The Priceline Group
PRICELINE COM INC (Form: 10-Q, Received: 11/07/2013 16:15:29)


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q  
(Mark One)
 
ý        QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 

For the quarterly period ended September 30, 2013
 
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 ý 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 ý No  o .
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" 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 ý
 
Number of shares of Common Stock outstanding at November 1, 2013 :
Common Stock, par value $0.008 per share
 
51,427,568
(Class)
 
(Number of Shares)




priceline.com Incorporated
Form 10-Q
 
For the Three Months Ended September 30, 2013
 
PART I - FINANCIAL INFORMATION
 
 
 
Item 1. Financial Statements
 
 
Consolidated Balance Sheets (unaudited) at September 30, 2013 and December 31, 2012
Consolidated Statements of Operations (unaudited) For the Three and Nine Months Ended September 30, 2013 and 2012
Consolidated Statements of Comprehensive Income (unaudited) For the Three and Nine Months Ended September 30, 2013 and 2012
Consolidated Statement of Changes in Stockholders’ Equity (unaudited) For the Nine Months Ended September 30, 2013
Consolidated Statements of Cash Flows (unaudited) For the Nine Months Ended September 30, 2013 and 2012
Notes to Unaudited Consolidated Financial Statements
 
 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
 
Item 3. Quantitative and Qualitative Disclosures About Market Risk
 
 
Item 4. Controls and Procedures
 
 
PART II - OTHER INFORMATION
 
 
 
Item 1. Legal Proceedings
 
 
Item 1A. Risk Factors
 
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 
 
Item 6. Exhibits
 
 
SIGNATURES

2



PART I — FINANCIAL INFORMATION
Item 1.  Financial Statements

priceline.com Incorporated
UNAUDITED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
 
 
 
September 30,
2013
 
December 31,
2012
ASSETS
 
 

 
 

Current assets:
 
 

 
 

Cash and cash equivalents
 
$
1,096,094

 
$
1,536,349

Restricted cash
 
9,034

 
6,641

Short-term investments
 
5,487,526

 
3,646,845

Accounts receivable, net of allowance for doubtful accounts of $12,256 and $10,322, respectively
 
706,234

 
367,512

Prepaid expenses and other current assets
 
107,688

 
84,290

Deferred income taxes
 
82,471

 
40,738

Total current assets
 
7,489,047

 
5,682,375

Property and equipment, net
 
119,766

 
89,269

Intangible assets, net
 
1,038,863

 
208,113

Goodwill
 
1,761,194

 
522,672

Deferred income taxes
 
827

 
31,485

Other assets
 
35,958

 
35,828

Total assets
 
$
10,445,655

 
$
6,569,742

 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 

 
 

Current liabilities:
 
 

 
 

Accounts payable
 
$
312,896

 
$
184,648

Accrued expenses and other current liabilities
 
544,021

 
387,911

Deferred merchant bookings
 
430,661

 
368,823

Convertible debt (see Note 8)
 
538,266

 
520,344

Total current liabilities
 
1,825,844

 
1,461,726

Deferred income taxes
 
371,498

 
45,159

Other long-term liabilities
 
83,934

 
68,944

Convertible debt (see Note 8)
 
1,731,027

 
881,996

Total liabilities
 
4,012,303

 
2,457,825

 
 
 
 
 
Redeemable noncontrolling interests (see Note 11)
 

 
160,287

Convertible debt (see Note 8)
 
36,730

 
54,655

 
 
 
 
 
Stockholders’ equity:
 
 

 
 

Common stock, $0.008 par value; authorized 1,000,000,000 shares, 60,274,497 and 58,055,586 shares issued, respectively
 
468

 
450

Treasury stock, 9,214,110 and 8,184,787 shares, respectively
 
(1,943,615
)
 
(1,060,607
)
Additional paid-in capital
 
4,459,333

 
2,612,197

Accumulated earnings
 
3,840,675

 
2,368,611

Accumulated other comprehensive income (loss)
 
39,761

 
(23,676
)
Total stockholders' equity
 
6,396,622

 
3,896,975

Total liabilities and stockholders' equity
 
$
10,445,655

 
$
6,569,742

 
See Notes to Unaudited Consolidated Financial Statements.

3



priceline.com Incorporated
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
 
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2013
 
2012
 
2013
 
2012
Agency revenues
 
$
1,576,434

 
$
1,118,128

 
$
3,411,002

 
$
2,427,751

Merchant revenues
 
620,904

 
584,969

 
1,729,692

 
1,632,402

Advertising and other revenues
 
72,565

 
3,213

 
111,459

 
10,163

Total revenues
 
2,269,903

 
1,706,310

 
5,252,153

 
4,070,316

Cost of revenues
 
280,838

 
309,809

 
869,568

 
926,385

Gross profit
 
1,989,065

 
1,396,501

 
4,382,585

 
3,143,931

Operating expenses:
 
 

 
 

 
 

 
 

Advertising — Online
 
533,164

 
375,204

 
1,399,452

 
966,820

Advertising — Offline
 
39,891

 
8,441

 
99,750

 
29,519

Sales and marketing
 
65,274

 
52,961

 
177,392

 
145,943

Personnel, including stock-based compensation of $34,551, $17,555, $90,996 and $51,690, respectively
 
186,443

 
135,210

 
486,658

 
343,916

General and administrative
 
63,113

 
42,287

 
178,195

 
122,768

Information technology
 
18,536

 
10,799

 
48,717

 
31,974

Depreciation and amortization
 
35,747

 
16,007

 
80,854

 
47,513

Total operating expenses
 
942,168

 
640,909

 
2,471,018

 
1,688,453

Operating income
 
1,046,897

 
755,592

 
1,911,567

 
1,455,478

Other income (expense):
 
 

 
 

 
 

 
 

Interest income
 
867

 
905

 
2,882

 
3,004

Interest expense
 
(24,135
)
 
(17,067
)
 
(61,097
)
 
(45,208
)
Foreign currency transactions and other
 
(3,278
)
 
(8,256
)
 
(7,002
)
 
(7,427
)
Total other income (expense)
 
(26,546
)
 
(24,418
)
 
(65,217
)
 
(49,631
)
Earnings before income taxes
 
1,020,351

 
731,174

 
1,846,350

 
1,405,847

Income tax expense
 
187,362

 
131,201

 
331,629

 
271,405

Net income
 
832,989

 
599,973

 
1,514,721

 
1,134,442

Less: net income attributable to noncontrolling interests
 

 
3,387

 
135

 
3,539

Net income applicable to common stockholders
 
$
832,989

 
$
596,586

 
$
1,514,586

 
$
1,130,903

Net income applicable to common stockholders per basic common share
 
$
16.22

 
$
11.97

 
$
29.88

 
$
22.70

Weighted average number of basic common shares outstanding
 
51,363

 
49,851

 
50,690

 
49,830

Net income applicable to common stockholders per diluted common share
 
$
15.72

 
$
11.66

 
$
29.00

 
$
22.05

Weighted average number of diluted common shares outstanding
 
52,984

 
51,185

 
52,226

 
51,295

 
See Notes to Unaudited Consolidated Financial Statements.


4



priceline.com Incorporated
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
Net income
$
832,989

 
$
599,973

 
$
1,514,721

 
$
1,134,442

Other comprehensive income, net of tax
 
 
 
 
 
 
 
Foreign currency translation adjustments  (1)
114,366

 
48,366

 
52,547

 
29,715

Unrealized gain (loss) on marketable securities (2)
977

 
244

 
476

 
(544
)
Comprehensive income
948,332

 
648,583

 
1,567,744

 
1,163,613

Less: Comprehensive income (loss) attributable to noncontrolling interests (See Note 11)

 
7,222

 
(10,279
)
 
8,000

Comprehensive income attributable to common stockholders
$
948,332

 
$
641,361

 
$
1,578,023

 
$
1,155,613


(1) Net of tax benefit of $ 42,253 and $ 27,969 for the three and nine months ended September 30, 2013, respectively, and net of tax benefit of $ 7,965 and tax of $ 2,770 for the three and nine months ended September 30, 2012, respectively, associated with hedges of foreign denominated net assets. See Note 12.

(2) Net of tax of $ 452 and $ 201 for the three and nine months ended September 30, 2013, respectively, and net of tax of $ 178 and tax benefit of $ 167 for the three and nine months ended September 30, 2012, respectively.


See Notes to Unaudited Consolidated Financial Statements.


5



priceline.com Incorporated
UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2013
(In thousands)
 
 
 
Common Stock
 
Treasury Stock
 
Additional Paid-In Capital
 
Accumulated Earnings
 
Accumulated Other Comprehensive Income (Loss)
 
 
 
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
Total
Balance, December 31, 2012
 
58,056

 
$
450

 
(8,185
)
 
$
(1,060,607
)
 
$
2,612,197

 
$
2,368,611

 
$
(23,676
)
 
$
3,896,975

Net income applicable to common stockholders
 

 

 

 

 

 
1,514,586

 

 
1,514,586

Foreign currency translation adjustments, net of tax benefit of $27,969
 

 

 

 

 

 

 
62,961

 
62,961

Unrealized gain on marketable securities, net of tax of $201
 

 

 

 

 

 

 
476

 
476

Redeemable noncontrolling interests fair value adjustments
 

 

 

 

 

 
(42,522
)
 

 
(42,522
)
Reclassification adjustment for convertible debt in mezzanine
 

 

 

 

 
17,925

 

 

 
17,925

Exercise of stock options and vesting of restricted stock units and performance share units
 
696

 
6

 

 

 
86,304

 

 

 
86,310

Repurchase of common stock
 

 

 
(1,029
)
 
(883,008
)
 

 

 

 
(883,008
)
Stock-based compensation and other stock-based payments
 

 

 

 

 
91,810

 

 

 
91,810

Issuance of convertible senior notes
 

 

 

 
 
 
92,239

 

 

 
92,239

Common stock issued in an acquisition
 
1,522

 
12

 

 

 
1,281,122

 

 

 
1,281,134

Vested stock options assumed in an acquisition
 

 

 

 

 
264,423

 

 

 
264,423

Conversion of debt
 

 

 

 

 
(5
)
 

 

 
(5
)
Excess tax benefit on stock-based compensation
 

 

 

 

 
13,318

 

 

 
13,318

Balance, September 30, 2013
 
60,274

 
$
468

 
(9,214
)
 
$
(1,943,615
)
 
$
4,459,333

 
$
3,840,675

 
$
39,761

 
$
6,396,622

 
See Notes to Unaudited Consolidated Financial Statements.


6



priceline.com Incorporated
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
 
 
Nine Months Ended
September 30,
 
 
2013
 
2012
OPERATING ACTIVITIES:
 
 
 
 
Net income
 
$
1,514,721

 
$
1,134,442

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation
 
33,965

 
23,321

Amortization
 
46,889

 
24,192

Provision for uncollectible accounts, net
 
12,678

 
11,287

Deferred income taxes
 
11,450

 
16,446

Stock-based compensation expense and other stock-based payments
 
91,810

 
52,042

Amortization of debt issuance costs
 
4,352

 
3,790

Amortization of debt discount
 
41,225

 
28,831

Changes in assets and liabilities:
 
 
 
 
Accounts receivable
 
(283,961
)
 
(232,660
)
Prepaid expenses and other current assets
 
(8,514
)
 
(97,057
)
Accounts payable, accrued expenses and other current liabilities
 
280,945

 
318,054

Other
 
1,403

 
6,243

Net cash provided by operating activities
 
1,746,963

 
1,288,931

 
 
 
 
 
INVESTING ACTIVITIES:
 
 
 
 
Purchase of investments
 
(7,100,081
)
 
(4,790,106
)
Proceeds from sale of investments
 
5,341,488

 
3,069,242

Additions to property and equipment
 
(56,958
)
 
(38,950
)
Acquisitions and other equity investments, net of cash acquired
 
(331,557
)
 
(13,871
)
Proceeds from settlement of foreign currency contracts
 
3,266

 
78,828

Payments on foreign currency contracts
 
(56,045
)
 
(2,222
)
Change in restricted cash
 
(1,506
)
 
(3,474
)
Net cash used in investing activities
 
(2,201,393
)
 
(1,700,553
)
 
 
 
 
 
FINANCING ACTIVITIES:
 
 
 
 
Proceeds from the issuance of convertible debt
 
980,000

 
1,000,000

Payment of debt issuance costs
 
(910
)
 
(20,916
)
Payments related to conversion of senior notes
 
(8
)
 
(1
)
Repurchase of common stock
 
(883,008
)
 
(255,397
)
Payments to purchase subsidiary shares from noncontrolling interests
 
(192,530
)
 
(61,079
)
Payments of stock issuance costs
 
(1,191
)
 

Proceeds from exercise of stock options
 
86,310

 
2,655

Excess tax benefit on stock-based compensation
 
13,318

 
12,911

Net cash provided by financing activities
 
1,981

 
678,173

Effect of exchange rate changes on cash and cash equivalents
 
12,194

 
(917
)
Net (decrease) increase in cash and cash equivalents
 
(440,255
)
 
265,634

Cash and cash equivalents, beginning of period
 
1,536,349

 
632,836

Cash and cash equivalents, end of period
 
$
1,096,094

 
$
898,470

SUPPLEMENTAL CASH FLOW INFORMATION:
 
 
 
 
Cash paid during the period for income taxes
 
$
265,303

 
$
205,256

Cash paid during the period for interest
 
$
18,614

 
$
13,463

Non-cash fair value increase for redeemable noncontrolling interests
 
$
42,522

 
$
59,255

Non-cash financing activity for acquisitions
 
$
1,546,748

 
$

 
See Notes to Unaudited Consolidated Financial Statements.

7



priceline.com Incorporated
Notes to Unaudited Consolidated Financial Statements
 
1.                                       BASIS OF PRESENTATION
 
Priceline.com Incorporated (the "Priceline Group" 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, 2012 .
 
The Unaudited Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiaries, including KAYAK Software Corporation ("KAYAK") since its acquisition on May 21, 2013 (see Note 14). All inter-company accounts and transactions have been eliminated in consolidation.  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 income (loss)" on the accompanying Unaudited Consolidated Balance Sheets.  Foreign currency transaction gains and losses are included on the Unaudited Consolidated Statements of Operations 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
 
In February 2013, the Financial Accounting Standards Board ("FASB") issued accounting guidance which requires entities to provide additional information about items reclassified out of accumulated other comprehensive income ("AOCI") to net income. Changes in AOCI balances by component, both before tax and after tax, must be disclosed and significant items reclassified out of AOCI by component must be reported either on the face of the income statement or in a separate footnote to the financial statements. The accounting guidance is effective for public companies for fiscal years, and interim periods within those years, beginning after December 15, 2012. See Note 12 for information on AOCI balances. There were no reclassifications out of AOCI to net income for the nine months ended September 30, 2013 and 2012.
In July 2013, the FASB issued an accounting update which provides guidance on financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward or a tax credit carryforward exists in the same taxing jurisdiction. Per this guidance, an entity must present the unrecognized tax benefit as a reduction to a deferred tax asset, except when the carryforward is not available as of the reporting date under the governing tax law to settle taxes or the entity does not intend to use the deferred tax asset for this purpose. This amendment does not impact the recognition or measurement of uncertain tax positions or the disclosure reconciliation of gross unrecognized tax benefits. The update is effective for public companies beginning after December 15, 2013. Early adoption of the update is permitted and an entity may choose to apply this amendment retrospectively to each reporting period presented. The adoption of this accounting update is not expected to have a material impact on the Company's consolidated financial statements.

2.                                       STOCK-BASED EMPLOYEE COMPENSATION
 
Stock-based compensation expense included in personnel expenses in the Unaudited Consolidated Statements of Operations was approximately $ 34.6 million and $ 17.6 million for the three months ended September 30, 2013 and 2012, respectively, and $ 91.0 million and $ 51.7 million for the nine months ended September 30, 2013 and 2012 , respectively.

The cost of stock-based transactions is recognized in the financial statements based upon fair value. The fair value of performance share units and restricted stock units is determined based on the number of units or shares, as applicable, granted and the quoted price of the Company's common stock as of the grant date. Stock-based compensation related to performance share units reflects the estimated probable outcome at the end of the performance period. The fair value of employee stock

8



options assumed in the acquisition of KAYAK was determined using the Black-Scholes model and the market value of the Company's common stock at the merger date. Fair value is recognized as expense on a straight line basis, net of estimated forfeitures, over the employee requisite service period.
 
Restricted Stock Units and Performance Share Units

The following table summarizes the activity of unvested restricted stock units and performance share units ("share-based awards") during the nine months ended September 30, 2013
Share-Based Awards
 
Shares
 
 
Weighted Average Grant Date Fair Value
Unvested at December 31, 2012
 
540,128

 
$
389.21

Granted
 
154,001

 
$
710.65

Vested
 
(256,021
)
 
$
240.30

Performance Share Units Adjustment
 
15,391

 
$
659.39

Forfeited
 
(10,372
)
 
$
555.36

Unvested at September 30, 2013
 
443,127

 
$
592.46

 
As of September 30, 2013 , there was $ 132.2 million of total future compensation cost related to unvested share-based awards to be recognized over a weighted-average period of 1.6 years.
 
During the three months ended March 31, 2013, the Company made broad-based grants of 43,431 restricted stock units that generally vest after three years. These share-based awards had a total grant date fair value of $ 30.2 million based on a weighted average grant date fair value per share of $ 695.62 . During the three months ended June 30, 2013, the Company made broad-based grants of 4,334 restricted stock units that generally vest after three years. These share-based awards had a total grant date fair value of $ 3.5 million based on a weighted average grant date fair value per share of $ 801.43 . During the three months ended September 30, 2013, the Company made broad-based grants of 1,371 restricted stock units that generally vest after three years. These share-based awards had a total grant date fair value of $ 1.3 million based on a weighted average grant date fair value per share of $ 969.89 .

In addition, during the three months ended March 31, 2013 , the Company granted 92,615 performance share units to certain executives.  The performance share units had a total grant date fair value of $ 64.4 million based upon a weighted average grant date fair value per share of $ 695.62 .  During the three months ended June 30, 2013, the Company granted 12,250 performance share units to certain executives which had a total grant date fair value of $ 10.0 million based upon a weighted average grant date fair value per share of $ 816.45 . The performance share units are payable in shares of the Company's common stock upon vesting. 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, recipients of these performance share units must continue their service through the three year requisite service period in order to receive any shares.  Stock-based compensation related to performance share units reflects the estimated probable outcome at the end of the performance period.  The actual number of shares to be issued on the vesting date will be determined upon completion of the performance period which ends December 31, 2015, assuming there is no accelerated vesting for, among other things, a termination of employment under certain circumstances, or a change in control.  As of September 30, 2013 , the estimated number of probable shares to be issued is a total of 103,277 shares.  If the maximum performance thresholds are met at the end of the performance period, a maximum number of 226,124 total shares could be issued.  If the minimum performance thresholds are not met, 40,581 shares would be issued at the end of the performance period.
 
2012 Performance Share Units

During the year ended December 31, 2012 , the Company granted 60,365 performance share units with a grant date fair value of $39.0 million , based on a weighted average grant date fair value per share of $645.86 . The actual number of shares to be issued will be determined upon completion of the performance period which ends December 31, 2014.

At September 30, 2013 , there were 58,120 unvested 2012 performance share units outstanding, net of performance share units that were forfeited or vested since the grant date. As of September 30, 2013 , the number of shares estimated to be issued pursuant to these performance share units at the end of the performance period is a total of 77,943 shares. If the maximum thresholds are met at the end of the performance period, a maximum of 116,240 total shares could be issued pursuant

9



to these performance share units. If the minimum performance thresholds are not met, 36,366 shares would be issued at the end of the performance period.

2011 Performance Share Units
 
During the year ended December 31, 2011, the Company granted 77,144 performance share units with a grant date fair value of $ 35.9 million , based on a weighted average grant date fair value per share of $464.79 .  The actual number of shares to be issued will be determined upon completion of the performance period which ends December 31, 2013 .
 
At September 30, 2013 , there were 73,045 unvested 2011 performance share units outstanding, net of performance share units that were forfeited or vested since the grant date.  As of September 30, 2013 , the number of shares estimated to be issued pursuant to these performance share units at the end of the performance period is a total of 149,701 shares.  If the maximum performance thresholds are met at the end of the performance period, a maximum of 156,310 total shares could be issued pursuant to these performance share units. If the minimum performance thresholds are not met, 18,697 shares would be issued at the end of the performance period.

Stock Options

Excluding employee stock options assumed in the acquisition of KAYAK (refer to disclosure below on assumed employee stock options), during the nine months ended September 30, 2013 , stock options were exercised for 59,005 shares of common stock with a weighted average exercise price per share of $19.22 .  As of September 30, 2013 , the aggregate number of stock options outstanding and exercisable (excluding employee stock options assumed in the acquisition of KAYAK) was 11,996 shares, with a weighted average exercise price per share of $22.67 and a weighted average remaining term of 1.3 years.

The following table summarizes for the second and third quarters of 2013 stock option activity for vested and unvested employee stock options assumed in the acquisition of KAYAK:
Assumed Employee Stock Options
 
Number of Shares
 
Weighted Average
 Exercise Price
 
Aggregate
 Intrinsic Value (000's)
 
Weighted Average Remaining Contractual Term (in years)
Balance, May 21, 2013
 
540,179

 
$
260.96

 
$
314,133

 
6.8
Exercised
 
(329,687
)
 
$
207.93

 
 
 
 
 
Forfeited
 
(2,210
)
 
$
395.99

 
 
 
 
 
Balance, June 30, 2013
 
208,282

 
$
343.47

 
$
100,641

 
7.5
Exercised
 
(44,204
)
 
$
288.48

 
 
 
 
 
Forfeited
 
(11,023
)
 
$
463.23

 
 
 
 
 
Balance, September 30, 2013
 
153,055

 
$
350.74

 
$
101,048

 
7.3
Vested and exercisable as of September 30, 2013
 
85,583

 
$
257.74

 
$
64,462

 
6.7
Vested and exercisable as of September 30, 2013 and expected to vest thereafter, net of estimated forfeitures
 
149,438

 
$
347.46

 
$
99,150

 
7.3

The total intrinsic value of employee stock options assumed in the acquisition of KAYAK that were exercised during the periods of May 22 through June 30, 2013 and the three months ended September 30, 2013 was $ 197.5 million and $ 29.0 million , respectively.

At May 21, 2013, there were vested employee stock options assumed in the acquisition of KAYAK for 408,716 shares of common stock with a fair value of $ 260.9 million . The fair value of these assumed vested employee stock options was included in the purchase price allocation, with a corresponding increase in additional paid-in capital.

At May 21, 2013, there were unvested employee stock options assumed in the acquisition of KAYAK for 131,463 shares of common stock with a fair value of $ 57.4 million and a weighted average fair value per share of $443.92 . During the second and third quarters of 2013, assumed unvested employee stock options vested for 15,923 shares and 34,835 shares of common stock with a fair value of $ 7.6 million and $ 15.4 million , respectively.

10




The following assumptions were used for the three months ended June 30, 2013 to determine the fair value of the assumed options:
 
 
Weighted Average
 
Range
Risk-free interest rate
 
0.23
%
 
0.11% - 0.63%
Expected volatility
 
32
%
 
25% - 39%
Expected life (in years)
 
2.2

 
9 months - 4 years
Dividend yield
 
%
 
 

For the second and third quarters of 2013, the Company recorded stock-based compensation expense of $ 11.0 million and $ 12.0 million , respectively, for the KAYAK unvested assumed employee stock options. As of September 30, 2013, there was $ 27.3 million of total future compensation cost related to these KAYAK unvested assumed employee stock options to be recognized over a weighted-average period of 2.1 years.


3.                                       NET INCOME PER SHARE
 
The Company computes basic net income per share by dividing net income 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 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, at the Company's option.  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): 
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2013
 
2012
 
2013
 
2012
Weighted average number of basic common shares outstanding
 
51,363

 
49,851

 
50,690

 
49,830

Weighted average dilutive stock options, restricted stock units and performance share units
 
338

 
353

 
359

 
475

Assumed conversion of convertible debt
 
1,283

 
981

 
1,177

 
990

Weighted average number of diluted common and common equivalent shares outstanding
 
52,984

 
51,185

 
52,226

 
51,295

Anti-dilutive potential common shares
 
2,923

 
2,335

 
2,931

 
2,246

 
Anti-dilutive potential common shares for the three and nine months ended September 30, 2013 include approximately 2.4 million and 2.5 million shares, respectively, that could be issued under the Company's outstanding convertible notes, if the Company experiences substantial increases in its common stock price.  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.

In 2006 , the Company issued $ 172.5 million aggregate principal amount of convertible notes due September 30, 2013 (the "2013 Notes"). In 2006 , the Company also entered into hedge transactions (the "Conversion Spread Hedges") relating to the potential dilution of the Company's common stock upon conversion of the 2013 Notes at their stated maturity date.


11



The Conversion Spread Hedges were settled in October 2013 and the Company received 42,160 share s of common stock from the counterparties . The settlement will be accounted for as an equity transaction. Since the impact of the Conversion Spread Hedges was anti-dilutive, it is excluded from the calculation of net income per share until the shares of common stock are received in October.

4.                                       INVESTMENTS
 
The following table summarizes, by major security type, the Company's short-term investments as of September 30, 2013 (in thousands): 
 
 
Cost
 
Gross 
Unrealized 
Gains
 
Gross 
Unrealized
  Losses
 
Fair
  Value
Available for sale securities
 
 

 
 

 
 

 
 

Foreign government securities
 
$
3,605,525

 
$
686

 
$
(458
)
 
$
3,605,753

U.S. government securities
 
1,880,675

 
700

 
(4
)
 
1,881,371

Corporate debt securities
 
402

 

 

 
402

Total
 
$
5,486,602

 
$
1,386

 
$
(462
)
 
$
5,487,526

 
As of September 30, 2013 , foreign government securities included investments in debt securities issued by the governments of Germany, the Netherlands, and the United Kingdom. 
 
The following table summarizes, by major security type, the Company's short-term investments as of December 31, 2012 (in thousands): 
 
 
Cost
 
Gross
  Unrealized
  Gains
 
Gross
  Unrealized
  Losses
 
Fair
  Value
Available for sale securities
 
 

 
 

 
 

 
 

Foreign government securities
 
$
1,886,822

 
$
18

 
$
(287
)
 
$
1,886,553

U.S. government securities
 
1,759,773

 
520

 
(1
)
 
1,760,292

Total
 
$
3,646,595

 
$
538

 
$
(288
)
 
$
3,646,845

 

There were no realized gains or losses related to investments for the three and nine months ended September 30, 2013 and 2012 .

12





5.                                       FAIR VALUE MEASUREMENTS
 
Financial assets and liabilities carried at fair value as of September 30, 2013 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
 
$

 
$
3,605,753

 
$

 
$
3,605,753

U.S. government securities
 

 
1,881,371

 

 
1,881,371

Corporate debt securities
 

 
402

 

 
402

Foreign exchange derivatives
 

 
168

 

 
168

Total assets at fair value
 
$

 
$
5,487,694

 
$

 
$
5,487,694

 
 
 
Level 1
 
Level 2
 
Level 3
 
Total
LIABILITIES:
 
 

 
 

 
 

 
 

Foreign exchange derivatives
 
$

 
$
80,573

 
$

 
$
80,573

Redeemable noncontrolling interests
 

 

 

 

Total liabilities at fair value
 
$

 
$
80,573

 
$

 
$
80,573

 
Financial assets and liabilities carried at fair value as of December 31, 2012 were 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
 
$

 
$
1,886,553

 
$

 
$
1,886,553

U.S. government securities
 

 
1,760,292

 

 
1,760,292

Foreign exchange derivatives
 

 
1,038

 

 
1,038

Total assets at fair value
 
$

 
$
3,647,883

 
$

 
$
3,647,883

 
 
 
Level 1
 
Level 2
 
Level 3
 
Total
LIABILITIES:
 
 

 
 

 
 

 
 

Foreign exchange derivatives
 
$

 
$
63,151

 
$

 
$
63,151

Redeemable noncontrolling interests
 

 

 
160,287

 
160,287

Total liabilities at fair value
 
$

 
$
63,151

 
$
160,287

 
$
223,438

 
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 :
Inputs that are observable, either directly or indirectly.  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.

Investments in foreign government and U.S. Treasury securities are considered "Level 2 " valuations because the Company has access to quoted prices, but does not have visibility to the volume and frequency of trading for all of these investments.  Investments in corporate debt securities are valued using recently executed transactions, bid price or spread, and benchmark curves and are considered "Level 2" valuations. For the Company's investments, a market approach is used for

13



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. The Company's derivative instruments are typically short-term in nature.
 
The Company considered its redeemable noncontrolling interests to represent a "Level 3 " fair value measurement that requires a high degree of judgment to determine fair value.  The fair value of the redeemable noncontrolling interests was determined by industry peer comparable analysis and a discounted cash flow valuation model. In April 2013, the Company purchased the remaining shares underlying redeemable controlling interests. See Note 11 for information on the estimated fair value of redeemable noncontrolling interests.
 
As of September 30, 2013 and December 31, 2012 , the carrying value of the Company's cash and cash equivalents approximated their fair value and consisted primarily of foreign and U.S. 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 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 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 international 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 is exposed to adverse movements in currency exchange rates as the operating results of its international operations are translated from local currency into U.S. Dollars upon consolidation.  The Company's derivative contracts principally address short-term foreign exchange fluctuations for the Euro and British Pound Sterling versus the U.S. Dollar.  As of September 30, 2013 and December 31, 2012 , there were no outstanding derivative contracts associated with foreign currency translation risk.  Foreign exchange losses of $ 1.1 million and foreign exchange gains of $ 1.0 million for the three and nine months ended September 30, 2013 , respectively, and foreign exchange losses of $ 5.3 million and foreign exchange gains of $ 0.5 million for the three and nine months ended September 30, 2012 , respectively, were recorded in "Foreign currency transactions and other" on the Unaudited Consolidated Statements of Operations.
 
The Company also enters into foreign currency forward contracts to hedge its exposure to the impact of movements in currency exchange rates on its transactional balances denominated in currencies other than the functional currency. Foreign exchange derivatives outstanding as of September 30, 2013 associated with hedging these risks resulted in a net liability of $ 1.1 million , with $ 0.1 million recorded in "Prepaid expenses and other current assets" and $ 1.2 million recorded in "Accrued expenses and other current liabilities" on the Unaudited Consolidated Balance Sheet. Foreign exchange derivatives outstanding as of December 31, 2012 associated with hedging these risks resulted in a net asset of $ 0.3 million , with $ 0.8 million recorded in "Prepaid expenses and other current assets" and $ 0.5 million recorded in "Accrued expenses and other current liabilities" on the Unaudited Consolidated Balance Sheet.  Foreign exchange gains of $ 1.5 million and $ 1.9 million for the three and nine months ended September 30, 2013 compared to foreign exchange gains of $ 1.5 million and foreign exchange losses of $ 1.1 million for the three and nine months ended September 30, 2012 were recorded related to these derivatives in "Foreign currency transactions and other" on the Unaudited Consolidated Statements of Operations.
 
The settlement of derivative contracts not designated as hedging instruments resulted in a net cash inflow of $ 3.6 million for the nine months ended September 30, 2013 compared to a net cash inflow of $ 3.3 million for the nine months ended September 30, 2012 , and are reported within "Net cash provided by operating activities" on the Unaudited Consolidated Statements of Cash Flows.
 

14



Derivatives Designated as Hedging Instruments — As of September 30, 2013 and December 31, 2012 , the Company had outstanding foreign currency forward contracts with a notional value of 2.4 billion Euros and 1.5 billion Euros, respectively, to hedge a portion of its net investment in a foreign subsidiary.  These contracts are 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, 2013 was a net liability of $ 79.3 million , with $ 0.1 million recorded in "Prepaid expenses and other current assets" and $ 79.4 million recorded in "Accrued expenses and other current liabilities" on the Unaudited Consolidated Balance Sheet. The fair value of these derivatives at December 31, 2012 was a net liability of $ 62.4 million , with $ 62.6 million recorded in "Accrued expenses and other current liabilities" and $ 0.2 million recorded in "Prepaid expenses and other current assets" on the Unaudited Consolidated Balance Sheet.  A net cash outflow of $ 52.8 million for the nine months ended September 30, 2013 compared to a net cash inflow of $ 76.6 million for the nine months ended September 30, 2012 is reported within "Net cash used in investing activities" on the Unaudited Consolidated Statements of Cash Flows.


6.                                       INTANGIBLE ASSETS AND GOODWILL
 
The Company's intangible assets at September 30, 2013 and December 31, 2012 consisted of the following (in thousands): 
 
September 30, 2013
 
December 31, 2012
 
 
 
 
 
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
$
576,478

 
$
(148,233
)
 
$
428,245

 
$
269,523

 
$
(122,940
)
 
$
146,583

 
10 - 20 years
 
16 years
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Technology
96,790

 
(29,088
)
 
67,702

 
23,329

 
(23,250
)
 
79

 
3 - 5 years
 
5 years
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Patents
1,638

 
(1,481
)
 
157

 
1,638

 
(1,446
)
 
192

 
15 years
 
15 years
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Customer lists

 

 

 
20,500

 
(20,500
)
 

 
0 years
 
0 years
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Internet domain names
44,611

 
(10,074
)
 
34,537

 
39,559

 
(3,817
)
 
35,742

 
2 - 20 years
 
8 years
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Trade names
550,256

 
(42,038
)
 
508,218

 
53,817

 
(28,305
)
 
25,512

 
5 - 20 years
 
19 years
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other
326

 
(322
)
 
4

 
326

 
(321
)
 
5

 
3 - 10 years
 
4 years
Total intangible assets
$
1,270,099

 
$
(231,236
)
 
$
1,038,863

 
$
408,692

 
$
(200,579
)
 
$
208,113

 
 
 
 
 
Intangible assets with determinable lives are amortized on a straight-line basis.  Intangible asset amortization expense was approximately $ 22.9 million and $ 7.8 million for the three months ended September 30, 2013 and 2012 , respectively. Intangible asset amortization expense was approximately $ 46.9 million and $ 24.2 million for the nine months ended September 30, 2013 and 2012, respectively.

15




The amortization expense for intangible assets for the remainder of 2013 , the annual expense for the next five years , and the expense thereafter is expected to be as follows (in thousands): 
2013
$
22,457

2014
89,820

2015
86,869

2016
83,864

2017
79,857

2018
63,977

Thereafter
612,019

 
$
1,038,863

 
The change in goodwill for the nine months ended September 30, 2013 consists of the following (in thousands): 
Balance at December 31, 2012
$
522,672

Acquisitions
1,234,480

Currency translation adjustments
4,042

Balance at September 30, 2013
$
1,761,194

 
During the three months ended September 30, 2013, the Company performed its annual goodwill impairment testing and concluded that there was no impairment of goodwill. A substantial portion of the intangible assets and goodwill relates to the acquisition of the KAYAK business in May 2013.  See Note 14 for further information on the acquisition. The fair values of the Company's other reporting units substantially exceed their respective carrying values.


7.                                       OTHER ASSETS
 
Other assets at September 30, 2013 and December 31, 2012 consisted of the following (in thousands): 
 
 
September 30,
2013
 
December 31,
2012
Deferred debt issuance costs
 
$
20,011

 
$
23,523

Other
 
15,947

 
12,305

Total
 
$
35,958

 
$
35,828

 
Deferred debt issuance costs arose from (i) the $ 1.0 billion aggregate principal amount of 1.0% Convertible Senior Notes, due March 15, 2018 , issued in March 2012 ; (ii) a $ 1.0 billion revolving credit facility entered into in October 2011 ; (iii) the Company's issuance, in March 2010 , of the $ 575.0 million aggregate principal amount of 1.25% Convertible Senior Notes, due March 15, 2015 , and (iv) the $ 1.0 billion aggregate principal amount of 0.35% Convertible Senior Notes, due June 15, 2020 , issued in May 2013.  Deferred debt issuance costs are being amortized using the effective interest rate method and the period of amortization was determined at inception of the related debt agreements based upon the stated maturity dates.

8.                                       DEBT
 
Revolving Credit Facility

In October 2011 , the Company entered into a $ 1.0 billion five -year unsecured revolving credit facility with a group of lenders. Borrowings under the revolving credit facility will bear interest, at the Company's option, at a rate per annum equal to either (i) the adjusted LIBOR for the interest period in effect for such borrowing plus an applicable margin ranging from 1.00% to 1.50% ; or (ii) the greatest of (a) JPMorgan Chase Bank, National Association's prime lending rate, (b) the federal funds rate plus 0.50% , and (c) an adjusted LIBOR for an interest period of one month plus 1.00% , plus an applicable margin ranging from 0.00% to 0.50% . Undrawn balances available under the revolving credit facility are subject to commitment fees at the applicable rate ranging from 0.10% to 0.25% .
 
The revolving credit facility provides for the issuance of up to $ 100.0 million of letters of credit as well as borrowings of up to $ 50.0 million on same-day notice, referred to as swingline loans. Borrowings under the revolving credit facility may

16



be made in U.S. Dollars, Euros, British Pounds 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, 2013 and December 31, 2012 , there were no borrowings under the facility and there were approximately $ 1.9 million of letters of credit issued under the facility for both periods.
 
Convertible Debt
 
Convertible debt as of September 30, 2013 consisted of the following (in thousands): 
September 30, 2013
 
Outstanding
  Principal 
Amount
 
Unamortized
  Debt
  Discount
 
Carrying
  Value
1.25% Convertible Senior Notes due March 2015
 
$
574,996

 
$
(36,730
)
 
$
538,266

1.0% Convertible Senior Notes due March 2018
 
1,000,000

 
(102,168
)
 
897,832

0.35% Convertible Senior Notes due June 2020
 
1,000,000

 
(166,805
)
 
833,195

Outstanding convertible debt
 
$
2,574,996

 
$
(305,703
)
 
$
2,269,293

 
Convertible debt as of December 31, 2012 consisted of the following (in thousands): 
December 31, 2012
 
Outstanding
  Principal 
Amount
 
Unamortized
  Debt
  Discount
 
Carrying
  Value
1.25% Convertible Senior Notes due March 2015
 
$
574,999

 
$
(54,655
)
 
$
520,344

1.0% Convertible Senior Notes due March 2018
 
1,000,000

 
(118,004
)
 
881,996

Outstanding convertible debt
 
$
1,574,999

 
$
(172,659
)
 
$
1,402,340

 
Based upon the closing price of the Company's common stock for the prescribed measurement period during the three months ended September 30, 2013 and December 31, 2012 , the contingent conversion threshold on the 2015 Notes (as defined below) was exceeded.  Therefore, the 2015 Notes were convertible at the option of the holders. Accordingly, the Company reported the carrying value of the 2015 Notes as a current liability as of September 30, 2013 and December 31, 2012 . Since these notes are convertible at the option of the holders and the principal amount is required to be paid in cash, the difference between the principal amount and the carrying value is reflected as convertible debt in the mezzanine section on the Company's Unaudited Consolidated Balance Sheets. Therefore, with respect to the 2015 Notes, the Company reclassified $ 36.7 million and $ 54.7 million before tax from additional paid-in capital to convertible debt in the mezzanine section on the Company's Unaudited Consolidated Balance Sheets as of September 30, 2013 and December 31, 2012 , respectively. The determination of whether or not the 2015 Notes are convertible must continue to be performed on a quarterly basis. Consequently, the 2015 Notes may not be convertible in future quarters, and therefore may again be classified as long-term debt, if the contingent conversion threshold is not met in such quarters. As of October 25, 2013, the Company had received early conversion notices for an aggregate principal amount of approximately $ 390 million associated with the 1.25% Convertible Senior Notes due March 2015. During the three months ended December 31, 2013, the Company will deliver cash of approximately $ 390 million to satisfy the aggregate principal amount and will issue shares of its common stock in satisfaction of the conversion value in excess of the principal amount for the convertible debt that was converted prior to maturity.

The contingent conversion thresholds on the 2018 Notes (as defined below) and the 2020 Notes (as defined below) were not exceeded at September 30, 2013 and the contingent conversion threshold for the 2018 Notes was not exceeded at December 31, 2012 , and therefore these Notes are reported as a non-current liability on the Unaudited Consolidated Balance Sheets.

As of September 30, 2013 and December 31, 2012 , the estimated market value of the outstanding convertible senior notes was approximately $ 4.3 billion and $ 2.3 billion , respectively, and was considered a "Level 2 " fair value measurement (see Note 5). 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.  A substantial portion of the market value of the Company's debt in excess of the outstanding principal amount relates to the conversion premium on the convertible senior notes.
 

17




Description of Senior Notes
 
In May 2013, the Company issued in a private placement $ 1.0 billion aggregate principal amount of Convertible Senior Notes due June 15, 2020, with an interest rate of 0.35% (the "2020 Notes"). The 2020 Notes were issued with an initial discount of $ 20.0 million . The Company paid $ 0.9 million in debt issuance costs during the nine months ended September 30, 2013, related to this offering. The 2020 Notes are convertible, subject to certain conditions, into the Company's common stock at a conversion price of approximately $ 1,315.10 per share. The 2020 Notes are convertible, at the option of the holder, prior to June 15, 2020, upon the occurrence of specific 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 trading days in the period of 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 2020 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 2020 Notes in an aggregate value ranging from $ 0 to approximately $ 397.0 million depending upon the date of the transaction and the then current stock price of the Company. As of March 15, 2020, holders will have the right to convert all or any portion of the 2020 Notes. The 2020 Notes may not be redeemed by the Company prior to maturity.  The holders may require the Company to repurchase the 2020 Notes for cash in certain circumstances.  Interest on the 2020 Notes is payable on June 15 and December 15 of each year.

In March 2012 , the Company issued in a private placement $ 1.0 billion aggregate principal amount of Convertible Senior Notes due March 15, 2018 , with an interest rate of 1.0% (the "2018 Notes"). The Company paid $ 20.9 million in debt issuance costs during the nine months ended September 30, 2012, related to this offering. The 2018 Notes are convertible, subject to certain conditions, into the Company's common stock at a conversion price of approximately $ 944.61 per share. The 2018 Notes are convertible, at the option of the holder, prior to March 15, 2018 , upon the occurrence of specific 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 trading days in the period of 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 2018 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 2018 Notes in aggregate value ranging from $ 0 to approximately $ 344.0 million depending upon the date of the transaction and the then current stock price of the Company. As of December 15, 2017 , holders will have the right to convert all or any portion of the 2018 Notes. The 2018 Notes may not be redeemed by the Company prior to maturity.  The holders may require the Company to repurchase the 2018 Notes for cash in certain circumstances.  Interest on the 2018 Notes is payable on March 15 and September 15 of each year.

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 Company paid $ 13.3 million in debt issuance costs associated with the 2015 Notes for the year ended December 31, 2010 .  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 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.
 
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 the origination date through the

18



stated maturity date.  The Company estimated the straight debt borrowing rates at debt origination to be 5.89% for the 2015 Notes, 3.50% for the 2018 Notes, and 3.13% for the 2020 Notes.  The yield to maturity was estimated at an at-market coupon priced at par.

Debt discount after tax of $ 92.4 million ($ 154.3 million before tax) and financing costs associated with the equity component of convertible debt of $ 0.1 million after tax were recorded in additional paid-in capital related to the 2020 Notes at June 30, 2013. Debt discount after tax of $ 80.9 million ($ 135.2 million before tax) and financing costs associated with the equity component of convertible debt of $ 2.8 million after tax were recorded in additional paid-in capital related to the 2018 Notes at March 31, 2012 . Debt discount after tax of $ 69.1 million ($ 115.2 million before tax) and financing costs associated with the equity component of convertible debt of $ 1.6 million after tax were recorded in additional paid-in-capital related to the 2015 Notes at March 31, 2010. The Company reclassified $ 36.7 million before tax and $ 54.7 million before tax out of additional paid-in capital to the mezzanine section in the Company's Unaudited Consolidated Balance Sheets at September 30, 2013 and December 31, 2012 , respectively, related to the 2015 Notes.
 
For the three months ended September 30, 2013 and 2012 , the Company recognized interest expense of $ 23.5 million and $ 16.4 million , respectively, related to convertible notes. Interest expense related to convertible notes for the three months ended September 30, 2013 and 2012 was comprised of $ 5.2 million and $ 4.3 million , respectively, for the contractual coupon interest, $ 17.0 million , which includes $ 0.6 million of original issuance discount for the 2020 Notes, and $ 10.9 million , respectively, related to the amortization of debt discount and $ 1.3 million and $ 1.2 million , respectively, for amortization of debt issuance costs. The effective interest rate for the three months ended September 30, 2013 and 2012 was 4.1% and 4.7% , respectively.

For the nine months ended September 30, 2013 and 2012 , the Company recognized interest expense of $ 59.1 million and $ 43.2 million , respectively, related to convertible notes.  Interest expense related to convertible notes for the nine months ended September 30, 2013 and 2012 was comprised of $ 14.1 million and $ 11.2 million , respectively, for the contractual coupon interest, $ 41.2 million , which includes $ 0.8 million of original issuance discount for the 2020 Notes, and $ 28.8 million , respectively, related to the amortization of debt discount and $ 3.8 million and $ 3.2 million , respectively, related to the amortization of debt issuance costs.  The effective interest rate for the nine months ended September 30, 2013 and 2012 was 4.4% and 4.9% , respectively.

9.                                TREASURY STOCK
 
In the second quarter of 2013, the Company's Board of Directors authorized a program to purchase $ 1.0 billion of the Company's common stock. The Company repurchased 431,910 shares in the second quarter of 2013 for an aggregate cost of $ 345.5 million in privately negotiated, off-market transactions. In the third quarter of 2013, the Company repurchased 484,361 shares for an aggregate cost of $ 459.2 million .

In the first quarter of 2012, the Company's Board of Directors authorized a one-time purchase of the Company's common stock up to $ 200 million concurrent with the issuance of the 2018 Notes. The Company repurchased 263,913 shares in the first quarter of 2012 for an aggregate cost of $ 166.2 million .

As of September 30, 2013, the Company has a remaining aggregate amount from all authorizations granted by the Board of Directors of $ 654.5 million to purchase its common stock.  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. 

The 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 113,052 shares and 138,576 shares at aggregate costs of $ 78.3 million and $ 89.2 million in the nine months ended September 30, 2013 and 2012 , respectively, to satisfy employee withholding taxes related to stock-based compensation.
 
As of September 30, 2013 , there were approximately 9.2 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 provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized.

19



 
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, 2013 and 2012 , a substantial majority of the Company's foreign-sourced income was generated in the Netherlands.  Income tax expense for the three and nine months ended September 30, 2013 and 2012 differs from the expected tax expense at the U.S. statutory rate of 35% , primarily due to lower foreign tax rates, including the Innovation Box Tax benefit discussed below, partially offset by state income taxes and certain non-deductible expenses. 
 
According to Dutch corporate income tax law, income generated from qualifying "innovative" activities is taxed at a rate of 5% ("Innovation Box Tax") rather than the Dutch statutory rate of 25% .  Booking.com obtained a ruling from the Dutch tax authorities in February 2011 confirming that a portion of its earnings is eligible for Innovation Box Tax treatment. The ruling from the Dutch tax authorities is valid through December 31, 2017.

The Company has significant deferred tax assets, resulting principally from U.S. net operating loss carryforwards ("NOLs"). The amount of NOLs available for the Company's use is limited by Section 382 of the U.S. Internal Revenue Code ("IRC Section 382 "). At December 31, 2012, after considering the impact of IRC Section 382 , the Company had approximately $ 1.2 billion of available NOLs for U.S. federal income tax purposes, comprised of $ 0.3 billion of NOLs generated from operating losses and approximately $ 0.9 billion of NOLs generated from equity-related transactions, including equity-based compensation and stock warrants. The NOLs mainly expire from December 31, 2019 to December 31, 2021 . The utilization of these NOLs is dependent upon the Company's ability to generate sufficient future taxable income in the United States. 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. 


11.                                REDEEMABLE NONCONTROLLING INTERESTS
 
On May 18, 2010 , the Company, through its wholly-owned subsidiary, priceline.com International Ltd. ("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 (now known as the rentalcars.com business), a Manchester, U.K.-based international rental car reservation service.
 
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 had the right to put their shares to PIL and PIL had 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 were subject to the put and call options in each of 2011, 2012 and 2013, respectively, during specified option exercise periods.  In April 2012 and April 2011 , in connection with the exercise of call and put options, PIL purchased a portion of the shares underlying redeemable noncontrolling interests for an aggregate purchase price of approximately $ 61.1 million and $ 13.0 million , respectively.  As a result of the April 2012 purchase, the redeemable noncontrolling interests in TravelJigsaw Holdings Limited were reduced from 19.0% to 12.7% . In April 2013, in connection with the exercise of the March 2013 call and put options, PIL purchased the remaining outstanding shares underlying redeemable noncontrolling interests for an aggregate purchase price of approximately $ 192.5 million .

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 Sheets in mezzanine equity in "Redeemable noncontrolling interests."


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A reconciliation of redeemable noncontrolling interests for the three and nine months ended September 30, 2013 and 2012 , respectively, is as follows (in thousands):

 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2013
 
2012
 
2013
 
2012
Balance, beginning of period
 
$

 
$
110,184

 
$
160,287

 
$
127,045

Net income attributable to noncontrolling interests
 

 
3,387

 
135

 
3,539

Fair value adjustments (1)  
 

 
15,815

 
42,522

 
59,255

Purchases of subsidiary shares at fair value (1)
 

 

 
(192,530
)
 
(61,079
)
Currency translation adjustments
 

 
3,835

 
(10,414
)
 
4,461

Balance, end of period
 
$

 
$
133,221

 
$

 
$
133,221


(1)           The fair value of the redeemable noncontrolling interests was determined by industry peer comparable analysis and a discounted cash flow valuation model.

12.                                ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
 
The table below provides the balances for each classification of accumulated other comprehensive income (loss) as of September 30, 2013 and December 31, 2012 (in thousands): 
 
 
September 30,
2013
 
December 31,
2012
Foreign currency translation adjustments, net of tax (1)
 
$
39,175

 
$
(23,786
)
Net unrealized gain on marketable securities, net of tax (2)
 
586

 
110

Accumulated other comprehensive income (loss)
 
$
39,761

 
$
(23,676
)
 
(1)           Foreign currency translation adjustments, net of tax, includes net losses from fair value adjustments at September 30, 2013 of $ 17.8 million after tax ($ 30.9 million before tax) and net gains from fair value adjustments at December 31, 2012 of $ 23.8 million after tax ($ 38.7 million before tax) associated with net investment hedges (see Note 5).  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, 2013 and December 31, 2012 was $ 0.9 million and $ 0.2 million , respectively.

13.                                COMMITMENTS AND CONTINGENCIES
 
Litigation Related to Travel Transaction Taxes
 
The Company and certain third-party online travel companies ("OTCs") are currently involved in approximately forty lawsuits, including certified and putative class actions, brought by or against states, cities and counties over issues involving the payment of travel transaction taxes (e.g., hotel occupancy taxes, excise taxes, sales taxes, etc.).  The Company's subsidiaries Lowestfare.com LLC and Travelweb LLC are named in some but not all of these cases.  Generally, each complaint alleges, among other things, that the OTCs violated each jurisdiction's respective relevant travel transaction tax ordinance with respect to the charges and remittance of amounts to cover taxes under each law.  Each complaint typically seeks compensatory damages, disgorgement, penalties available by law, attorneys' fees and other relief.  In addition, approximately seventy-nine municipalities or counties, and at least eleven states, have initiated audit proceedings (including proceedings initiated by more than forty municipalities in California, which have been inactive for several years), issued proposed tax assessments or started inquiries relating to the payment of travel transaction taxes.  Additional state and local jurisdictions are likely to assert that the Company is subject to travel transaction taxes 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 laws at issue do not apply to the services it provides, namely the facilitation of travel reservations, and, therefore, that it does not owe the taxes that are claimed to be owed.  Rather, the Company believes that the laws at issue generally impose travel transaction taxes on entities that own, operate or control hotels (or similar businesses) or furnish or provide hotel rooms or similar accommodations or other travel

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services.  In addition, in many of these matters, the taxing jurisdictions have 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 taxing jurisdictions 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.  From time to time, the Company has found it expedient to settle, and may in the future agree to settle, claims pending in these matters without conceding that the claims at issue are meritorious or that the claimed taxes are in fact due to be paid.
 
In connection with some of these 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 laws 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 the Company paid in July 2009, and issued a second assessment totaling approximately $ 2.7 million , which the Company paid in January 2013.  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 that it should not be subject to such taxes.  In the San Francisco action, for example, the court ruled in February 2013 that the Company and OTCs do not owe transient accommodations tax to the city and ordered the city to refund the pay first amounts paid in July 2009; the Company is also seeking a refund of the amounts paid first in January 2013. It is possible the city may take the position that it need not refund the pay first amounts until after it has exhausted all appeals.

Litigation is subject to uncertainty and there could be adverse developments in these pending or future cases and proceedings.  For example, in January 2013, the Tax Appeal Court for the State of Hawaii held that the Company and other OTCs are not liable for the State's transient accommodations tax, but held that the OTCs, including the Company, are liable for the State's general excise tax on the full amount the OTC collects from the customer for a hotel room reservation, without any offset for amounts passed through to the hotel. The Company recorded an accrual for travel transaction taxes (including estimated interest and penalties), with a corresponding charge to cost of revenues, of approximately $ 16.5 million in December 2012 and approximately $ 18.7 million in the three months ended March 31, 2013, primarily related to this ruling. During the nine months ended September 30, 2013, the Company paid approximately $ 20.1 million under protest to the State of Hawaii related to this ruling. The Company has filed an appeal with the Hawaii appellate court and intends to vigorously appeal this ruling. Other adverse rulings include a decision in September 2012, in which the Superior Court in the District of Columbia granted summary judgment in favor of the District and against the OTCs ruling that tax is due on the OTCs' margin and service fees. As a result, the Company increased its accrual for travel transaction taxes (including estimated interest), with a corresponding charge to cost of revenues, by approximately $ 4.8 million in September 2012 and by approximately $ 5.6 million in the three months ended March 31, 2013. In addition, in October 2009, a jury in a San Antonio class action found that the Company and the other OTCs 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. The Company intends to vigorously appeal the trial court's final judgment.
 
An unfavorable outcome or settlement of pending litigation may 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 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 could be material to the Company's results of operations 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 such a responsibility, 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 travel reservations to its customers and, consequently, could make the Company's travel reservation service less competitive (as compared to the services of other OTCs or travel service providers) and reduce the Company's travel reservation transactions; alternatively, the Company could choose to reduce the compensation for its services.  Either action 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, the taxing jurisdictions seek not only historical taxes that are claimed to be owed, but also, among other things, interest, penalties, punitive damages and/or attorney fees and costs.  Therefore, any liability associated with travel transaction tax matters is not constrained to the Company's liability for tax owed, 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 travel reservations have not asserted that taxes are due and payable on the Company's travel services.  With respect to taxing jurisdictions that have not initiated proceedings to date, it is possible that

22



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.
 
Reserve for Travel Transaction Taxes
 
As a result of this litigation and other attempts by jurisdictions to levy similar taxes, the Company has established an accrual (including estimated interest and penalties) for the potential resolution of issues related to travel transaction taxes in the amount of approximately $ 60 million at September 30, 2013 and approximately $ 56 million at December 31, 2012 (which includes, among other things, amounts related to the litigation in the State of Hawaii, District of Columbia, San Antonio and Chicago). The accrual is based on the Company's estimate of the probable cost of resolving these issues. The Company's legal expenses for these matters are expensed as incurred and are not reflected in the amount accrued. The actual cost may be less or greater, potentially significantly, than the liabilities recorded. An estimate for a reasonably possible loss or range of loss in excess of the amount accrued cannot be reasonably made.
 
Developments in and after the Quarter Ended September 30, 2013
 
On September 10, 2013, the Florida Supreme Court accepted jurisdiction over Leon County, et al. v. Expedia, Inc., et al. (filed November 2009); (Florida First District Court of Appeal; filed in May 2012). On February 28, 2013, the First District Court of Appeal had affirmed summary judgment in favor of defendants.

On July 8, 2013, in City of Chicago, Illinois v. Hotels.com, L.P., et al. (Circuit Court of Cook County Illinois; filed in November 2005), the Cook County Circuit Court entered an order denying the OTCs' motion for summary judgment and granting, in part, the City's motion for summary judgment relating to the Chicago Hotel Accommodations Tax ("CHAT") and related common law claims, holding that the Company and the other OTCs are liable for that tax and other obligations under CHAT. The Court's order applied only to liability and did not address or resolve any issues as to damages.

On July 8, 2013, in Warrenville, et al. v. Priceline.com Incorporated, et al. (U.S. District Court for the Northern District of Illinois; filed in April 2013), the plaintiffs voluntarily dismissed the putative class action pending in federal court, and filed a new class action complaint in Illinois state court. That action, which was removed to federal court, is captioned Village of Bedford Park, et al. v. Expedia, Inc., et al. (U.S. District Court for the Northern District of Illinois; filed in July 2013). The complaint alleges violation of the municipalities' respective accommodations ordinances, conversion, civil conspiracy, unjust enrichment, breach of fiduciary duty, and seeks a declaratory judgment, imposition of a constructive trust, and an accounting.

In Hamilton County, Ohio, et al. v. Hotels.com, L.P., et al. (U.S. District Court for the Northern District of Ohio; filed in August 2010), the district court granted summary judgment to defendant OTCs on August 30, 2013. Plaintiffs did not appeal that decision.

On August 16, 2013, in Leon County v. Expedia, Inc. et al. (Second Judicial Circuit Court for Leon County, Florida; filed in December 2009); (Florida First District Court of Appeal; appeal filed in October 2012), in a per curiam decision, the First District Court of Appeal affirmed the trial court’s grant of summary judgment in favor of the OTCs. On October 9, 2013, that court also denied the County’s motion for rehearing, rehearing en banc, for certified question of great importance, and for written opinion. On October 24, 2013, the County filed a notice to invoke the discretionary jurisdiction of the Florida Supreme Court.

In County of Nassau v. Expedia, Inc., et al. (Supreme Court of Nassau County, New York; filed in September 2011; Appellate Division, Second Department; appeal filed in April 2013), the Company received notice on September 11, 2013, that the City of New York opted out of the class certified in that action. No other localities filed notices to opt out of the certified class.

On September 30, 2013, in City of Atlanta, Georgia v. Hotels.com L.P., et al. (Superior Court of Fulton County, Georgia; filed in March 2006; Court of Appeals of the State of Georgia; appeal filed in January 2007; Georgia Supreme Court; further appeal filed in December 2007; petition for writs of mandamus and prohibition filed in December 2012), the trial court granted defendant OTCs' summary judgment dismissing all of plaintiff’s remaining claims. The Georgia Supreme Court had earlier ruled that the district court's entry of summary judgment against Atlanta on July 30, 2010 had not decided the City's claim for conversion.  After the City amended its complaint to add new claim for breach of trust, the OTCs moved again for summary judgment. The September 30, 2013 ruling addresses, and dismisses, all claims remaining.

On October 10, 2013, in Pine Bluff Advertising and Promotion Commission, Jefferson County, Arkansas, et al. v.

23



Hotels.com, LP, et al. (Circuit Court of Jefferson County, Arkansas; filed in September 2009); (Arkansas Supreme Court; appeal filed in March 2013), the Arkansas Supreme Court affirmed certification of a class.

Four new actions commenced:

Department of Revenue, Finance and Administration Cabinet, Commonwealth of Kentucky v. Expedia, Inc., et al. (Franklin Circuit Court, Kentucky) was filed on July 15, 2013. The complaint alleges violation of the state's accommodations tax law, breach of fiduciary duty, conversion and money had and received, and seeks imposition of a constructive trust and injunctive relief.
City of Columbia, South Carolina, et al. v. Hotelguides.com, Inc. et al. (Court of Common Pleas, Ninth Judicial Circuit, County of Charleston; filed in July 2013) is a putative class action brought on behalf of South Carolina local governments and taxing authorities against the Company and other OTCs (and other defendants) alleging that the defendants have failed to collect and/or remit transient accommodations taxes as required by the putative class members' respective ordinances. The complaint asserts violations of these ordinances, conversion, civil conspiracy, "voluntary undertaking" and "contractual undertaking" by defendants, and other equitable claims, including constructive trust, unjust enrichment and an accounting.
On September 27, 2013, the Company and other OTCs' filed a complaint in Expedia, Inc., et al. v. Oregon Department of Revenue (Oregon Tax Court), seeking declaratory relief as to Oregon House Bill 2656.  On the same date, the Company and other OTCs' filed a request with the Oregon Department of Revenue for an administrative ruling with respect to that bill. HB 2656 purports to amend Oregon's transient lodging tax statute, effective October 7, 2013, to subject the OTCs’ compensation subject to the tax insofar as the OTCs are “transient lodging intermediaries.”
State of New Hampshire v. priceline.com Incorporated, et al. (Merrimack Superior Court) was filed on October 16, 2013. The complaint alleges violation of the state meals and rooms tax, violation of the New Hampshire Consumer Protection Act, breach of fiduciary duty, conversion, unjust enrichment, assumpsit for money had and received and civil conspiracy, and seeks an accounting, imposition of a constructive trust and injunctive relief with respect to the OTCs’ merchant model hotel and rental car services.

Two matters were resolved. In The Village of Rosemont, Illinois v. Priceline.com, Inc., et al. (U.S. District Court for the Northern District of Illinois; filed in July 2009) (U.S. Court of Appeals for the Seventh Circuit, appeal filed in November 2012), the Company and other OTC defendants resolved the litigation through settlement. The case was dismissed with prejudice on August 6, 2013. The Company and other OTC defendants also resolved the remaining issues in City of Gallup, New Mexico v. Hotels.com, L.P., et al. (U.S. District Court for the District of New Mexico; filed in July 2007); (U.S. Court of Appeals for the Tenth Circuit; appeal filed in April 2013). The case was remanded to the district court, which has granted preliminary approval of the settlement. A settlement fairness hearing has been set for November 19, 2013. In addition, in District of Columbia v. Expedia, Inc., et al. (Superior Court of District of Columbia; filed in March 2011), the Company reached agreement with the District on a stipulated damage amount. The Company intends to vigorously pursue its appeal in that case.
    
The Company intends to vigorously defend against the claims in all of the proceedings described below.

Statewide Class Actions and Putative Class Actions

Such actions include:

City of Los Angeles, California v. Hotels.com, Inc., et al. (California Superior Court, Los Angeles County; filed in December 2004)
City of Rome, Georgia, et al. v. Hotels.com, L.P., et al. (U.S. District Court for the Northern District of Georgia; filed in November 2005); (U.S. Court of Appeals for the Eleventh Circuit appeal filed in September 2012)
City of San Antonio, Texas v. Hotels.com, L.P., et al. (U.S. District Court for the Western District of Texas; filed in May 2006)
City of Gallup, New Mexico v. Hotels.com, L.P., et al. (U.S. District Court for the District of New Mexico; filed in July 2007) ); (U.S. Court of Appeals for the Tenth Circuit; appeal filed in April 2013)
Pine Bluff Advertising and Promotion Commission, Jefferson County, Arkansas, et al. v. Hotels.com, LP, et al. (Circuit Court of Jefferson County, Arkansas; filed in September 2009); (Arkansas Supreme Court; appeal filed in March 2013)
County of Lawrence, Pennsylvania v. Hotels.com, L.P., et al. (Court of Common Pleas of Lawrence County, Pennsylvania; filed Nov. 2009); (Commonwealth Court of Pennsylvania; appeal filed in November 2010)
Elizabeth McAllister, et al. v. Hotels.com L.P., et al. , (Circuit Court of Saline County, Arkansas; filed in

24



February 2011); (Arkansas Supreme Court; appeal filed in June 2013)
Town of Breckenridge, Colorado v. Colorado Travel Company, LLC, et al. (District Court for Summit County, Colorado; filed in July 2011)
County of Nassau v. Expedia, Inc., et al. (Supreme Court of Nassau County, New York; filed in September 2011); ); (Appellate Division, Second Department; appeal filed in April 2013)
Village of Bedford Park, et al. v. Expedia, Inc. et al. (U.S. District Court for the Northern District of Illinois; filed in July 2013)
City of Columbia, South Carolina, et al. v. Hotelguides.com, Inc. et al. (Court of Common Pleas, Ninth Judicial Circuit, County of Charleston; filed in July 2013).

Actions Filed on Behalf of Individual Cities, Counties and States

Such actions include:

City of Chicago, Illinois v. Hotels.com, L.P., et al. (Circuit Court of Cook County Illinois; filed in November 2005)
City of San Diego, California v. Hotels.com L.P., et al. (California Superior Court, San Diego County; filed in September 2006) (Superior Court of California, Los Angeles County) (California Court of Appeal; appeal filed in August 2012)
City of Atlanta, Georgia v. Hotels.com L.P., et al. (Superior Court of Fulton County, Georgia; filed in March 2006); (Court of Appeals of the State of Georgia; appeal filed in January 2007); (Georgia Supreme Court; further appeal filed in December 2007; petition for writs of mandamus and prohibition filed in December 2012)
Wake County, North Carolina v. Hotels.com, L.P., et al. (General Court of Justice, Superior Court Division, Wake County, North Carolina; filed in November 2006); (Court of Appeals of North Carolina; appeal filed in January 2013); Dare County, North Carolina v. Hotels.com, LP, et al. (General Court of Justice, Superior Court Division, Dare County, North Carolina; filed in January 2007); (Court of Appeals of North Carolina; appeal filed in January 2013); Buncombe County, North Carolina v. Hotels.com, LP, et al. (General Court of Justice, Superior Court Division, Buncombe County, North Carolina; filed in February 2007); (Court of Appeals of North Carolina; appeal filed in January 2013); Mecklenburg County, North Carolina v. Hotels.com LP, et al. (General Court of Justice, Superior Court Division, Mecklenburg County, North Carolina; filed in January 2008); (Court of Appeals of North Carolina; appeal filed in January 2013)
Leon County, et al. v. Expedia, Inc., et al. (Second Judicial Circuit Court for Leon County, Florida; filed November 2009); (Florida First District Court of Appeal; appeal filed in May 2012); (Florida Supreme Court; jurisdiction accepted in September 2013)
Leon County v. Expedia, Inc. et al. (Second Judicial Circuit Court for Leon County, Florida; filed in December 2009); (Florida First District Court of Appeal; appeal filed in October 2012)
Montana Department of Revenue v. Priceline.com, Inc., et al. (First Judicial District Court of Lewis and Clark County, Montana; filed in November 2010)
District of Columbia v. Expedia, Inc., et al. (Superior Court of District of Columbia; filed in March 2011)
Volusia County, et al. v. Expedia, Inc., et al. (Circuit Court for Volusia County, Florida; filed in April 2011)
State of Mississippi v. Priceline.com Inc., et al. , (Chancery Court of Hinds County, Mississippi; filed in January 2012)
County of Kalamazoo, Michigan v. Hotels.com L.P., et al. (Circuit Court for the County of Kalamazoo; filed August 2012)
Fargo v. Expedia, Inc. et al. (District Court for the County of Cass; filed in February 2013)
Department of Revenue, Finance and Administration Cabinet, Commonwealth of Kentucky v. Expedia, Inc. et al. (Franklin Circuit Court, Kentucky; filed in July 2013)
State of New Hampshire v. priceline.com Incorporated, et al. (Merrimack Superior Court; filed in October 2013)

Judicial Actions Relating to Assessments Issued by Individual Cities, Counties and States

The Company may seek judicial review of assessments issued by an individual city or county. Currently pending actions seeking such a review include:

Priceline.com, Inc., et al. v. Broward County, Florida (Circuit Court - Second Judicial Circuit, Leon County, Florida; filed in January 2009); (Florida First District Court of Appeal; filed in February 2013)
Priceline.com, Inc. v. Indiana Department of State Revenue (Indiana Tax Court; filed in March 2009)

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Priceline.com, Inc., et al. v. City of San Francisco, California, et al. (California Superior Court, County of Los Angeles; filed in June 2009)
Priceline.com, Inc. v. Miami-Dade County, Florida, et al. (Eleventh Judicial Circuit Court for Miami-Dade, County, Florida; filed in December 2009)
Priceline.com Incorporated, et al. v. Osceola County, Florida, et al. (Circuit Court of the Second Judicial Circuit, in and For Leon County, Florida; filed in January 2011)
In the Matter of the Tax Appeal of priceline.com Inc. and In the Matter of the Tax Appeal of Travelweb LLC   (Tax Appeal Court of the State of Hawaii; filed in March 2011) (Intermediate Court of Appeals; filed September 2013); In the Matter of the Tax Appeal of priceline.com Inc. and In the Matter of the Tax Appeal of Travelweb LLC (Tax Appeal Court of the State of Hawaii, filed in July 2012) (Intermediate Court of Appeals; filed September 2013); In the Matter of the Tax Appeal of priceline.com Inc. and In the Matter of Tax Appeal of Travelweb LLC (Tax Appeal Court of the State of Hawaii, filed in June 2013)
Expedia, Inc. et al. v. City of Portland (Circuit Court for Multnomah County, Oregon, filed in February 2012)
Expedia, Inc., et al. v. City and County of Denver, et al. (District Court for Denver County, Colorado, filed in March 2012); (Colorado Supreme Court; appeal filed in April 2013)
Travelocity.com LP, et al., v. Wyoming Department of Revenue (District Court for the County of Laramie, 1 st Judicial Dist.; petition for review filed and petition granted by Wyoming Supreme Court in April 2013)
Expedia, Inc., et al. v. Oregon Department of Revenue (Oregon Tax Court; filed in September 2013)

Administrative Proceedings and Other Possible Actions
 
At various times, the Company has also received inquiries or proposed tax assessments from municipalities and other taxing jurisdictions relating to the Company's charges and remittance of amounts to cover state and local travel transaction taxes.  Among others, the City of Phoenix, Arizona (on behalf of itself and twelve other Arizona cities); the City of Paradise Valley, Arizona; fifteen cities (and one county) in Colorado; Arlington, Texas; Lake County, Indiana; Saratoga County, New York; and state tax officials from Arkansas, Colorado, Hawaii, Louisiana, Maryland, Michigan, Ohio, South Dakota, Texas, West Virginia, and Wisconsin have begun formal or informal administrative procedures or stated that they may assert claims against the Company relating to allegedly unpaid state or local travel transaction taxes.  Between 2008 and 2010, the Company received audit notices from more than forty cities in the state of California.  The audit proceedings in those cities have not been active but are not yet concluded.  The Company has also been contacted for audit by five counties in the state of Utah and by the City of St. Louis, Missouri. 
 
OFT Inquiry

In July 2012, the Office of Fair Trading (the "OFT"), the competition authority in the United Kingdom, issued a "Statement of Objections" ("SO") to Booking.com, which sets out the OFT's preliminary views on why it believes Booking.com and others in the hotel online booking sector have allegedly breached E.U. and U.K. competition law.  The SO alleges, among other things, that there are agreements or concerted practices between hotels and Booking.com and between hotels and at least one other OTC that restrict Booking.com's (and the other OTC's) ability to discount hotel room reservations, which the OFT alleges is a form of resale price maintenance.  The Company disputes the allegations in the SO. 

On August 9, 2013, the OFT announced its intention to accept commitments offered by Booking.com, as well as Expedia and Intercontinental Hotel Group, to close the investigation.  The OFT sought feedback on the proposed commitments from the public. The public comment period expired on September 13, 2013.  The OFT is now considering the public comments and input from the European Commission before making its final decision whether to accept the commitments.   If the proposed commitments are accepted by the OFT, the investigation will be closed with no finding of infringement or admission of wrongdoing and no imposition of a fine.

The proposed commitments provide, among other things, that hotels will continue to be able to set retail prices for hotel room reservations on all OTC websites, such as Booking.com.  OTCs, such as Booking.com, will have the flexibility to discount a hotel's retail price, but only to members of closed user groups, a concept that is defined in the proposed commitments, who have previously made a booking with the OTC.

If the commitments are not accepted by the OFT, the Company will have the right to respond to the allegations in the SO in writing and orally.  If the OFT chooses to maintain its objections after hearing Booking.com's responses, the OFT will issue a "Decision" which will state its case against Booking.com and others under investigation.   The Company will have the opportunity to challenge an adverse Decision in the U.K. courts. 


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In connection with a Decision, the OFT may impose a fine against Booking.com. The Company estimates that a fine could range from $ 0 to approximately $ 50 million . A fine in this amount could adversely impact the Company's cash flow and results of operations.  In addition, the OFT may require changes to Booking.com's business practices, including changes to its approach to pricing and the use of "Most Favored Nation" clauses in contracts with hotels.  The Company is unable at this time to predict the outcome of the proceedings before the OFT and, if necessary, before the U.K. courts, and the impact of changes to its business practices that may be required, if any, on its business, financial condition and results of operations. In addition, the Company is also unable to predict at this time the extent to which other regulatory authorities may pursue similar claims against it.

Lawsuits Alleging Antitrust Violations

On August 20, 2012, one complaint was filed on behalf of a putative class of persons who purchased hotel room reservations from certain hotels (the "Hotel Defendants") through certain OTC defendants, including the Company.  The initial complaint, Turik v. Expedia, Inc. , Case No. 12-cv-4365, filed in the U.S. District Court for the Northern District of California, alleges that the Hotel Defendants and the OTC defendants violated federal and state laws by entering into a conspiracy to enforce a minimum resale price maintenance scheme pursuant to which putative class members paid inflated prices for hotel room reservations that they purchased through the OTC defendants.  Thirty-one other complaints containing similar allegations have been filed in a number of federal jurisdictions across the country. Plaintiffs in these actions seek treble damages and injunctive relief. 

The Judicial Panel on Multidistrict Litigation ("JPML") heard arguments on a motion for consolidation and transfer of pretrial proceedings under 28 U.S.C. § 1407 on November 29, 2012.  Pursuant to JPML orders, all of the pending cases were consolidated before Judge Boyle in the U.S. District Court for the Northern District of Texas. On May 1, 2013, an amended consolidated complaint was filed.

On July 1, 2013, the Company, together with the OTC and hotel defendants, filed an omnibus motion to dismiss the amended consolidated complaint.

The Company intends to defend vigorously against the claims in all of the proceedings described in this Note 13.  The Company has accrued for certain legal contingencies where it is probable that a loss has been incurred and the amount can be reasonably estimated.  Except as disclosed, such amounts accrued are not material to the Company's consolidated balance sheets and provisions recorded have not been material to the Company's consolidated results of operations or cash flows.  The Company is unable to estimate a reasonably possible range of loss.
 
From time to time, the Company has been, and expects to continue to be, subject to legal proceedings and claims in the ordinary course of business, including claims of alleged infringement of third party intellectual property rights.  Such claims, even if not meritorious, could result in the expenditure of significant financial and managerial resources, divert management's attention from the Company's business objectives and adversely affect the Company's business, results of operations, financial condition and cash flows.


14.    ACQUISITION

On May 21, 2013, the Company acquired 100% of KAYAK Software Corporation in a stock and cash transaction. The purchase value was approximately $ 2.1 billion ($ 1.9 billion net of cash acquired). The Company paid $ 0.5 billion in cash, from cash on hand in the United States, and $ 1.6 billion in shares of its common stock (based upon the market value of the Company's common stock at the merger date) and the fair value of the assumed vested KAYAK stock options. These assumed KAYAK stock options are related to pre-combination service.
KAYAK is a leading travel research site that allows people to easily compare hundreds of travel sites at once when searching for flights, hotels, and rental cars, and gives travelers choices on where to book. KAYAK has built a strong brand in online travel research and its track record of profitable growth is demonstrative of its popularity with consumers and value to advertisers. KAYAK also has world class technology and a tradition of innovation in building great user interfaces across multiple platforms and devices. The Company believes that it can be helpful with KAYAK's plans to build a global online travel brand.
Also in conjunction with the acquisition, the Company assumed unvested KAYAK employee stock options, which relate to post-combination service, with an acquisition date fair value of $ 57.4 million . See Note 2 for further information on the assumed KAYAK unvested employee stock options.

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As a result of the acquisition of KAYAK, the Company expensed approximately $ 8.6 million of professional fees for the nine months ended September 30, 2013. These acquisition-related expenses were included in "General and administrative" expenses on the Unaudited Consolidated Statements of Operations. In addition, the Company paid approximately $ 1.2 million of stock issuance costs in the nine months ended September 30, 2013, with an offsetting charge to additional paid-in capital.

The aggregate purchase price was preliminarily allocated to the assets acquired and liabilities assumed as follows (in millions):
Current assets  (1)
 
$
321

Identifiable intangible assets (2)
 
871

Goodwill (3)
 
1,234

Other long-term assets
 
12

Total liabilities  (4)
 
(370
)
Total consideration
 
$
2,068


(1) Includes cash acquired of $ 194 million .
(2) Acquired definite-lived intangibles, with a weighted average life of 18.7 years, consisted of trade names of $ 496 million with an estimated useful life of 20 years, supply and distribution agreements of $ 302 million with an estimated useful life of 20 years, and technology of $ 73 million