect to the first five-million Accounts opened during
the term of this Agreement; and provided further that if, after Value-Added
Payments have been made by FUSA for the first one-million Accounts, FUSA
determines that such Value-Added Payments have resulted in a ROO of less
than 3% or an NPV/CPA Ratio that is below the NPV/CPA Ratio of Competitive
Opportunities, FUSA may pay to the Company, in lieu of such Value-Added
Payment, a Usage Fee (calculated in accordance with Paragraph 6 of this
Schedule B) with respect to the remaining four-million Accounts for which a
Value-Added Payment would have been earned but for this proviso.
- --------------
[**] = Confidential treatment requested for redacted portion.
6. Usage Fee. In addition to any other payment the Company is
entitled to under this Agreement, the Company shall be paid a fee (a "Usage
Fee") for every Company-Sourced Account equal to, (a) if the net retail
purchases for such period are equal to or less than $1,000 for such
Account, 0.50% of the net retail purchases made and statemented every 12
billing cycles on each Company-Sourced Account or, (b) if the net retail
purchases for such period on such Company-Sourced Account exceed $1,000, an
amount equal to the sum of (i) $[**] plus (ii) [**]% of the net retail
purchases made and statemented every 12 billing cycles for such
Company-Sourced Account, to the extent such net retail purchases exceed
$1,000 for such Account. FUSA shall pay Usage Fees to the Company quarterly
and shall pay such fees within 15 days of the end of each calendar quarter
with respect to such calendar quarter, in accordance with the terms of
Article V. Notwithstanding the foregoing, with respect to any Account for
which the Company receives a Value-Added Payment, FUSA shall not be
required to pay to the Company any Usage Fee for the first 12 billing
cycles after such Account is opened.
7. Acquisition Balance Transfer Commission. In addition to any other
payment the Company is entitled to receive under this Agreement, FUSA shall
pay to the Company a commission (an "Acquisition Balance Transfer
Commission") equal to the sum of (a)[**]% of all balance dollars
transferred to Balance Transferring Accounts at non-introductory rates, not
to exceed $[**] balance dollars transferred per Account per annum, and (b)
an amount equal to[**]% of the amount that is (i) the difference between
the actual Incident Rate (expressed as a percentage) and [**]% (which
number shall never be less than zero), multiplied by (ii) the total number
of balance dollars transferred; provided, however, that in calculating such
amount of balance dollars transferred, the maximum number of balance
dollars transferred to be counted for any Account shall not exceed $[**].
8. Portfolio Balance Transfer Commission. In addition to any other
payment the Company is entitled to receive under this Agreement, FUSA shall
pay the Company a commission (a "Portfolio Balance Transfer Commission")
equal to [**]% of all balance dollars transferred to any FUSA account
(whether or not such account was sourced by the Company) at
non-introductory rates, which balance transfer the Company has marketed and
sourced, it being understood and agreed to by the Parties that the Company
shall not be entitled to any Portfolio Balance Transfer Commission with
respect to any balance transfers sourced by FUSA to any account, including,
without limitation, any Company-Sourced Account; provided that such
Portfolio Balance Transfer Commission shall be paid only (a) if such
balance dollars transferred equal or exceed $[**] per account per annum and
(b) in no event with respect to more than $[**] balance dollars transferred
per account per annum; and provided further that no Portfolio Balance
Transfer Commission shall be paid with respect to any balance transfer for
which the Company receives an Acquisition Balance Transfer Commission.
- --------------- [**] = Confidential treatment requested for redacted portion.
9. Balance Retention Bonus. In addition to any other payment to
which the Company is entitled under this Agreement, with respect any
Company-Sourced Account that has remained open and available for charging
activity for 12 billing cycles from such Company-Sourced Account's initial
billing statement, FUSA shall pay to the Company a one-time "Balance
Retention Bonus" equal to [**]% of the amount by which the actual balance
remaining on such Account at the end of such 12-month period exceeds 80% of
the highest balance reached at any time on such account during such prior
12-month period.
10. Account Reactivation Fee. FUSA shall pay the Company an "Account
Reactivation Fee" for every FUSA account that the Company causes to be
reactivated if such reactivated account (a) had been dormant, i.e., had
generated no debit-based statement, during the six months immediately prior
to reactivation and (b) reaches billing activity of $1,000 or more, in the
aggregate, at any time during the first six billing cycles immediately
following reactivation (a "Reactivated Account"). The Account Reactivation
Fee shall be equal to (i) $[**] for every Reactivated Account that had been
dormant for 13 or more consecutive billing cycles immediately prior to
reactivation, (ii) $[**] for every Reactivated Account that had been
dormant for no fewer than nine and no more than 12 of the consecutive
billing cycles immediately prior to reactivation and (iii) $[**] for every
Reactivated Account that had been dormant for no fewer than six and no more
than eight consecutive billing cycles immediately prior to reactivation. To
the extent that any Reactivation Account also qualifies the Company to
receive a Portfolio Balance Transfer Commission pursuant to Paragraph 8 of
this Schedule B, the Company shall be entitled to receive the greater of
the Account Reactivation Fee and the Portfolio Balance Transfer Commission,
but not both.
- ------------- [**] = Confidential treatment requested for redacted portion.
SCHEDULE C
DISPUTE RESOLUTION
1. Level 1 Dispute Review. Upon the written request of either Party,
the Company and FUSA shall each appoint a designated representative whose
task shall be to meet the other Party's designated representative (by
conference telephone call or in person at a mutually agreeable site) in an
endeavor to resolve any Dispute ("Level 1 Dispute Review"). The designated
representatives shall meet as often as the parties reasonably deem
necessary to discuss the Dispute and negotiate in good faith in an effort
to resolve the Dispute without the necessity of any formal proceeding.
2. Level 2 Dispute Review. If resolution of the Dispute cannot be
resolved within the earlier of (a) 15 days from the first Level 1 Dispute
Review meeting and (b) such time as when either Party gives the other
written notice of an impasse ("Level 1 Dispute Termination Date"), a chief
executive officer (or a functional equivalent) of each of the Company and
FUSA shall meet (by conference telephone call or in person at a mutually
agreeable site) within 72 hours after the Level 1 Dispute Termination Date
for the purpose of resolving such unresolved Dispute ("Level 2 Dispute
Review").
3. Submission of Dispute to Mediation. If the Parties are unable to
resolve the Dispute within a reasonable period after commencement of the
Level 2 Dispute Review, the Parties shall give each other written notice of
the existence of a continuing impasse (the date on which both Parties are
in receipt of such notice, the "Level 2 Dispute Termination Date") and
shall thereafter immediately submit the Dispute to mediation in accordance
with the Commercial Mediation Rules of the AAA and shall bear equally the
costs of the mediation. The Parties will act in good faith to jointly
appoint a mutually acceptable mediator, seeking assistance in such regard
from the AAA within 15 days of the Level 2 Termination Date. The Parties
agree to participate in good faith in the mediation and negotiations
related thereto for a period of 30 days commencing with the selection of
the mediator and any extension of such period as mutually agreed to by the
Parties.
4. Arbitration. (a) If the Parties cannot agree to a mediator within
15 days of the Level 2 Dispute Termination Date or if the Dispute is not
resolved within 30 days after the beginning of the mediation and any
extension of such periods as mutually agreed to by the Parties, the Dispute
shall be submitted to, and finally determined by, binding arbitration in
accordance with the following provisions of this Schedule, regardless of
the amount in controversy or whether such Dispute would otherwise be
considered justiciable or ripe for resolution by a court or arbitration
panel.
(b) Any such arbitration shall be conducted by the AAA in
accordance with its current Commercial Arbitration Rules (the "AAA Rules"),
except to the extent that the AAA Rules conflict with the provisions of
this Schedule, in which event the provisions of this Schedule shall
control.
(c) The arbitration panel (the "Panel") shall consist of three
neutral arbitrators ("Arbitrators"), each of whom shall be an attorney
having five or more years experience in the primary area of law as to which
the Dispute relates, and shall be appointed in accordance with the AAA
Rules (the "Basic Qualifications").
(d) Should an Arbitrator refuse or be unable to proceed with
arbitration proceedings as called for by this Schedule, a substitute
Arbitrator possessing the Basic Qualifications shall be appointed by the
AAA. If an Arbitrator is replaced after the arbitration hearing has
commenced, then a rehearing shall take place in accordance with the
provisions of this Schedule and the AAA Rules.
(e) The arbitration shall be conducted in Wilmington, Delaware;
provided that the Panel may from time to time convene, carry on hearings,
inspect property or documents and take evidence at any location that the
Panel deems appropriate.
(f) The Panel may, in its discretion, order a pre-exchange of
information, including production of documents, exchange of summaries of
testimony or exchange of statements of position, and shall schedule
promptly all discovery and other procedural steps and otherwise assume case
management initiative and control to effect an efficient and expeditious
resolution of the Dispute.
(g) At any oral hearing of evidence in connection with any
arbitration conducted pursuant to this Schedule, each Party and its legal
counsel shall have the right to examine its witnesses and to cross-examine
the witnesses of the other party. No testimony of any witness shall be
presented in written form unless the opposing party shall have the
opportunity to cross-examine such witness, except as the parties otherwise
agree in writing and except under extraordinary circumstances where, in the
opinion of the Panel, the interests of justice require a different
procedure.
(h) Within 15 days after the closing of the arbitration
hearing, the Panel shall prepare and distribute to the parties a written
award, setting forth the Panel's findings of facts and conclusions of law
relating to the Dispute, including the reasons for the giving or denial of
any requested remedy or relief. The Panel shall have the authority to award
any remedy or relief that a court of competent jurisdiction could order or
grant and shall award interest on any monetary award from the date that the
loss or expense was incurred by the successful party. In addition, the
Panel shall have the authority to decide issues relating to the
interpretation, meaning or performance of this Agreement, any agreement,
certificate or other document referred to herein or delivered in connection
herewith or the relationships of the parties hereunder or thereunder, even
if such decision would constitute an advisory opinion in a court proceeding
or if the issues would otherwise not be ripe for resolution in a court
proceeding, and any such decision shall bind the parties in their
performance of this Agreement and such other documents.
(i) Except as necessary in court proceedings to enforce this
arbitration provision or an award rendered hereunder, or to obtain interim
relief, no party nor any arbitrator shall disclose the existence, content
or results of any arbitration conducted hereunder without the prior written
consent of the other parties.
(j) To the extent that the relief or remedy granted in an award
rendered by the Panel is relief or a remedy on which a court could enter
judgment, a judgment upon the award rendered by the Panel may be entered in
any court having jurisdiction thereof. Otherwise, the award shall be
binding upon the Parties in connection with their obligations under this
Agreement and in any subsequent arbitration or judicial proceedings between
the Parties.
(k) The Parties agree to share equally the cost of any
arbitration, including the administrative fee, the compensation of the
arbitrators and the costs of any neutral witnesses or proof produced at the
direct request of the Panel.
(l) Notwithstanding the choice of law provision set forth in
Section 14.10 of this Agreement, The Federal Arbitration Act, 9 U.S.C.
ss.ss.1 to 14, except as modified hereby, shall govern the enforcement of
Article XIII and this Schedule.
5. Recourse to Courts and Other Remedies. Notwithstanding the
Dispute resolution procedures contained in this Schedule, any Party may
apply to any court having jurisdiction (a) to enforce this Agreement to
arbitrate, (b) to seek provisional injunctive relief so as to maintain the
status quo until the arbitration award is rendered or the Dispute is
otherwise resolved, (c) to avoid the expiration of any applicable
limitation period, (d) to preserve a superior position with respect to
other creditors or (e) to challenge or vacate any final judgment, award or
decision of the Panel that does not comport with the express provisions of
this Schedule.
6. Attorneys' Fees. If any action, suit or proceeding is
commenced to establish, maintain or enforce any right or remedy under this
Agreement, the party not prevailing therein shall pay, in addition to any
damages or other award, all reasonable attorneys' fees and litigation
expenses incurred therein by the prevailing party.
7. Affiliates. Each party hereto agrees that for purposes of
Article XIII and this Schedule, references to the Parties shall also
include their respective controlled affiliates, who shall be subject to the
Dispute resolution procedures of Article XIII and this Schedule to the same
extent as the Parties.
SCHEDULE D
LITIGATION
See attached.
other federal or state laws. Such action could severely interfere with
the conduct of the priceline.com business.
LendingTree provides the mortgage brokerage services offered
through the priceline.com home mortgage service on priceline.com's Web site
and is responsible for maintaining the necessary and appropriate state
registrations and licenses associated with LendingTree's provision of those
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.
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 is also subject to related "plain
language" statutes in place in many jurisdictions, which require the use of
simple, easy to read, terms and conditions in contracts with consumers.
Although there are very few laws and regulations directly
applicable to the protection of consumers in an online environment, it is
possible that legislation will be enacted in this area and could cover such
topics as permissible online content and user privacy, including the
collection, use, retention and transmission of personal information
provided by an online user. Furthermore, the growth and demand for online
commerce could result in more stringent consumer protection laws that
impose additional compliance burdens on online companies. Such consumer
protection laws could result in substantial compliance costs and interfere
with the conduct and growth of the priceline.com business.
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 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 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
therewith, 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 and supplemental complaint. The amended complaint
filed by Marketel, which joins 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, 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, 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 amended complaint also alleges that three former Marketel employees are
the actual sole inventors or co-inventors of US 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 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 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 defendants 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 law suit 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 194 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 35,000 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.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL
INFORMATION EXTRACTED FROM THE UNAUDITED
CONDENSED FINANCIAL STATEMENTS OF
PRICELINE.COM INCORPORATED FOR THE THREE
MONTHS ENDED MARCH 31, 1999 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 30,593,613
<SECURITIES> 0
<RECEIVABLES> 160,229,976
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 197,389,236
<PP&E> 10,009,654
<DEPRECIATION> 0
<TOTAL-ASSETS> 209,738,926
<CURRENT-LIABILITIES> 22,100,201
<BONDS> 0
<COMMON> 1,138,564
0
0
<OTHER-SE> 185,491,227
<TOTAL-LIABILITY-AND-EQUITY> 209,738,926
<SALES> 49,410,542
<TOTAL-REVENUES> 49,410,542
<CGS> 44,039,943
<TOTAL-COSTS> 44,039,943
<OTHER-EXPENSES> 22,988,680
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (17,160,309)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (17,160,309)
<EPS-PRIMARY> (0.27)
<EPS-DILUTED> (0.27)
</TABLE>
