SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to __________
Commission File Number 0-25581
PRICELINE.COM INCORPORATED
(Exact name of Registrant as specified in its charter)
Delaware 06-1528493
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
Five High Ridge Park
Stamford, Connecticut 06905
(Address of principal executive offices)
(203) 705-3000
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year,
if changed, since last report.)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports) and (2) has
been subject to such filing requirements for the past 90 days. YES X. NO _.
Number of shares of Common Stock outstanding at June 30, 1999:
Common Stock, par value $0.008 per share 142,320,427
- ------------------------------------------------- -----------------
(Class) (Number of Shares)
PRICELINE.COM INCORPORATED
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1999
Part I - FINANCIAL INFORMATION..........................................1
Item 1. Condensed Financial Statements...........................1
Condensed Balance Sheets as of December 31, 1998
And June 30, 1999........................................1
Condensed Statements of Operations for the
Three and Six Months Ended June 30, 1998 and 1999........2
Condensed Statement of Changes in Stockholders'
Equity for the Six Months Ended June 30, 1999............3
Condensed Statements of Cash Flows
For the Six Months Ended June 30, 1998 and 1999..........4
Notes to Condensed Financial Statements .................5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................10
Item 3. Quantitative and Qualitative Disclosures About
Market Risk...........................................41
PART II - OTHER INFORMATION............................................42
Item 1. Legal Proceedings.....................................42
Item 2. Changes in Securities and Use of Proceeds.............42
Item 3. Defaults Upon Senior Securities.......................43
Item 4. Submission of Matters to Vote of Security Holders.....43
Item 5. Other Information.....................................43
Item 6. Exhibits and Reports on Form 8-K......................43
SIGNATURES.....................................................44
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS.
PRICELINE.COM INCORPORATED
CONDENSED BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND JUNE 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, June 30,
ASSETS 1998 1999
----------------- -----------------
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents................................... $53,593,026 $142,803,134
Short term investments...................................... - 9,307,474
Accounts receivable, net of allowance for uncollectible
accounts of $290,823 and $1,173,243 at December 31,
1998 and June 30, 1999, respectively...................... 4,176,980 22,683,987
Related party receivable.................................... - 1,383,592
Prepaid expenses and other current assets................... 2,433,542 7,338,897
----------------- -----------------
Total current assets...................................... 60,203,548 183,517,084
PROPERTY AND EQUIPMENT-net..................................... 5,926,877 15,311,214
RELATED PARTY RECEIVABLE....................................... - 4,374,372
OTHER ASSETS................................................... 442,060 1,592,222
----------------- -----------------
TOTAL ASSETS................................................... $66,572,485 $204,794,892
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable............................................ $5,268,430 $26,933,608
Related party payable....................................... 32,447 -
Accrued expenses............................................ 4,258,641 6,403,716
Other current liabilities................................... 722,030 136,109
----------------- -----------------
Total current liabilities................................. 10,281,548 33,473,433
LONG-TERM DEBT-net............................................. 989,018 -
CAPITAL LEASE OBLIGATIONS-net of current portion............... 26,074 12,248
----------------- -----------------
Total liabilities.............................................. 11,296,640 33,485,681
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDERS' EQUITY
Preferred stock............................................. 311,262 -
Common stock................................................ 745,802 1,138,564
Additional paid-in capital.................................. 171,158,186 326,880,953
Accumulated deficit......................................... (116,939,405) (156,710,306)
----------------- -----------------
Total stockholders' equity................................ 55,275,845 171,309,211
----------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY..................... $66,572,485 $204,794,892
================= =================
See accompanying notes to condensed financial statements.
</TABLE>
<TABLE>
<CAPTION>
PRICELINE.COM INCORPORATED
CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND 1999
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
June 30, June 30, June 30, June 30,
1998 1999 1998 1999
-------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Revenues.......................... $7,021,639 $111,563,849 $7,021,639 $160,974,391
Cost of Revenues:
Product costs.................. 7,942,840 100,664,343 7,942,840 144,323,527
Supplier warrant costs......... - 380,759 - 761,518
-------------- --------------- --------------- ---------------
Total cost of revenues............ 7,942,840 101,045,102 7,942,840 145,085,045
Gross profit (loss)............ (921,201) 10,518,747 (921,201) 15,889,346
Expenses:
Sales and marketing............ 6,635,069 17,732,941 7,764,477 34,871,086
General and administrative..... 3,101,635 5,503,245 4,798,876 9,169,869
Systems and business
development.................. 3,442,161 3,468,512 5,368,214 5,652,423
-------------- --------------- --------------- ---------------
Total expenses.................... 13,178,865 26,704,698 17,931,567 49,693,378
-------------- --------------- --------------- ---------------
Operating loss.................... (14,100,066) (16,185,951) (18,852,768) (33,804,032)
Interest income, net.............. 112,690 1,929,332 162,331 2,387,104
-------------- --------------- --------------- ---------------
Net loss.......................... (13,987,376) (14,256,619) (18,690,437) (31,416,928)
Accretion on preferred stock...... - - - (8,353,973)
-------------- --------------- --------------- ---------------
Net loss applicable to common
stockholders................... $(13,987,376) $(14,256,619) $(18,690,437) $(39,770,901)
============== =============== =============== ===============
Per share basic and diluted net
loss applicable to common
stockholders................... $(0.17) $(0.10) $(0.27) $(0.29)
============== =============== =============== ===============
Weighted average common shares
outstanding.................... 81,297,098 142,320,427 69,738,365 137,436,399
See accompanying notes to condensed financial statements.
</TABLE>
<TABLE>
<CAPTION>
PRICELINE.COM INCORPORATED
CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(UNAUDITED)
ADDITIONAL
PREFERRED STOCK COMMON STOCK PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
----------- --------------------- ----------- ---------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1999.. 31,126,184 $311,262 93,225,199 $745,802 $171,158,186 $(116,939,405) $55,275,845
Conversion of Series A
convertible preferred
stock........... (17,288,684) (172,887) 21,610,853 172,887 - - -
Conversion of Series B
convertible
preferred stock........... (13,837,500) (138,375) 17,296,875 138,375 - - -
Accretion on preferred
stock.................. - - - - 8,353,973 (8,353,973) -
Issuance of common stock.. - - 10,000,000 80,000 144,274,221 - 144,354,221
Exercise of warrants...... 187,500 1,500 48,500 - 50,000
Issuance of warrants to
purchase common stock... - - - - 3,046,073 - 3,046,073
Net loss.................. - - - - - (31,416,928) (31,416,928)
----------- -------- ---------- --------- ------------ ------------ -------------
Balance, June 30, 1999.... - $- 142,320,427 $1,138,564 $326,880,953 $(156,710,306) $171,309,211
=========== ======== =========== ========== ============ ============= ============
See accompanying notes to condensed financial statements.
</TABLE>
<TABLE>
<CAPTION>
PRICELINE.COM INCORPORATED
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1999
(UNAUDITED)
SIX MONTHS ENDED
June 30, June 30,
1998 1999
------------------ -----------------
OPERATING ACTIVITIES:
<S> <C> <C>
Net loss....................................................... $(18,690,437) $(31,416,928)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................. 659,544 1,911,678
Provision for uncollectible accounts...................... 5,829 1,401,372
Supplier warrant costs.................................... 761,518
Changes in assets and liabilities:
Receivables............................................... (1,679,081) (19,908,379)
Related party receivables................................. - (5,790,411)
Prepaid expenses and other current assets................. (368,159) (3,382,318)
Accounts payable and accrued expenses..................... 3,315,410 23,703,167
Other..................................................... (296,447) (1,030,020)
------------------ -----------------
Net cash used in operating activities................... (17,053,341) (33,750,321)
INVESTING ACTIVITIES:
Additions to property and equipment....................... (5,076,153) (11,285,032)
Purchases of short-term investments....................... - (9,307,474)
------------------ -----------------
Net cash used in investing activities................... (5,076,153) (20,592,506)
FINANCING ACTIVITIES:
Issuance of long-term debt................................ 2,000,000 -
Payment of long-term debt and capital lease obligations... (10,587) (1,012,099)
Issuance of common stock and subscription units........... 23,364,000 144,565,034
Payment received on stockholder note...................... 250,000 -
------------------ -----------------
Net cash provided by financing activities............... 25,603,413 143,552,935
NET INCREASE IN CASH AND CASH EQUIVALENTS...................... 3,473,919 89,210,108
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD................. 16,459 53,593,026
------------------ -----------------
CASH AND CASH EQUIVALENTS, END OF PERIOD....................... $3,490,378 $142,803,134
================== =================
SUPPLEMENTAL CASH FLOW INFORMATION-Cash paid
during the year for interest................................ $5,232 $50,397
See accompanying notes to condensed financial statements.
</TABLE>
PRICELINE.COM INCORPORATED
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. BUSINESS DESCRIPTION
Priceline.com Incorporated ("priceline.com") has pioneered a new
type of e-commerce known as a demand collection system that enables
consumers to use the Internet to save money on a wide range of products and
services while enabling sellers to generate incremental revenue.
Priceline.com collects consumer demand, in the form of individual customer
offers guaranteed by a credit card for a particular product or service at a
price set by the customer. Priceline.com then either communicates that
demand directly to participating sellers or accesses participating sellers'
private databases to determine whether the customer's offer can be
fulfilled on the basis of the pricing information and rules established by
the sellers. Consumers agree to hold their offers open for a specified
period of time and once fulfilled, offers cannot be cancelled. By requiring
consumers to be flexible with respect to brands, sellers and/or product
features, priceline.com enables sellers to generate incremental revenue
without disrupting their existing distribution channels or retail pricing
structures.
Priceline Travel, Inc. ("Priceline Travel") previously held the
travel agency license used to effect airline ticket sales through the
priceline.com service. Priceline Travel was wholly owned by the founding
stockholder of priceline.com and on March 24, 1999, Priceline Travel was
merged into priceline.com for nominal consideration. The accompanying
condensed financial statements include the financial position as of
December 31, 1998 (restated) and results of operations for the six month
periods ended June 30, 1998 and June 30, 1999 of Priceline Travel.
2. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10
of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all
adjustments, consisting of normal recurring accruals considered necessary
for a fair presentation, have been included in the accompanying unaudited
financial statements. Operating results for the three and six months ended
June 30, 1999 are not necessarily indicative of the results that may be
expected for the full year ending December 31, 1999.
3. INITIAL PUBLIC OFFERING OF COMMON STOCK
On April 1, 1999, priceline.com completed an initial public
offering in which it sold 10,000,000 shares of its common stock at a price
of $16.00 per share, raising $160.0 million in gross proceeds. Offering
proceeds to priceline.com, net of approximately $11.2 million in aggregate
underwriters discounts and commissions and $4.4 million in related
expenses, were approximately $144.4 million. Simultaneous with the
effectiveness on March 29, 1999 of priceline.com's Registration Statement
on Form S-1, each outstanding share of priceline.com's Series A and Series
B convertible preferred stock was automatically converted into shares of
common stock. As of June 30, 1999, approximately 142.3 million shares of
common stock were outstanding.
4. NET LOSS PER SHARE
Priceline.com computes net loss per share in accordance with
Statement Financial Accounting Standards No. 128, "Earnings Per Share"
which requires dual presentation of basic earnings per share ("EPS") and
diluted EPS.
Basic earnings per share is computed using the weighted average
number of common shares outstanding during the period. Diluted earnings per
share is computed using the weighted average number of common shares and
potentially dilutive shares outstanding during the period. The effect of
the conversion of the Series A and Series B convertible preferred stock is
included in the weighted average number of shares outstanding during the
period that commenced on the conversion date, March 29, 1999. The effect of
the preferred stock conversion for the period prior to March 29, 1999 has
not been included in the computation of diluted net loss per share as the
impact would have been antidilutive for the periods presented. Potential
common shares consist of the incremental common shares issuable upon the
exercise of stock options and warrants. At June 30, 1999, options and
warrants to purchase 48,228,959 shares of common stock were outstanding.
Outstanding warrants and options could potentially dilute basic earnings
per share in the future but have not been included in the computation of
diluted net loss per share as the impact would have been antidilutive for
the periods presented.
Net loss applicable to common stockholders for the three and six
month periods ended June 30, 1999 was $14.3 and $39.8 million,
respectively. The six month period ended June 30, 1999 included a
non-recurring, non-cash charge associated with the accretion on the Series
B convertible preferred stock that was outstanding during such period of
$8.4 million. Based on the weighted average number of 142.3 and 137.4
million shares of common stock outstanding during the three and six month
periods ended June 30, 1999, the per share basic and diluted net loss
applicable to common stockholders was $0.10 and $0.29, respectively.
5. RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public
Accountants issued Statement of Position ("SOP") 98-1, "Accounting for
Costs of Computer Software Developed or Obtained for Internal Use." This
SOP requires capitalization of certain costs of computer software developed
or obtained for internal use. Priceline.com adopted this SOP on January 1,
1999 and for the three and six month periods ended June 30, 1999,
priceline.com capitalized approximately $3.3 and $5.7 million,
respectively, of computer software developed or obtained for internal use.
Amortization of such costs aggregated approximately $149,000 during the
three and six month periods ended June 30, 1999.
6. COMMITMENTS AND CONTINGENCIES
On January 6, 1999, priceline.com received notice that a third
party patent applicant and patent attorney, Thomas G. Woolston, purportedly
had filed in December 1998 with the United States Patent and Trademark
Office a request to declare an "interference" between a patent application
filed by Woolston describing an electronic market for used and collectible
goods and priceline.com's core buyer-driven commerce patent. Priceline.com
has received a copy of a Petition for Interference from Woolston, the named
inventor of at least three United States Patent applications titled
"Consignment Nodes," one of which has issued as a patent. Priceline.com
currently is awaiting information from the Patent Office regarding whether
it will initiate an interference proceeding concerning Woolston's patent
application and priceline.com's core buyer-driven commerce patent.
Woolston recently announced an agreement to license his issued
patent and pending patent applications to the owner of a competing Internet
travel service.
While the interference process is still at an early stage,
priceline.com believes that it has meritorious defenses to Woolston's
claim, which it intends to pursue vigorously. Among other things,
priceline.com believes that the Woolston patent application does not
disclose the inventions covered by the priceline.com patent claims.
However, it is impossible to predict the outcome of an interference with
certainty. While Woolston claims to have an earlier invention date by a
period of approximately sixteen months, the final decision as to priority
of invention would be made by the Patent Office after considering facts
provided by each party during the interference proceeding. If an
interference is declared and thereafter resolved in favor of Woolston, such
resolution could result in an award of some or all of the disputed patent
claims to Woolston. If, following such award, Woolston were successful in a
patent infringement action against priceline.com, including prevailing over
all defenses available to priceline.com such as those of non-infringement
and invalidity, this could require priceline.com to obtain licenses from
Woolston at a cost which could significantly adversely affect
priceline.com's business. If Woolston prevailed in both an interference and
an infringement action, then priceline.com could be enjoined from
conducting business through the priceline.com service to the extent covered
by the patent claims awarded to Woolston. In addition, defense of the
interference action may be expensive and may divert management attention
away from priceline.com's business.
On January 19, 1999, Marketel International Inc. ("Marketel"), a
California corporation, filed a lawsuit against priceline.com and Priceline
Travel, among others. On February 22, 1999, Marketel filed an amended and
supplemental complaint, and on March 17, 1999, Marketel filed a second
amended complaint. The second amended complaint filed by Marketel alleges
causes of action for, among other things, misappropriation of trade
secrets, breach of contract, conversion, breach of confidential
relationship, copyright infringement, fraud, unfair competition and false
advertising, and seeks injunctive relief and damages in an unspecified
amount. In its second amended complaint, Marketel alleges, among other
things, that the defendants conspired to misappropriate Marketel's business
model, which it describes as a buyer- driven electronic marketplace for
travel services and its appurtenant techniques, market research, forms,
plans, and processes, which allegedly were provided in confidence to some
of the defendants approximately ten years ago. The second amended complaint
also alleges that three former Marketel employees are the actual sole
inventors or co-inventors of a patent which was issued on August 11, 1998
and which patent has been assigned to priceline.com. Marketel asks that the
patent's inventorship be corrected accordingly.
On February 5, 1999, February 10, 1999 and March 31, 1999, the
defendants filed their answer, amended answer and answer to the second
amended complaint, respectively in which they denied the material
allegations of liability in the complaints. Priceline.com and all other
defendants strongly dispute the material legal and factual allegations
contained in Marketel's second amended complaint and believe that the
second amended complaint is without merit. Since May 28, 1999, there has
been a discovery stay in effect, which was caused by the withdrawal of
Marketel's counsel. Marketel has retained new counsel, and the
priceline.com now anticipates moving forward with discovery.
Defending the Marketel litigation may involve significant expense
and, due to the inherent uncertainties of litigation, there can be no
certainty as to the ultimate outcome. Pursuant to the indemnification
obligations contained in the Purchase and Intercompany Services Agreement
with Walker Digital, Walker Digital has agreed to indemnify, defend and
hold harmless priceline.com for damages, liabilities and legal expenses
incurred in connection with the Marketel litigation.
From time to time priceline.com has been and expects to continue to
be subject to legal proceedings and claims in the ordinary course of
business, including claims of alleged infringement of third party
intellectual property rights. Such claims, even if not meritorious, could
result in the expenditure of significant financial and managerial
resources.
7. SUBSEQUENT EVENTS
Common Stock and Convertible Debt Offerings. On July 23, 1999,
priceline.com filed a registration statement covering the sale of up to
$287.5 million of convertible subordinated notes (including $37.5 million
in respect of an underwriters' over-allotment option) and up to 6.325
million shares of common stock (including 825,000 shares in respect of an
underwriters' over-allotment option). The common stock offering is to be
comprised of 2.0 million shares of common stock to be issued and sold by
priceline.com and 3.5 million shares to be sold by certain selling
stockholders, plus the sale by the selling stockholders of any additional
shares sold upon exercise of the underwriters' over-allotment option.
Option Exercise Program. On July 19, 1999, an option exercise
program was established to enable employees employed as of June 1, 1999 to
exercise options and sell shares through a cashless exercise program
administered through a broker dealer. Priceline.com employees holding
967,183 options that were vested as of June 1, 1999 were permitted, during
the period commencing on July 20, 1999 and ending on July 30, 1999, to
exercise a portion of their options that otherwise were not exercisable
until September 26, 1999 (following expiration of the 180 day initial
public offering lock-up period) and to sell the underlying option shares
through the program. Any employee who elected to exercise options and sell
option shares pursuant to the option exercise program was required to agree
to enter into a "lock-up" agreement in a form similar to that signed by
selling stockholders in the secondary common stock offering, which
prohibits additional option exercises or stock sales prior to 180 days from
the completion of the secondary common stock offering.
Continental Airlines Agreements. Continental Airlines agreed to
join the priceline.com service on July 20, 1999 pursuant to the terms of an
Airline Participation Agreement with priceline.com. Upon execution of the
Airline Participation Agreement, priceline.com issued a warrant to
Continental for the purchase of 1 million shares of common stock at an
exercise price of $97.41 per share. The warrant will become exercisable
upon the earlier of July 2004 or the achievement of certain performance
thresholds. However the agreement does not require Continental to make any
performance commitments. Priceline.com will incur a non-cash charge of
approximately $90 million during the quarter ending September 30, 1999,
reflecting the fair value of the Continental warrant at the grant date.
PRICELINE.COM INCORPORATED
FORM 10-Q
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
This "Management's Discussion and Analysis of Financial Condition
and Results of Operations" contains forward-looking statements. In some
cases, readers can identify forward-looking statements by terminology such
as "may," "will," "should," "could," "expects," "plans," "anticipates,"
"believes," "estimates," "predicts," "potential," or "continue," or the
negative of such terms or other comparable terminology. These statements
involve known and unknown risks, uncertainties and other factors that may
cause our actual results, levels of activity, performance, or achievements
to be materially different from any future results, levels of activity,
performance, or achievements expressed or implied by such forward-looking
statements. Such factors include, among other things, those set forth under
"Overview," "Liquidity and Capital Resources," and "Additional Factors that
May Affect Future Results" included in this section, and those set forth in
the "Risk Factors" section of priceline.com's Registration Statement on
Form S-1 (File No. 333- 83513), as amended, filed with the Securities and
Exchange Commission on July 23, 1999. Although we believe that the
expectations reflected in the forward-looking statements are reasonable, we
cannot guarantee future results, levels of activity, performance, or
achievements. We undertake no duty to update any of the forward-looking
statements, whether as a result of new information, future events or
otherwise.
OVERVIEW
Priceline.com has pioneered a unique e-commerce pricing system
known as a "demand collection system" that enables consumers to use the
Internet to save money on a wide range of products and services while
enabling sellers to generate incremental revenue. Using a simple and
compelling consumer proposition-"name your price"-we collect consumer
demand, in the form of individual customer offers guaranteed by a credit
card, for a particular product or service at a price set by the customer.
We then either communicate that demand directly to participating sellers or
access participating sellers' private databases to determine whether we can
fulfill the customer's offer on the basis of the pricing information and
rules established by the sellers. Consumers agree to hold their offers open
for a specified period of time and, once fulfilled, offers cannot be
canceled. We benefit consumers by enabling them to save money, while at the
same time benefitting sellers by providing them with an effective revenue
management tool capable of identifying and capturing incremental revenues.
By requiring consumers to be flexible with respect to brands, sellers and
product features, we enable sellers to generate incremental revenue without
disrupting their existing distribution channels or retail pricing
structures.
Priceline.com was formed in July 1997 and our primary activities
during the period prior to launch consisted of recruiting and training
employees, developing our business model, implementing systems to support
our business model, developing relationships with seller participants and
developing the priceline.com brand. We commenced operations in April 1998
with the sale of leisure airline tickets. Since that time, our business has
grown significantly and the priceline.com service now includes the
following products and services:
o leisure airline tickets, provided by six domestic and 16
international airline participants;
o new automobiles, which was launched on a test basis in the
New York metropolitan area in July 1998;
o hotel room reservations, which was launched in October 1998,
offers hotel rooms in substantially all major United States
markets and includes as participants more than 10 leading
national hotel chains; and
o home financing services, which was launched in January 1999
with home mortgage services and now also includes home
equity loans and refinancing services.
Through the innovative use of "adaptive marketing programs," we also market
customer acquisition programs for third parties. These programs facilitate
the completion of a higher percentage of successful transactions through
the priceline.com service while generating fee income for us. We also are
exploring expansion of our core "name your price" business model to other
areas of e-commerce, such as retail merchandise and the
consumer-to-consumer market. The number of our full-time employees
increased from 10 to 261 during the period from inception to June 30, 1999.
We generate revenues in a variety of ways depending on the product
or service sold. With respect to our airline ticket and hotel room
reservation services, we recognize as revenue the customer's named price,
net of taxes, and records as the cost of revenue the fare or rate charged
by the seller. With respect to our automobile service, we earn a fixed fee
from both the customer and the seller after the transaction is consummated.
With respect to our home financing service, we receive marketing fees equal
to a percentage of the net revenue generated by the service, which is
operated in conjunction with LendingTree, Inc. We also generate revenues
through adaptive marketing programs with third parties that pay us fees for
marketing their customer acquisition programs. Additionally, we generate
revenues from third party sources, including airline ticket processing fees
from consumers and ancillary reservation booking fees from the Worldspan
reservation system for our booking of airline flight segments and hotel
reservations through the Worldspan system. Consumer fees are payable and
recognized only upon completion of successful transactions.
All offers made through the priceline.com service are guaranteed by
a customer credit card and credit cards are the only form of payment that
we accept. The manner in which and time at which revenues are recognized
differs depending on the product or service sold through the priceline.com
service. With respect to airline ticket and hotel room reservation
services, revenues are generated by transactions with customers who make
offers to purchase airline tickets and reserve hotel rooms supplied by
participating sellers. Revenues and related costs are recognized if, and
when, we accept the customer's offer and charge the customer's credit card.
Because we are the merchant of record in these transactions, revenue for
these services includes the offer price paid by the customer, net of
certain taxes and fees. Airline and hotel revenues also may include fees
from third parties for adaptive marketing programs. With respect to
automobile services, fees or other payments payable by the seller and /or
the customer are recognized as revenue. With respect to home financing
services, we receive no fees from consumers. We recognize revenue from
marketing fees paid directly by LendingTree through the operation of our
home financing services. Because we act as an intermediary between the
customer and the seller in auto and home financing transactions, revenues
for these products and services is recorded at the amount of the fee
received, and not on the value of the underlying transaction, when the
transaction is completed. Automobile and home financing services revenues
also may include fees from third parties for adaptive marketing programs.
When making offers through the priceline.com service, consumers are
permitted to make only one offer within a seven day period unless they
change some feature of their itinerary, such as the date on which or the
airport from which they are willing to fly. In April 1999, we introduced a
new "checkstatus" feature on our Web site that invites consumers whose
initial requests are not satisfied to change a feature of their itinerary
and resubmit revised offers without having to start the offer submission
process over again. Commencing with the second quarter of 1999, we treat
each initial offer and any resubmitted offer made in response to the
checkstatus invitation as a single offer for purposes of measuring our
offer fulfillment rates.
During the period from launch through June 30, 1999, we collected
guaranteed offers for approximately 5.1 million airline tickets,
representing approximately $1.1 billion in total consumer demand. This
demand resulted in sales of approximately 762,000 airline tickets,
representing approximately $165.2 million in revenue.
Because the priceline.com system does not set minimum offer
thresholds, and consumers are not charged to make offers for airline
tickets and other products, it is expected that we will receive a
significant number of unreasonable or fantasy offers. Accordingly, we also
analyze the percentage of "reasonable" ticket requests that we are able to
fill. We consider an offer for an airline ticket to be "reasonable" when it
is no more than 30% lower than the lowest generally available
advance-purchase fare for the same route. Using this standard, the overall
percentage of ticket requests considered reasonable for the six-month
period ended June 30, 1999 was approximately 55.3%. The 626,860 tickets
sold through the priceline.com service during the six-month period
represented approximately 34.7% of the combined reasonable ticket requests
for domestic and international flights. For domestic routes where our
airline participants have strong coverage, that percentage was higher, with
approximately 40.0% of all reasonable requests fulfilled for the same
six-month period. The percentage of reasonable offers that we are able to
fill can also vary depending on the particular route. The following table
sets forth, for the periods presented, data regarding the total percentage
of "reasonable" ticket requests that we have fulfilled:
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------------------------
June 30, September 30, December 31, March 31, June 30,
1998 1998 1998 1999 1999 (1)
------------ ------------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Total ticket requests........... 492,240 639,089 737,630 1,396,381 1,868,728
"Reasonable" ticket requests.... 275,186 374,984 425,135 763,600 1,043,227
Tickets sold.................... 30,678 36,027 68,743 186,521 440,339
"Reasonable" fill rate.......... 11.1% 9.6% 16.2% 24.4% 42.2%
- -----------
(1) For this period, due to the introduction of the new "checkstatus"
feature, initial offers and any resubmitted offers made in response
to this feature were treated as a single offer; comparisons with
other periods may not be meaningful as resubmitted offers were
considered separate offers in prior periods.
</TABLE>
Since our inception, we have incurred net losses in each fiscal
quarter. We incurred net losses of $88.1 million during the period from
July 18, 1997 (inception) through June 30, 1999, before giving effect to
$68.6 million of non-cash charges arising from equity issuances to a number
of our participating airlines, our chief executive officer and other
parties, as more fully described below. As of June 30, 1999, we had an
accumulated deficit of $156.7 million. We believe that our continued growth
will depend in large part on our ability to continue to promote the
priceline.com brand and to apply the priceline.com business model to a wide
range of products and services. Accordingly, we intend to continue to
invest heavily in marketing and promotion, technology and personnel. As a
result, we expect to incur additional losses for at least the next two
years. See "Additional Factors that May Affect Future Results -- We are Not
Profitable and Expect to Continue to Incur Losses." In addition, our
limited operating history makes the prediction of future results of
operations difficult, and accordingly, there can be no assurance that we
will achieve or sustain revenue growth or profitability. See "Additional
Factors that May Affect Future Results -- Potential Fluctuations in Our
Financial Results makes Financial Forecasting Difficult."
As of June 30, 1999, we also had outstanding non-qualified stock
options to purchase 27,422,057 shares issued to various employees,
consultants and directors pursuant to the 1997 Omnibus Plan and the 1999
Omnibus Plan. The options entitle the holders to purchase common stock at a
weighted average exercise price of approximately $10.82 per share, subject
to adjustment in accordance with the 1997 Omnibus Plan and the 1999 Omnibus
Plan. Upon exercise of an option, we will be required to make payments on
behalf of the option holders for certain payroll related taxes such as
Social Security and Medicare. These payroll taxes will appear as a general
and administrative expense on priceline.com's statement of operations and
will amount to approximately 1.5% to 2.0% of the difference between the
exercise price and the then fair market value of the common stock at the
time of exercise. However, upon exercise of outstanding options, we will be
paid the exercise price of the options that are exercised. We also will be
entitled to an income tax deduction equal to the sum of (1) the difference
between the exercise price of the option and the then fair market value of
the common stock at the time of exercise and (2) the total amount of
payroll related tax payments. As the calculation of this expense is
directly dependent upon our stock price and the exercise of options is in
the sole discretion of the holder of the options, the amount and timing of
the expense and the timing of the corresponding income tax deduction are
not currently able to be determined and are not within our control. We
estimate that, in connection with the exercise of outstanding options
pursuant to the option exercise program, in the third quarter of 1999 we
will (x) record expenses of approximately $1.3 million in respect of such
payroll related taxes; (y) increase additional paid-in capital by
approximately $944,000 in respect of the exercise price of such options;
and (z) increase common stock by approximately $7,700 in respect of the par
value of the shares purchased upon exercise of such options.
Priceline.com's travel agency license was previously held by
Priceline Travel, a separate company that was owned by Mr. Jay S. Walker,
priceline.com's Founder and Vice Chairman, and all of its airline ticket
sales were effected through Priceline Travel, which was merged with and
into priceline.com as of March 24, 1999. Accordingly, the financial
statements of Priceline Travel as of December 31, 1998 (restated) are
presented on a combined basis with priceline.com.
RESULTS OF OPERATIONS
We were formed in July 1997, but did not commence operations until
April 1998. Accordingly, comparisons with prior periods are not meaningful.
THREE MONTHS ENDED JUNE 30, 1999
REVENUES
Total revenues for the three months ended June 30, 1999 were $111.6
million. Revenues for the period were comprised primarily of (1)
transaction revenues representing the selling price of airline tickets and
hotel room reservations; (2) fee income from adaptive marketing programs
offered in connection with our product offerings; (3) ancillary revenues
consisting primarily of Worldspan reservation booking fees; and (4) fee
income from our home financing and auto programs.
On April 23, 1999, the adaptive marketing program with Capital One
ended and we commenced our credit card adaptive marketing program with
First USA. The fee structure of the First USA program is based on different
factors and may or may not result in revenues comparable to those under the
Capital One program. For example, under the Capital One program we received
fees based upon the submission of qualifying credit card applications,
while the First USA program ties a portion of our fees to account
activation and usage. Because, to date, there is no meaningful activation
and usage experience upon which to draw, we cannot predict the degree to
which revenues ultimately will be recognized under the First USA program.
In addition, we expect that future contributions to adaptive marketing
revenues from credit card adaptive marketing programs may decline on a
percentage basis, as agreements with new adaptive marketing suppliers are
reached and become operative. At the same time, increased transaction
activity, particularly associated with airline ticket sales and related
processing fees, is likely to provide an increasing portion of revenues.
All of these factors are likely to diminish the proportion of our revenues
provided by our credit card adaptive marketing programs.
During the three months ended June 30, 1999, we also earned
revenue from our Customer Affinity Share Purchase Program, the first phase
of our adaptive marketing program with E*TRADE. Revenues from this program
related specifically to the referral of our customers to E*TRADE in
connection with our initial public offering and, therefore, are not
recurring. We also commenced the second phase of our adaptive marketing
program with E*TRADE under which E*TRADE compensates us for offering our
customers the opportunity to open an account with E*TRADE while visiting or
making an offer on the priceline.com Web site. We intend to continue to add
adaptive marketing programs so that consumers have a variety of programs
from which to choose and we have a diversified source of adaptive marketing
revenues. See "Additional Factors that May Affect Future Results -- We are
Dependent on Adaptive Marketing Programs."
Our ancillary revenues for the three month period increased as a
result of volume driven increases in Worldspan reservation booking fees and
a recently introduced processing fee. Revenues from these sources are
linked to airline ticket sales and, accordingly, will increase or decrease
in future periods in relation to changes in the volume of airline ticket
sales. Worldspan reservation booking fees also are linked to hotel
reservations booked through the Worldspan system.
COST OF REVENUES AND GROSS PROFIT
Cost of revenues for the three months ended June 30, 1999 totaled
$101.0 million, consisting of product costs of $100.7 million and supplier
warrant costs of $380,759. Product costs were comprised of the cost of
airline tickets from our suppliers, net of the federal air transportation
tax, segment fees and passenger facility charges imposed in connection with
the sale of airline tickets. Product costs also included the cost of hotel
rooms from our suppliers, net of hotel tax. Supplier warrant costs
represent a non-cash expense related to the issuance of common stock
warrants to one of our airline program participants in January 1999. We
anticipate that we will recognize additional supplier warrant costs in the
amount of approximately $381,000 in each of the next six fiscal quarters.
Gross profit, which is comprised of revenues less cost of revenues,
was $10.5 million for the three months ended June 30, 1999. Gross margin
was 9.4% for the period. Excluding the effect of non-cash supplier warrant
costs, we would have had gross profit of $10.9 million and gross margin of
9.8% for the three months ended June 30, 1999. Gross profit and gross
margin are affected by the price at which we cause offers to be fulfilled
and by the level of fees generated by adaptive marketing programs. Because
the fees generated by adaptive marketing revenue and ancillary revenues did
not involve separate costs, adaptive marketing revenues and ancillary
revenues had a disproportionately positive impact on total gross margins
and made a very substantial contribution to our gross profit for the three
months ended June 30, 1999. If our transaction activity continues to grow,
we expect the proportion of our gross profit and gross margin attributable
to adaptive marketing revenues to decline.
Gross margins for the second quarter of 1999 were affected by a
change in revenue mix, resulting from a greater percentage of revenues
being attributable to transaction revenues rather than fee based revenues.
Fee-based revenues, such as adaptive marketing revenues, ancillary revenues
and revenues from financial services and automobiles, have higher margins
than transaction revenues, which are derived from the spread between
customer offers and the product costs.
OPERATING EXPENSES
Sales and Marketing. Sales and marketing expenses for the three
months ended June 30, 1999 totaled $17.7 million, or 15.9% of revenues.
Approximately 52.0% of sales and marketing expenses were comprised of
advertising and promotion expenses. The remaining expenses consisted
primarily of (1) fees payable to a third party service provider that
operates our call center; (2) credit card processing fees; (3) provisions
for customer credit card charge-backs (based upon a percentage reflecting
our historical experience); and (4) compensation for our sales and
marketing personnel.
General and Administrative. General and administrative expenses for
the three months ended June 30, 1999 totaled $5.5 million, or 4.9% of
revenues. General and administrative expenses for the period were comprised
primarily of compensation for personnel, fees for outside professionals,
telecommunications and other overhead costs, including occupancy expense.
Systems and Business Development. Systems and business development
expenses for the three months ended June 30, 1999 totaled $3.5 million, or
3.1% of revenues. Systems and business development expenses for the period
were comprised primarily of compensation to our information technology and
product development staff and payments to outside contractors, data
communications and other expenses associated with operating priceline.com's
Web site and, to a lesser extent, depreciation on computer hardware and
licensing fees for computer software.
In March 1998, the American Institute of Certified Public
Accountants issued Statement of Position ("SOP") 98-1, "Accounting for
Costs of Computer Software Developed or Obtained for Internal Use." This
SOP requires capitalization of certain costs of computer software developed
or obtained for internal use. We adopted this SOP on January 1, 1999 and,
during the three-month period ended June 30, 1999, we capitalized
approximately $3.3 million of computer software developed or obtained for
internal use. Amortization of such costs aggregated approximately
$149,000 during the three month period ended June 30, 1999.
INTEREST INCOME, NET
Interest income, net for the three months ended June 30, 1999
totaled $1.9 million, reflecting approximately $2.0 million of interest
income earned by us on our cash balances, net of interest expense for the
period. Cash balances increased during this period due to our initial
public offering in April 1999.
THREE MONTHS ENDED JUNE 30, 1998
We commenced our service on April 6, 1998 with the sale of leisure
airline tickets. Revenues from the sale of airline tickets during the three
month period ended June 30, 1998 were $7.0 million. Cost of revenues during
this period exceeded such revenues by approximately $900,000. We chose to
sell a substantial number of leisure airline tickets below our cost during
this period in order to increase airline revenues, build a record of
successful transactions and enhance the priceline.com brand.
In addition, we incurred operating expenses of $13.2 million,
consisting of sales and marketing expenses of $6.6 million, general and
administrative expenses of $3.1 million and systems and business
development expenses of $3.4 million. These activities resulted in an
operating loss of $14.1 million and, after consideration of interest
income, a net loss of $14.0 million for the three month period ended June
30, 1998.
SIX MONTHS ENDED JUNE 30, 1999
REVENUES
Total revenues for the six months ended June 30, 1999 were $161.0
million. Revenues for the period were comprised primarily of (1)
transaction revenues representing the selling price of airline tickets and
hotel room reservations; (2) fee income from adaptive marketing programs
offered in connection with our product offerings; (3) ancillary revenues
consisting of Worldspan reservation booking fees and airline ticket
processing fees; and (4) fee income from our home financing and auto
programs.
On April 23, 1999, the adaptive marketing program with Capital One
ended and we commenced our credit card adaptive marketing program with
First USA. The fee structure of the First USA program is based on different
factors and may or may not result in revenues comparable to those under the
Capital One program. For example, under the Capital One program we received
fees based upon the submission of qualifying credit card applications,
while the First USA program ties a portion of our fees to account
activation and usage. Because, to date, there is no meaningful activation
and usage experience upon which to draw, we cannot predict the degree to
which revenues ultimately will be recognized under the First USA program.
In addition, we expect that future contributions to adaptive marketing
revenues from credit card adaptive marketing programs may decline on a
percentage basis, as agreements with new adaptive marketing suppliers are
reached and become operative. At the same time, increased transaction
activity, particularly associated with airline ticket sales and related
processing fees, is likely to provide an increasing portion of revenues.
All of these factors are likely to diminish the proportion of our revenues
provided by our credit card adaptive marketing programs.
During the six months ended June 30, 1999, we also earned revenue
from our Customer Affinity Share Purchase Program, the first phase of our
adaptive marketing program with E*TRADE. Revenues from this program related
specifically to the referral of our customers to E*TRADE in connection with
our initial public offering and, therefore, are not recurring. We also
commenced the second phase of our adaptive marketing program with E*TRADE
under which E*TRADE compensates us for offering our customers the
opportunity to open an account with E*TRADE while visiting or making an
offer on the priceline.com Web site. We intend to continue to add adaptive
marketing programs so that consumers have a variety of programs from which
to choose and we have a diversified source of adaptive marketing revenues.
See "Additional Factors that May Affect Future Results -- We are Dependent
on Adaptive Marketing Programs."
Our ancillary revenues for the six month period increased as a
result of volume driven increases in Worldspan reservation booking fees and
a recently introduced processing fee. Revenues from these sources are
linked to airline ticket sales and, accordingly, will increase or decrease
in future periods in relation to changes in the volume of airline ticket
sales. Worldspan reservation booking fees also are linked to hotel
reservations booked through the Worldspan system.
COST OF REVENUES AND GROSS PROFIT
Cost of revenues for the six months ended June 30, 1999 totaled
$145.1 million, consisting of product costs of $144.3 million and supplier
warrant costs of $761,518. Product costs were comprised of the cost of
airline tickets from our suppliers, net of the federal air transportation
tax, segment fees and passenger facility charges imposed in connection with
the sale of airline tickets. Product costs also included the cost of hotel
rooms from our suppliers, net of hotel tax. Supplier warrant costs
represent a non-cash expense related to the issuance of common stock
warrants to one of our airline program participants in January 1999. We
anticipate that we will recognize additional supplier warrant costs in the
amount of approximately $381,000 in each of the next six fiscal quarters.
Gross profit, which is comprised of revenues less cost of revenues,
was $15.9 million for the six months ended June 30, 1999. Gross margin was
9.9% for the period. Excluding the effect of non-cash supplier warrant
costs, we would have had gross profit of $16.7 million and gross margin of
10.3% for the six months ended June 30, 1999. Gross profit and gross margin
are affected by the price at which we cause offers to be fulfilled and by
the level of fees generated by adaptive marketing programs. We are able to
manage the level of gross margins by controlling the price at which we will
cause offers to be fulfilled. During the first quarter of 1999, we chose to
sell a substantial number of tickets below our cost in order to increase
airline and adaptive marketing revenues, build a record of successful
transactions and enhance the priceline.com brand. As a result of the growth
of the priceline.com service, we reduced the percentage of airline tickets
that we chose to sell below cost during the second quarter, thereby
improving gross margins on airline ticket sales. Because the fees generated
by adaptive marketing revenue and ancillary revenues did not involve
separate costs, adaptive marketing revenues and ancillary revenues had a
disproportionately positive impact on total gross margins and made a very
substantial contribution to our gross profit for the six months ended June
30, 1999. If our transaction activity continues to grow, we expect the
proportion of our gross profit and gross margin attributable to adaptive
marketing revenues to decline. Gross margins for the six months ended June
30, 1999 also were affected by a somewhat lower gross margin in the second
quarter of 1999 compared to the first quarter of 1999. See "Three Months
Ended June 30, 1999--Cost of Revenues and Gross Profit" above.
Gross margins for the second quarter of 1999 were affected by a
change in product mix, resulting from a greater percentage of revenues
being attributable to transaction revenues rather than fee based revenues.
Fee-based revenues, such as adaptive marketing revenues, ancillary revenues
and revenues from financial services and automobiles, have higher margins
than transaction revenues, which are derived from the spread between
customer offers and the product costs.
OPERATING EXPENSES
Sales and Marketing. Sales and marketing expenses for the six
months ended June 30, 1999 totaled $34.9 million, or 21.7% of revenues.
Approximately 65.0% of sales and marketing expenses were comprised of
advertising and promotion expenses. The remaining expenses consisted
primarily of (1) fees payable to a third party service provider that
operates our call center; (2) credit card processing fees; (3) provisions
for customer credit card charge-backs (based upon a percentage reflecting
our historical experience); and (4) compensation for our sales and
marketing personnel.
General and Administrative. General and administrative expenses for
the six months ended June 30, 1999 totaled $9.2 million, or 5.7% of
revenues. General and administrative expenses for the period were comprised
primarily of compensation for personnel, fees for outside professionals,
telecommunications and other overhead costs, including occupancy expense.
Systems and Business Development. Systems and business development
expenses for the six months ended June 30, 1999 totaled $5.7 million, or
3.5% of revenues. Systems and business development expenses for the period
were comprised primarily of compensation to our information technology and
product development staff and payments to outside contractors, data
communications and other expenses associated with operating priceline.com's
Web site and, to a lesser extent, depreciation on computer hardware and
licensing fees for computer software.
In March 1998, the American Institute of Certified Public
Accountants issued Statement of Position ("SOP") 98-1, "Accounting for
Costs of Computer Software Developed or Obtained for Internal Use." This
SOP requires capitalization of certain costs of computer software developed
or obtained for internal use. We adopted this SOP on January 1, 1999 and,
during the six-month period ended June 30, 1999, we capitalized
approximately $5.7 million of computer software developed or obtained for
internal use. Amortization of such costs aggregated approximately $149,000
during the six month period ended June 30, 1999.
INTEREST INCOME, NET
Interest income, net for the six months ended June 30, 1999 totaled
$2.4 million, reflecting approximately $2.5 million of interest income
earned by us on our cash balances, net of interest expense for the period.
Cash balances increased during this period due to our initial public
offering in April 1999.
SIX MONTHS ENDED JUNE 30, 1998
We commenced our service on April 6, 1998 with the sale of leisure
airline tickets. Revenues from the sale of airline tickets during the six
month period ended June 30, 1998 were $7.0 million. Cost of revenues during
this period exceeded such revenues by approximately $900,000. We chose to
sell a substantial number of leisure airline tickets below our cost during
this period in order to increase airline revenues, build a record of
successful transactions and enhance the priceline.com brand.
In addition, we incurred operating expenses of $17.9 million,
consisting of sales and marketing expenses of $7.7 million, general and
administrative expenses of $4.8 million and systems and business
development expenses of $5.4 million. These activities resulted in an
operating loss of $18.9 million and, after consideration of interest
income, a net loss of $18.7 million for the six month period ended June 30,
1998.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have financed our operations primarily
through the sale of equity securities. Net proceeds from financing
activities since inception through June 30, 1999 totaled approximately
$246.6 million. As of June 30, 1999, we had approximately $142.8 million in
cash and cash equivalents. On April 1, 1999, we completed our initial
public offering in which we sold 10,000,000 shares of our common stock at a
price of $16.00 per share, raising $160.0 million in gross proceeds. The
offering proceeds, net of approximately $11.2 million in aggregate
underwriters discounts and commissions and $4.4 million in related
expenses, were approximately $144.4 million.
On July 23, 1999, we filed a registration statement on Form S-1
relating to the following concurrent public offerings: (1) an equity
offering of up to 5,500,000 shares of our common stock, of which 2,000,000
shares will be issued and sold by priceline.com and 3,500,000 shares will
be sold by selling stockholders and (2) a convertible note offering up to
$250.0 million aggregate principal amount of convertible subordinated notes
due 2006, which will be convertible at the option of the holders into
shares of our common stock, subject to adjustment.
In April 1999, we made a $3.3 million loan to Mr. Richard S.
Braddock for the payment of taxes related to the issuance to Mr. Braddock
of 8,125,000 shares of common stock in August 1998. The loan bears interest
at 5.28% per annum. Interest is payable annually and principal is payable
in January 2004.
Net cash used in operating activities was $33.8 million for the six
months ended June 30, 1999. Net cash used in operating activities was
primarily attributable to net losses.
Net cash used in investing activities was $20.6 million for the six
months ended June 30, 1999. Net cash used in investing activities was
primarily related to purchases of property and equipment.
Net cash provided by financing activities was $143.6 million for
the six months ended June 30, 1999. Net cash provided by financing
activities resulted primarily from our initial public offering of
10,000,000 shares of our common stock, for which we received approximately
$149.0 million in cash, net of underwriting discounts and commissions on
April 1, 1999.
We had commitments for capital expenditures as of June 30, 1999 of
approximately $1.2 million. Capital expenditures were $11.3 million for the
six months ended June 30, 1999, and we expect such expenditures to be at
least $22.0 million for the full year of 1999. As a result of our rapid
growth, we expect to increase capital expenditures for purchased software,
internally developed software, computer equipment and leasehold
improvements.
We believe that, based upon our current operating plan, our
existing cash and cash equivalents, the net proceeds from our initial
public offering, the net proceeds from the pending concurrent public
offerings of common stock and notes and any cash generated from operations
will be sufficient to fund our operating activities, capital expenditures
and other obligations through at least the next three years. However, if
during that period or thereafter we are not successful in generating
sufficient cash flow from operations or in raising additional capital when
required in sufficient amounts and on terms acceptable to us, these
failures could have a material adverse effect on our business, results of
operations and financial condition. If additional funds are raised through
the issuance of equity securities, the percentage ownership of our
then-current stockholders would be diluted.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, Statement of Financial Accounting Standards ("SFAS")
No. 133 "Accounting for Derivative Instruments and Hedging Activities" was
released. The statement requires the recognition of all derivatives as
either assets or liabilities in the balance sheet and the measurement of
those instruments at fair value. The accounting for changes in the fair
value of a derivative depends on the planned use of the derivative and the
resulting designation. We are required to implement the statement in the
first quarter of fiscal 2001. We have not used derivative instruments and
believe the impact of adoption of this statement will not have significant
effect on our financial statements.
TAX MATTERS
NET OPERATING LOSS CARRYFORWARDS
Through July 31, 1998, we operated as a limited liability company,
and income taxes (benefits) accrued to our members. During the year ended
December 31, 1998, we had a net loss, and since converting from a limited
liability company to a corporation in July 1998, we have incurred a tax net
operating loss of $54.2 million. Utilization of our net operating loss
carryforwards, which begin to expire in 2018, may be subject to certain
limitations under Section 382 of the Internal Revenue Code of 1986, as
amended. We have provided a full valuation allowance on the deferred tax
asset, consisting primarily of net operating loss carryforwards, because of
uncertainty regarding our realization. Our accounting for deferred taxes
under Statement of Financial Accounting Standards No. 109 involves the
evaluation of a number of factors concerning the realizability of our
deferred tax assets. In concluding that a full valuation allowance was
required, management primarily considered such factors as our history of
losses from operations and expected future losses.
FEDERAL AIR TRANSPORTATION TAX ON AIRLINE TICKET SALES
A federal air transportation tax is imposed upon the sale of
airline tickets and generally is collected by the airlines selling the
tickets. The tax is based upon a percentage of the cost of transportation,
which was 9% for periods prior to October 1, 1998 and 8% thereafter.
Because of the unique pricing structures employed in the priceline.com
service, such as the amount paid by the customer for a ticket being
different than the amount charged by the airline for the same ticket with
the excess payment, if any, going to us as a charge for the use of our
proprietary business method, it is not clear how this federal tax should be
calculated when sales occur using the priceline.com service. We have been
calculating this tax based on the fare paid to the airline for a ticket,
rather than the price paid by the customer. There is a possibility that
current law requires computation of the tax based on the price paid by the
customer to us. Due to the uncertainty of how the federal air
transportation tax applies to sales of airline tickets using the
priceline.com service, we have submitted a written request to the United
States Internal Revenue Service seeking a determination of our federal air
transportation tax obligations. Such determination may not be favorable and
may require us to collect federal air transportation tax on the total
amount paid by consumers for air travel.
If the determination of the Internal Revenue Service is
unfavorable, we could owe $766,339 in additional taxes as of June 30, 1999.
We have accrued for such potential liability in our condensed balance sheet
as of June 30, 1999 and are providing for such potential liability on an
ongoing basis. We have agreed to indemnify and hold harmless certain of our
participating airlines from any liability with respect to such taxes as
well as to secure the payment of such taxes by a letter of credit. See "--
Additional Factors that May Affect Future Results -- Our Business is
Subject to Tax Uncertainties."
NON-QUALIFIED STOCK OPTIONS
As of June 30, 1999, we had outstanding non-qualified stock options
to purchase 27,422,057 shares issued to various employees, consultants and
directors pursuant to the 1997 Omnibus Plan and the 1999 Omnibus Plan. The
options entitle holders to purchase common stock at a weighted average
exercise price of approximately $10.82 per share, subject to adjustment in
accordance with the 1997 Omnibus Plan and the 1999 Omnibus Plan. Upon
exercise of an option, we will be required to make payments on behalf of
the option holders for certain payroll related taxes such as Social
Security and Medicare. These payroll taxes will appear as a general and
administrative expense on our income statement and will amount to
approximately 1.5% to 2.0% of the difference between the exercise price and
the then fair market value of the common stock at the time of exercise.
However, upon exercise of outstanding options, we will be paid the exercise
price of the options that are exercised. We also will be entitled to an
income tax deduction equal to the sum of (1) the difference between the
exercise price of the option and the then fair market value of the common
stock at the time of exercise and (2) the total amount of payroll related
tax payments. As the calculation of the expense is directly dependent upon
our stock price and the exercise of options is within the sole discretion
of the holder of the options, the amount and timing of the expense and the
timing of the corresponding income tax deduction are not currently able to
be determined and are not within our control. We estimate that, in
connection with the exercise of outstanding options pursuant to the option
exercise program, in the third quarter of 1999 we will (x) record expenses
of approximately $1.3 million in respect of such payroll related taxes; (y)
increase additional paid-in capital by approximately $944,000 in respect of
the exercise price of such options; and (z) increase common stock by
approximately $7,700 in respect of the par value of the shares purchased
upon exercise of such options.
YEAR 2000 READINESS DISCLOSURE
OUR STATE OF READINESS
We have defined Year 2000 compliance as follows:
Information technology time and date data processes, including, but
not limited to, calculating, comparing and sequencing data from, into and
between the 20th and 21st centuries contained in our products and services
offered through the priceline.com service, will function accurately,
continuously and without degradation in performance and without requiring
intervention or modification in any manner that will or could adversely
affect the performance of such products or the delivery of such services as
applicable at any time hereafter.
Our internal systems include both our information technology
systems and non-information technology systems. We have initiated an
assessment of our proprietary information technology systems, and expect to
complete any remediation and testing of all information technology systems
during 1999. With respect to information technology systems provided by
third-party vendors, we have sought assurances from such vendors that their
technology is Year 2000 compliant. All of our material information
technology system vendors have replied to inquiry letters sent by us
stating that they either are Year 2000 compliant or expect to be so in a
timely manner.
We are evaluating our non-information technology systems for Year
2000 compliance. We have not, to date, discovered any material Year 2000
issues with respect to our non-information technology systems.
We are in the process of contacting our material seller
participants whose products or services are sold through the priceline.com
service to determine if they are Year 2000 compliant. To date, all such
seller participants have stated that they are, or expect to be, Year 2000
compliant in a timely manner.
Our customers are individual Internet users, and, therefore, we do
not have any individual customers who are material to an evaluation of Year
2000 compliance issues.
THE COSTS TO ADDRESS YEAR 2000 ISSUES
We have expensed amounts incurred in connection with Year 2000
compliance since our formation through June 30, 1999. Such amounts have not
been material. The additional costs to make any other products or services
Year 2000 compliant will be expensed as incurred, but are not expected to
be material.
We are not currently aware of any material operational issues or
costs associated with preparing our systems for the Year 2000. Nonetheless,
we may experience material unexpected costs caused by undetected errors or
defects in the technology used in our systems or because of the failure of
a material seller participant to be Year 2000 compliant.
RISKS ASSOCIATED WITH YEAR 2000 ISSUES
Notwithstanding our Year 2000 compliance efforts, the failure of a
material system or vendor, including a seller participant in the
priceline.com service, or the Internet generally, to be Year 2000 compliant
could harm the operation of the priceline.com service or prevent certain
products and services being offered through the priceline.com service, or
have other unforeseen, adverse consequences to us.
Finally, we also are subject to external Year 2000-related failures
or disruptions that might generally affect industry and commerce, such as
utility or transportation company Year 2000 compliance failures and related
service interruptions. Moreover, participating sellers in priceline.com
services might experience substantial slow-downs in business if consumers
avoid products and services such as air travel both before and after
January 1, 2000 arising from concerns about reliability and safety because
of the Year 2000 issue. All of these factors could have a material adverse
effect on our business, financial condition and results of operations.
CONTINGENCY PLANS
We have developed a contingency plan to address situations that we
believe would arise if we fail to be Year 2000 compliant. We have not
developed a contingency plan to address situations that may result if our
suppliers are unable to achieve Year 2000 compliance. The cost of
developing and implementing such a plan, if necessary, could be material.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
OUR LIMITED OPERATING HISTORY MAKES EVALUATING OUR BUSINESS DIFFICULT
Priceline.com was formed in July 1997 and began operations on April
6, 1998. As a result, we have only a limited operating history on which you
can base an evaluation of our business and prospects. Our prospects must be
considered in the light of the risks, uncertainties, expenses and
difficulties frequently encountered by companies in their early stages of
development, particularly companies in new and rapidly evolving markets,
such as online commerce, using new and unproven business models. To address
these risks and uncertainties, we must, among other things:
o attract leading sellers and consumers to the priceline.com
service;
o maintain and enhance our brand, and expand our product and
service offerings;
o attract, integrate, retain and motivate qualified personnel;
and
o adapt to meet changes in our markets and competitive
developments.
We may not be successful in accomplishing these objectives.
WE ARE NOT PROFITABLE AND EXPECT TO CONTINUE TO INCUR LOSSES
We have incurred net losses of $88.1 million during the period from
July 18, 1997 (inception) through June 30, 1999, before giving effect to
$68.6 million of non-cash charges arising from equity issuances to a number
of our participating airlines, our chief executive officer and other
parties, which resulted in total net losses of $156.7 million for such
period. We have not achieved profitability and expect to continue to incur
losses for at least the next two years. The principal causes of our losses
are likely to continue to be significant brand development costs, marketing
and promotion costs and technology and systems development costs.
Almost all of our revenues to date have been derived from airline
ticket sales, hotel room reservations and related adaptive marketing
programs. In order to increase airline, hotel room and adaptive marketing
revenues, build a record of successful transactions and enhance the
priceline.com brand, we have sold a substantial portion of our airline
tickets and hotel room reservations below cost. In addition, as our
business model evolves, we have introduced and expect to continue to
introduce a number of new products and services. With respect to both
current and future product and service offerings, we expect to increase
significantly our operating expenses in order to increase our customer
base, enhance our brand image and support our growing infrastructure. For
us to make a profit, our revenues and gross profit margins will need to
increase sufficiently to cover these and other future costs. Otherwise, we
may never achieve profitability.
WE ARE DEPENDENT ON ADAPTIVE MARKETING PROGRAMS
Our adaptive marketing programs permit consumers to increase the
amount of their offers at no additional cost by participating in sponsor
promotions during the process of making an offer through the priceline.com
service. The fees paid to us by sponsors offering the promotions generate
significant revenues. Since these fees historically have involved no direct
costs, they have had a disproportionately positive impact on our gross
profit margins. A significant reduction in consumer acceptance of our
adaptive marketing programs, costs that we may incur in connection with
adaptive marketing programs, reductions in fees paid to us in connection
with such programs or any material decline in such programs could result in
a material reduction in our revenues and our gross profit. We may not be
able to replace such revenues through other programs or through product
sales.
During 1998 and the first two quarters of 1999, a substantial
majority of our adaptive marketing revenues were derived from fees paid by
credit card issuers for qualifying credit card applications submitted over
the priceline.com service in connection with customer offers for airline
tickets. Through May 1, 1999, almost all of our adaptive marketing revenues
were derived from fees related to a credit card adaptive marketing program
with Capital One Bank. In May 1999, we replaced Capital One Bank with First
USA Bank, a leading national credit card issuer. Since that time, our
credit card adaptive marketing program revenues have been attributable to
our adaptive marketing relationship with First USA.
Both the Capital One and First USA adaptive marketing programs
enable our customers to increase the amount of their offers by a specified
amount by applying online for a credit card. However, the fee structure of
the First USA program is based on different factors than the factors that
were applicable under the Capital One program. For example, under the
Capital One program we received fees based upon the submission of
qualifying applications, while the First USA program ties a portion of our
fees to account activation and usage. However, since the First USA program
only recently commenced, we have no method of accurately predicting such
activation and usage rates. In addition, unlike the Capital One program, a
portion of the fees earned under the First USA program is required to be
reinvested in program incentives. Accordingly, the First USA program may or
may not generate revenues or gross profits comparable to those previously
generated under the Capital One program. The First USA agreement has a term
of five years, subject to certain earlier termination and repricing rights
of First USA. For example, subject to priceline.com's rights of
renegotiation, First USA has the right to terminate the agreement after one
year (and earlier under certain circumstances) if its financial returns
under the adaptive marketing program are not at least equivalent to certain
agreed upon levels. The full financial statement impact of the shift from
the Capital One adaptive marketing program to the First USA adaptive
marketing program will not be known until completion of future periods.
In addition to our credit card adaptive marketing program with
First USA, we have an adaptive marketing program with E*TRADE for online
brokerage services and expect to commence adaptive marketing programs with
Discover Financial Services Inc. for credit cards, Sprint Communications
Company L.P. for long distance telecommunications services and Earthlink
Network, Inc. for the provision of Internet services. Our adaptive
marketing program with E*TRADE is based on an oral agreement which may be
terminated at any time and most of our other adaptive marketing programs
may be terminated on short notice.
We cannot guarantee that any of our adaptive marketing programs
will continue beyond their initial terms or, even if continued, that they
will be successful. If they are not successful, our gross profit and
results of operations could be adversely affected.
POTENTIAL FLUCTUATIONS IN OUR FINANCIAL RESULTS MAKES FINANCIAL FORECASTING
DIFFICULT
We expect our revenues and operating results to vary significantly
from quarter to quarter. As a result, quarter to quarter comparisons of our
revenues and operating results may not be meaningful. In addition, due to
our limited operating history and our new and unproven business model, we
cannot predict our future revenues or results of operations accurately. It
is likely that in one or more future quarters our operating results will
fall below the expectations of securities analysts and investors. If this
happens, the trading price of our common stock would almost certainly be
materially and adversely affected.
Our business has no backlog and almost all of our revenues for a
particular quarter are derived from transactions that are both initiated
and completed during that quarter. Our current and future expense levels
are based largely on our investment plans and estimates of future revenues
and are, to a large extent, fixed. Accordingly, we may be unable to adjust
spending in a timely manner to compensate for any unexpected revenue
shortfall, and any significant shortfall in revenues relative to our
planned expenditures could have an immediate adverse effect on our business
and results of operations.
Our limited operating history and rapid growth makes it difficult
for us to assess the impact of seasonal factors on our business.
Nevertheless, we expect our business to be subject to seasonal
fluctuations, reflecting a combination of seasonality trends for the
products and services offered by the priceline.com service and seasonality
patterns affecting Internet use. For example, with regard to our travel
products, demand for leisure travel may increase over summer vacations and
holiday periods, while Internet usage may decline during the summer months.
Our results also may be affected by seasonal fluctuations in the inventory
made available to the priceline.com service by participating sellers.
Airlines, for example, typically enjoy high demand for tickets through
traditional distribution channels for travel during Thanksgiving and the
year-end holiday period. As a result, during those periods, airlines may
have less excess inventory to offer through the priceline.com service at
discounted prices. Our business also may be subject to cyclical variations
for the products and services offered; for example, leisure travel and home
mortgage financing tend to decrease in economic downturns.
WE ARE DEPENDENT ON THE AIRLINE INDUSTRY AND CERTAIN AIRLINES
Our near term, and possibly long term, prospects are significantly
dependent upon our sale of leisure airline tickets. Sales of leisure
airline tickets represented approximately 83.7% of total revenue for the
six months ended June 30, 1999. Leisure travel, including the sale of
leisure airline tickets, is dependent on personal discretionary spending
levels. As a result, sales of leisure airline tickets and other leisure
travel products tend to decline during general economic downturns and
recessions. Unforeseen events, such as political instability, regional
hostilities, increases in fuel prices, travel-related accidents and unusual
weather patterns also may adversely affect the leisure travel industry. As
a result, our business also is likely to be affected by those events.
Significantly reducing our dependence on the airline and travel industries
is likely to take a long time and there can be no guarantee that we will
succeed in reducing that dependence.
Sales of airline tickets from priceline.com's four largest airline
suppliers, exclusive of Continental Airlines, Inc., which joined the
priceline.com service in July 1999, accounted for approximately 92.0% of
airline ticket revenue for the six months ended June 30, 1999. As a result,
currently we are substantially dependent upon the continued participation
of these four airlines in the priceline.com service in order to maintain
and continue to grow our total airline ticket revenues. We currently have
22 participating airlines. However, our airline participation agreements:
o do not require the airlines to make tickets available for
any particular routes;
o do not require the airlines to provide any specific quantity
of airline tickets;
o do not require the airlines to provide particular prices or
levels of discount;
o do not require the airlines to deal exclusively with us in
the public sale of discounted airline tickets; and
o generally, can be terminated upon relatively short notice.
These agreements also outline the terms and conditions under which ticket
inventory provided by the airlines may be sold.
Our agreement with Delta, subject to various exceptions, requires
Delta's approval of the addition of new carriers to the priceline.com
service, restricts the routes for which tickets may be offered by specified
carriers through the priceline.com service and imposes limitations on the
code share arrangements of specified carriers. Delta also may require the
exclusion of specific markets in order for certain other airlines to
participate. These provisions could limit our ability to expand our airline
ticket service. In addition, our ability to transfer or license our
intellectual property to other travel providers is limited in the manner
set forth in the agreement.
It is possible that, as the priceline.com service grows and becomes
a significant channel of distribution for airline tickets and as other
carriers seek participation in the priceline.com service, these
competitively restrictive provisions of the Delta agreement could raise
issues under federal and state antitrust laws. If that happened, either a
federal or state government agency or private party could initiate
litigation seeking to enjoin us and Delta from enforcing these provisions
or seeking to collect treble damages. The outcome of any such litigation
would be uncertain. If, however, such a lawsuit resulted in an injunction
or subjected us to damages, our business and financial condition could
suffer.
Due to our dependence on the airline industry, we could be severely
affected by changes in that industry, and, in many cases, we will have no
control over such changes or their timing. For example, if the Federal
Aviation Administration grounded a popular aircraft model, excess seat
capacity could be dramatically reduced and, as a result, our source of
inventory could be significantly curtailed. In addition, given the
concentration of the airline industry, particularly in the domestic market,
major airlines that are not participating in the priceline.com service
could exert pressure on other airlines not to supply us with tickets.
Alternatively, the airlines could attempt to establish their own
buyer-driven commerce service or other similar service to compete with us.
We also could be materially adversely affected by the bankruptcy,
insolvency or other material adverse change in the business or financial
condition of one or more of our airline participants.
The sale of shares of common stock by the selling stockholders in
the pending equity offering is being made pursuant to the "piggyback"
registration rights contained in the registration rights agreement. We
obtained from parties to the registration rights agreement that hold shares
(or presently exercisable warrants to purchase shares) of common stock
available for sale in the equity offering a waiver of a 30-day notice
period under the agreement and a consent to the assignment of registration
rights by Messrs. Jay Walker and Richard Braddock, each of whom
chose to sell less than his pro rata number of shares in the equity
offering. We did not obtain such waiver and consent from certain other
parties to the registration rights agreement (comprised of certain airline
participants) because they do not have shares (or presently exercisable
warrants to purchase shares) of common stock available for sale in the
equity offering. We believe that no damages arise as a result of the
failure to obtain such waiver and consent since such airline participants
do not have shares (or presently exercisable warrants to purchase shares)
of common stock available for sale. Nevertheless, if a disagreement with
such airline participants were to arise, we can not be certain as to the
effect, if any, that it could have on our relationship with such airline
participants or whether damages or other remedies could be imposed.
OUR BUSINESS MODEL IS NOVEL AND UNPROVEN
The priceline.com service is based on a novel and unproven business
model. We will be successful only if consumers and sellers actively use the
priceline.com service. Prior to the launch of the priceline.com service,
consumers and sellers had never bought and sold products and services
through a demand collection system over the Internet. Therefore, it is
impossible to predict the degree to which consumers and sellers will use
the priceline.com service.
Many of the factors influencing consumers' and sellers' willingness
to use the priceline.com service are outside our control. For example, a
labor dispute that disrupts airline service or an airline accident could
make consumers unwilling to use a service like priceline.com that does not
permit the customer to designate the airline on which the customer
purchases a ticket. In addition, a breach of security on the Internet, even
if we were not involved, could make consumers unwilling to guarantee orders
online with a credit card. Consequently, it is possible that consumers and
sellers will never utilize the priceline.com service to the degree
necessary for us to achieve profitability.
WE NEED TO SELL NEW PRODUCTS AND SERVICES
We are unlikely to make significant profits unless we make new or
complementary products and services and a broader range of existing
products and services available through the priceline.com service. We will
incur substantial expenses and use significant resources in trying to
expand the type and range of the products and services that we offer.
However, we may not be able to attract sellers and other participants to
provide such products and services or consumers to purchase such products
and services through the priceline.com service. In addition, if we launch
new products or services and they are not favorably received by consumers,
our reputation and the value of the priceline.com brand could be damaged.
Almost all of our experience to date is in the travel industry. The
travel industry is characterized by "expiring" inventories. For example, if
not used by a specific date, an airline ticket or hotel room reservation
has no value. The expiring nature of the inventory creates incentives for
airlines and hotels to sell seats or room reservations at reduced rates.
Because we have only limited experience in selling "non-expiring"
inventories on the priceline.com service, such as new cars or financial
services, we cannot predict whether the priceline.com business model can be
successfully applied to such products and services.
TWO NEW BUSINESSES WE ARE EVALUATING MAY NOT BE SUCCESSFUL
In addition to broadening the products and services offered through
the priceline.com service, we may expand our current "name your price"
business model into other areas of e-commerce. We currently are evaluating
the licensing of our business model to two new companies. One of these
companies is developing a consumer-to-consumer business in which buyers
would make conditional purchase offers to acquire goods from other
consumers. The other would enable consumers to use the Internet to name the
price that they are willing to pay for retail merchandise, which they would
pick up from participating retailers. However, we have not determined the
structure of our relationship with these companies, which may include,
among other things, our licensing of the priceline.com brand and "name your
price" business model and investment in such entities. These new businesses
may not be launched and, if launched, may not be successful. If these new
businesses are not favorably received by consumers, the association of our
brand name and business model with these new entities may adversely affect
our business and reputation and may dilute the value of our brand name. In
addition, to the extent that we may need to invest funds and/or management
resources for the development of these entities, our core business may
suffer.
Expansion of our core business model would expose us to additional
risks not currently applicable to our existing operations. For example,
expansion into retail products would give rise to operational challenges
not applicable to our existing products, such as consumer pick-up
arrangements. Moreover, a consumer-to-consumer service would create risks
that we do not face currently, such as deceptive or fraudulent activities
conducted by users on the Web site. The additional risks associated with an
expansion of our core business could have a material adverse effect on our
business generally.
WE MAY BE UNABLE TO EFFECTIVELY MANAGE OUR RAPID GROWTH
We have rapidly and significantly expanded our operations and
anticipate that further expansion will be required to realize our growth
strategy. Our rapid growth has placed significant demands on our management
and other resources which, given our expected future growth rate, is likely
to continue. To manage our future growth, we will need to attract, hire and
retain highly skilled and motivated officers and employees and improve
existing systems and/or implement new systems for: (1) transaction
processing; (2) operational and financial management; and (3) training,
integrating and managing our growing employee base.
IF WE LOSE OUR KEY PERSONNEL OR CANNOT RECRUIT ADDITIONAL PERSONNEL, OUR
BUSINESS MAY SUFFER
Competition for personnel with experience in Internet commerce is
intense. If we do not succeed in attracting new employees or retaining and
motivating our current and future employees, our business could suffer
significantly.
Since our formation in July 1997, we have expanded from 10 to 261
full-time employees as of June 30, 1999. We also have employed many key
personnel since our launch in April 1998, including our Chairman and Chief
Executive Officer and our President and Chief Operating Officer, and a
number of key managerial, marketing, planning, financial, technical and
operations personnel. We expect to continue to add additional key personnel
in the near future. We do not have "key person" life insurance policies on
any of our key personnel.
We believe our performance is substantially dependent on:
o our ability to retain and motivate our senior management and
other key employees; and
o our ability to identify, attract, hire, train, retain and
motivate other highly skilled technical, managerial,
marketing and customer service personnel.
WE RELY ON THIRD-PARTY SYSTEMS
We rely on certain third-party computer systems or third-party
service providers, including:
o the computerized central reservation systems of the airline
and hotel industries to satisfy demand for airline tickets
and hotel room reservations;
o the computer systems of LendingTree, Inc. to satisfy offers
for home financing services;
o Exodus Communications to host our systems infrastructure,
web and database servers; and
o CallTech Communications Incorporated to operate our call
center.
Any interruption in these third-party services, or a deterioration
in their performance, could be disruptive to our business. We currently do
not have any contractual arrangement with Exodus Communications and our
agreements with CallTech Communications and LendingTree are terminable upon
short notice. In the event our arrangement with any of such third parties
is terminated, we may not be able to find an alternative source of systems
support on a timely basis or on commercially reasonable terms.
INTENSE COMPETITION COULD REDUCE OUR MARKET SHARE AND HARM OUR FINANCIAL
PERFORMANCE
The markets for the products and services offered on the
priceline.com service are intensely competitive. We compete with both
traditional distribution channels and online services. Increased
competition could diminish our ability to become profitable or result in
loss of market share and damage the priceline.com brand.
We currently or potentially compete with a variety of companies
with respect to each product or service we offer. With respect to travel
products, these competitors include:
o Internet travel agents such as Travelocity, Preview Travel
and Microsoft's Expedia;
o traditional travel agencies;
o consolidators and wholesalers of airline tickets and other
travel products, including online consolidators such as
Cheaptickets.com;
o individual airlines, hotels, rental car companies, cruise
operators and other travel service providers; and
o operators of travel industry reservation databases such as
Worldspan and Sabre.
Our current or potential competitors with respect to new
automobiles include traditional and online auto dealers, including newly
developing auto superstores such as AutoNation, Auto- by-Tel and
Microsoft's CarPoint. With respect to financial service products, our
competitors include:
o banks and other financial institutions;
o online and traditional mortgage and insurance brokers,
including mortgage.com, Quicken Mortgage, E-Loan and iOwn,
Inc.; and
o insurance companies.
We also potentially face competition from a number of large online
services that have expertise in developing online commerce and in
facilitating Internet traffic. These potential competitors include
Amazon.com, America Online, Microsoft, and Yahoo! who could choose to
compete with us either directly or indirectly through affiliations with
other e-commerce companies. Other large companies with strong brand
recognition, technical expertise and experience in online commerce and
direct marketing could also seek to compete in the buyer-driven commerce
market. In addition, as we expand our business through the introduction of
new products and services, we will face competition from established
providers of these products and services. For example, if we expand into
the consumer-to-consumer market either directly or through a licensing
arrangement, we will face competition from established web site operators
such as eBay.
Many of our competitors have significant competitive advantages.
For example, airlines, hotels, financial institutions and other suppliers
also sell their products and services directly to consumers and have
established Web sites. Internet directories, search engines and large
traditional retailers have significantly greater operating histories,
customer bases, technical expertise, brand recognition and/or online
commerce experience than us. In addition, certain competitors may be able
to devote significantly greater resources than us to:
o marketing and promotional campaigns;
o attracting traffic to their Web sites;
o attracting and retaining key employees; and
o Web site and systems development.
OUR SUCCESS DEPENDS ON OUR ABILITY TO PROTECT OUR INTELLECTUAL PROPERTY
We have developed a comprehensive program for securing and
protecting rights in patentable inventions, trademarks, trade secrets and
copyrightable materials. If we are not successful in protecting our
intellectual property, there could be a material adverse effect on our
business.
PATENTS
We currently hold one issued United States patent directed to a
unique Internet-based buyer-driven commerce method and system underlying
our business model. We also hold one issued United States patent directed
to a method and system for pricing and selling airline ticket options and
one issued United States patent directed to methods and systems for
generating airline-specified time tickets. In addition, we have pending 25
United States and four international patent applications directed to
different aspects of our technology and business processes. We also have
instituted an invention development program to identify and protect new
inventions and a program for international filing of selected patent
applications. Nevertheless, it is possible that:
o our core buyer-driven commerce patent and any other issued
patents could be successfully challenged by one or more
third parties, which could result in our loss of the right
to prevent others from exploiting the buyer-driven commerce
system claimed in the patent or the inventions claimed in
any other issued patents;
o because of variations in the application of our business
model to each of our products and services, our core
buyer-driven commerce patent may not be effective in
preventing one or more third parties from utilizing a
copycat business model to offer the same product or service
in one or more categories;
o our ability to practice our core buyer-driven commerce
patent through offering one or more of our products or
services could be successfully prevented if one or more
third parties prevail in an interference action in the U.S.
Patent and Trademark Office and thereby obtain priority of
invention for the subject matter claimed in our core
buyer-driven commerce patent;
o newly discovered prior art could diminish the value of or
invalidate an issued patent;
o our pending patent applications may not result in the
issuance of patents; and
o current and future competitors could devise new methods of
competing with our business that are not covered by our
issued patents or patent applications.
While our core patent is directed to a unique buyer-driven commerce
system and method, it does not necessarily prevent competitors from
developing and operating Internet commerce businesses that use
customer-offer based business models. It is possible for a competitor to
develop and utilize a business model that appears similar to our patented
buyer-driven commerce system, but which has sufficient distinctions that it
does not fall within the scope of our patent. For example, we are aware of
Internet travel services that appear to use customer-offer based
transaction models, but based on the information we have obtained to date,
may not infringe our patent.
Walker Digital currently owns assets and intellectual property
related to two new areas of e-commerce into which we may expand our "name
your price" business model, one involving consumer-to-consumer sales and
the other involving the sale of retail merchandise. We may license our
brand name and "name your price" business model to two new companies formed
to develop these businesses. Walker Digital may contribute assets and
intellectual property to these companies in return for an equity interest
in these companies.
Walker Digital owns the intellectual property rights underlying the
technology associated with our adaptive marketing programs. Walker Digital
has licensed to priceline.com the right to use these intellectual property
rights under a perpetual, non-exclusive, royalty-free license agreement.
Walker Digital has pending several United States patent applications
directed to different aspects of the processes and technology supporting
adaptive marketing programs.
We are currently subject to an interference action relating our
core buyer-drive commerce patent. See Note 6 to the Notes to Condensed
Financial Statements.
TRADEMARKS, COPYRIGHTS AND TRADE SECRETS
We regard the protection of our copyrights, service marks,
trademarks, trade dress and trade secrets as critical to our future
success. We rely on a combination of laws and contractual restrictions,
such as confidentiality agreements, to establish and protect our
proprietary rights. However, laws and contractual restrictions may not be
sufficient to prevent misappropriation of our technology or deter others
from developing similar technologies. We also attempt to register our
trademarks and service marks in the United States and internationally.
However, effective trademark, service mark, copyright and trade secret
protection may not be obtainable and/or available in every country in which
our services are made available online.
PENDING LITIGATION
Current pending litigation against priceline.com and others alleges
causes of action for, among other things, misappropriation of trade
secrets, breach of contract, conversion, breach of confidential
relationship, copyright infringement, fraud, unfair competition, and false
advertising, and seeks injunctive relief and damages in an unspecified
amount. See Note 6 of the Notes to the Condensed Financial Statements.
DOMAIN NAMES
We currently hold the Internet domain name "priceline.com," as well
as various other related names. Domain names generally are regulated by
Internet regulatory bodies. The regulation of domain names in the United
States and in foreign countries is subject to change. Regulatory bodies
could establish additional top-level domains, appoint additional domain
name registrars or modify the requirements for holding domain names. As a
result, we may not acquire or maintain the "priceline.com" domain name in
all of the countries in which we conduct business.
The relationship between regulations governing domain names and
laws protecting trademarks and similar proprietary rights is unclear.
Therefore, we could be unable to prevent third parties from acquiring
domain names that infringe or otherwise decrease the value of our
trademarks and other proprietary rights.
LICENSES
In the future, we may license portions of our intellectual
property, including our issued patents, to third parties or to joint
ventures or other entities in which we may have an interest. To date, we
have granted a small business providing online travel services immunity
from suit under our core Internet- based buyer-driven commerce system
patent, on the condition that the nature and scope of such business is not
significantly changed. If the nature or scope of such immunity were
disputed, we would need to institute proceedings to enforce our rights
either under the immunity agreement or under the patent.
WE MAY NOT BE ABLE TO KEEP UP WITH THE RAPID TECHNOLOGICAL AND OTHER CHANGES
The markets in which we compete are characterized by rapidly
changing technology, evolving industry standards, frequent new service and
product announcements, introductions and enhancements and changing consumer
demands. We may not be able to keep up with these rapid changes. In
addition, these market characteristics are heightened by the emerging
nature of the Internet and the apparent need of companies from many
industries to offer Internet-based products and services. As a result, our
future success will depend on our ability to adapt to rapidly changing
technologies, to adapt our services to evolving industry standards and to
continually improve the performance, features and reliability of our
service in response to competitive service and product offerings and the
evolving demands of the marketplace. In addition, the widespread adoption
of new Internet, networking or telecommunications technologies or other
technological changes could require us to incur substantial expenditures to
modify or adapt our services or infrastructure.
YEAR 2000 RISKS MAY HARM OUR BUSINESS
The risks posed by Year 2000 issues could adversely affect our
business in a number of significant ways. Although we believe that our
internally developed systems and technology are Year 2000 compliant, our
information technology systems nevertheless could be substantially impaired
or cease to operate due to Year 2000 problems. Additionally, we rely on
information technology supplied by third parties, and our participating
sellers also are heavily dependent on information technology systems and on
their own third party vendors' systems. Year 2000 problems experienced by
us or any of such third parties could materially adversely affect our
business. Additionally, the Internet could face serious disruptions arising
from the Year 2000 problem.
We are evaluating our internal information technology systems and
contacting our information technology suppliers and participating sellers
to ascertain their Year 2000 status. However, we cannot guarantee that our
own systems will be Year 2000 compliant in a timely manner, that any of our
participating sellers or other Web site vendors will be Year 2000 compliant
in a timely manner, or that there will not be significant interoperability
problems among information technology systems. We also cannot guarantee
that consumers will be able to visit our Web site without serious
disruptions arising from the Year 2000 problem. Given the pervasive nature
of the Year 2000 problem, we cannot guarantee that disruptions in other
industries and market segments will not adversely affect our business.
Further, the costs related to Year 2000 compliance could be significant.
Moreover, participating sellers in priceline.com services could experience
substantial slow-downs in business if consumers avoid products and services
such as air travel both before and after January 1, 2000 arising from
concerns about reliability and safety because of the Year 2000 issue.
ONLINE SECURITY BREACHES COULD HARM OUR BUSINESS
The secure transmission of confidential information over the
Internet is essential in maintaining consumer and supplier confidence in
the priceline.com service. Substantial or ongoing security breaches on our
system or other Internet-based systems could significantly harm our
business. We currently require buyers to guarantee their offers with their
credit card, either online or through our toll-free telephone service. We
rely on licensed encryption and authentication technology to effect secure
transmission of confidential information, including credit card numbers. It
is possible that advances in computer capabilities, new discoveries or
other developments could result in a compromise or breach of the technology
used by us to protect customer transaction data.
We incur substantial expense to protect against and remedy security
breaches and their consequences. However, we cannot guarantee that our
security measures will prevent security breaches. A party that is able to
circumvent our security systems could steal proprietary information or
cause interruptions in our operations. Security breaches also could damage
our reputation and expose us to a risk of loss or litigation and possible
liability. Our insurance policies carry low coverage limits, which may not
be adequate to reimburse us for losses caused by security breaches.
We also face risks associated with security breaches affecting
third parties conducting business over the Internet. Consumers generally
are concerned with security and privacy on the Internet and any publicized
security problems could inhibit the growth of the Internet and, therefore,
the priceline.com service as a means of conducting commercial transactions.
OUR STOCK PRICE IS HIGHLY VOLATILE
The market price of our common stock is highly volatile and is
likely to continue to be subject to wide fluctuations in response to
factors such as the following, some of which are beyond our control:
o quarterly variations in our operating results;
o operating results that vary from the expectations of
securities analysis and investors;
o changes in expectations as to our future financial
performance, including financial estimates by securities
analysts and investors;
o changes in market valuations of other Internet or online
service companies;
o announcements of technological innovations or new services
by us or our competitors;
o announcements by us or our competitors of significant
contracts, acquisitions, strategic partnerships, joint
ventures or capital commitments;
o loss of a major seller participant, such as an airline or
hotel chain;
o changes in the status of our intellectual property rights;
o loss of a major adaptive marketing partner;
o announcements by third parties of significant claims or
proceedings against us or adverse developments in pending
proceedings;
o additions or departures of key personnel;
o future sales of our common stock; and
o stock market price and volume fluctuations.
In addition, the trading prices of Internet stocks in general,
including ours, have experienced extreme price and volume fluctuations in
recent months. These fluctuations often have been unrelated or
disproportionate to the operating performance of these companies. The
valuations of many Internet stocks, including ours, are extremely high
based on conventional valuation standards, such as price to earnings and
price to sales ratios. The trading price of our common stock has increased
significantly from the initial public offering price. These trading prices
and valuations may not be sustained. Any negative change in the public's
perception of the prospects of Internet or e-commerce companies could
depress our stock price regardless of our results. Other broad market and
industry factors may decrease the market price of our common stock,
regardless of our operating performance. Market fluctuations, as well as
general political and economic conditions, such as a recession or interest
rate or currency rate fluctuations, also may decrease the market price of
our common stock.
In the past, securities class action litigation often has been
brought against a company following periods of volatility in the market
price of their securities. We may in the future be the target of similar
litigation. Securities litigation could result in substantial costs and
divert management's attention and resources.
OUR BUSINESS IS SUBJECT TO TAX UNCERTAINTIES
POTENTIAL FEDERAL AIR TRANSPORTATION TAX LIABILITY
A federal air transportation tax is imposed upon the sale of
airline tickets and generally is collected by the airlines selling the
tickets. The tax is based upon a percentage of the cost of transportation,
which was 9% for periods prior to October 1, 1998 and 8% thereafter.
Because of the unique pricing structures employed in the priceline.com
service, such as the amount paid by the customer for a ticket being
different than the amount charged by the airline for the same ticket with
the excess payment, if any, going to us as a charge for the use of our
proprietary business method, it is not clear how this federal tax should be
calculated when sales occur using the priceline.com service. We have been
calculating this tax based on the price charged by the airline for a
ticket, rather than the price paid by the customer. There is a possibility
that current law requires computation of the tax based on the price paid by
the customer to us.
Due to the uncertainty of how the federal air transportation tax
applies to sales of airline tickets using the priceline.com service, we
have submitted a written request to the United States Internal Revenue
Service seeking a determination of our federal air transportation tax
obligations. We recently met with representatives of the Internal Revenue
Service to informally discuss our submission. We intend to revise and
resubmit our request to address certain factual and legal inquiries raised
during our meeting. The actual ruling by the Internal Revenue Service may
not be favorable and may require us to collect the federal air
transportation tax on the total amount paid by consumers for air travel.
If the determination of the Internal Revenue Service is
unfavorable, we could owe approximately $766,339 in additional taxes as of
June 30, 1999. We have accrued for such potential liability in our
condensed balance sheet as of June 30, 1999 and are providing for such
potential liability on an ongoing basis. We have agreed to indemnify and
hold harmless certain of our participating airlines from any liability with
respect to such taxes, as well as to secure the payment of such taxes by a
letter of credit.
STATE TAXES
We file tax returns in such states as required by law based on
principles applicable to traditional businesses. In addition, we do not
collect sales or other similar taxes in respect of transactions conducted
through the priceline.com service (other than the federal air
transportation tax referred to above). However, one or more states could
seek to impose additional income tax obligations or sales tax collection
obligations on out-of-state companies, such as ours, which engage in or
facilitate online commerce. A number of proposals have been made at state
and local levels that could impose such taxes on the sale of products and
services through the Internet or the income derived from such sales. Such
proposals, if adopted, could substantially impair the growth of e-commerce
and adversely affect our opportunity to become profitable.
Legislation limiting the ability of the states to impose taxes on
Internet-based transactions recently has been enacted by the United States
Congress. However, this legislation, known as the Internet Tax Freedom Act,
imposes only a three-year moratorium, which commenced October 1, 1998 and
ends on October 21, 2001, on state and local taxes on (1) electronic
commerce where such taxes are discriminatory and (2) Internet access unless
such taxes were generally imposed and actually enforced prior to October 1,
1998. It is possible that the tax moratorium could fail to be renewed prior
to October 21, 2001. Failure to renew this legislation would allow various
states to impose taxes on Internet-based commerce. The imposition of such
taxes could adversely affect our ability to become profitable.
PAYROLL TAXES RELATED TO OPTION EXERCISES
As of June 30, 1999, we had outstanding non-qualified stock options
to purchase 27,422,057 shares issued to various employees, consultants and
directors pursuant to the 1997 Omnibus Plan and the 1999 Omnibus Plan. The
options entitle the holders to purchase common stock at a weighted average
exercise price of approximately $11.35 per share, subject to adjustment in
accordance with the 1997 Omnibus Plan and the 1999 Omnibus Plan. Upon
exercise of an option, we will be required to make payments on behalf of
the option holders for certain payroll related taxes such as Social
Security and Medicare. These payroll taxes will appear as a general and
administrative expense on our statement of operations and will amount to
approximately 1.5% to 2.0% of the difference between the exercise price and
the then fair market value of the common stock at the time of exercise.
However, upon exercise of outstanding options, we will be paid the exercise
price of the options that are exercised. We also will be entitled to an
income tax deduction equal to the sum of (1) the difference between the
exercise price of the option and the then fair market value of the common
stock at the time of exercise and (2) the total amount of payroll related
tax payments. As the calculation of this expense is directly dependent upon
our stock price and the exercise of options is in the sole discretion of
the holder of the options, the amount and timing of the expense and the
timing of the corresponding income tax deduction are not currently able to
be determined and are not within our control.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Priceline.com currently has no floating rate indebtedness, holds no
derivative instruments and does not earn significant foreign-sourced
income. Accordingly, changes in interest rates or currency exchange rates
do not generally have a direct effect on priceline.com's financial
position. However, changes in currency exchange rates may affect the cost
of international airline tickets and international hotel reservations
offered through the priceline.com service, and so indirectly affect
consumer demand for such products and priceline.com's revenue. In addition,
to the extent that changes in interest rates and currency exchange rates
affect general economic conditions, priceline.com would also be affected by
such changes.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Priceline.com is currently subject to an interference action
relating its core buyer-drive commerce patent. See Note 6 to the Notes to
Condensed Financial Statements included in this Form 10-Q and Part II, Item
1 of priceline.com's Quarterly Report on Form 10-Q for the Quarterly
Period Ended March 31, 1999.
Current pending litigation against priceline.com and others alleges
causes of action for, among other things, misappropriation of trade
secrets, breach of contract, conversion, breach of confidential
relationship, copyright infringement, fraud, unfair competition, and false
advertising, and seeks injunctive relief and damages in an unspecified
amount. Since May 28, 1999, there has been a discovery stay in effect,
which was caused by the withdrawal of the plaintiff's counsel. The
plaintiff has retained new counsel, and priceline.com now anticipates
moving forward with discovery. Defending the lawsuit may involve
significant expense and, due to the inherent uncertainties of litigation,
there can be no certainty as to the ultimate outcome. Pursuant to the terms
of the indemnification obligations contained in the Purchase and
Intercompany Agreement with Walker Digital, Walker Digital has agreed to
indemnify priceline.com for damages, liability and legal expenses incurred
in connection with the this litigation. See Note 6 to the Notes to
Condensed Financial Statements included in this Form 10-Q and Part II, Item
1 of priceline.com's Quarterly Report on Form 10-Q for the Quarterly Period
Ended March 31, 1999.
From time to time priceline.com has been and expects to continue to
be subject to legal proceedings and claims in the ordinary course of
business, including claims of alleged infringement of third party
intellectual property rights by the company. Such claims, even if not
meritorious, could result in the expenditure of significant financial and
managerial resources.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
On April 1, 1999, priceline.com completed an initial public
offering in which it sold 10,000,000 shares of its common stock, $0.008 par
value. The managing underwriters in the offering were Morgan Stanley & Co.
Incorporated, Merrill Lynch, Pierce, Fenner & Smith Incorporated,
BancBoston Robertson Stephens Inc. and Donaldson, Lufkin & Jenrette
Securities Corporation. The shares of common stock sold in the offering
were registered under the Securities Act of 1933, as amended, on a
Registration Statement on Form S-1 (the "Registration Statement") (Reg. No.
333-69657) that was declared effective by the Securities and Exchange
Commission on March 29, 1999. All 10,000,000 shares of common stock
registered under the Registration Statement were sold at a price of $16.00
per share for gross proceeds of $160.0 million. Offering proceeds to
priceline.com, net of approximately $11.2 million in aggregate underwriter
discounts and commissions and $4.4 million in other related expenses, were
approximately $144.4 million.
Net offering proceeds received on April 1, 1999 from the initial
public offering were used for general corporate purposes, including working
capital to fund anticipated operating losses, expenses associated with its
advertising campaigns, brand-name promotions and other marketing efforts
and capital expenditures. Priceline.com also may use a portion of the net
proceeds, currently intended for general corporate purposes, to acquire or
invest in businesses, technologies, products or services, although no
specific acquisitions are planned and no portion of the net proceeds has
been allocated for any acquisition. None of the net offering proceeds of
priceline.com have been or will be paid directly or indirectly to any
director, officer, general partner of priceline.com or their associates,
persons owning 10% or more of any class of priceline.com's equity
securities, or an affiliate of priceline.com.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS.
Not Applicable.
ITEM 5. OTHER INFORMATION.
Not Applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit
Number Description
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
On June 20, 1999, priceline.com filed a Current Report on Form 8-K
to announce the hire of a new President and Chief Operating Officer.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
Date: August 6, 1999 PRICELINE.COM INCORPORATED
(Registrant)
By: /s/ Richard S. Braddock
-----------------------------
Name: Richard S. Braddock
Title: Chairman and Chief Executive
Officer
Date: August 6, 1999 By: /s/ Paul E. Francis
----------------------------
Name: Paul E. Francis
Title: Chief Financial Officer
EXHIBIT INDEX
Exhibit No. Description
27.1 Financial Data Schedule.
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL
INFORMATION EXTRACTED FROM THE UNAUDITED
CONDENSED FINANCIAL STATEMENTS OF
PRICELINE.COM INCORPORATED FOR THE SIX
MONTHS ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
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<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 142,803,134
<SECURITIES> 9,307,474
<RECEIVABLES> 22,683,987
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 183,517,084
<PP&E> 15,311,214
<DEPRECIATION> 0
<TOTAL-ASSETS> 204,794,892
<CURRENT-LIABILITIES> 33,473,433
<BONDS> 0
<COMMON> 1,138,564
0
0
<OTHER-SE> 170,170,647
<TOTAL-LIABILITY-AND-EQUITY> 204,794,892
<SALES> 160,974,391
<TOTAL-REVENUES> 160,974,391
<CGS> 145,085,045
<TOTAL-COSTS> 145,085,045
<OTHER-EXPENSES> 49,693,378
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (31,416,928)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> (31,416,928)
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