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Priceline Group Inc. 10-Q 2010

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.2
  6. Ex-32.2

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 

(Mark One)

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

For the quarterly period ended September 30, 2010

 

OR

 

 

o

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
incorporation or organization)

 

(I.R.S. Employer
Identification Number)

 

800 Connecticut Avenue

Norwalk, Connecticut 06854

(address of principal executive offices)

 

(203) 299-8000

(Registrant’s telephone number, including area code)

 

N/A

(Former name, former address and former fiscal year, if changed, since last report)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days.  YES x.  NO o.

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES x  NO o.

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one):

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).Yes o No x

 

Number of shares of Common Stock outstanding at November 2, 2010:

 

Common Stock, par value $0.008 per share

 

49,096,034

(Class)

 

(Number of Shares)

 

 

 



Table of Contents

 

priceline.com Incorporated

Form 10-Q

 

For the Three Months Ended September 30, 2010

 

PART I - FINANCIAL INFORMATION

 

 

 

Item 1.  Consolidated Financial Statements

 

 

 

Consolidated Balance Sheets (unaudited) at September 30, 2010 and December 31, 2009

2

Consolidated Statements of Operations (unaudited) For the Three and Nine Months Ended September 30, 2010 and 2009

3

Consolidated Statement of Changes in Stockholders’ Equity (unaudited) For the Nine Months Ended September 30, 2010

4

Consolidated Statements of Cash Flows (unaudited) For the Nine Months Ended September 30, 2010 and 2009

5

Notes to Unaudited Consolidated Financial Statements

6

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

27

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

56

 

 

Item 4. Controls and Procedures

57

 

 

 

 

PART II - OTHER INFORMATION

 

 

 

Item 1. Legal Proceedings

58

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

58

Item 6. Exhibits and Reports on Form 8-K

59

 

 

SIGNATURES

60

 

1



Table of Contents

 

PART I — FINANCIAL INFORMATION

Item 1.  Unaudited Consolidated Financial Statements

priceline.com Incorporated

UNAUDITED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

 

 

 

September 30,
2010

 

December 31,
2009

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

533,121

 

$

202,141

 

Restricted cash

 

1,155

 

1,319

 

Short-term investments

 

941,948

 

598,014

 

Accounts receivable, net of allowance for doubtful accounts of $5,758 and $5,023, respectively

 

248,946

 

118,659

 

Prepaid expenses and other current assets

 

41,631

 

36,828

 

Deferred income taxes

 

73,257

 

65,980

 

Total current assets

 

1,840,058

 

1,022,941

 

 

 

 

 

 

 

Property and equipment, net

 

35,905

 

30,489

 

Intangible assets, net

 

243,243

 

172,080

 

Goodwill

 

453,618

 

350,630

 

Deferred income taxes

 

158,888

 

253,700

 

Other assets

 

14,833

 

4,384

 

Total assets

 

$

2,746,545

 

$

1,834,224

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

112,753

 

$

60,568

 

Accrued expenses and other current liabilities

 

195,936

 

119,521

 

Deferred merchant bookings

 

117,800

 

60,758

 

Income taxes payable

 

79,666

 

8,040

 

Convertible debt (see Note 8)

 

174

 

159,878

 

Total current liabilities

 

506,329

 

408,765

 

 

 

 

 

 

 

Deferred income taxes

 

59,402

 

43,793

 

Other long-term liabilities

 

28,481

 

24,052

 

Convertible debt (see Note 8)

 

471,071

 

 

Total liabilities

 

1,065,283

 

476,610

 

 

 

 

 

 

 

Convertible debt (see Note 8)

 

41

 

35,985

 

Redeemable noncontrolling interests (See Note 11)

 

44,222

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Common stock, $0.008 par value; authorized 1,000,000,000 shares, 56,498,183 and 52,446,173 shares issued, respectively

 

438

 

405

 

Treasury stock, 7,410,558 and 6,865,119 shares, respectively

 

(636,623

)

(510,970

)

Additional paid-in capital

 

2,355,093

 

2,289,867

 

Accumulated deficit

 

(62,861

)

(454,673

)

Accumulated other comprehensive loss

 

(19,048

)

(3,000

)

Total stockholders’ equity

 

1,636,999

 

1,321,629

 

Total liabilities and stockholders’ equity

 

$

2,746,545

 

$

1,834,224

 

 

See Notes to Unaudited Consolidated Financial Statements.

 

2



Table of Contents

 

priceline.com Incorporated

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

Merchant revenues

 

$

494,473

 

$

400,314

 

$

1,309,407

 

$

1,130,169

 

Agency revenues

 

504,010

 

323,188

 

1,034,765

 

647,899

 

Other revenues

 

3,274

 

7,158

 

9,419

 

18,391

 

Total revenues

 

1,001,757

 

730,660

 

2,353,591

 

1,796,459

 

Cost of revenues

 

335,569

 

296,654

 

923,032

 

848,885

 

Gross profit

 

666,188

 

434,006

 

1,430,559

 

947,574

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Advertising — Offline

 

7,773

 

8,474

 

29,684

 

30,293

 

Advertising — Online

 

172,727

 

115,103

 

418,354

 

273,327

 

Sales and marketing

 

33,060

 

24,473

 

85,663

 

63,583

 

Personnel, including stock-based compensation of $21,176, $10,870, $48,550 and $32,727, respectively

 

82,007

 

50,959

 

194,635

 

135,333

 

General and administrative

 

15,730

 

19,367

 

56,224

 

48,881

 

Information technology

 

5,347

 

4,777

 

14,850

 

14,002

 

Depreciation and amortization

 

12,775

 

10,098

 

33,312

 

29,182

 

Total operating expenses

 

329,419

 

233,251

 

832,722

 

594,601

 

Operating income

 

336,769

 

200,755

 

597,837

 

352,973

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

Interest income

 

918

 

471

 

2,713

 

1,695

 

Interest expense

 

(8,293

)

(5,911

)

(22,366

)

(19,221

)

Foreign currency transactions and other

 

(10,715

)

(1,220

)

(12,806

)

(1,283

)

Total other income (expense)

 

(18,090

)

(6,660

)

(32,459

)

(18,809

)

 

 

 

 

 

 

 

 

 

 

Earnings before income taxes and equity in income of investees

 

318,679

 

194,095

 

565,378

 

334,164

 

Income tax (expense) benefit

 

(94,119

)

124,887

 

(172,347

)

76,851

 

Equity in income of investees

 

 

 

 

2

 

Net income

 

224,560

 

318,982

 

393,031

 

411,017

 

Less: net income attributable to noncontrolling interests

 

1,580

 

 

1,219

 

 

 

 

 

 

 

 

 

 

 

 

Net income applicable to common stockholders

 

$

222,980

 

$

318,982

 

$

391,812

 

$

411,017

 

Net income applicable to common stockholders per basic common share

 

$

4.59

 

$

7.49

 

$

8.24

 

$

9.84

 

Weighted average number of basic common shares outstanding

 

48,570

 

42,569

 

47,565

 

41,750

 

Net income applicable to common stockholders per diluted common share

 

$

4.41

 

$

6.42

 

$

7.70

 

$

8.42

 

Weighted average number of diluted common shares outstanding

 

50,559

 

49,670

 

50,917

 

48,805

 

 

See Notes to Unaudited Consolidated Financial Statements.

 

3



Table of Contents

 

priceline.com Incorporated

UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated Other

 

 

 

 

 

Common Stock

 

Treasury Stock

 

Additional

 

Accumulated

 

Comprehensive

 

 

 

 

 

Shares

 

Amount

 

Shares

 

Amount

 

Paid-in Capital

 

Deficit

 

Loss

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2009

 

52,446

 

$

405

 

(6,865

)

$

(510,970

)

$

2,289,867

 

$

(454,673

)

$

(3,000

)

$

1,321,629

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income applicable to common stockholders

 

 

 

 

 

 

 

 

 

 

 

391,812

 

 

 

391,812

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain on marketable securities, net of tax of $166

 

 

 

 

 

 

 

 

 

 

 

 

 

87

 

87

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Currency translation adjustment, net of tax of $7,548

 

 

 

 

 

 

 

 

 

 

 

 

 

(16,135

)

(16,135

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

375,764

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Redeemable noncontrolling interests fair value adjustment

 

 

 

 

 

 

 

 

 

(4,118

)

 

 

 

 

(4,118

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercise of stock options and vesting of stock-based awards

 

594

 

5

 

 

 

 

 

24,618

 

 

 

 

 

24,623

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Repurchase of common stock

 

 

 

 

 

(545

)

(125,653

)

 

 

 

 

 

 

(125,653

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation and other stock-based payments

 

 

 

 

 

 

 

 

 

48,628

 

 

 

 

 

48,628

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of senior convertible notes

 

 

 

 

 

 

 

 

 

67,516

 

 

 

 

 

67,516

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reclassification adjustment for convertible debt in mezzanine

 

 

 

 

 

 

 

 

 

3,680

 

 

 

 

 

3,680

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Conversion of debt

 

3,458

 

28

 

 

 

 

 

(80,073

)

 

 

 

 

(80,045

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Excess tax benefit on stock-based compensation

 

 

 

 

 

 

 

 

 

4,975

 

 

 

 

 

4,975

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, September 30, 2010

 

56,498

 

$

438

 

(7,410

)

$

(636,623

)

$

2,355,093

 

$

(62,861

)

$

(19,048

)

$

1,636,999

 

 

See Notes to Unaudited Consolidated Financial Statements.

 

4



Table of Contents

 

priceline.com Incorporated

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

 

 

Nine Months Ended
September 30,

 

 

 

2010

 

2009

 

OPERATING ACTIVITIES:

 

 

 

 

 

Net income

 

$

393,031

 

$

411,017

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation

 

12,068

 

10,605

 

Amortization

 

24,193

 

18,577

 

Provision for uncollectible accounts, net

 

5,737

 

3,379

 

Reversal of valuation allowance on deferred tax assets

 

 

(181,874

)

Other deferred income taxes, excluding valuation allowance reversal

 

33,650

 

27,835

 

Stock-based compensation and other stock-based payments

 

48,628

 

32,727

 

Amortization of debt issuance costs

 

2,785

 

1,620

 

Amortization of debt discount

 

14,948

 

14,752

 

Loss (gain) on early extinguishment of debt

 

11,334

 

(2,735

)

Equity in income of investees

 

 

(2

)

Changes in assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(112,755

)

(73,932

)

Prepaid expenses and other current assets

 

(8,034

)

8,921

 

Accounts payable, accrued expenses and other current liabilities

 

169,898

 

89,827

 

Other

 

1,897

 

2,683

 

Net cash provided by operating activities

 

597,380

 

363,400

 

INVESTING ACTIVITIES:

 

 

 

 

 

Purchase of investments

 

(1,030,011

)

(534,274

)

Proceeds from sale of investments

 

665,925

 

294,618

 

Additions to property and equipment

 

(14,471

)

(9,902

)

Acquisitions and other equity investments, net of cash acquired

 

(110,972

)

 

Proceeds from foreign currency contracts

 

44,564

 

 

Payments on foreign currency contracts

 

(4,283

)

 

Proceeds from redemption of equity investment in pricelinemortgage.com

 

 

8,921

 

Change in restricted cash

 

156

 

1,234

 

Net cash used in investing activities

 

(449,092

)

(239,403

)

FINANCING ACTIVITIES:

 

 

 

 

 

Proceeds from the issuance of convertible senior notes

 

575,000

 

 

Payment of debt issuance costs

 

(13,334

)

 

Payments related to conversion of convertible senior notes

 

(295,398

)

(122,047

)

Repurchase of common stock

 

(125,653

)

(14,169

)

Proceeds from the sale of subsidiary shares to noncontrolling interests

 

4,311

 

 

Proceeds from exercise of stock options

 

24,623

 

9,404

 

Excess tax benefit on stock-based compensation

 

4,975

 

1,580

 

Net cash provided by (used in) financing activities

 

174,524

 

(125,232

)

Effect of exchange rate changes on cash and cash equivalents

 

8,168

 

(842

)

Net increase/(decrease) in cash and cash equivalents

 

330,980

 

(2,077

)

Cash and cash equivalents, beginning of period

 

202,141

 

364,550

 

Cash and cash equivalents, end of period

 

$

533,121

 

$

362,473

 

SUPPLEMENTAL CASH FLOW INFORMATION:

 

 

 

 

 

Cash paid during the period for income taxes

 

$

61,568

 

$

60,155

 

Cash paid during the period for interest

 

$

4,639

 

$

4,242

 

Non-cash fair value adjustment for redeemable noncontrolling interests

 

$

4,118

 

$

 

 

See Notes to Unaudited Consolidated Financial Statements

 

5



Table of Contents

 

priceline.com Incorporated

Notes to Unaudited Consolidated Financial Statements

 

1.                                      BASIS OF PRESENTATION

 

Priceline.com Incorporated (“priceline.com” or the “Company”) is responsible for the Unaudited Consolidated Financial Statements included in this document.  The Unaudited Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and include all normal and recurring adjustments that management of the Company considers necessary for a fair presentation of its financial position and operating results.  The Company prepared the Unaudited Consolidated Financial Statements following the requirements of the Securities and Exchange Commission for interim reporting.  As permitted under those rules, the Company condensed or omitted certain footnotes or other financial information that are normally required by GAAP for annual financial statements.  These statements should be read in combination with the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

 

The Unaudited Consolidated Financial Statements include the accounts of the Company and its subsidiaries.  All intercompany accounts and transactions have been eliminated in consolidation.  Investments in affiliates in which the Company does not have control, but has the ability to exercise significant influence, are accounted for by the equity method.  The functional currency of the Company’s foreign subsidiaries is generally the respective local currency.  Assets and liabilities are translated into U.S. Dollars at the rate of exchange existing at the balance sheet date.  Income statement amounts are translated at the average exchange rates for the period.  Translation gains and losses are included as a component of “Accumulated other comprehensive loss” in the accompanying Unaudited Consolidated Balance Sheets.  Foreign currency transaction gains and (losses) are included in the Unaudited Consolidated Statements of Operations, principally in “Foreign currency transactions and other.”

 

Revenues, expenses, assets and liabilities can vary during each quarter of the year.  Therefore, the results and trends in these interim financial statements may not be the same as those for the full year.

 

Recent Accounting Pronouncements

 

On January 1, 2008, the Company adopted certain provisions of a new accounting standard which defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosures about fair value measurements.  On January 1, 2009, the Company adopted the remaining provisions of this accounting standard as it relates to nonfinancial assets and liabilities that are not recognized or disclosed at fair value on a recurring basis.  In April 2009, the FASB issued further clarification for determining fair value when the volume and level of activity for an asset or liability had significantly decreased and for identifying transactions that were not conducted in an orderly market.  This clarification of the accounting standard was effective for interim reporting periods after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Company adopted this clarification of the standard effective for the three months ended March 31, 2009.  The adoption of the provisions of this new standard did not materially impact the Company’s Unaudited Consolidated Financial Statements.  In January 2010, the accounting requirements for fair value measurements were modified to provide disclosures about transfers into and out of Levels 1 and 2 fair value measurements, separate detail of activity relating to Level 3 fair value measurements, and disclosure by class of asset and liability as opposed to disclosure by the major category of assets and liabilities, which was often interpreted as a line item on the balance sheet.  The accounting guidance also clarified for Level 2 and Level 3 fair value measurements that a description of the valuation techniques and inputs used to measure fair value and a discussion of changes in valuation techniques or inputs, if any, are required for both recurring and nonrecurring fair value measurements.  The Company adopted this 2010 guidance effective with the three months ended March 31, 2010.  See Note 5 for information on fair value measurements.

 

In May 2009, the FASB issued new accounting guidance which required entities to state in their periodic filings the date through which subsequent events were evaluated.  The Company adopted this accounting standard for the six months ended June 30, 2009.  In February 2010, this accounting guidance was amended.  Although the Company is still required to conduct its review of subsequent events until its periodic reports are filed, it is no longer required to specifically state that date in its filings.  This change in guidance also requires an entity to update its evaluation of subsequent events through the date revised financial statements are issued (“revised financial statements” is a new term that incorporates the retrospective adoption of new accounting standards and the correction of an error).

 

6



Table of Contents

 

2.                                      STOCK-BASED COMPENSATION AND OTHER STOCK-BASED PAYMENTS

 

The Company has adopted stock compensation plans which provide for grants of share-based compensation as incentives and rewards to encourage employees, officers, consultants and directors to contribute towards the long-term success of the Company.  Stock-based compensation included in personnel expenses in the Unaudited Consolidated Statements of Operations was approximately $21.2 million and $10.9 million, and $48.6 million and $32.7 million, for the three and nine months ended September 30, 2010 and 2009, respectively.  Stock-based compensation for the three and nine months ended September 30, 2010 includes charges amounting to $6.4 million and $11.0 million, respectively, representing the cumulative impact of adjusting the estimated probable outcome at the end of the performance period for certain outstanding unvested performance share units.

 

During the nine months ended September 30, 2010, 362,569 options to purchase shares of common stock were exercised with a weighted average exercise price of $67.91, and 157,370 options with a weighted average exercise price of $317.66 were forfeited or expired.  As of September 30, 2010, the aggregate number of stock options outstanding and exercisable was 400,360 shares, with a weighted average exercise price of $23.77 and a weighted average remaining life of 2.8 years.

 

The following table summarizes the activity of unvested restricted stock, restricted stock units and performance share units (“Share-Based Awards”) related to stock-based compensation during the nine months ended September 30, 2010:

 

Share-Based Awards

 

Shares

 

Weighted Average
Grant Date Fair Value

 

 

 

 

 

 

 

Unvested at December 31, 2009

 

1,488,854

 

$

90.82

 

Granted

 

178,681

 

$

236.23

 

Vested

 

(340,833

)

$

53.39

 

Performance Share Units Adjustment

 

229,866

 

$

187.31

 

Forfeited

 

(18,829

)

$

120.56

 

Unvested at September 30, 2010

 

1,537,739

 

$

130.08

 

 

As of September 30, 2010, there was approximately $86.0 million of total future compensation cost related to unvested share-based awards to be recognized over a weighted-average period of 2.0 years.

 

2010 Restricted Stock Units (“RSUs”)

 

During the three months ended September 30, 2010, the Company made grants of 3,486 RSUs with a total grant date fair value of $1.0 million based upon the grant date fair value per share of $289.10.  During the three months ended June 30, 2010, the Company made grants of 3,253 RSUs with a total grant date fair value of $0.7 million based upon the grant date fair value per share of $217.88.  During the three months ended March 31, 2010, the Company made broad-based grants of 61,512 RSUs that had a total grant date fair value of $14.5 million based upon the grant date fair value per share of $235.82.  These share-based awards generally vest after three years.

 

2010 Performance Share Units

 

During the three months ended June 30, 2010, the Company made grants of 2,983 performance share units with a grant date fair value of $0.7 million based on the grant date fair value per share of $217.88.  During the three months ended March 31, 2010, the Company granted 107,447 performance share units with a total grant date fair value of $25.3 million based upon the grant date fair value per share of $235.82.

 

These performance share units are payable in shares of the Company’s common stock upon vesting and are based upon the attainment of certain performance targets.  Subject to certain exceptions for terminations related to a change in control and terminations other than for “cause,” for “good reason” or on account of death or disability, the executive officers must continue their service through March 1, 2013 in order to receive any share units.  Stock-based compensation for performance share units is recorded based on the estimated probable outcome at the end of the performance period.  The actual number of shares will be determined upon completion of the performance period which ends December 31, 2012.

 

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During the three months ended September 30, 2010, the estimated number of probable shares to be issued in connection with performance share units granted in 2010 increased by 51,207 shares.  As of September 30, 2010, the estimated total number of probable shares to be issued is 252,689 shares.  If the maximum performance thresholds are met at the end of the performance period, a maximum number of 268,611 total shares could be issued.

 

2008 Performance Share Units

 

During the three months ended September 30, 2010, the estimated number of probable shares to be issued in connection with the performance share units granted in 2008 increased by 49,735 shares.  As of September 30, 2010, the estimated total number of probable shares to be issued is 284,553 shares.  If the maximum performance thresholds are met at the end of the performance period, a maximum number of 443,214 shares could be issued.  The actual number of shares will be determined in 2011 upon completion of the performance period, which ends December 31, 2010.

 

Other Stock-based Payments

 

In 2010, the Company granted 5,555 RSUs with a total grant date fair value of $1.6 million to an advertising partner.  Expense is amortized over the service period and is charged to offline advertising expense.

 

3.                                      NET INCOME PER SHARE

 

The Company computes basic net income per share by dividing net income applicable to common stockholders by the weighted average number of common shares outstanding during the period.  Diluted net income per share is based upon the weighted average number of common and common equivalent shares outstanding during the period.

 

Common equivalent shares related to stock options, restricted stock, restricted stock units and performance share units are calculated using the treasury stock method.  Performance share units are included in the weighted average common equivalent shares based on the number of shares that would be issued if the end of the reporting period were the end of the performance period, if the result would be dilutive.

 

The Company’s convertible debt issues have net share settlement features requiring the Company upon conversion to settle the principal amount of the debt for cash and the conversion premium for cash or shares of the Company’s common stock.  The convertible notes are included in the calculation of diluted net income per share if their inclusion is dilutive under the treasury stock method.

 

A reconciliation of the weighted average number of shares outstanding used in calculating diluted earnings per share is as follows (in thousands):

 

 

 

For the Three Months
Ended September 30,

 

For the Nine Months
Ended September 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of basic common shares outstanding

 

48,570

 

42,569

 

47,565

 

41,750

 

Weighted average dilutive stock options, restricted stock, restricted stock units and performance share units

 

1,402

 

1,207

 

1,524

 

1,335

 

Assumed conversion of Convertible Senior Notes

 

587

 

5,894

 

1,828

 

5,720

 

Weighted average number of diluted common and common equivalent shares outstanding

 

50,559

 

49,670

 

50,917

 

48,805

 

Anti-dilutive potential common shares

 

2,629

 

3,723

 

2,582

 

4,204

 

 

Anti-dilutive potential common shares for the three and nine months ended September 30, 2010 includes approximately 1.9 million shares for each period, which could be issued under the Company’s convertible debt if the Company’s stock price increases.  Under the treasury stock method, the convertible notes will generally have a dilutive impact on net income per share if the Company’s average stock price for the period exceeds the conversion price for the convertible notes.  The Company has Conversion Spread Hedges outstanding that increase the effective conversion price of the Company’s 0.50% Convertible Senior Notes due 2011 (the “2011 Notes”) and the Company’s 0.75% Convertible Senior Notes due 2013 (the “2013 Notes”) from $40.38 to $50.47 per share from the Company’s perspective and were designed to reduce potential dilution upon conversion of these notes at maturity (see Note 8).  Since the beneficial impact of the Conversion Spread Hedges is anti-dilutive, it is excluded from the calculation of net income per share.  At stock prices above

 

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$50.47, the Company will receive $85 million in value which will be settled in shares.  The actual number of shares to be received will depend upon the Company’s stock price on the date on which the Conversion Spread Hedges are exercisable, which coincides with the scheduled maturity of the 2011 Notes and the 2013 Notes.

 

4.                                      INVESTMENTS

 

The following table summarizes, by major security type, the Company’s short-term investments as of September 30, 2010 (in thousands):

 

 

 

Cost

 

Gross Unrealized
Gains

 

Gross Unrealized
Losses

 

Fair Value

 

 

 

 

 

 

 

 

 

 

 

Foreign government securities

 

$

450,328

 

$

59

 

$

(217

)

$

450,170

 

U.S. government securities

 

445,880

 

326

 

 

446,206

 

U.S. agency securities

 

45,531

 

41

 

 

45,572

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

941,739

 

$

426

 

$

(217

)

$

941,948

 

 

The following table summarizes, by major security type, the Company’s short-term investments as of December 31, 2009 (in thousands):

 

 

 

Cost

 

Gross Unrealized
Gains

 

Gross Unrealized
Losses

 

Fair Value

 

 

 

 

 

 

 

 

 

 

 

Foreign government securities

 

$

397,012

 

$

94

 

$

(35

)

$

397,071

 

U.S. government securities

 

200,940

 

56

 

(53

)

200,943

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

597,952

 

$

150

 

$

(88

)

$

598,014

 

 

Long-term investments amounting to approximately $0.4 million at both September 30, 2010 and December 31, 2009, comprised of corporate notes with a maturity date greater than one year, are included in “Other assets” on the Company’s Unaudited Consolidated Balance Sheets.  There were no material gains or losses related to long-term investments for the three or nine months ended September 30, 2010 or 2009.

 

5.                                      FAIR VALUE MEASUREMENTS

 

Financial assets and liabilities carried at fair value as of September 30, 2010 are classified in the table below in the categories described below (in thousands):

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

ASSETS

 

 

 

 

 

 

 

 

 

Short-term investments

 

 

 

 

 

 

 

 

 

Foreign government securities

 

$

450,170

 

$

 

$

 

$

450,170

 

U.S. government securities

 

446,206

 

 

 

446,206

 

U.S. agency securities

 

 

45,572

 

 

45,572

 

Long-term investments

 

 

424

 

 

424

 

Total assets at fair value

 

$

896,376

 

$

45,996

 

$

 

$

942,372

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

 

 

 

Foreign exchange derivatives

 

$

 

$

18,959

 

$

 

$

18,959

 

Redeemable noncontrolling interests

 

 

 

44,222

 

44,222

 

Total liabilities at fair value

 

$

 

$

18,959

 

$

44,222

 

$

63,181

 

 

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Financial assets and liabilities carried at fair value as of December 31, 2009 were classified in the table below in the categories described below (in thousands):

 

 

 

Level 1

 

Level 2

 

Total

 

Short-term investments

 

$

598,014

 

$

 

$

598,014

 

Long-term investments

 

 

359

 

359

 

Foreign exchange derivative assets

 

 

8,047

 

8,047

 

Total assets at fair value

 

$

598,014

 

$

8,406

 

$

606,420

 

 

There are three levels of inputs to measure fair value.  The definition of each input is described below:

 

Level 1:      Quoted prices in active markets that are accessible by the Company at the measurement date for identical assets and liabilities.

Level 2:      These prices are not directly accessible by the Company.  Such prices may be based upon quoted prices for identical or comparable securities in active markets or inputs not quoted on active markets, but corroborated by market data.

Level 3:      Unobservable inputs are used when little or no market data is available.

 

As of September 30, 2010, the Company considers its redeemable noncontrolling interests to represent a “Level 3” fair value measurement that requires a high level of judgment to determine fair value.  The Company estimated such fair value based upon standard valuation techniques using discounted cash flow analysis and industry peer comparable analysis.  See Note 11 for information on the estimated fair value for redeemable noncontrolling interests.

 

For the Company’s investments, a market approach is used for recurring fair value measurements and the valuation techniques use inputs that are observable, or can be corroborated by observable data, in an active marketplace.  The Company’s derivative instruments are valued using pricing models.  Pricing models take into account the contract terms as well as multiple inputs where applicable, such as interest rate yield curves, option volatility and currency rates.  Derivatives are considered “Level 2” fair value measurements.

 

As of September 30, 2010 and December 31, 2009, the carrying value of the Company’s cash and cash equivalents approximated their fair value and consisted primarily of U.S. and foreign government securities and bank deposits.  Other financial assets and liabilities, including restricted cash, accounts receivable, accrued expenses and deferred merchant bookings are carried at cost which also approximates their fair value because of the short-term nature of these items.  See Note 4 for information on the carrying value of investments and Note 8 for the estimated fair value of the Company’s convertible senior notes.

 

In the normal course of business, the Company is exposed to the impact of foreign currency fluctuations.  The Company limits these risks by following established risk management policies and procedures, including the use of derivatives.  The Company’s derivative instruments are typically short-term in nature.  The Company does not use derivatives for trading or speculative purposes.  All derivative instruments are recognized in the Unaudited Consolidated Balance Sheets at fair value.  Gains and losses resulting from changes in the fair value of derivative instruments which are not designated as hedging instruments for accounting purposes are recognized in the Unaudited Consolidated Statements of Operations in the period that the changes occur.  Changes in the fair value of derivatives designated as net investment hedges are recorded as currency translation adjustments to offset a portion of the translation adjustment of the foreign subsidiary’s net assets and are recognized in the Unaudited Consolidated Balance Sheets in “Accumulated other comprehensive loss.”

 

Derivatives Not Designated as Hedging Instruments — The Company’s derivative contracts principally address foreign exchange fluctuation risk for the Euro.  As of September 30, 2010, derivatives with a notional value of 65 million Euros were outstanding and are short-term in nature.  There were no derivative contracts outstanding as of December 31, 2009.  Foreign exchange losses related to derivatives were $6.2 million for the three months ended September 30, 2010 compared to gains of $2.4 million for the nine months ended September 30, 2010.  Foreign exchange losses were $1.7 million and $2.5 million for the three and nine months ended September 30, 2009, respectively. Foreign exchange gains and losses are recorded in “Foreign currency transactions and other” in the Unaudited Consolidated Statement of Operations.  The fair value of derivative liabilities of $2.5 million at September 30, 2010 is recorded in “Accrued expenses and other current liabilities” in the Unaudited Consolidated Balance Sheet.  Net cash inflows of $5.7 million and $7.4 million for contracts that settled for the nine months ended September 30, 2010 and 2009, respectively, were reported within “Net cash provided by operating activities” in the Unaudited Consolidated Statements of Cash Flows.

 

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Derivatives Designated as Hedging Instruments — As of September 30, 2010 and December 31, 2009, the Company had outstanding contracts for 353 million Euros and 183 million Euros, respectively, to hedge a portion of its net investment in a foreign subsidiary.  These contracts were all short-term in nature.  Hedge ineffectiveness is assessed and measured based on changes in forward exchange rates.  The fair value of these derivatives at September 30, 2010 of $16.5 million is a liability recorded in “Accrued expenses and other current liabilities” in the Unaudited Consolidated Balance Sheet.  The fair value of these derivatives at December 31, 2009 of $8.0 million was an asset recorded in “Prepaid expenses and other current assets” in the Unaudited Consolidated Balance Sheet.

 

6.                                      INTANGIBLE ASSETS AND GOODWILL

 

The Company’s intangible assets consist of the following (in thousands):

 

 

 

September 30, 2010

 

December 31, 2009

 

 

 

 

 

 

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net
Carrying
Amount

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net
Carrying
Amount

 

Amortization
Period

 

Weighted
Average
Useful Life

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Supply and distribution agreements

 

$

267,565

 

$

(72,222

)

$

195,343

 

$

204,117

 

$

(60,587

)

$

143,530

 

10 – 13 years

 

12 years

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Technology

 

23,884

 

(21,878

)

2,006

 

24,185

 

(20,890

)

3,295

 

3 years

 

3 years

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Patents

 

1,487

 

(1,233

)

254

 

1,489

 

(1,197

)

292

 

15 years

 

15 years

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer lists

 

20,616

 

(17,256

)

3,360

 

17,235

 

(15,098

)

2,137

 

2 years

 

2 years

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Internet domain names

 

6,894

 

(3,202

)

3,692

 

6,517

 

(2,633

)

3,884

 

2 – 10 years

 

10 years

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trade names

 

47,219

 

(10,477

)

36,742

 

26,855

 

(8,031

)

18,824

 

5 – 20 years

 

12 years

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

5,267

 

(3,421

)

1,846

 

469

 

(351

)

118

 

7 months – 15 years

 

1 year

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total intangible assets

 

$

372,932

 

$

(129,689

)

$

243,243

 

$

280,867

 

$

(108,787

)

$

172,080

 

 

 

 

 

 

Intangible assets with determinable lives are primarily amortized on a straight-line basis.  Intangible asset amortization expense was approximately $10.6 million and $6.4 million for the three months ended September 30, 2010 and 2009, respectively, and approximately $24.2 million and $18.6 million for the nine months ended September 30, 2010 and 2009, respectively.

 

The annual estimated amortization expense for intangible assets for the remainder of 2010, the next five years and thereafter is expected to be as follows (in thousands):

 

2010

 

$

10,010

 

2011

 

32,024

 

2012

 

29,668

 

2013

 

28,390

 

2014

 

28,319

 

2015

 

25,585

 

Thereafter

 

89,247

 

 

 

$

243,243

 

 

A substantial portion of the Company’s intangible assets relate to its Booking.com business.  In addition, purchased identifiable intangibles increased by $94.5 million as a result of the acquisition of TravelJigsaw Holdings Limited in May 2010 (refer to Note 11).

 

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The change in goodwill for the nine months ended September 30, 2010 consists of the following (in thousands):

 

Balance at December 31, 2009

 

$

350,630

 

Acquisition

 

105,313

 

Currency translation adjustments

 

(2,325

)

Balance at September 30, 2010

 

$

453,618

 

 

A substantial majority of the Company’s goodwill relates to its acquisition of Booking.com.  In addition, the acquisition of TravelJigsaw Holdings Limited in May 2010 increased goodwill by $105.3 million (refer to Note 11).  During the three months ended September 30, 2010, the Company performed its annual goodwill impairment testing using standard valuation techniques.  The estimated fair value for Booking.com, as well as the Company’s other reporting units, substantially exceeds their respective carrying values.

 

7.                                      OTHER ASSETS

 

Other assets at September 30, 2010 and December 31, 2009 consist of the following (in thousands):

 

 

 

September 30, 2010

 

December 31, 2009

 

Deferred debt issuance costs

 

$

10,124

 

$

2,235

 

Long-term investments

 

424

 

359

 

Other

 

4,285

 

1,790

 

Total

 

$

14,833

 

$

4,384

 

 

Deferred debt issuance costs arose from (i) the Company’s issuance, in March 2010, of $575.0 million aggregate principal amount of 1.25% Convertible Senior Notes due 2015 (the “2015 Notes”); (ii) a $175.0 million revolving credit facility entered into in September 2007; (iii) the Company’s issuance, in September 2006, of $172.5 million aggregate principal amount of 2011 Notes; and (iv) the Company’s issuance, in September 2006, of $172.5 million aggregate principal amount of 2013 Notes.  Deferred debt issuance costs are being amortized using the effective interest rate method over the term of approximately five years, except for the 2013 Notes, which are amortized over their term of seven years.  The period of amortization for the Company’s debt issue costs was determined at inception of the related debt agreements to be the stated maturity date or the first stated put date, if applicable.

 

Long-term investments amounting to approximately $0.4 million at both September 30, 2010 and December 31, 2009 were comprised of corporate notes with a maturity date greater than one year.

 

Other assets, consisting primarily of supplier and other security deposits, increased $2.5 million during the nine months ended September 30, 2010.  This increase is principally related to the other assets acquired with the acquisition of TravelJigsaw Holdings Limited in May 2010 (see Note 11 for further information on the acquisition).

 

8.                                      DEBT

 

Revolving Credit Facility

 

In September 2007, the Company entered into a $175.0 million five-year committed revolving credit facility with a group of lenders, which is secured, subject to certain exceptions, by a first-priority security interest on substantially all of the Company’s assets and related intangible assets located in the United States.  In addition, the Company’s obligations under the revolving credit facility are guaranteed by substantially all of the assets and related intangible assets of the Company’s material direct and indirect domestic and foreign subsidiaries.  Borrowings under the revolving credit facility will bear interest, at the Company’s option, at a rate per annum equal to the greater of (a) JPMorgan Chase Bank, National Association’s prime lending rate and (b) the federal funds rate plus ½ of 1%, plus an applicable margin ranging from 0.25% to 0.75%; or at an adjusted LIBOR for the interest period in effect for such borrowing plus an applicable margin ranging from 1.25% to 1.75%.  Undrawn balances available under the revolving credit facility are subject to commitment fees at the applicable rate ranging from 0.25% to 0.375%.

 

The revolving credit facility provides for the issuance of up to $50.0 million of letters of credit as well as borrowings on same-day notice, referred to as swingline loans, which are available in U.S. Dollars, Euros, Pound Sterling and any other foreign currency agreed to by the lenders. The proceeds of loans made under the facility will be used for working capital and general corporate purposes.  As of September 30, 2010 and December 31, 2009, there were no borrowings outstanding under

 

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the facility, and there were approximately $1.6 million and $2.4 million, respectively, of letters of credit issued under the revolving credit facility.

 

Convertible Debt

 

Convertible debt as of September 30, 2010 consisted of the following (in thousands):

 

September 30, 2010

 

Outstanding
Principal
Amount

 

Unamortized
Debt
Discount

 

Carrying
Value

 

1.25% Convertible Senior Notes due 2015

 

$

575,000

 

$

(103,929

)

$

471,071

 

0.50% Convertible Senior Notes due 2011

 

2

 

 

2

 

0.75% Convertible Senior Notes due 2013

 

213

 

(41

)

172

 

Outstanding convertible debt

 

$

575,215

 

$

(103,970

)

$

471,245

 

 

Convertible debt as of December 31, 2009 consists of the following (in thousands):

 

December 31, 2009

 

Outstanding
Principal
Amount

 

Unamortized
Debt
Discount

 

Carrying
Value

 

0.50% Convertible Senior Notes due 2011

 

$

39,990

 

$

(4,730

)

$

35,260

 

0.75% Convertible Senior Notes due 2013

 

133,000

 

(31,151

)

101,849

 

2.25% Convertible Senior Notes due 2025

 

22,873

 

(104

)

22,769

 

Outstanding convertible debt

 

$

195,863

 

$

(35,985

)

$

159,878

 

 

Based upon the closing price of the Company’s common stock for the prescribed measurement periods during the three months ended September 30, 2010 and December 31, 2009, the contingent conversion thresholds on the 2011 Notes and the 2013 Notes and the 2.25% Convertible Senior Notes due 2025 (the “2025 Notes”) were exceeded.  As a result, the 2011 Notes and the 2013 Notes were convertible at the option of the holder as of September 30, 2010 and December 31, 2009, and the 2025 Notes were convertible at the option of the holder as of December 31, 2009.  Accordingly, the carrying value of the 2011 Notes, the 2013 Notes and the 2025 Notes has been classified as a current liability.  Since the notes are convertible at the option of the holder and the principal amount is required to be paid in cash, the difference between the principal amount and carrying value is reflected as convertible debt in mezzanine on the Company’s Unaudited Consolidated Balance Sheets as of those dates.  The determination of whether or not the notes are convertible must continue to be performed on a quarterly basis.  The contingent conversion thresholds on the 2015 Notes were not exceeded at September 30, 2010, and therefore that debt is reported as a non-current liability.

 

In January 2010, the Company exercised its right to redeem the 2025 Notes; however, all of the holders of the then outstanding Notes tendered their notes for conversion prior to the redemption date, and as a result, none of the 2025 Notes was outstanding as of September 30, 2010.  In cases where holders decide to convert prior to the maturity date or first stated put date, the Company writes off the proportionate amount of remaining debt issuance costs to interest expense.  If the note holders exercise their option to convert, the Company would deliver cash to repay the principal amount of the notes and would deliver cash or shares of common stock, at its option, to satisfy the conversion value in excess of the principal amount.

 

In the three months ended September 30, 2010, $18.9 million aggregate principal amount of the 2011 Notes and $30.9 million aggregate principal amount of the 2013 Notes were converted.  The Company delivered cash of $49.8 million to repay the principal amount and issued 660,196 shares and delivered cash of $72.2 million in satisfaction of the conversion value in excess of the principal amount.  In the nine months ended September 30, 2010, $39.9 million aggregate principal amount of the 2011 Notes, $132.8 million aggregate principal amount of the 2013 Notes and $22.9 million aggregate principal amount of the 2025 Notes were converted.  The Company delivered cash of $195.6 million to repay the principal amount and issued 3,457,785 shares and delivered cash of $99.8 million in satisfaction of the conversion value in excess of the principal amount.  In October 2010, the Company settled $2 thousand principal amount of the 2011 Notes for cash of $2 thousand for the principal amount and issued 43 shares in satisfaction of the conversion value in excess of the principal amount.  As a result, none of the 2011 Notes is currently outstanding.

 

As of September 30, 2010 and December 31, 2009, the estimated market value of the outstanding senior notes was approximately $770 million and $1.1 billion, respectively.  Fair value was estimated based upon actual trades at the end of the reporting period or the most recent trade available as well as the Company’s stock price at the end of the reporting period. 

 

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A substantial portion of the fair value of the Company’s debt in excess of the outstanding principal amount relates to the conversion premium on the bonds.

 

In March 2010, the Company issued in a private placement $575.0 million aggregate principal amount of Convertible Senior Notes due March 15, 2015, with an interest rate of 1.25% (the “2015 Notes”).  The 2015 Notes are convertible, subject to certain conditions, into the Company’s common stock at a conversion price of approximately $303.06 per share.  The 2015 Notes are convertible, at the option of the holder, prior to March 15, 2015 upon the occurrence of specified events, including, but not limited to a change in control, or if the closing sales price of the Company’s common stock for at least 20 consecutive trading days in the period of the 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is more than 150% of the applicable conversion price in effect for the notes on the last trading day of the immediately preceding quarter. In the event that all or substantially all of the Company’s common stock is acquired on or prior to the maturity of the 2015 Notes in a transaction in which the consideration paid to holders of the Company’s common stock consists of all or substantially all cash, the Company would be required to make additional payments in the form of additional shares of common stock to the holders of the 2015 Notes in aggregate value ranging from $0 to approximately $132.7 million depending upon the date of the transaction and the then current stock price of the Company.  As of December 15, 2014, holders will have the right to convert all or any portion of the 2015 Notes.  The 2015 Notes may not be redeemed by the Company prior to maturity.  The holders may require the Company to repurchase the 2015 Notes for cash in certain circumstances.  Interest on the 2015 Notes is payable on March 15 and September 15 of each year.

 

In 2006, the Company issued in a private placement $172.5 million aggregate principal amount of Convertible Senior Notes due September 30, 2011, with an interest rate of 0.50% (the “2011 Notes”), and $172.5 million aggregate principal amount of Convertible Senior Notes due September 30, 2013, with an interest rate of 0.75% (the “2013 Notes”).  The 2011 Notes and the 2013 Notes are convertible, subject to certain conditions, into the Company’s common stock at a conversion price of approximately $40.38 per share. The 2011 Notes and the 2013 Notes are convertible, at the option of the holder, prior to June 30, 2011 in the case of the 2011 Notes, and prior to June 30, 2013 in the case of the 2013 Notes, upon the occurrence of specified events, including, but not limited to a change in control, or if the closing sale price of the Company’s common stock for at least 20 consecutive trading days in the period of the 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is more than 120% of the applicable conversion price in effect for the notes on the last trading day of the immediately preceding quarter.  In October 2010, the Company settled $2 thousand principal amount of the 2011 Notes.  As a result, none of the 2011 Notes is currently outstanding.  Neither the 2011 Notes nor the 2013 Notes were redeemable by the Company prior to maturity.  Interest on the 2011 Notes and the 2013 Notes is payable on March 30 and September 30 of each year.

 

In 2006, the Company entered into hedge transactions relating to potential dilution of the Company’s common stock upon conversion of the 2011 Notes and the 2013 Notes (the “Conversion Spread Hedges”).  Under the Conversion Spread Hedges, the Company is entitled to purchase from Goldman Sachs and Merrill Lynch approximately 8.5 million shares of the Company’s common stock (the number of shares underlying the 2011 Notes and the 2013 Notes) at a strike price of $40.38 per share (subject to adjustment in certain circumstances) in 2011 and 2013, and the counterparties are entitled to purchase from the Company approximately 8.5 million shares of the Company’s common stock at a strike price of $50.47 per share (subject to adjustment in certain circumstances) in 2011 and 2013.  The Conversion Spread Hedges increase the effective conversion price of the 2011 Notes and the 2013 Notes to $50.47 per share from the Company’s perspective and are designed to reduce the potential dilution upon conversion of the 2011 Notes and the 2013 Notes.  If the market value per share of the Company’s common stock at maturity is above $40.38, the Conversion Spread Hedges will entitle the Company to receive from the counterparties net shares of the Company’s common stock based on the excess of the then current market price of the Company’s common stock over the strike price of the hedge (up to $50.47).  Holders of the 2011 Notes and the 2013 Notes do not have any rights with respect to the Conversion Spread Hedges.  The Conversion Spread Hedges are separate transactions entered into by the Company with the counterparties, are not part of the terms of the Notes and will not affect the holders’ rights under the 2011 Notes and the 2013 Notes.  The Conversion Spread Hedges are exercisable at dates coinciding with the scheduled maturities of the 2011 Notes and 2013 Notes.  The Conversion Spread Hedges do not immediately hedge against the associated dilution from conversions of the Notes prior to their stated maturities.  Therefore, upon conversion of the 2011 Notes or the 2013 Notes, the Company has delivered or will be obligated to immediately deliver any related conversion premium in shares of common stock or cash, at its option.  However, the hedging counterparties will not be obligated to deliver the Company shares or cash that would offset the dilution associated with the early conversion activity until 2011 and 2013.  Because of this potential timing difference, the number of shares, if any, that the Company receives from its Conversion Spread Hedges could differ materially from the number of shares, if any, that it is required to deliver to holders of the Notes upon their early conversion.  This difference in timing can potentially make the hedges ineffective, which could negatively impact the Company’s future diluted shares outstanding and diluted earnings per share.

 

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Accounting guidance requires that cash-settled convertible debt, such as the Company’s convertible senior notes, be separated into debt and equity components at issuance and each be assigned a value.  The value assigned to the debt component is the estimated fair value, as of the issuance date, of a similar bond without the conversion feature.  The difference between the bond cash proceeds and this estimated fair value, representing the value assigned to the equity component, is recorded as a debt discount.  Debt discount is amortized using the effective interest method over the period from origination or modification date through the earlier of the first stated put date or the stated maturity date.

 

The Company estimated the straight debt borrowing rates at debt origination or modification (the 2015 Notes, 2011 Notes and 2013 Notes were structured requiring net cash settlement at issue and the 2025 Notes were modified to provide for net cash settlement in 2006) to be 5.89% for the 2015 Notes, 7.75% for the 2011 Notes and 2025 Notes, and 8.0% for the 2013 Notes.  The yield to maturity was estimated at an at-market coupon priced at par.  The straight debt borrowing rate for the 2025 Notes was based upon an effective maturity date of January 15, 2010 because on that date the 2025 Notes were redeemable and the holders could require the Company to repurchase these notes.

 

The carrying value of the permanent equity component reported in additional paid-in-capital related to the 2015 Notes was a credit of $67.5 million at September 30, 2010, comprised of debt discount after tax of $69.1 million ($115.2 million before tax) partially offset by financing costs after tax of $1.6 million.

 

For the three months ended September 30, 2010 and 2009, the Company recognized interest expense of $7.7 million and $5.4 million, respectively, related to convertible notes.  Interest expense was comprised of $1.7 million and $0.6 million, respectively, for the contractual coupon interest, $5.5 million and $4.5 million, respectively, related to the amortization of debt discount and $0.5 million and $0.3 million, respectively, related to the amortization of debt issuance costs.  In addition, unamortized debt issuance costs written off to interest expense related to debt conversions in the three months ended September 30, 2010 and 2009 amounted to approximately $0.3 million for each period.  The effective interest rate for the three months ended September 30, 2010 and 2009 was 6.5% and 8.4%, respectively.  The remaining debt discount and debt issuance costs are amortized through the stated maturity dates of the respective debt.

 

For the nine months ended September 30, 2010 and 2009, the Company recognized interest expense of $20.2 million and $18.0 million, respectively, related to convertible notes, comprised of $4.0 million and $2.4 million, respectively, for the contractual coupon interest, $15.0 million and $14.8 million, respectively, related to the amortization of debt discount and $1.2 million and $0.8 million, respectively, related to the amortization of debt issuance costs.  In addition, unamortized debt issuance costs written off to interest expense related to debt conversions for the nine months ended September 30, 2010 and 2009 amounted to $1.3 million and $0.6 million, respectively.  The effective interest rate for the nine months ended September 30, 2010 and 2009 was 6.9% and 8.3%, respectively.

 

In addition, if the Company’s convertible debt is redeemed or converted prior to maturity, a gain or loss on extinguishment is recognized.  The gain or loss is the difference between the fair value of the debt component immediately prior to extinguishment and its carrying value.  To estimate the fair value at each conversion date, the Company used an applicable LIBOR rate plus an applicable credit default spread based upon the Company’s credit rating at the respective conversion dates.  As a result of debt conversions during the three months ended September 30, 2010 and 2009, the Company recognized a loss of $3.2 million ($1.9 million after tax) and a loss of $0.4 million ($0.2 million after tax), respectively, in “Foreign currency transactions and other” in the Unaudited Consolidated Statements of Operations.  As a result of debt conversions during the nine months ended September 30, 2010 and 2009, the Company recognized a loss of $11.3 million ($6.8 million after tax) and a gain of $2.7 million ($1.6 million after tax), respectively, in “Foreign currency transactions and other” in the Unaudited Consolidated Statements of Operations.

 

9.                                      TREASURY STOCK

 

In the first quarter of 2010, the Company’s Board of Directors authorized an additional repurchase of up to $500 million of the Company’s common stock from time to time in the open market or in privately negotiated transactions, including the approval to purchase up to $100 million from the proceeds from the issuance of the 2015 Notes.  During the three months ended June 30, 2010, the Company repurchased 32,487 shares of its common stock at an aggregate cost of approximately $6.1 million.  The Company repurchased 428,950 shares of its common stock at an aggregate cost of approximately $100.0 million in the three months ended March 31, 2010.

 

The Company’s Board of Directors has also given the Company the general authorization to repurchase shares of its common stock to satisfy employee withholding tax obligations related to stock-based compensation.  The Company repurchased 84,002 shares and 163,557 shares at aggregate costs of $19.6 million and $14.2 million in the nine months ended September 30, 2010 and 2009, respectively, to satisfy employee withholding taxes related to stock-based compensation.

 

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The Company may make additional repurchases of shares under its stock repurchase programs, depending on prevailing market conditions, alternate uses of capital and other factors.  Whether and when to initiate and/or complete any purchase of common stock and the amount of common stock purchased will be determined in the Company’s complete discretion.  The Company has a remaining authorization of $459.2 million to purchase its common stock.  As of September 30, 2010, there were approximately 7.4 million shares of the Company’s common stock held in treasury.

 

10.                               INCOME TAXES

 

Income tax expense includes U.S. and international income taxes, determined using an estimate of the Company’s annual effective tax rate.  A deferred tax liability is recognized for all taxable temporary differences, and a deferred tax asset is recognized for all deductible temporary differences and operating loss and tax credit carryforwards.  A valuation allowance is recognized if it is more likely than not that some portion of the deferred tax asset will not be realized.

 

The Company recognizes income tax expense related to income generated outside of the United States based upon the applicable tax rates and tax laws of the foreign countries in which the income is generated.  During the three and nine months ended September 30, 2010 and 2009, the substantial majority of the Company’s foreign-sourced income has been generated in the Netherlands and the United Kingdom.  Income tax expense for the three and nine months ended September 30, 2010 differs from the expected tax expense at the U.S. statutory rate of 35%, primarily due to lower foreign tax rates, partially offset by state income taxes and certain non-deductible expenses.  Income tax expense for the three and nine months ended September 30, 2009 differs from the expected tax expense at the U.S. statutory rate of 35%, principally because it includes a benefit of $181.9 million resulting from the reversal of the remaining valuation allowance on the deferred tax assets related to net operating losses (“NOLs”) generated from the Company’s domestic operating losses, and to a lesser extent, lower foreign tax rates, partially offset by state income taxes and certain non-deductible expenses.

 

The Company has significant deferred tax assets, resulting principally from domestic NOLs.  At December 31, 2009, the Company had approximately $2.8 billion of NOLs for U.S. federal income tax purposes, comprised of $0.8 billion of NOLs generated from operating losses and approximately $2.0 billion of NOLs generated from equity-related transactions, including equity-based compensation and stock warrants, mainly expiring from December 31, 2019 to December 31, 2021.  The utilization of these NOLs is subject to limitation under Section 382 of the Internal Revenue Code and is also dependent on the Company’s ability to generate sufficient future taxable income.  Section 382 imposes limitations on the availability of a company’s net operating losses after a more than 50 percentage point ownership change occurs.  The Section 382 limitation is based upon certain conclusions pertaining to the dates of ownership changes and the value of the Company on the dates of the ownership changes.  As a result of a study, it was determined that ownership changes, as defined in Section 382, occurred in 2000 and 2002.  The amount of the Company’s net operating losses incurred prior to each ownership change is limited based on the value of the Company on the respective dates of ownership change.  As of December 31, 2009, it is estimated that the effect of Section 382 will generally limit the total cumulative amount of net operating loss available to offset future taxable income to approximately $1.4 billion, comprised of $0.8 billion of NOLs generated from operating losses which have been fully reflected in the Unaudited Consolidated Financial Statements and $0.6 billion of NOLs generated from equity-related transactions. In accordance with accounting guidance, tax benefits related to equity transactions will be recognized as a credit to additional paid-in capital if and when they are realized by reducing the Company’s current income tax liability.  Pursuant to Section 382, subsequent ownership changes could further limit this amount.

 

The Company periodically evaluates the likelihood of the realization of deferred tax assets, and reduces the carrying amount of these deferred tax assets by a valuation allowance to the extent it believes a portion will not be realized.  The Company considers many factors when assessing the likelihood of future realization of the deferred tax assets, including its recent cumulative earnings experience by taxing jurisdiction, expectations of future income, the carryforward periods available for tax reporting purposes, and other relevant factors.  The deferred tax asset at September 30, 2010 and December 31, 2009 amounted to $232.1 million and $319.7 million, net of the valuation allowance recorded, respectively.

 

The Company has recorded a non-current deferred tax liability in the amount of $59.4 million and $43.8 million at September 30, 2010 and December 31, 2009, respectively, primarily related to the assignment of estimated fair value to certain purchased identifiable intangible assets associated with various acquisitions.

 

The Company does not have any significant uncertain tax positions as of September 30, 2010 and December 31, 2009.

 

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11.                               REDEEMABLE NONCONTROLLING INTERESTS

 

On May 18, 2010, the Company, through its wholly-owned subsidiary, Priceline.com International Limited (“PIL”), paid $108.5 million, net of cash acquired, to purchase a controlling interest of the outstanding equity of TravelJigsaw Holdings Limited and its operating subsidiary, TravelJigsaw Limited, a Manchester, U.K.-based multinational car hire reservation service (collectively, “TravelJigsaw”).

 

Certain key members of TravelJigsaw’s management team retained a noncontrolling ownership interest in TravelJigsaw Holdings Limited.  In addition, certain key members of the management team of Booking.com purchased a 3% ownership interest in TravelJigsaw from PIL in June 2010 (together with TravelJigsaw management’s investment, the “Redeemable Shares”).  The holders of the Redeemable Shares will have the right to put their shares to PIL and PIL will have the right to call the shares in each case at a purchase price reflecting the fair value of the Redeemable Shares at the time of exercise.  Subject to certain exceptions, one-third of the Redeemable Shares will be subject to the put and call options in each of 2011, 2012 and 2013, respectively, during specified option exercise periods.

 

Redeemable noncontrolling interests are measured at fair value, both at the date of acquisition and subsequently at each reporting period.  The redeemable noncontrolling interests are reported on the Unaudited Consolidated Balance Sheet in mezzanine equity in “Redeemable noncontrolling interests.”

 

A reconciliation of redeemable noncontrolling interests for the nine months ended September 30, 2010 is as follows (in thousands):

 

 

 

2010

 

 

 

 

 

Balance, December 31, 2009

 

$

 

Fair value at acquisition (1)

 

29,520

 

Sale of subsidiary shares at fair value(2)

 

4,311

 

Net income attributable to noncontrolling interests

 

1,219

 

Fair value adjustment (3)

 

4,118

 

Currency translation adjustments

 

5,054

 

Balance, September 30, 2010

 

$

44,222

 

 


(1)          The fair value was determined based on the price paid at acquisition.

(2)          The Company retained a controlling interest after the sale of the subsidiary shares.

(3)          The estimated fair value adjustment was based upon standard valuation techniques using discounted cash flow analysis and industry peer comparable analysis.

 

12.                               COMPREHENSIVE INCOME AND ACCUMULATED OTHER COMPREHENSIVE LOSS

 

Comprehensive income for the three months ended September 30, 2010 was $298.6 million comprised of net income applicable to common stockholders of $223.0 million and favorable currency translation adjustments of $75.8 million partially offset by unrealized losses on investments of $0.2 million,  For the comparable period in 2009, comprehensive income was $334.9 million comprised of $319.0 million of net income, favorable currency translation adjustments of $15.8 million, and unrealized gains on investments of $0.1 million.

 

Comprehensive income for the nine months ended September 30, 2010 was $375.8 million comprised of net income applicable to common stockholders of $391.8 million and an unrealized gain on marketable securities of $0.1 million, partially offset by unfavorable currency translation adjustments of $16.1 million.  For the comparable period in 2009, comprehensive income was $456.2 million, comprised of $411.0 million of net income and favorable currency translation adjustments of $45.3 million, partially offset by an unrealized loss on marketable securities of $0.1 million.

 

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The table below provides the balances for each classification of accumulated other comprehensive loss as of September 30, 2010 and December 31, 2009 (in thousands):

 

 

 

September 30,
2010

 

December 31,
2009

 

Foreign currency translation adjustments (1)

 

$

(19,359

)

$

(3,224

)

Net unrealized gain on investment securities (2)

 

311

 

224

 

Accumulated other comprehensive loss

 

$

(19,048

)

$

(3,000

)

 


(1)          Includes net gains from fair value adjustments at September 30, 2010 and December 31, 2009 associated with net investment hedges of $11.2 million after tax ($18.7 million before tax) and $1.8 million after tax ($3.0 million before tax), respectively.  The remaining balance in currency translation adjustments excludes income taxes due to the Company’s practice and intention to reinvest the earnings of its foreign subsidiaries in those operations.

(2)          The unrealized gain before tax at September 30, 2010 was $0.5 million.

 

13.                               COMMITMENTS AND CONTINGENCIES

 

Litigation Related to Hotel Occupancy and Other Taxes

 

The Company and certain third-party defendants are currently involved in approximately fifty lawsuits brought by or against states, cities and counties over issues involving the payment of hotel occupancy and other taxes (i.e., state and local sales tax) and its “merchant” hotel business.  The Company is also involved in two consumer lawsuits relating to, among other things, the payment of hotel occupancy taxes and service fees.  In addition, over sixty municipalities or counties, and at least eight states, have initiated audit proceedings (including proceedings initiated by more than forty municipalities in California), issued proposed tax assessments or started inquiries relating to the payment of hotel occupancy and other taxes (i.e., state and local sales tax).  Additional state and local jurisdictions are likely to assert that the Company is subject to, among other things, hotel occupancy and other taxes (i.e., state and local sales tax) and could seek to collect such taxes, retroactively and/or prospectively.

 

With respect to the principal claims in these matters, the Company believes that the ordinances at issue do not apply to the service it provides, namely the facilitation of reservations, and, therefore, that the Company does not owe the taxes that are claimed to be owed.  Rather, the Company believes that the ordinances at issue generally impose hotel occupancy and other taxes on entities that own, operate or control hotels (or similar businesses) or furnish or provide hotel rooms or similar accommodations.  In addition, in many of these matters, municipalities have typically asserted claims for “conversion” — essentially, that the Company has collected a tax and wrongfully “pocketed” those tax dollars — a claim that the Company believes is without basis and has vigorously contested.  The municipalities that are currently involved in litigation and other proceedings with the Company, and that may be involved in future proceedings, have asserted contrary positions and will likely continue to do so.

 

In connection with some of the tax audits and assessments, the Company may be required to pay any assessed taxes, which amounts may be substantial, prior to being allowed to contest the assessments and the applicability of the ordinances in judicial proceedings.  This requirement is commonly referred to as “pay to play” or “pay first.”  For example, the City of San Francisco assessed the Company approximately $3.4 million (an amount that includes interest and penalties) relating to hotel occupancy taxes, which it paid in July 2009.  Payment of these amounts, if any, is not an admission that the Company believes it is subject to such taxes and, even if such payments are made, the Company intends to continue to assert its position vigorously.  The Company has successfully argued against a “pay first” requirement asserted in another California proceeding.

 

Litigation is subject to uncertainty and there could be adverse developments in these pending or future cases and proceedings.  For example, in October 2009, a jury in a San Antonio class action found that the Company and the other online travel companies that are defendants in the lawsuit “control” hotels for purposes of the local hotel occupancy tax ordinances at issue and are, therefore, subject to the requirements of those ordinances.  An unfavorable outcome or settlement of pending litigation is likely to encourage the commencement of additional litigation, audit proceedings or other regulatory inquiries.  In addition, an unfavorable outcome or settlement of these actions or proceedings could result in substantial

 

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liabilities for past and/or future bookings, including, among other things, interest, penalties, punitive damages and/or attorney fees and costs.  There have been, and will continue to be, substantial ongoing costs, which may include “pay first” payments, associated with defending the Company’s position in pending and any future cases or proceedings.  An adverse outcome in one or more of these unresolved proceedings could have a material adverse effect on the Company’s business and results of operations and could be material to its earnings or cash flow in any given operating period.

 

To the extent that any tax authority succeeds in asserting that the Company has a tax collection responsibility, or the Company determines that it has one, with respect to future transactions, the Company may collect any such additional tax obligation from its customers, which would have the effect of increasing the cost of hotel room reservations to its customers and, consequently, could make the Company’s hotel service less competitive (i.e., versus the websites of other online travel companies or hotel company websites) and reduce hotel reservation transactions; alternatively, the Company could choose to reduce the compensation for its services on “merchant” hotel transactions.  Either step could have a material adverse effect on the Company’s business and results of operations.

 

In many of the judicial and other proceedings initiated to date, municipalities seek not only historical taxes that are claimed to be owed on the Company’s gross profit, but also, among other things, interest, penalties, punitive damages and/or attorney fees and costs.  Any liability associated with hotel occupancy tax matters is not constrained to the Company’s liability for tax owed on its historical gross profit, but may also include, among other things, penalties, interest and attorneys’ fees.  To date, the majority of the taxing jurisdictions in which the Company facilitates the sale of hotel reservations have not asserted that taxes are due and payable on the Company’s U.S. “merchant” hotel business.  With respect to municipalities that have not initiated proceedings to date, it is possible that they will do so in the future or that they will seek to amend their tax statutes and seek to collect taxes from the Company only on a prospective basis.  As a result of this litigation and other attempts by jurisdictions to levy similar taxes, the Company has established a reserve for the potential resolution of issues related to hotel occupancy and other taxes in the amount of approximately $23 million as of September 30, 2010 (which includes, among other things, amounts related to the litigation in San Antonio).  The reserve is based on the Company’s reasonable estimate, and the ultimate resolution of these issues may be less or greater, potentially significantly, than the liabilities recorded.

 

From time to time, the Company has settled, and may in the future agree to settle, claims pending in these matters.  Since June 30, 2010, the Company has reached an agreement in principle with the respective plaintiffs resolving the claims for purported back taxes in Mayor & City Council of Baltimore v. priceline.com, Inc., et al., as well as three individual cases that had been previously consolidated for pretrial purposes, City of Charleston, South Carolina v. Hotel.com, et al.; Town of Mount Pleasant, South Carolina v. Hotels.com, et al.; and City of North Myrtle Beach, South Carolina v. Hotels.com, LP, et al.  Also, as part of each of the agreements in principle, plaintiffs have agreed to not assert claims based on the ordinance at issue in the respective action for a period of time, ranging from two to four years.  For the City of Baltimore, as discussed below, the agreement was finalized and dismissal followed shortly thereafter.  For the City of Charleston, Town of Mount Pleasant, and City of North Myrtle Beach cases, the agreement was finalized by October 25, 2010 and dismissal is expected shortly.  The settlement amounts in these cases are not material to the Company’s results of operations for the three months ended September 30, 2010.

 

Statewide Class Actions and Putative Class Actions

 

A number of cities and counties have filed class actions or putative class actions on behalf of themselves and other allegedly similarly situated cities and counties within the same respective state against the Company and other defendants, including, but not in all cases, Lowestfare.com LLC and Travelweb LLC, both of which are the Company’s subsidiaries, and Hotels.com, L.P.; Hotels.com GP, LLC; Hotwire, Inc.; Cheaptickets, Inc.; Travelport, Inc. (f/k/a Cendant Travel Distribution Services Group, Inc.); Expedia, Inc.; Internetwork Publishing Corp. (d/b/a Lodging.com); Maupintour Holding LLC; Orbitz, Inc.; Orbitz, LLC; Site59.com, LLC; Travelocity.com, Inc.; Travelocity.com LP; and Travelnow.com, Inc.  Each complaint alleges, among other things, that the defendants violated each jurisdiction’s respective hotel occupancy tax ordinance with respect to the charges and remittance of amounts to cover taxes under each ordinance.  Each complaint typically seeks compensatory damages, disgorgement, penalties available by law, attorneys’ fees and other relief.  Such actions include:

 

·                  City of Los Angeles v. Hotels.com, Inc., et al.

·                  City of Rome, Georgia, et al. v. Hotels.com, L.P., et al.

·                  City of San Antonio, Texas v. Hotels.com, L.P., et al.

·                  Lake County Convention and Visitors Bureau, Inc. and Marshall County, Indiana v. Hotels.com, L.P., et al.

·                  County of Nassau, New York v. Hotels.com, LP, et al.

·                  City of Gallup, New Mexico v. Hotels.com, L.P., et al.

·                  City of Jacksonville v. Hotels.com, L.P., et al.

 

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·                  The City of Goodlettsville, Tennessee, et al. v. priceline.com Incorporated, et al.

·                  The Township of Lyndhurst, New Jersey v. priceline.com Incorporated, et al.

·                  County of Monroe, Florida v. Priceline.com, Inc. et al.

·                  County of Genesee, Michigan, et al. v. Hotels.com L.P. et al.

·                  Pine Bluff Advertising and Promotion Commission, Jefferson County, Arkansas, et al. v. Hotels.com, LP, et al.

·                  County of Lawrence, Pennsylvania v. Hotels.com, L.P., et al.

 

A discussion of each of the legal proceedings listed above can be found in the section titled “Legal Proceedings” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2009, and in the section titled “Commitments and Contingencies” in each of the Company’s Quarterly Reports on Form 10-Q for the three months ended March 1, 2010 and for the three months ended June 30, 2010.

 

The following developments regarding such legal proceedings occurred during or after the three months ended September 30, 2010:

 

City of Rome, Georgia, et al., v. Hotels.com, L.P., et al.:  The parties were unable to resolve the case in mediation.  The Company expects plaintiffs to seek class certification and move forward with the litigation.

 

City of Gallup, New Mexico v. Hotels.com, L.P., et al.:  On March 1, 2010, the court denied plaintiffs’ motion for partial summary judgment.  Plaintiffs moved for reconsideration on March 9, 2010 and that motion was denied on October 7, 2010.

 

The City of Goodlettsville, Tennessee, et al. v. priceline.com Incorporated, et al.:  The court granted plaintiff’s motion for class certification on April 20, 2010.  Notice of the pendency of the class action was sent to class members in June 2010.  The opt out period expired July 23, 2010, and the only city to opt out of the class was South Fulton.  The parties are currently conducting discovery.

 

County of Monroe, Florida v. Priceline.com, Inc. et al.:  The court granted class certification on March 15, 2010.  The opt-out period expired on May 24, 2010.  As of the opt-out date, the following counties opted-out of the Monroe class action:  Alachua, Bay, Brevard, Broward, Charlotte, Escambia, Flagler, Gulf, Hillsborough, Lee, Leon, Manatee, Marion, Nassau, Okaloosa, Orange, Palm Beach, Pasco, Pinellas, Polk, St. Johns, Seminole, Volusia, Wakulla and Walton.

 

The parties to the lawsuit signed a settlement agreement resolving the claims asserted by the remaining class members in the action.  As part of the agreement, the remaining class members have agreed to not assert claims based on the tourist development tax ordinances at issue in the action for a period of three years.  On September 3, 2010, the court entered an order preliminarily approving the class settlement agreement and establishing deadlines for, among other things, class members to object to the terms of the settlement or request exclusion from the class.  One additional county, Gilchrist, opted out of the class because it had no alleged tax amounts at issue.  A fairness hearing is currently scheduled for January 6, 2011.

 

County of Genesee, Michigan, et al. v. Hotels.com L.P. et al.:     Defendants filed a notice of plaintiffs’ failure to timely file a motion for class certification on May 14, 2010.  Plaintiffs have elected not to pursue class certification.  On September 10, 2010, plaintiffs filed a motion for partial summary disposition.  The parties are currently conducting discovery.

 

Pine Bluff Advertising and Promotion Commission, Jefferson County, Arkansas, et al. v. Hotels.com, LP, et al.:  Defendants filed a motion to dismiss the complaint for failure to exhaust administrative remedies.  The court held a hearing on the motion to dismiss on August 27, 2010.  The parties are awaiting a decision on the motion.

 

County of Lawrence, Pennsylvania v. Hotels.com, L.P., et al.:  Defendants filed preliminary objections to the complaint on March 9, 2010.  The plaintiff then filed an amended complaint on March 26, 2010 and Defendants moved to dismiss on April 15, 2010.  After full briefing and oral argument, on October 25, 2010 the Court dismissed the action on the grounds that plaintiff failed to exhaust administrative remedies.

 

The Company intends to defend vigorously against the claims in all of the proceedings described above.

 

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Actions Filed on Behalf of Individual States, Cities and Counties

 

Several states, cities, counties, municipalities and other political subdivisions across the country have filed actions relating to the collection of hotel occupancy taxes against the Company and other defendants, including, but not in all cases, Lowestfare.com LLC and Travelweb LLC, both of which are the Company’s subsidiaries, and Hotels.com, L.P.; Hotels.com GP, LLC; Hotwire, Inc.; Cheaptickets, Inc.; Cendant Travel Distribution Services Group, Inc.; Expedia, Inc.; Internetwork Publishing Corp. (d/b/a Lodging.com); Maupintour Holding LLC; Orbitz, Inc.; Orbitz, LLC; Site59.com, LLC; Travelocity.com, Inc.; Travelocity.com LP; and Travelnow.com, Inc.  In each, the complaint alleges, among other things, that each of these defendants violated each jurisdiction’s respective hotel occupancy tax ordinance with respect to the charges and remittance of amounts to cover taxes under each ordinance.  Each complaint typically seeks compensatory damages, disgorgement, penalties available by law, attorneys’ fees and other relief.  Such actions include:

 

·                  City of Findlay, Ohio v. Hotels.com, L.P., et al.

·                  City of Chicago, Illinois v. Hotels.com, L.P., et al.

·                  City of San Diego, California v. Hotels.com L.P., et al.

·                  City of Atlanta, Georgia v. Hotels.com L.P., et al.

·                  City of Charleston, South Carolina v. Hotels.com, et al.

·                  Town of Mount Pleasant, South Carolina v. Hotels.com, et al.

·                  City of Columbus, Ohio, et al. v. Hotels.com, L.P., et al.

·                  City of North Myrtle Beach, South Carolina v. Hotels.com, LP, et al.

·                  Wake County, North Carolina v. Hotels.com, LP, et al.

·                  City of Branson, Missouri v. Hotels.com, LP, et al.

·                  Dare County, North Carolina v. Hotels.com, LP, et al.

·                  Buncombe County, North Carolina v. Hotels.com, LP, et al.

·                  Horry County, South Carolina, et al. v. Hotels.com, LP, et al.

·                  City of Myrtle Beach, South Carolina v. Hotels.com, LP, et al.

·                  City of Houston, Texas v. Hotels.com, LP, et al.

·                  City of Oakland, California v. Hotels.com, L.P., et al.

·                  Mecklenburg County, North Carolina v. Hotels.com, LP, et al.

·                  City of Baltimore, Maryland v. Priceline.com Inc., et al.

·                  County Commissioners of Worcester, Maryland v. Priceline.com Inc., et al.

·                  City of Bowling Green, Kentucky v. Hotels.com L.P., et al.

·                  St. Louis County, Missouri v. Prestige Travel, Inc. et al.

·                  Village of Rosemont, Illinois v. Priceline.com, Inc., et al.

·                  Anne Gannon, in her capacity as Palm Beach County Tax Collector, on behalf of Palm Beach County v. Hotel.com LP, et al.

·                  Brevard County, Florida v. Priceline.com, Inc., et al.

·                  Leon County, Florida, et al. v. Expedia, Inc., et al. (2 separate proceedings).

·                  City of Birmingham, Alabama, et al. v. Orbitz, Inc., et al.

·                  Town of Hilton Head Island, South Carolina v. Hotels.com, L.P., et al.

·                  City of Santa Monica v. Hotels.com, LP, et al.

·                  Baltimore County, Maryland v. Priceline.com, Inc., et al.

·                  Hamilton County, Ohio, et al. v. Hotels.com, L.P., et al.

 

A discussion of each of the legal proceedings listed above can be found in the section titled “Legal Proceedings” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2009, and in the section titled “Commitments and Contingencies” in each of the Company’s Quarterly Reports on Form 10-Q for the three months ended March 1, 2010 and for the three months ended June 30, 2010.  In addition to the matters listed above, on August 23, 2010, Hamilton County, Ohio, Cuyahoga County, Ohio, and Erie County, Ohio commenced the action Hamilton County, Ohio, et al. v. Hotels.com, L.P., et al., naming priceline.com, Inc., Travelweb, LLC, and Lowestfare.com, Inc. as defendants.  Also, the State of Oklahoma has filed the lawsuit State of Oklahoma v. Priceline.com, Inc. et al., against the Company, Travelweb LLC and other online travel companies alleging that the Company and other defendants have failed to appropriately pay state taxes.

 

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The following developments regarding such legal proceedings occurred during or after the three months ended September 30, 2010:

 

City of Findlay, Ohio v. Hotels.com, L.P., et al. and City of Columbus, et al. v. Hotels.com, L.P., et al.:  Defendants filed a motion for summary judgment on May 10, 2010.  On June 14, 2010, Plaintiffs filed a response to the motion for summary judgment, a cross motion for summary judgment and a motion to certify questions of law to the Ohio Supreme Court.  Defendants opposed the motion to certify on July 1, 2010.  On July 12, 2010, defendants filed a reply in support of their motion for summary judgment and in opposition to plaintiffs’ motion for summary judgment.  The motions have not yet been decided.

 

City of San Diego, California v. Hotels.com L.P., et al.:  On May 28, 2010, the administrative hearing officer appointed by the City issued a ruling holding the Company and other online travel companies liable for transient occupancy tax.  Specifically, the hearing officer’s decision held the Company liable for a total of $2.1 million in transient occupancy taxes and penalties.  The hearing officer rejected the City’s attempt to impose interest and certain penalties.  On August 4, 2010, the Company and the other online travel company defendants filed their Verified Petition and Cross-Complaint challenging Hearing Officer’s Ruling in the Los Angeles Superior Court.  The City has stated that it intends to file an amended complaint.

 

City of Atlanta, Georgia v. Hotels.com L.P., et al.:  Defendants filed a motion for summary judgment and plaintiff filed a motion for summary judgment and for a preliminary injunction on March 1, 2010.  On July 22, 2010, the court granted in part each motion.  The court granted defendants’ motion for summary judgment dismissing plaintiff’s claim for declaratory judgment, expressly finding that defendants are not innkeepers or operators under the ordinance and statute at issue.  At the same time, the court found that under the “merchant” model, defendants have undertaken an obligation to collect these taxes and granted plaintiff’s request for an injunction, prospectively enjoining defendants to collect and remit occupancy tax to the City of Atlanta.  In addition, the court held that the amount on which defendants must collect and remit such taxes is the rate charged to customers, which includes not only the amount paid to hotels for occupancy, but also defendants’ respective margins, i.e., compensation for reservation facilitation services.  The court denied plaintiff’s claims for unjust enrichment, money had and received, constructive trust, and for an equitable accounting.  The court also denied defendants’ constitutional claims.  The Company intends to comply with the judge’s order.  The City and the other defendants are appealing the court’s decision.

 

City of Charleston, South Carolina v. Hotel.com, et al., Town of Mount Pleasant, South Carolina v. Hotels.com, et al., City of North Myrtle Beach, South Carolina v. Hotels.com, LP, et al.:  The Company and other online travel company defendants reached principle settlement agreement with each plaintiff in these consolidated cases resolving their claims.  As part of the agreement, the respective plaintiff in each case has agreed to not assert claims based on the ordinances at issue in the action for a period of two years.   Dismissal of the action is expected shortly.

 

City of Houston, Texas v. Hotels.com, LP., et al.:  On November 23, 2009, defendants moved for summary judgment on all of plaintiffs’ claims.  The court granted the motion in its entirety and dismissed the action with prejudice on January 19, 2010.  The court denied plaintiffs’ motion for a new trial on March 29, 2010.  Plaintiffs filed a notice of appeal on April 14, 2010, and the matter is now pending before the Fourteenth Circuit Court of Appeals, Houston.  The parties completed briefing submissions on October 21, 2010 and are awaiting an argument date.

 

City of Baltimore, Maryland v. Priceline.com, Inc., et al.:  The Company and the City signed a final agreement resolving the claims for purported back taxes.  As part of the agreement, the City of Baltimore agreed not to assert claims based on the ordinance at issue in the action for a period of four years.  On October 1, 2010, the Court issued an order of dismissal, which included a stipulation of dismissal with prejudice.

 

County Commissioners of Worcester, Maryland v. Priceline.com, Inc., et al.:  The parties signed a final agreement resolving the claims for purported back taxes.  As part of the agreement, the County of Worcester agreed to not assert claims based on the ordinance at issue in the action for a period of four years.  On June 25, 2010, the Court issued an Order of Dismissal Due To Settlement.  A Stipulation of Dismissal, with prejudice, was filed on July 26, 2010.

 

City of Bowling Green, Kentucky v. Hotels.com LP et al.:  The court granted defendants motion to dismiss the complaint on April 8, 2010.  Plaintiff filed a notice of appeal on April 30, 2010.  Briefing on the appeal is currently ongoing.

 

St. Louis County, Missouri v. Prestige Travel, Inc. et al.:  On July 12, 2010, the court denied defendants’ motion to dismiss.  The defendants filed a motion for reconsideration based primarily on a recent clarification of the current statutory scheme by the Missouri legislative and executive branches.  The court granted the motion for consideration and dismissed the

 

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case with prejudice on September 8, 2010.  On September 27, 2010, the plaintiff appealed the court’s order dismissing the case.

 

Brevard County, Florida v. Priceline.com Inc., et al.: The parties reached an agreement in principle to resolve the matter at mediation on October 29, 2010 and are currently finalizing the agreement.  As part of the agreement in principle, plaintiff has agreed to not assert claims based on the ordinance at issue in the action for three years.

 

Leon County, Florida, et al. v. Expedia, Inc., et al.:  Defendants filed a motion to dismiss the complaint on January 19, 2010.  On February 9, 2010, Plaintiffs amended their complaint and filed a one count declaratory action.  Defendants filed answers and affirmative defenses to that amended complaint on March 17, 2010.  Plaintiffs filed a second amended complaint on April 6, 2010, which defendants answered on May 3, 2010.  On July 15, 2010 the plaintiffs filed with the court an unopposed motion to add five more counties as plaintiffs to the action.  The plaintiffs in this matter now consist of 17 Florida counties, including Leon County, Florida, and certain individual tax collectors for some of the counties.  The parties are currently conducting discovery.

 

Leon County, Florida v. Expedia, Inc. et al.:  Plaintiff filed an amended complaint on March 9, 2010 and defendants filed a motion to dismiss the amended complaint on March 24, 2010.  The Court denied defendants’ motion to dismiss on September 1, 2010.  Defendants filed an answer to the complaint on September 21, 2010.

 

City of Birmingham, Alabama, et al. v. Orbitz, Inc., et al.:  Defendants moved to dismiss the complaint on February 19, 2010.  The court denied the motion on April 1, 2010.  The court ordered expedited and limited discovery, with a discovery deadline of May 28, 2010.  Defendants moved for summary judgment on July 19, 2010. A hearing is currently scheduled for February 4, 2011.

 

Baltimore County v. Priceline.com et al:  On August 20, the Company filed a motion to dismiss the Complaint for failure to state a claim of action.  Briefing on the matter was completed on October 29, 2010.

 

City of Santa Monica, California v. Expedia, Inc., et al.:  On June 25, 2010, the City of Santa Monica, California filed a complaint in the Superior Court of the State of California, County of Los Angeles—West District.  At a hearing conducted on August 31, 2010, the Court granted the online travel company defendants’ motion to coordinate the Santa Monica action with other similar actions already pending in the Los Angeles Superior Court.  On October 8, 2010, the defendants moved to dismiss the City’s complaint.  On October 18, 2010, the City filed a motion to strike the motion because Defendants did not “pay first” the asserted tax liability prior to moving to dismiss.  Briefing is currently ongoing, and a hearing on the motion to strike is set for November 17, 2010.

 

In addition, the following new actions were filed during or after the three months ended September 30, 2010:

 

Hamilton County, Ohio, et al. v. Hotels.com, L.P., et al.:  On August 23, 2010, Hamilton County, Ohio, Cuyahoga County, Ohio and Erie County, Ohio filed a complaint in the Hamilton County Court of Common Pleas.  In addition to a claim that defendants have violated the local accommodations tax ordinances, the complaint asserts claims for unjust enrichment, money had and received, conversion, constructive trust, breach of contract, and declaratory judgment.  Defendants removed the action to federal court (Southern District of Ohio) on the basis of diversity jurisdiction.  The defendants filed on October 29, 2010, a motion to transfer venue to the Northern District of Ohio.  After the court rules on the motion to transfer venue, the defendants will respond to the complaint.

 

State of Oklahoma v. Priceline.com, Inc. et al.: On November 2, 2010, the State of Oklahoma filed a lawsuit in the District Court of Oklahoma County, Oklahoma, against the Company, Travelweb LLC, Lowestfare.com, Inc. and other online travel companies, alleging that the defendants failed to properly remit taxes to the state of Oklahoma under the Oklahoma Sales Tax Code.  The Complaint asserts claims for declaratory and injunctive relief, damages, penalties and interest.

 

State of Florida v. Expedia, Inc., et al.:  On November 1, 2010, the Office of the Attorney General of the State of Florida added the Company as a defendant in this action, originally filed in 2009 against other online travel companies.  The complaint asserts one claim, a violation of the state Deceptive and Unfair Trade Practices Act, insofar as the company does not collect and remit the state transient rentals tax.

 

The Company intends to defend vigorously against the claims in all of the proceedings described above.