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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2000
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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:
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Stamps.com Inc.
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(Exact name of registrant as specified in its charter)
Delaware 77-0454966
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(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
3420 Ocean Park Boulevard, Suite 1040, Santa Monica, California 90405
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(Address of principal executive offices) (Zip Code)
(310) 581-7200
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(Registrant's telephone number, including area code)
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(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 Sections 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. [X] Yes [_] No
The number of shares of the registrant's common stock, $0.001 par value,
issued and outstanding as of May 8, 2000 was 48,852,025
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PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
STAMPS.COM INC.
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2000 1999
-------------------------------------
(unaudited)
ASSETS (In thousands)
Current assets:
Cash and short-term investments................................... $368,289 $374,746
Accounts receivable............................................... 1,456 134
Prepaid expenses.................................................. 19,123 23,883
-------- --------
Total current assets................................................ 388,868 398,763
Property and equipment, net......................................... 22,505 9,702
Goodwill and other intangible assets, net........................... 215,764 --
Other assets........................................................ 2,336 1,977
-------- --------
Total assets........................................................ $629,473 $410,442
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit................................................... $ 1,000 $ 1,000
Accounts payable................................................. 2,903 2,707
Accrued expenses................................................. 3,389 4,004
Deferred revenue................................................. 144 182
Current portion of long-term debt and capital leases............. 1,177 513
-------- --------
Total current liabilities........................................... 8,613 8,406
Long-term debt and capital leases, less current portion............. 4,001 438
Commitments and contingencies
Minority interest in consolidated subsidiary..................... 29,261 --
Stockholders' equity:
Common stock..................................................... 48 42
Additional paid-in capital....................................... 718,506 472,714
Notes receivable from stock sales................................ (101) (101)
Deferred compensation............................................ (32,344) (9,435)
Accumulated deficit.............................................. (97,572) (60,683)
Treasury stock at cost........................................... (939) (939)
-------- --------
Total stockholders' equity.......................................... 587,598 401,598
-------- --------
Total liabilities and stockholders' equity.......................... $629,473 $410,442
======== ========
The accompanying notes are an integral part of these financial statements.
2
STAMPS.COM INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
March 31,
---------
2000 1999
---- ----
(In thousands, except per share data)
Revenues......................................................... $ 2,036 $ --
Cost of revenues................................................. 3,733 --
-------- -------
Gross profit.................................................. (1,697) --
Operating expenses:
Sales and marketing........................................... 22,500 --
Research and development...................................... 3,395 1,160
General and administrative.................................... 5,839 2,118
Amortization of goodwill and other intangibles................ 4,625 --
Acquired in-process research and development.................. 2,000 --
Deferred compensation amortization............................ 1,753 410
-------- -------
Total operating expenses................................... 40,112 3,688
-------- -------
Loss from operations............................................. (41,809) (3,688)
Other income (expense):
Interest expense.............................................. (46) (33)
Interest income............................................... 4,967 35
-------- -------
Net loss......................................................... $(36,888) $(3,686)
======== =======
Basic and diluted net loss per share............................. $ (0.86) $ (0.53)
======== =======
Weighted average shares outstanding used in basic and diluted
per-share calculation........................................... 43,021 6,901
======== =======
The accompanying notes are an integral part of these financial statements.
3
STAMPS.COM INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
March 31,
-----------------
2000 1999
-------- -------
(In thousands)
Operating activities:
Net loss.................................................................. $(36,888) $(3,686)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization........................................ 5,791 63
Amortization of deferred compensation................................ 1,753 410
Charge for acquired in-process research and development.............. 2,000 --
Changes in operating assets and liabilities, net of effects
of acquisition:
Accounts receivable.............................................. (1,316) --
Prepaid expenses................................................. 5,236 (122)
Accounts payable................................................. (2,169) 167
Accrued expenses................................................. (863) 304
Deferred revenue................................................. (39) --
-------- -------
Net cash used in operating activities...................................... (26,495) (2,864)
Investing activities:
Purchase of short-term investments, net................................. (50,268) --
Acquisition of property and equipment................................... (6,250) (311)
Acquisition of iShip.com, net of cash acquired.......................... (2,111) --
Other................................................................... (1,520) (22)
-------- -------
Net cash used in investing activities...................................... (60,149) (333)
Financing activities:
Repayment of long-term debt and capital leases.......................... (389) (48)
Issuance of redeemable preferred stock of subsidiary, net............... 29,260 --
Issuance of redeemable preferred stock, net............................. -- 28,299
Issuance of common stock................................................ 1,048 --
-------- -------
Net cash provided by financing activities.................................. 29,919 28,251
-------- -------
Net (decrease) increase in cash and cash equivalents....................... (56,725) 25,054
Cash and cash equivalents at beginning of period........................... 326,820 3,470
-------- -------
Cash and cash equivalents at end of period................................. 270,095 28,524
Short-term investments..................................................... 98,194 --
-------- -------
Cash and short-term investments............................................ $368,289 $28,524
======== =======
The accompanying notes are an integral part of these financial statements.
4
STAMPS.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL INFORMATION WITH RESPECT TO MARCH 31, 2000 AND 1999 IS UNAUDITED)
1. Summary of Significant Accounting Policies
Basis of Presentation
The financial statements are unaudited, other than the balance sheet at
December 31, 1999, and, in the opinion of management, reflect all adjustments
that are necessary for a fair presentation of the results for the periods shown.
The results of operations for such periods are not necessarily indicative of the
results expected for the full fiscal year or for any future period. These
financial statements should be read in conjunction with the financial statements
as of December 31, 1999 and related notes included in the Company's Annual
Report on Form 10-K/A filed with the Securities and Exchange Commission (the
"SEC") on April 28, 2000. The Company formerly reported as a development stage
company.
Principles of Consolidation
The consolidated financial statements include the accounts of Stamps.com Inc.
and its majority-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and the accompanying
notes. Actual results could differ from those estimates and such differences
may be material to the financial statements.
Cash and Short-term Investments
The Company considers all highly liquid investments with an original or
remaining maturity of three months or less at the date of purchase to be cash
equivalents.
The Company's short-term investments are comprised of U.S. government
obligations and public corporate debt securities with maturities of less than
one year at the date of purchase. All short-term investments are classified as
available for sale and are recorded at market using the specific identification
method. Realized gains and losses are reflected in other income and expense
while unrealized gains and losses, which to date have not been material, are
included as a separate component of stockholders' equity.
Reclassifications
Certain prior period balances have been reclassified to conform to current
period presentation.
5
2. Acquisition of iShip.com
On March 7, 2000, Stamps.com (the Company) completed the acquisition of
iShip.com, Inc. (iShip), a development stage enterprise developing Internet-
based shipping technology. In connection with the acquisition, approximately 5.6
million shares of Stamps.com common stock were issued in exchange for all
outstanding iShip stock. An additional 1.6 million shares of Stamps.com common
stock have been reserved for issuance upon exercise of options and warrants
assumed in the transaction. Finally, 800,000 shares of Stamps.com common stock
have been deposited into an escrow account. The escrow amount is intended to
compensate the Company for any inaccuracy or breach of any representation,
warranty, covenant or agreement of iShip as contained in the merger agreement.
The shares must remain in the escrow fund for a period of one year from the
close of the acquisition. The parties are currently not aware of any inaccuracy
or breach of any representation, warranty, covenant or agreement of iShip as
contained in the merger agreement.
The acquisition was accounted for as a purchase in accordance with the
provisions of Accounting Principles Board Opinion ("APB") No. 16. Under the
purchase method of accounting, the purchase price was allocated to the assets
acquired and liabilities assumed based on their estimated fair values at the
date of acquisition. The Company recorded intangible assets of $220.3 million
and deferred compensation of $24.7 million, which will be amortized over periods
ranging from three to four years. Results of operations for iShip have been
included with those of the Company for periods subsequent to the acquisition
date.
The purchase price was allocated as follows (in thousands):
Goodwill $209,188
Deferred compensation 24,662
Purchased technology 11,200
In-process research and development 2,000
Tangible assets acquired 8,931
Liabilities assumed (7,232)
--------
Purchase price $248,749
========
Presented below is unaudited selected pro forma financial information,
presenting the results of operations of the Company as if the acquisition had
taken place on January 1 (in thousands, except per share amounts):
Three Months Ended March 31,
---------------------------
2000 1999
---- ----
Revenues $ 2,036 $ --
Net loss $(49,900) $(9,877)
Basic and diluted net loss per share $ (1.06) $ (0.79)
Shares used in per share calculation - 47,062 12,473
basic and diluted
The unaudited pro forma information is not necessarily indicative of the
actual results of operations had the acquisition occurred at the beginning of
the periods indicated, nor should it be indicative of operations for any future
date or period.
3. Change in Subsidiary Ownership
On February 17, 2000, the Company announced that it sold approximately
38% of EncrypTix, Inc., until then a wholly owned subsidiary, in a private
financing of approximately $30 million. The financing was completed in March
2000.
In April 2000, EncrypTix received an additional $6 million in private
financing. Upon completion of the financing, the Company will maintain an
ownership percentage of approximately 58%.
The Company includes EncrypTix's balances and results in its consolidated
financial statements. The minority interest reflected in the attached
consolidated balance sheet represents the investment received in the private
financing.
4. Segment Information
In connection with the acquisition of iShip, the Company announced the
organization of three specialized strategic business units (SBUs) focused on the
enterprise, e-commerce and small business market segments of the core mailing
and shipping services. The Enterprise SBU will offer companies with more than
1,000 employees an Internet-based, multi-carrier mailing and shipping service.
The E-commerce SBU addresses the shipping needs of e-tailers and other online
businesses, including auctioneers. The Small
6
Business SBU provides small businesses and consumers with Internet Postage and
shipping services. The Company will begin reporting under the SBUs in the second
quarter of 2000.
5. Legal Proceedings
Please refer to "Part II--Other Information--Item 1" of this report for a
discussion of legal proceedings.
6. Computation Of Historical Net Loss Per Share
Basic earnings per share is computed by dividing the net earnings available
to common stockholders for the period by the weighted average number of common
shares outstanding during the period. Diluted earnings per share is computed by
dividing the net earnings for the period by the weighted average number of
common and common equivalent shares outstanding during the period.
Common equivalent shares, consisting of unvested restricted common stock
and incremental common shares issuable upon the exercise of stock options and
warrants and upon conversion of convertible preferred stock, are excluded from
the diluted earnings per share calculation if their effect is anti-dilutive.
7. Subsequent Event
In February 2000, Mr. Payne (Chairman of the Board and Chief Executive
Officer) purchased 187,000 shares of the Company's common stock on the open
market for an aggregate purchase price of approximately $6.0 million. The
shares were purchased on margin by Mr. Payne and the margin account was secured
by a pledge of 1,467,500 shares of the Company's common stock held by Mr. Payne.
In April 2000, the Company agreed to guarantee Mr. Payne's margin account in the
event the value of the shares pledged becomes insufficient collateral to secure
the indebtedness outstanding under the margin account. The guarantee is in the
form of a single-purpose line of credit extended to Mr. Payne which will have a
balance due to the extent the value of the pledged shares is insufficient
collateral to secure indebtedness outstanding under the margin account. This
line of credit is secured by all of Mr. Payne's assets.
7
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Cautionary Statement
This report on Form 10-Q contains forward-looking statements based on our
current expectations, estimates and projections about our industry, management's
beliefs and certain assumptions made by us. Words such as "anticipates,"
"expects," "intends," "plans," "believes," "may," "will" or similar expressions
are intended to identify forward-looking statements. In addition, any statements
that refer to expectations, projections or other characterizations of future
events or circumstances, including any underlying assumptions, are forward-
looking statements. Such statements include, but are not limited to, statements
concerning the Internet postage market and commercial approval and release of
our Internet postage service; pending litigation regarding intellectual property
infringement allegations; postal service regulation of our business; projected
operating losses; strategic relationships and distribution arrangements; the
security of our Internet postage service; competition; the need for additional
capital; and the commercial acceptance of our Internet postage service. Such
statements are not guarantees of future performance and are subject to certain
risks, uncertainties and assumptions that are difficult to predict. Therefore,
our actual results could differ materially and adversely from those expressed in
any forward-looking statements as a result of various factors. The section
entitled "Risk Factors" set forth in this Form 10-Q and similar discussions in
our Annual Report on Form 10-K/A filed with the Securities and Exchange
Commission ("SEC") on April 28, 2000, discuss some of the important risk factors
that may affect our business, results of operations and financial condition. You
should carefully consider those risks, in addition to the other information in
this report and in our other filings with the SEC, before deciding to invest in
our company or to maintain or increase your investment. We undertake no
obligation to revise or update publicly any forward-looking statements for any
reason. The information contained in this Form 10-Q is not a complete
description of our business or the risks associated with an investment in our
common stock. We urge you to carefully review and consider the various
disclosures made by us in this report and in our other reports filed with the
SEC, including our Annual Report on Form 10-K/A filed with the SEC on April 28,
2000, that discuss our business in greater detail and advise interested parties
of certain risks, uncertainties and other factors that may affect our business,
results of operations or financial condition.
Overview
Stamps.com Inc. provides the easiest and smartest way to mail or ship
letters, packages or small parcels anywhere or anytime by offering a convenient,
cost effective and easy-to-use service for purchasing and printing postage over
the Internet. On October 22, 1999, we commercially launched our Internet
Postage Service and on March 7, 2000 we completed our acquisition of iShip.com,
a development stage enterprise developing Internet-based shipping technology.
As a result of the acquisition, our expanded offerings create an efficient
marketplace where any size business can choose the best carrier, price and
delivery terms for every mailing or shipping transaction based on sophisticated,
real time rating, tracking and pricing tools. To date, our operating activities
have consisted primarily of our efforts to promote our brand, build market
awareness, attract new customers, recruit personnel, build operating
infrastructure and develop our Web site and associated systems that we use to
process customers' orders and payments. As of March 31, 2000, our customer base
consisted of over 187,000 users who had downloaded our software and registered
for our service.
Small Business Services: Our small business services include our
traditional business of serving small businesses and consumers with the easiest
Internet Postage service as well as offering multi-carrier document and package
shipping to companies with less than 100 employees.
The revenues from our small business services consist primarily of the
revenues from our Internet Postage Service and commission fees from our on-line
store operated by a third-party. Service fee revenues are generated from our
basic service plan that we are currently offering to our users. Under this plan,
a user purchases postage at cost and is charged a monthly convenience fee of 10%
of the value of postage printed during a month. There is a monthly minimum fee
of $1.99 and a monthly maximum fee of $19.99. Service fees are calculated and
charged at the end of a monthly billing cycle. Although we have established a
basic pricing plan, we may need to change our pricing or add variations to the
basic service plan given the lack of an established or proven commercial market
for Internet Postage.
The revenues from our Internet-based shipping services are primarily
generated from recurring, transaction-based service fees. Also, we generate
revenues from advertising and revenue share arrangements. We expect revenues to
increase significantly in 2000 as we continue to grow our customer base in the
Internet Postage service and as we fully rollout our Internet-based shipping
services.
Enterprise Services: We offer companies with more than 1,000 employees an
Internet-based, multi-carrier mailing and shipping service. The enterprise
service will allow corporations to centrally manage and control costs from
mailing and shipping activities across multiple carriers and can be distributed
to thousands of corporate desktops using only a Web browser. The largest
customer to date of the enterprise service is Mail Boxes Etc., a retail
business, communication and postal services franchiser.
8
Revenues from our enterprise service will be generated from recurring,
transaction-based service fees as well as fixed monthly service fees.
E-commerce Services: Our E-commerce services strategic business unit
addresses the growing shipping needs of e-tailers and other online-businesses,
including auctioneers. Through our current partnerships with premier auction
Web sites such as eBay and AuctionRover.com, we will provide mailing and
shipping services available at the conclusion of any transaction on the
Internet. These services will be embedded in auction Web sites, e-tailer
"shopping carts" and other points-of-purchase on various Web sites, enabling
buyers and sellers to select precise pricing and delivery terms from among a
variety of carrier choices. Revenues from our E-commerce services will be
primarily generated from recurring, transaction-based service fees.
From time to time, we may offer special promotions to attract new
customers to our mailing and shipping services. Currently, these promotions
involve waiving or discounting convenience fees, discounts on supplies offered
through Stamps.com's online store, or free postage. We cannot predict the impact
of any promotion or pricing plan changes and our ability to generate revenues or
achieve profitability could be adversely affected by special promotions or
changes to pricing plans. Furthermore, given the lack of an established or
proven commercial market for our services, we are unable to quantify the total
impact of these promotions on revenue and profitability. In addition, with the
current limited commercial roll-out of our Internet shipping services and the
early stage of the commercial market for Internet-shipping services, we cannot
be sure of our ultimate pricing approach for such services or that fees from
Internet shipping services will generate significant revenues, if at all. See
"Risk Factors--We have a history of losses and expect to incur losses in the
future and may never achieve profitability."
Results of Operations
Revenues. Revenues are generated from fees from our Internet-based mailing
and shipping services, commission fees and advertising. Revenues were
approximately $2.0 million for the three months ended March 31, 2000. There were
no revenues during the three months ended March 31, 1999 as we launched our
first service, Internet Postage, on October 22, 1999. During the three months
ended March 31, 2000, more than 114,000 new customers were added for a net
ending customer balance of 187,000 at March 31, 2000. We expect revenues to
increase as we continue to add new customers and expand our service offerings in
the enterprise and e-commerce strategic business units later this year.
Cost of Revenues. Cost of revenues primarily consist of costs related to
customer service activities and server and network operations and, to a lesser
extent, bank processing charges for customer fees paid by credit card, Internet
connection charges, depreciation of server and network equipment and allocation
of overhead. Costs of revenues were $3.7 million for the three months ended
March 31, 2000. As of March 31, 1999, there were no costs of revenues because
we had not recognized any revenues to date. We expect cost of revenues to
increase as we continue to add new customers and expand the enterprise and e-
commerce strategic business units.
Sales and Marketing Expenses. Sales and marketing expenses include costs to
acquire and retain customers, including costs associated with strategic
relationships, advertising and promotions and compensation and related expenses
for personnel engaged in marketing and business development activities. Sales
and marketing expenses were $22.5 million for the three months ended March 31,
2000. We incurred no sales and marketing expenses during the three months ended
March 31, 1999. The increase in sales and marketing is principally due to our
marketing campaign and advertising of our Internet-based mailing and shipping
services. We expect sales and marketing expenses to increase significantly as we
continue to promote our brand through new strategic relationships and marketing
campaigns.
Research and Development Expenses. Research and development expenses
principally consist of compensation for personnel involved in the development of
our Internet Postage service and expenditures for consulting services and third-
party software. Research and development expenses for the three months ended
March 31, 2000 were approximately $3.4 million compared to $1.2 million for the
three months ended March 31, 1999. The increase is due to higher personnel and
consulting costs associated with the ongoing development of our Internet-based
mailing and shipping services. We believe that significant investments in
research and development are required to remain competitive and expect to
continue incurring significant research and development expenses.
General and Administrative Expenses. General and administrative expenses
primarily consist of compensation and related costs for executive and
administrative personnel, facility costs, and fees for legal and other
professional services. General and administrative expenses for the three months
ended March 31, 2000 were $5.8 million compared to $2.1 million for the three
months ended March 31, 1999. The increase is principally due to increased
headcount and the expansion of our facilities related to the growth of our
business, as well as legal fees related to the Pitney Bowes patent infringement
claim. We expect general and administrative expenses to increase as we grow our
business and incur additional costs related to the Pitney Bowes infringement
claim.
Amortization of Goodwill and Other Intangibles. Amortization of goodwill
and other intangibles is principally due to the goodwill resulting from the
acquisition of iShip.com in March 2000. Amortization expense is expected to
increase significantly as the goodwill and other intangibles resulting from our
acquisition are amortized over useful lives ranging from three to four years.
Acquired in-Process Research and Development
The Company incurred a total of $2 million in acquired in-process research
and development charges in connection with its acquisition of iShip.com in March
2000. With regards to the in-process research and development projects, the
Company considered, among other factors, the stage of development of each
project at the time of acquisition and the projected incremental cash flow for
the projects when completed as well as any associated risks.
Deferred Compensation Amortization
During 1998 and 1999, we granted stock options with exercise prices that
were less than the estimated fair value of the underlying shares of common stock
for accounting purposes on the date of grant. This will result in amortization
expenses of deferred compensation over the period that these options vest, which
ranges from three to four years from the date of grant.
Interest Income (Expense), Net. Interest income (expense), net consists of
income from our cash and cash equivalents net of interest expense related to
financing our obligations. Interest income (expense), net for the three months
ended March 31, 2000 was $4.9 million compared to $2,000 for the three months
ended March 31, 1999. The increase is due to earnings on a higher average cash
equivalent balance as a result of our initial public offering in June 1999 and
our follow-on public offering in December 1999.
9
Liquidity and Capital Resources
As of March 31, 2000, the Company had approximately $368.3 million in cash
and short-term investments. In June 1999, we completed our initial public
offering in which the underwriters sold to the public 5,750,000 shares of common
stock at $11.00 per share. The net proceeds from the offering were $10.23 per
share, or $58.8 million in the aggregate. In December 1999, we completed a
follow-on public offering in which the underwriters sold to the public 5,750,000
shares of the common stock at $65.00 per share. Our net proceeds from the
offering were $61.83 per share, or $355.5 million in the aggregate. We
regularly invest excess funds in short-term money market funds and commercial
paper and do not engage in hedging or speculative activities.
Through April 2000, our majority-owned subsidiary, EncrypTix, raised
approximately $36.0 million in private financing from a group of financial and
strategic investors. The proceeds of this financing will be used by EncrypTix
for research and development, sales and marketing and general working capital
purposes.
In February 2000, we entered into a facility lease agreement for our
Bellevue, Washington location with aggregate minimum lease payments of
approximately $15.2 million through fiscal year ending December 31, 2008.
Net cash used in operating activities was $26.5 million for the three
months ended March 31, 2000 compared to $2.9 million for the three months ended
March 31, 1999. The increase in net cash used in operating activities resulted
primarily from increases in net loss, principally due to sales and marketing
expenses as well as research and development and general expenditures.
Net cash used in investing activities was $60.1 million for the three
months ended March 31, 2000 compared to $333,000 for the three months ended
March 31, 1999. The increase in net cash used in investing activities resulted
primarily from net purchases of short-term investments and increased capital
expenditures for computer equipment, purchased software and office equipment.
Net cash provided by financing activities was $29.9 million for the three
months ended March 31, 2000 compared to $28.3 million for the three months ended
March 31, 1999. The increase in net cash provided by financing activities
resulted principally from the private financing of EncrypTix, our majority-owned
subsidiary.
We anticipate that our current cash balances will be sufficient to fund our
operations, including the acquired operations of iShip.com, through fiscal year
2001. However, we may require substantial working capital to fund our business
and may need to raise additional capital. We cannot be certain that additional
funds will be available on satisfactory terms when needed, if at all.
Quantitative and Qualitative Disclosure about Market Risk
We are exposed to interest rate risk from the short-term investments and
line of credit. At March 31, 2000, the short-term investments, which consist
principally of corporate debt and commercial paper, approximated $330.7 million
and had a related weighted average interest rate of 6.3%. At March 31, 2000, the
line of credit balance totaled $1 million and the related interest rate was 9.5%
(the bank's prime rate plus 1%).
If market interest rates continue to rise, the value of the short-term
investments will continue to decrease. We currently hold no derivative
instruments and do not earn foreign-source income. We expect to invest only in
short-term, investment grade and interest-bearing instruments.
10
RISK FACTORS
BEFORE DECIDING TO INVEST IN OUR COMPANY OR TO MAINTAIN OR INCREASE YOUR
INVESTMENT, YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW, IN ADDITION
TO THE OTHER INFORMATION IN THIS REPORT AND OUR OTHER FILINGS WITH THE SEC. THE
RISKS AND UNCERTAINTIES DESCRIBED BELOW ARE NOT THE ONLY ONES FACING OUR
COMPANY. ADDITIONAL RISKS AND UNCERTAINTIES NOT PRESENTLY KNOWN TO US OR THAT
WE CURRENTLY DEEM IMMATERIAL MAY ALSO AFFECT OUR BUSINESS OPERATIONS. IF ANY OF
THE FOLLOWING RISKS ACTUALLY OCCUR, THAT COULD SERIOUSLY HARM OUR BUSINESS,
FINANCIAL CONDITION OR RESULTS OF OPERATIONS. IN SUCH CASE, THE MARKET PRICE FOR
OUR COMMON STOCK COULD DECLINE AND YOU MAY LOSE ALL OR PART OF YOUR INVESTMENT.
We face risks associated with our operations
If we do not effectively manage the commercial release of our Internet mailing
and shipping services, our business will be harmed.
On August 9, 1999, our Internet Postage service was approved by the US
Postal Service for commercial release. On October 22, 1999, we began to offer
our Internet Postage service commercially. Our Internet shipping services have
not yet been introduced on a commercial scale. We face numerous risks coincident
with the introduction of our services. For example, our mailing and shipping
services have not yet been subjected to the demands of widespread commercial
use. We cannot be sure that our services will successfully process large numbers
of user transactions. If we experience problems with the scalability or
functionality of our services, our full commercial deployment could be delayed
and our results of operations would be adversely impacted.
The continued commercial roll-out of our Internet Postage service is
dependent upon our service continuing to meet US Postal Service performance
specifications and regulations. For example, our service must continue to
perform according to US Postal Service specifications in order to receive
additional license certificates necessary to add customers. Meanwhile, our
Internet mailing and shipping services must meet the commercial demands of our
customers, which are primarily expected to range from small businesses to large
enterprises. We are currently conducting a national customer registration
campaign, particularly for our Internet Postage service; however, we have very
limited experience conducting marketing campaigns, and we may fail to generate
significant interest. Additionally, we have limited experience selling our
services to enterprise customers and cannot predict the length of enterprise
sales cycles or implementation times for our services. On the other hand, if we
experience extensive interest in our services, we may fail to meet the
expectations of customers due to limited experience in operating our services
and the strains this demand will place on our Web site, network infrastructure
and systems.
Our ability to obtain and retain customers depends on the attractiveness of
our service to our customers and on our customer service capabilities. If we are
unable at any time to address customer service issues adequately or to provide a
satisfactory customer experience for current or potential customers, our
business and reputation may be harmed.
Success by Pitney Bowes in its suit against us alleging patent infringement
could prevent us from offering our Internet Postage service and severely harm
our business or cause it to fail.
On June 16, 1999, Pitney Bowes filed a patent infringement lawsuit against
us. The suit alleges that we are infringing two patents held by Pitney Bowes
related to postage application systems and electronic indicia. The suit seeks
treble damages, a preliminary and permanent injunction from further alleged
infringement, attorneys' fees and other unspecified damages. We answered the
complaint on August 6, 1999, denying the allegations of patent infringement and
asserting a number of affirmative defenses. Pitney Bowes filed a similar
complaint in early June 1999 against one of our competitors, E-Stamp
Corporation, alleging infringement of seven Pitney Bowes patents. On April 13,
2000, Pitney Bowes asked the court for permission to amend its complaint to drop
allegations of patent infringement with respect to one patent and to add
allegations of patent infringement with respect to three other patents.
The outcome of the litigation that Pitney Bowes has brought against us is
uncertain. Therefore, we can give no assurance that Pitney Bowes will not
prevail in its suit against us.
If Pitney Bowes prevails in its suit against us, we may be prevented from
selling postage on the Internet. Alternatively, the Pitney Bowes suit could
result in limitations on how we implement our service, delays and costs
associated with redesigning our service and payments of license fees and other
payments. Thus, if Pitney Bowes prevails in its suit against us, our business
could be severely harmed or fail.
11
In addition, the litigation could result in significant expenses and
diversion of management time and other resources.
On August 17, 1998, Pitney Bowes issued a press release stating that it
holds dozens of US patents related to computer-based postage metering and that
it intended to engage in discussions with other marketers of computer-based
postal products to license Pitney Bowes technology. Prior to Pitney Bowes filing
a lawsuit against us, we were in license discussions with Pitney Bowes. We
intend to continue these discussions; however, we cannot predict whether these
discussions will continue, the outcome of these discussions or the impact of
Pitney Bowes' intellectual property claims on our business or the Internet
postage market. If Pitney Bowes is able to prevail in its claims against us and
if we do not enter into a license relationship with Pitney Bowes, our business
could be impacted severely or fail. In addition, as described above, Pitney
Bowes could obtain monetary and injunctive relief against us.
The Internet postage and shipping markets are new and uncertain and our business
may not develop.
The markets for Internet postage and shipping have not developed, and their
development is subject to substantial uncertainty. We cannot assure you that
these markets will develop.
We depend heavily on the commercial acceptance of our Internet Postage
service. We cannot predict if our target customers will choose the Internet as a
means of purchasing postage, or if customers will be willing to pay a fee to use
our service, or if potential users will select our system over our competitors.
Our target customers often have alternatives to the US Postal Service and
shipping services, including online invoicing, bill payment and financial
transactions. The General Accounting Office, in a report issued on October 21,
1999, stated that competition from these alternatives could lead to substantial
declines in the US Postal Service's First Class Mail volume in the next decade.
These trends could limit the market opportunity for our Internet Postage
service. In addition, the US Postal Service could suspend, terminate or offer
services which compete against Internet postage, any of which could stop or
negatively impact the commercial adoption of our Internet Postage service.
In addition, our acquisition of iShip.com in March 2000 represents our
entry into the market for online shipping services. There can be no assurance
that we will succeed in this business. The market for online shipping services
is new and uncertain and may not develop. In addition, we have not released our
shipping services on a commercial scale and we currently have no customers and
no revenues attributable to our online shipping services. Our ability to obtain
and retain customers will depend on the attractiveness of our service to our
customers and on our customer service capabilities. If we experience significant
system, customer service, security or other problems once we begin commercial
operation of our shipping services, customers may stop using or refuse to try
these and other services we offer. In addition, shippers may terminate or limit
their relationships with us. The occurrence of these problems could have a
material adverse effect on our business, financial condition or results of
operations.
The integration of our company and iShip.com will present significant
challenges. We may not be able to realize the benefits we anticipate from the
acquisition of iShip.com.
As a result of our acquisition of iShip.com in March 2000, we face
significant challenges in integrating organizations, operations, technology,
product lines and services in a timely and efficient manner and in retaining key
personnel and strategic partnerships of both companies. Cost synergies, revenue
growth, technological development and other synergistic benefits may not
materialize. Diversion of management attention, loss of management-level and
other highly qualified employees, and an inability to integrate management,
systems and operations of these two companies may all result from the
acquisition. The failure to integrate our company and iShip.com successfully and
to manage the challenges presented by the integration process may result in our
company and iShip.com not achieving the anticipated potential benefits of the
acquisition. Delays encountered in the transition process could have a material
adverse effect upon the combined company.
Further, the physical expansion in facilities that have occurred as a
result of this acquisition may result in disruptions that seriously impair our
business. In particular, we now have operations in multiple facilities in
geographically distant areas. We are not experienced in managing facilities or
operations in geographically distant areas.
We have a history of losses and expect to incur losses in the future, and we may
never achieve profitability.
As of March 31, 2000, we had not generated any significant revenues and had
an accumulated deficit of $97.6 million. Our accumulated deficit includes
iShip.com's losses from the date of acquisition, March 7, 2000. Our lack of
revenues can be attributed primarily to the fact that our Internet Postage
service had not been released commercially until October 22, 1999 and that the
Internet shipping services developed by iShip.com had yet to be released on a
commercial scale. Due to the need to establish our brand and service, we expect
to incur increasing sales
12
and marketing, research and development, and administrative expenses and
therefore could continue to incur net losses for at least the next several years
or longer. As a result of the iShip.com acquisition, we expect that our losses
will increase even more significantly because of additional costs and expenses
related to an increase in the number of employees; an increase in sales and
marketing activities; additional facilities and infrastructure; and assimilation
of operations and personnel. Overall, we will need to generate significant
revenues to achieve and maintain profitability.
In connection with the iShip.com acquisition, we will record a significant
amount of intangibles, the amortization of which will significantly and
adversely affect our operating results. To the extent we do not generate
sufficient cash flow to recover the amount of the investment recorded, the
investment may be considered impaired and could be subject to an immediate
write-down of up to the full amount of the investment. In this event, our net
loss in any given period could be greater than anticipated and the market price
of our stock could decline. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Our ability to generate gross margins generally assumes that if a market
for our services develops, we must generate significant revenues from a large
base of active customers. We currently charge our customers a fee to use our
Internet Postage service. We have yet to determine how customers will be charged
for our Internet shipping services. In order to attract customers, we may run
special promotions and offer discounts on fees, postage and supplies. However,
given the lack of an established or proven commercial market for our services,
we cannot be sure that customers will be receptive to our fee structures. Even
if we are able to establish a sizeable base of users, we still may not generate
sufficient gross margins to become profitable. In addition, our ability to
generate revenues or achieve profitability could be adversely affected by
special promotions or changes to our pricing plans. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
If we cannot effectively manage our growth, our ability to provide services will
suffer.
Our reputation and ability to attract, serve and retain our customers
depend upon the reliable performance of our Web site, network infrastructure and
systems. We have a limited basis upon which to evaluate the capability of our
systems to handle controlled or full commercial availability of our Internet
Postage service or our online shipping services. We have recently expanded our
operations significantly, and further expansion will be required to address the
anticipated growth in our user base and market opportunities. To manage the
expected growth of operations and personnel, we will need to improve existing
and implement new systems, procedures and controls. In addition, we will need to
expand, train and manage an increasing employee base. We will also need to
expand our finance, administrative and operations staff. As a result of the
iShip.com acquisition, we will need to assimilate substantially all of
iShip.com's operations into our operations.
We may not be able to manage our growth effectively. Our current expansion
has and will continue to place a significant strain on our managerial,
operational and financial resources. Our current and planned personnel, systems,
procedures and controls may be inadequate to support our future operations. If
we are unable to manage our growth effectively or experience disruptions during
our expansion, our business will suffer and our financial condition and results
of operations will be seriously affected.
If we are unable to maintain and develop our strategic relationships and
distribution arrangements, our Internet mailing and shipping services may not
achieve commercial acceptance.
We have established strategic relationships with a number of third parties.
Our strategic relationships generally involve the promotion and distribution of
our services through our partners' products, services and Web sites.
Additionally, some of our relationships provide for the inclusion of our logo or
promotional offers for our service in packaging and marketing materials utilized
by our partners. In return for promoting our service, our partners may receive
revenue-sharing opportunities. In order to achieve wide distribution of our
services, we believe we must establish additional strategic relationships to
market our services effectively. If one or more of our partners terminates or
limits its relationship with us, our business could be severely harmed or fail.
We have limited experience in establishing and maintaining strategic
relationships and we may fail in our efforts to establish and maintain these
relationships.
Our current strategic relationships, including those established by
iShip.com, have not yet resulted in significant revenues, primarily because we
have only recently commercially released our Internet Postage service and our
online shipping services have yet to be released on a commercial scale. As a
result, our strategic partners may not view their relationships with us as
significant or vital to their businesses and consequently, may not perform
according to our expectations. We have little ability to control the efforts of
our strategic partners and, even if we are successful in establishing strategic
relationships, these relationships may not be successful.
13
We face risks typical of early stage companies and of new and rapidly changing
markets.
You should consider our prospects in light of the risks and difficulties
frequently encountered by early stage companies and those in new and rapidly
evolving markets. These risks include, among other things, our (a) ability to
meet and maintain government specifications for our Internet Postage service,
specifically US Postal Service requirements; (b) complete dependence on Internet
mailing and shipping services that currently do not have broad market
acceptance; (c) need to expand our sales and support organizations; (d) ability
to establish and promote our brand name; (e) ability to expand our operations to
meet the commercial demand for our services; (f) development of and reliance on
strategic and distribution relationships; (g) ability to prevent and respond
quickly to service interruptions; (h) ability to minimize fraud and other
security risks; and (i) ability to compete with companies with greater capital
resources and brand awareness.
If we do not achieve the brand recognition necessary to succeed in the Internet
mailing and shipping markets, our business will suffer.
We must quickly build our Stamps.com brand to gain market acceptance for
our services. We believe it is imperative to our long term success that we
obtain significant market share for our services before other competitors enter
the Internet postage and shipping markets. We must make substantial expenditures
on product development, strategic relationships and marketing initiatives in an
effort to establish our brand awareness. In addition, we must devote significant
resources to ensure that our users are provided with a high quality online
experience supported by a high level of customer service. We cannot be certain
that we will have sufficient resources to build our brand and realize commercial
acceptance of our services. If we fail to gain market acceptance for our
services, our business will suffer dramatically or may fail.
System and online security failures could harm our business and operating
results.
Our services depend on the efficient and uninterrupted operation of our
computer and communications hardware systems. In addition, we must provide a
high level of security for the transactions we execute. We rely on internally-
developed and third-party technology to provide secure transmission of postage
and other confidential information. Any breach of these security measures would
severely impact our business and reputation and would likely result in the loss
of customers. Furthermore, if we are unable to provide adequate security, the US
Postal Service could prohibit us from selling postage over the Internet.
Our systems and operations are vulnerable to damage or interruption from a
number of sources, including fire, flood, power loss, telecommunications
failure, break-ins, earthquakes and similar events. We have entered into an
Internet hosting agreement with Exodus Communications, Inc. to maintain our
Internet postage servers at Exodus' data center in Southern California. Our
operations depend on Exodus' ability to protect its and our systems in its data
center against damage or interruption. Exodus does not guarantee that our
Internet access will be uninterrupted, error-free or secure. Our servers are
also vulnerable to computer viruses, physical, electrical or electronic break-
ins and similar disruptions. We have experienced minor system interruptions in
the past and may experience them again in the future. Any substantial
interruptions in the future could result in the loss of data and could
completely impair our ability to generate revenues from our service. We do have
a business interruption plan that we continue to refine and update; however, we
do not presently have a full disaster recovery plan in effect to cover loss of
facilities and equipment. In addition, we do not have a "fail-over" site that
mirrors our infrastructure to allow us to operate from a second location. We
have business interruption insurance; however, we cannot be certain that our
coverage will be sufficient to compensate us for losses that may occur as a
result of business interruptions.
A significant barrier to electronic commerce and communications is the
secure transmission of confidential information over public networks. Anyone who
is able to circumvent our security measures could misappropriate confidential
information or cause interruptions in our operations. We may be required to
expend significant capital and other resources to protect against potential
security breaches or to alleviate problems caused by any breach. We rely on
specialized technology, both within our own infrastructure and that provided by
Exodus, to provide the security necessary for secure transmission of postage and
other confidential information. Advances in computer capabilities, new
discoveries in security technology, or other events or developments may result
in a compromise or breach of the algorithms we use to protect customer
transaction data. Should someone circumvent our security measures, our
reputation, business, financial condition and results of operations could be
seriously harmed. Security breaches could also expose us to a risk of loss or
litigation and possible liability for failing to secure confidential customer
information. As a result, we may be required to expend a significant amount of
financial and other resources to protect against security breaches or to
alleviate any problems that they may cause.
14
If we do not expand our product and service offerings, our business may not
grow.
We may establish subsidiaries, enter into joint ventures or pursue the
acquisition of new or complementary businesses, products or technologies in an
effort to enter into new business areas, diversify our sources of revenue and
expand our product and service offerings outside the Internet postage market. We
have no commitments or agreements and are not currently engaged in discussions
for any material acquisitions or investments. We continue to evaluate
incremental revenue opportunities and derivative applications of our technology
and may pursue and develop those opportunities with strategic partners and
investors. To the extent we pursue new or complementary businesses, we may not
be able to expand our service offerings and related operations in a cost-
effective or timely manner. We may experience increased costs, delays and
diversions of management's attention when integrating any new businesses or
service. We may lose key personnel from our operations or those of any acquired
business. Furthermore, any new business or service we launch that is not
favorably received by users could damage our reputation and brand name in the
Internet postage and shipping or other markets that we enter. We also cannot be
certain that we will generate satisfactory revenues from any expanded services
or products to offset related costs. Any expansion of our operations would also
require significant additional expenses, and these efforts may strain our
management, financial and operational resources. Additionally, future
acquisitions may also result in potentially dilutive issuances of equity
securities, the incurrence of additional debt, the assumption of known and
unknown liabilities, and the amortization of expenses related to goodwill and
other intangible assets, all of which could have a material adverse effect on
our business, financial condition and operating results. New issuances of
securities may also have rights, preferences and privileges senior to those of
our common stock.
Fluctuations in our operating results could cause our stock price to fall.
Prior to our commercial launch on October 22, 1999, we had not generated
any revenues from our operations. Accordingly, we have a limited basis upon
which to predict future operating results. We expect that our revenues, margins
and operating results will fluctuate significantly due to a variety of factors,
many of which are outside of our control. These factors include: (a) the success
of the commercial release of our Internet Postage and online shipping services;
(b) the costs of defending ourselves in the Pitney Bowes litigation or against
other intellectual property claims; (c) the costs of our marketing programs to
establish and promote the Stamps.com brand name; (d) the demand for our Internet
Postage and shipping services; (e) our ability to develop and maintain strategic
distribution relationships; (f) the number, timing and significance of new
products or services introduced by both us and our competitors; (g) our ability
to develop, market and introduce new and enhanced services on a timely basis;
(h) the level of service and price competition; (i) the increases in our
operating expenses as we expand operations; (j) US Postal Service regulation and
policies and (k) general economic factors.
Our cost of revenues includes costs for systems operations, customer
service, Internet connection and security services; all of these costs will
fluctuate depending upon the demand for our services. In addition, a substantial
portion of our operating expenses is related to personnel costs, marketing
programs and overhead, which cannot be adjusted quickly and are therefore
relatively fixed in the short term. Our operating expense levels are based, in
significant part, on our expectations of future revenues. If our expenses
precede increased revenues, both gross margins and results of operations would
be materially and adversely affected.
Due to the foregoing factors and the other risks discussed in this report,
you should not rely on period-to-period comparisons of our results of operations
as an indication of future performance. It is possible that in some future
periods our results of operations will be below the expectations of public
market analysts and investors. In this event, the market price of our common
stock is likely to decline.
We rely on a relatively new management team and need additional personnel to
grow our business.
Our management team is relatively new. We hired our Chairman and Chief
Executive Officer in October 1998, our President and Chief Operating Officer in
October 1999 and our Chief Financial Officer in September 1998. We have also
recently hired or intend to hire senior managers for our strategic business
units. There can be no assurance that we will successfully assimilate our
recently hired managers or that we can successfully locate, hire, assimilate and
retain qualified key management personnel. Our business is largely dependent on
the personal efforts and abilities of our senior management, including our
Chairman and Chief Executive Officer, our President and Chief Operating Officer,
and our Chief Financial Officer. Any of our officers or employees can terminate
his or her employment relationship at any time. The loss of these key employees
or our inability to attract or retain other qualified employees could have a
material adverse effect on our results of operations and financial condition.
Our future success depends on our ability to attract, retain and motivate
highly skilled technical, managerial, marketing and customer service personnel.
Also, our success will also depend on a successful integration of iShip.com's
management with our senior management team. We plan to hire additional personnel
in all areas of our business. Competition for qualified personnel is intense,
15
particularly in the Internet and high technology industries. As a result, we may
be unable to successfully attract, assimilate or retain qualified personnel.
Further, we may be unable to retain the employees we currently employ or attract
additional technical personnel. The failure to retain and attract the necessary
personnel could seriously harm our business, financial condition and results of
operations.
Third party assertions of violations of their intellectual property rights could
adversely affect our business.
In addition to the Pitney Bowes claim described above, as is customary with
technology companies, we may receive or become aware of correspondence claiming
potential infringement of other parties' intellectual property rights. We could
incur significant costs and diversion of management time and resources to defend
claims against us regardless of their validity. We may not have adequate
resources to defend against these claims and any associated costs and
distractions could have a material adverse effect on our business, financial
condition and results of operations. As an alternative to litigation, we may
seek licenses for other parties' intellectual property rights. We may not be
successful in obtaining all of the necessary licenses on commercially reasonable
terms, if at all. Any loss resulting from intellectual property litigation could
severely limit our operations, cause us to pay license fees, or prevent us from
doing business.
A failure to protect our own intellectual property could harm our competitive
position.
We rely on a combination of patent, trade secret, copyright and trademark
laws and contractual restrictions to establish and protect our rights in our
products, services, know-how and information. We have three issued US patents
and have filed 40 patent applications in the United States, and one
international patent application. We have also applied to register a number of
trademarks and service marks. We plan to apply for other patents, trademarks and
service marks in the future. We may not receive patents for any of our patent
applications. Even if patents are issued to us, claims issued in these patents
may not protect our technology. In addition, any of our patents, trademarks or
service marks might be held invalid or unenforceable by a court. If our patents
fail to protect our technology or our trademarks and service marks are
successfully challenged, our competitive position could be harmed. Even if our
patents are upheld or are not challenged, third parties may develop alternative
technologies or products without infringing our patents.
We generally enter into confidentiality agreements with our employees,
consultants and other third parties to control and limit access and disclosure
of our confidential information. These contractual arrangements or other steps
taken to protect our intellectual property may not prove to be sufficient to
prevent misappropriation of technology or deter independent third party
development of similar technologies. Additionally, the laws of foreign countries
may not protect our services or intellectual property rights to the same extent
as do the laws of the United States.
Our growth and operating results could be impaired if we are unable to meet our
future capital requirements.
We believe that our current cash balances will allow us to fund our
operations through fiscal year 2001. However, we may require substantial working
capital to fund our business and we may need to raise additional capital. We
cannot be certain that additional funds will be available on satisfactory terms
when needed, if at all. Our future capital needs depend on many factors,
including market acceptance of our postage and shipping services; the level of
promotion and advertising of our postage and shipping services; the level of our
development efforts; rate of customer acquisition and retention of our postage
and shipping services; and changes in technology.
The various elements of our business and growth strategies, including our
plans to support fully the commercial release of our service, our introduction
of new products and services and our investments in infrastructure will require
additional capital. If we are unable to raise additional necessary capital in
the future, we may be required to curtail our operations significantly or obtain
funding through the relinquishment of significant technology or markets. Also,
raising additional equity capital would have a dilutive effect on existing
stockholders.
We could be required to register as an investment company and become subject to
substantial regulation that would interfere with our ability to conduct our
business.
We invest in short-term instruments consistent with prudent cash management
and not primarily for the purpose of achieving investment returns. This could
result in our being treated as an investment company under the Investment
Company Act of 1940 and therefore being required to register as an investment
company under the Investment Company Act. The Investment Company Act requires
the registration of companies which are engaged primarily in the business of
investing, reinvesting or trading in securities or
16
which are engaged in investing, reinvesting, owning, holding or trading in
securities and over 40% of whose assets on an unconsolidated basis (other than
government securities and cash) consist of investment securities. While we do
not believe that we are engaged primarily in the business of investing,
reinvesting or trading in securities, we may invest our cash and cash
equivalents in government securities to the extent necessary to avoid having
over 40% of our assets consist of investment securities. Government securities
are defined as securities issued by the U.S. government and certain federal
agencies. These securities generally yield lower rates of income than other
short-term instruments in which we have invested to date. Accordingly, investing
substantially all of our cash and cash equivalents in government securities
could result in lower levels of interest income, which could cause our losses to
increase.
If we were required to register as an investment company under the
Investment Company Act, we would become subject to substantial regulation with
respect to our capital structure, management, operations, transactions with
affiliated persons, if any, and other matters, incur substantial costs and
experience a disruption of our business. Application of the provisions of the
Investment Company Act to us would materially and adversely affect our business,
prospects, financial condition and results of operations.
If the software, hardware, computer technology and other systems and services we
use are not Year 2000 compliant, our operations could suffer and we could lose
customers.
Many existing computer systems and software products are coded to accept
only two digit entries in the date code field and cannot distinguish 21st
century dates from 20th century dates. If these systems have not been properly
corrected, there could be system failures or miscalculations causing disruptions
of operations, including, among other things, a temporary inability to process
transactions or engage in normal business activities. As a result, many
companies' software and computer systems may need to be upgraded or replaced to
become "Year 2000" compliant. In addition, despite the fact that many computer
systems are currently processing 21st century dates correctly, these companies,
including us, could experience latent Year 2000 problems.
We use and depend on third party equipment and software that may not be
Year 2000 compliant. If Year 2000 issues prevent our customers from accessing
the Internet or our Web site, processing transactions or using their credit
cards, our business will suffer. Any failure of our third party equipment,
software or services to operate properly could require us to incur unanticipated
expenses, which could seriously harm our business and operating results.
We face risks associated with our market
If we do not respond effectively to technological change, our services could
become obsolete and our business will suffer.
The development of our services and other technology entails significant
technical and business risks. To remain competitive, we must continue to enhance
and improve the responsiveness, functionality and features of our online
operations. The Internet and the electronic commerce industry are characterized
by rapid technological change; changes in user and customer requirements and
preferences; frequent new product and service introductions embodying new
technologies; and the emergence of new industry standards and practices.
The evolving nature of the Internet or the Internet postage and shipping
markets could render our existing technology and systems obsolete. Our success
will depend, in part, on our ability to license or acquire leading technologies
useful in our business; enhance our existing services; develop new services or
features and technology that address the increasingly sophisticated and varied
needs of our current and prospective users; and respond to technological
advances and emerging industry and regulatory standards and practices in a cost-
effective and timely manner.
Future advances in technology may not be beneficial to, or compatible with,
our business. Furthermore, we may not be successful in using new technologies
effectively or adapting our technology and systems to user requirements or
emerging industry standards on a timely basis. Our ability to remain
technologically competitive may require substantial expenditures and lead time.
If we are unable to adapt in a timely manner to changing market conditions or
user requirements, our business, financial condition and results of operations
could be seriously harmed.
If we are unable to compete successfully, particularly against large,
traditional providers of postage products such as Pitney Bowes who enter the
online postage and shipping markets, our revenues and operating results will
suffer.
The market for Internet postage products and services is new and we expect
it to be intensely competitive. At present, E-Stamp has a hardware-based product
commercially available and has announced that it begun testing a Web-based
product through the
17
Information Based Indicia Program. Pitney Bowes has a software-based product
commercially available and has a hardware-based product in beta testing. Neopost
Industries has hardware and software products in beta testing. If any of our
competitors, including Pitney Bowes, provide the same or similar service as we
provide, our operations could be adversely impacted. See "Business--
Competition."
Internet postage may not be adopted by customers. These customers may
continue to use traditional means to purchase postage, including purchasing
postage from their local post office. If Internet postage becomes a viable
market, we may not be able to establish or maintain a competitive position
against current or future competitors as they enter the market. Many of our
competitors have longer operating histories, larger customer bases, greater
brand recognition, greater financial, marketing, service, support, technical,
intellectual property and other resources than us. As a result, our competitors
may be able to devote greater resources to marketing and promotional campaigns,
adopt more aggressive pricing policies and devote substantially more resources
to Web site and systems development than us. This increased competition may
result in reduced operating margins, loss of market share and a diminished
brand. We may from time to time make pricing, service or marketing decisions or
acquisitions as a strategic response to changes in the competitive environment.
These actions could result in reduced margins and seriously harm our business.
If the market for Internet postage develops, we could face competitive
pressures from new technologies or the expansion of existing technologies
approved for use by the US Postal Service. We may also face competition from a
number of indirect competitors that specialize in electronic commerce and other
companies with substantial customer bases in the computer and other technical
fields. Additionally, companies that control access to transactions through a
network or Web browsers could also promote our competitors or charge us a
substantial fee for inclusion. Our competitors may also be acquired by, receive
investments from or enter into other commercial relationships with larger,
better-established and better-financed companies as use of the Internet and
other online services increases. In addition, changes in postal regulations
could adversely affect our service and significantly impact our competitive
position. We may be unable to compete successfully against current and future
competitors, and the competitive pressures we face could seriously harm our
business.
As a result of the iShip.com acquisition in March 2000, we also compete
with companies that provide shipping solutions to businesses. Customers may
continue using the direct services of the US Postal Service, UPS and other major
shippers, instead of adopting our online service. Alternatively, potential
competitors with greater resources than Stamps.com, like Pitney Bowes, may
develop more successful Internet solutions. In addition, companies including
TanData Corporation, GoShip.com, BITS, Inc./Intershipper.net, Kewill Systems,
PackageNet and Virtan, Inc./SmartShip are competing in shipping services. We
also face a significant risk that large shipping companies will collaborate in
the development and operation of an online shipping system that could make our
Internet shipping services obsolete.
The success of our business will depend on the continued growth of the Internet
and the acceptance by customers of the Internet as a means for purchasing
postage and shipping services.
Our success depends in part on widespread acceptance and use of the
Internet as a way to purchase postage and shipping services. This practice is at
an early stage of development, and market acceptance of Internet postage and
shipping services is uncertain. We cannot predict the extent to which customers
will be willing to shift their purchasing habits from traditional to online
postage and/or shipping services. To be successful, our customers must accept
and utilize electronic commerce to satisfy their product needs. Our future
revenues and profits, if any, substantially depend upon the acceptance and use
of the Internet and other online services as an effective medium of commerce by
our target users.
The Internet may not become a viable long-term commercial marketplace due
to potentially inadequate development of the necessary network infrastructure or
delayed development of enabling technologies and performance improvements. The
commercial acceptance and use of the Internet may not continue to develop at
historical rates. Our business, financial condition and results of operations
would be seriously harmed if use of the Internet and other online services does
not continue to increase or increases more slowly than expected; the
infrastructure for the Internet and other online services does not effectively
support future expansion of electronic commerce or our services; concerns over
security and privacy inhibit the growth of the Internet; or the Internet and
other online services do not become a viable commercial marketplace.
US Postal Service regulation may cause disruptions or the discontinuance of our
business. Additionally, the US Postal Service could assess fees that would
increase the cost of our service and possibly affect the adoption of Internet
postage as a new method of mailing.
We are subject to continued US Postal Service scrutiny and other government
regulations. The US Postal Service could change its certification requirements
or specifications for Internet postage or revoke the approval of our service at
any time. Any changes in
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requirements or specifications for Internet postage could adversely affect our
pricing, cost of revenues, operating results and margins by increasing the cost
of providing our Internet postage service. For example, the US Postal Service
could decide to charge Internet postage vendors fees for the enrollment of each
unique customer of the Internet postage product, which would be a cost that we
would either absorb or pass through to customers. The US Postal Service has in
fact invoiced each Internet postage vendor $8 for each digital certificate
required for each consumer of Internet postage to securely print postage. We are
currently discussing the necessity of this charge with the US Postal Service. If
we are required to pay this per customer charge, the cost of our service could
increase and the adoption of Internet postage as a new method of mailing could
be adversely affected.
The US Postal Service could also decide that Internet postage should no
longer be an approved postage service due to security concerns or other issues.
Our business would suffer dramatically if we are unable to adapt our Internet
Postage service to any new requirements or specifications or if the US Postal
Service were to discontinue Internet postage as an approved postage method.
Alternatively, the US Postal Service could introduce competitive programs or
amend Internet postage requirements to make certification easier to obtain,
which could lead to more competition from third parties or the US Postal Service
itself. See "Risk Factors--If we are unable to compete successfully,
particularly against large, traditional providers of postage products like
Pitney Bowes who enter the online postage and shipping markets, our revenues and
operating results will suffer."
In addition, US Postal Service regulations may require that our personnel
with access to postal information or resources receive security clearance prior
to doing relevant work. We may experience delays or disruptions if our personnel
cannot receive necessary security clearances in a timely manner, if at all. The
regulations may limit our ability to hire qualified personnel. For example,
sensitive clearance may only be provided to US citizens or aliens who are
specifically approved to work on US Postal Service projects.
Our operating results could be impaired if we or the Internet become subject to
additional government regulation and legal uncertainties.
With the exception of US Postal Service and Department of Commerce
regulations, we are not currently subject to direct regulation by any domestic
or foreign governmental agency, other than regulations applicable to businesses
generally, and laws or regulations directly applicable to electronic commerce.
However, due to the increasing popularity and use of the Internet, it is
possible that a number of laws and regulations may be adopted with respect to
the Internet, relating to user privacy; pricing; content; copyrights;
distribution; characteristics and quality of products and services; and export
controls.
The adoption of any additional laws or regulations may hinder the expansion
of the Internet. A decline in the growth of the Internet could decrease demand
for our products and services and increase our cost of doing business. Moreover,
the applicability of existing laws to the Internet is uncertain with regard to
many issues, including property ownership, export of specialized technology,
sales tax, libel and personal privacy. Our business, financial condition and
results of operations could be seriously harmed by any new legislation or
regulation. The application of laws and regulations from jurisdictions whose
laws do not currently apply to our business, or the application of existing laws
and regulations to the Internet and other online services could also harm our
business.
We offer our services in multiple states and plan to expand both
domestically and internationally. These jurisdictions may claim that we are
required to qualify to do business as a foreign corporation in each state or
foreign country. Our failure to qualify as a foreign corporation in a
jurisdiction where we are required to do so could subject us to taxes and
penalties. Other states and foreign countries may also attempt to regulate our
services or prosecute us for violations of their laws. Further, we might
unintentionally violate the laws of foreign jurisdictions and those laws may be
modified and new laws may be enacted in the future.
If we market our services internationally, government regulation could disrupt
our operations.
One element of our strategy is to provide services in international
markets. Our ability to provide our Internet Postage service in international
markets would likely be subject to rigorous governmental approval and
certification requirements similar to those imposed by the US Postal Service.
For example, our Internet Postage service cannot currently be used for
international mail because foreign postal authorities do not currently recognize
information-based indicia postage. If foreign postal authorities accept postage
generated by our service in the future, and if we obtain the necessary foreign
certification or approvals, we would be subject to ongoing regulation by foreign
governments and agencies. To date, efforts to create a certification process in
Europe and other foreign markets are in a preliminary stage and these markets
may not prove to be a viable opportunity for us. As a result, we cannot predict
when, or if, international markets will become a viable source of revenues for a
postage service similar to ours.
Our ability to provide service in international markets may also be
impacted by the export control laws of the United States. Our software
technology makes us subject to stronger export controls, and may prevent us from
being able to export our products and
19
services. Regulations and standards of the Universal Postal Union and other
international bodies may also limit our ability to provide international mail
services.
If we achieve significant international acceptance of our services, our
business activities will be subject to a variety of potential risks, including
the adoption of laws and regulatory requirements, political and economic
conditions, difficulties protecting our intellectual property rights and actions
by third parties that would restrict or eliminate our ability to do business in
these jurisdictions. If we begin to transact business in foreign currencies, we
will become subject to the risks attendant to transacting in foreign currencies,
including the potential adverse effects of exchange rate fluctuations.
Our charter documents could deter a takeover effort, which could inhibit your
ability to receive an acquisition premium for your shares.
The provisions of our Amended and Restated Certificate of Incorporation,
Bylaws and Delaware law could make it difficult for a third party to acquire us,
even it would be beneficial to our stockholders. In addition, we are subject to
the provisions of Section 203 of the Delaware General Corporation Law, which
could prohibit or delay a merger or other takeover of our company, and
discourage attempts to acquire us.
Additional shares held by existing stockholders may be sold into the public
market, which could cause our stock price to decline.
Public sales of substantial amounts of common stock purchased in private
financings prior to our initial public offering or upon the exercise of stock
options or warrants could adversely affect the prevailing market price of our
common stock. On December 22, 1999, upon the expiration of a lock-up entered
into in connection with our initial public offering, an additional 2.1 million
shares of our outstanding common stock were available for immediate sale. On
February 7, 2000, a lock-up entered into in connection with our follow-on public
offering expired for approximately 6.8 million shares of our outstanding common
stock and, on March 6, 2000, the follow-on offering lock-up expired for all
remaining shares subject to the lock-up. All of the shares subject to the lock-
up were available for immediate sale, subject to the volume and other
restrictions under Rule 144 of the Securities Act of 1933. Of these shares,
approximately 22.5 million held by investment funds may be distributed by them
from time to time to their investors. Upon distribution, those shares will be
available for immediate sale.
Sales of substantial amounts of common stock in the public market, or the
perception that these sales could occur, could adversely affect the prevailing
market price for our common stock and could impair our ability to raise capital
through a public offering of equity securities.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We are exposed to interest rate risk from the short-term investments and
line of credit. At March 31, 2000, the short-term investments, which consist
principally of corporate debt and commercial paper, approximated $330.7 million
and had a related weighted average interest rate of 6.3%. At March 31, 2000, the
line of credit balance totaled $1 million and the related interest rate was 9.5%
(the bank's prime rate plus 1%).
If market interest rates continue to rise, the value of the short-term
investments will continue to decrease. We currently hold no derivative
instruments and do not earn foreign-source income. We expect to invest only in
short-term, investment grade and interest-bearing instruments.
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PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
On June 16, 1999, Pitney Bowes sued us for alleged patent infringement in
the United States District Court for the District of Delaware. The suit alleges
that we are infringing two patents held by Pitney Bowes related to postage
application systems and electronic indicia. The suit seeks treble damages, a
preliminary and permanent injunction from further alleged infringement,
attorneys' fees and other unspecified damages. We answered the complaint on
August 6, 1999, denying the allegations of patent infringement and asserting a
number of affirmative defenses. Pitney Bowes filed a similar complaint in early
June 1999 against one of our competitors, E-Stamp Corporation, alleging
infringement of seven Pitney Bowes patents. On April 13, 2000, Pitney Bowes
asked the court for permission to amend its complaint to drop allegations of
patent infringement with respect to one patent and to add allegations of patent
infringement with respect to three other patents.
The outcome of the litigation that Pitney Bowes has brought against us is
uncertain. Therefore, we can give no assurance that Pitney Bowes will not
prevail in its suit against us. See "Risk Factors--Success by Pitney Bowes in
its suit against us alleging patent infringement could prevent us from offering
our Internet Postage service and severely harm our business or cause it to
fail."
On December 29, 1999, three individual plaintiffs filed a suit against us
for alleged breach of oral contract, quantum meruit, fraud and negligent
representation in the California Superior Court for the County of Los Angeles.
The complaint was amended on January 28, 2000 to add Mohan Ananda, one of our
directors, as a defendant and to remove one of the plaintiffs from the suit. The
suit alleges that the plaintiffs were due cash consideration for securing a
board member and investors for Stamps.com. The complaint seeks $13.3 .million
plus other unspecified compensatory damages, punitive and exemplary damages and
attorneys' fees and costs incurred. We answered the complaint on March 8, 2000,
denying the allegations and asserting a number of affirmative defenses. The
outcome of this litigation is uncertain and we can give no assurance that the
plaintiffs will not prevail.
We are not currently involved in any other material legal proceedings, nor
have we been involved in any such proceeding that has had or may have a
significant effect on our company. We are not aware of any other material legal
proceedings pending against us.
Item 2. Changes in Securities and Use of Proceeds.
(d) Use of Proceeds from Sales of Registered Securities.
On June 30,1999, we completed an initial public offering of 5,000,000
shares of common stock pursuant to our Registration Statement on Form S-1 (File
No. 333-77025) that was declared effective by the Securities and Exchange
Commission on June 24, 1999. On July 8, 1999, we sold an additional 750,000
shares of common stock pursuant to the exercise of the underwriters' over-
allotment option. There has been no material change with respect to our use of
proceeds from our initial public offering to the information discussed in our
Quarterly Report on Form 10-Q for the period ended June 30, 1999 and all of the
net proceeds from our initial public offering have been applied.
Item 4. Submission of Matters to a Vote of Security Holders.
(a) A special meeting of the stockholders of Stamps.com was held on
March 7, 2000.
(b) Not applicable.
(c) At the special meeting, the stockholders:
(1) voted to approve the Agreement and Plan of Merger, dated as of
October 22, 1999, by and among Stamps.com, Rocket Acquisition Corp., a
Washington corporation, and iShip.com, Inc., a Washington corporation, as
amended on February 14, 2000, with the following vote:
For 30,561,137
Against 25,480
Abstain 7,625;
(2) voted to approve an amendment to the Stamps.com 1999 Stock
Incentive Plan to increase by 2.5 million the number of shares
of Stamps.com common stock issuable under the plan, with the following
vote:
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For 26,826,336
Against 3,757,393
Abstain 10,513; and
(3) voted to withhold discretionary authority to vote on matters other
than proposals 1 and 2, with the following vote:
For 24,893,336
Against 5,212,193.
(d) Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
10.40.1 Common Stock Purchase Warrant dated August 20, 1999 between
the Company and Imperial Bank (Assumed by the Company on March 7, 2000
in connection with iShip.com acquisition).
10.40.2 Letter dated March 22, 2000 regarding assumption of Imperial
Bank Warrant.
10.41 Common Stock Purchase Warrant dated April 29, 1999 between the
Company and Mail Boxes Etc. USA, Inc. (Assumed, Amended and Restated
on March 7, 2000 in connection with iShip.com acquisition).
10.42 Lease Agreement dated as of May 7, 2000 between Sterling Realty
Organization Co. and iShip.com, Inc.
10.43+ License Agreement dated as of February 9, 2000 by and between
EncrypTix, Inc. and Stamps.com, Inc.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K.
Current Report on Form 8-K dated March 7, 2000 and filed with the
Commission on March 9, 2000 (Announcement of Closing of iShip.com
Acquisition).
Current Report on Form 8-K dated March 7, 2000 and filed with the
Commission on March 22, 2000 (Announcement that John A. Duffy and
Stephen M. Teglovic joined Board of Directors in connection with the
closing of the iShip.com Acquisition).
- -------------
+ Confidential treatment is being sought with respect to certain portions of
this agreement. Such portions have been omitted from this filing and have been
filed separately with the Securities and Exchange Commission.
22
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.
Stamps.com Inc.
-----------------------------------------------
(Registrant)
May 15, 2000 /s/ John W. LaValle
- ----------------------- -----------------------------------------------
Date John W. LaValle
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
May 15, 2000 /s/ Candelario J. Andalon
- ----------------------- ---------------------------------
Date Candelario J. Andalon
Corporate Controller
(Principal Accounting Officer)
23