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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 September 30, 1999
----------------------------------------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
----------------------- ------------------------
Commission file number:
---------------------------------------------------------
Stamps.com Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 77-0454966
- --------------------------------------------------------------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
3420 Ocean Park Boulevard, Suite 1040, Santa Monica, California 90405
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(310) 581-7200
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(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. [ ] Yes [X] No
The number of shares of the registrant's common stock, $0.001 par value,
issued and outstanding as of October 29, 1999 was 35,043,445.
- --------------------------------------------------------------------------------
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
STAMPS.COM INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------ -----------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 61,198,260 $ 3,470,207
Prepaid advertising...................................... 6,531,018 --
Prepaid expenses......................................... 684,495 48,118
------------ -----------
Total current assets....................................... 68,413,773 3,518,325
Property and equipment, net................................ 5,339,565 670,301
Other assets............................................... 432,138 237,193
------------ -----------
Total assets............................................... $ 74,185,476 $ 4,425,819
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Line of credit........................................... $ 1,000,000 $ 1,000,000
Accounts payable......................................... 2,331,566 392,372
Accrued expenses......................................... 3,229,878 533,470
Current portion of capital lease obligations............. 472,000 207,683
------------ -----------
Total current liabilities.................................. 7,033,444 2,133,525
Capital lease obligations, less current portion............ 500,214 265,070
Commitments
Redeemable preferred stock............................... -- 5,978,344
Stockholders' equity (deficit):
Preferred stock.......................................... -- --
Common stock............................................. 35,569 6,901
Additional paid-in capital............................... 103,047,686 1,437,859
Notes receivable from stock sales........................ (107,000) (117,000)
Deferred compensation.................................... (8,086,000) (1,083,000)
Deficit accumulated during the development stage......... (27,298,977) (4,195,880)
Treasury stock at cost................................... (939,460) --
------------ -----------
Total stockholders' equity (deficit)....................... 66,651,818 (3,951,120)
------------ -----------
Total liabilities and stockholders' equity (deficit)....... $ 74,185,476 $ 4,425,819
============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
STAMPS.COM INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Period from Period from
Three Months Ended Nine Months January 9, 1998 January 9, 1998
------------------------------------ Ended (inception) to (inceiption) to
September 30, September 30, September 30, September 30, September 30,
1999 1998 1999 1998 1999
------------- -------------- ------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
Revenues $ -- $ -- $ -- $ -- $ --
Costs and expenses:
Research and development........ 2,370,848 292,382 5,049,459 548,200 6,581,270
Sales and marketing............. 7,640,454 -- 10,856,087 -- 11,488,436
General and administrative...... 4,412,467 513,959 8,275,706 1,125,584 10,291,636
------------ ----------- ------------ ----------- ------------
Total costs and expenses..... 14,423,769 806,341 24,181,252 1,673,784 28,361,342
------------ ----------- ------------ ----------- ------------
Loss from operations............... (14,423,769) (806,341) (24,181,252) (1,673,784) (28,361,342)
Other income (expense):
Interest expense................ (40,269) (4,349) (121,968) (4,814) (149,592)
Interest income................. 766,044 1,732 1,200,123 2,682 1,211,957
------------ ----------- ------------ ----------- ------------
Net loss........................... $(13,697,994) $ (808,958) $(23,103,097) $(1,675,916) $(27,298,977)
============ =========== ============ =========== ============
Basic and diluted net loss
per share......................... $ (0.40) $ (0.17) $ (1.59) $ (0.35) $ (2.44)
============ =========== ============ =========== ============
Pro forma basic and diluted net
loss per share.................... $ (0.40) $ (0.07) $ (0.74) $ (0.17) $ (1.10)
============ =========== ============ =========== ============
Weighted average shares
outstanding used in basic
and diluted per-share
calculation....................... 34,101,500 4,897,500 14,495,600 4,738,400 11,186,100
Weighted average shares
outstanding used in pro forma
basic and diluted per-share
calculation....................... 34,101,500 10,984,700 31,259,500 9,612,800 24,794,800
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
STAMPS.COM INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Period from Period from
January 9, January 9,
Nine Months 1998 1998
Ended (inception) to (inception) to
September 30, September 30, September 30,
1999 1998 1999
---------------- --------------- ----------------
<S> <C> <C> <C>
Operating activities:
Net loss................................................ $(23,103,097) $(1,675,916) $(27,298,977)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization........................ 555,166 27,032 636,706
Amortization of deferred compensation................ 2,510,000 34,000 2,677,000
Changes in operating assets and liabilities:
Prepaid expenses.................................... (7,167,395) (14,202) (7,215,513)
Accounts payable.................................... 1,939,194 78,573 2,331,566
Accrued expenses.................................... 2,696,408 131,658 3,229,878
------------ ----------- ------------
Net cash used in operating activities.................... (22,569,724) (1,418,855) (25,639,340)
Investing activities:
Capital expenditures.................................. (4,562,263) (113,781) (4,757,560)
Other................................................. (197,591) (95,978) (406,662)
------------ ----------- ------------
Net cash used in investing activities.................... (4,759,854) (209,759) (5,164,222)
Financing activities:
Net proceeds from line of credit...................... -- 300,000 1,000,000
Repayment of capital lease obligations................ (150,059) (53,397) (232,004)
Issuance of redeemable preferred stock, net........... 28,299,594 2,063,344 34,277,938
Issuance of common stock.............................. 57,841,780 18,332 57,889,572
Repurchase of common stock............................ (939,460) -- (939,460)
Proceeds from exercise of stock options............... 5,776 -- 5,776
------------ ----------- ------------
Net cash provided by financing activities................ 85,057,631 2,328,279 92,001,822
------------ ----------- ------------
Net increase in cash and cash equivalents................ 57,728,053 699,665 61,198,260
Cash and cash equivalents at beginning of period......... 3,470,207 -- --
------------ ----------- ------------
Cash and cash equivalents at end of period............... $ 61,198,260 $ 699,665 $ 61,198,260
============ =========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
STAMPS.COM INC.
NOTES TO FINANCIAL STATEMENTS
(ALL INFORMATION WITH RESPECT TO SEPTEMBER 30, 1999 AND 1998 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Stamps.com Inc. (Stamps.com Inc. or the Company) was incorporated in Delaware
on January 9, 1998, and is a development stage company. Its primary activities
since inception have been to develop an Internet-based postage service for end-
users and raise capital to finance operations.
The Company is subject to the normal risks associated with a development
stage enterprise in the technology industry. These risks include, among others,
the risks associated with product development, commercial roll-out of its
Internet postage service, US Postal Service regulation, acceptance of the
product by end users and the ability to raise additional capital to sustain
operations.
On August 9, 1999, the Company's Internet postage service was approved by the
US Postal Service for commercial release. On October 22, 1999, the Company
commercially launched its Internet Postage service.
The financial statements are unaudited, other than the balance sheet at
December 31, 1998, 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, 1998 and related notes included in the Company's prospectus
related to its initial public offering filed with the Securities and Exchange
Commission (the "SEC") on June 25, 1999.
ADVERTISING COSTS
The Company generally expenses the costs of producing advertisements at the
time the advertising first runs, and expenses the costs of communicating
advertising in the period in which the advertising space or airtime is used.
Internet advertising expenses are recognized based on specifics of the
individual agreements. Under impression based agreements, advertising expense is
recognized using the ratio of the number of impressions delivered over the total
number of contracted impressions while agreements based on a period of time
recognize advertising expense on the straight-line basis over the term of the
contract.
2. INITIAL PUBLIC OFFERING
In June and July 1999, the Company completed an initial public offering in
which the underwriters sold to the public 5,750,000 shares of Common Stock,
including 750,000 shares in connection with the exercise of the underwriters'
over-allotment option, at $11.00 per share. The Company's proceeds from the
offering, after deducting underwriting discounts and commissions, were $10.23
per share, or $58,822,500 in the aggregate. Upon the closing of that offering,
the Company repurchased 704,595 shares of Common Stock for $939,460 and
converted all the Company's Redeemable Preferred Stock to Common Stock on a one-
for-one basis. After the offering, the Company's authorized capital consists of
95,000,000 shares of Common Stock, of which 34,864,807 shares were outstanding
at September 30, 1999, and 5,000,000 million shares of Preferred Stock, none of
which were outstanding as of September 30, 1999.
3. LEGAL PROCEEDINGS
Please refer to "Part II--Other Information--Item 1" of this report for a
discussion of legal proceedings.
<PAGE>
4. COMPUTATION OF HISTORICAL NET LOSS PER SHARE AND PRO FORMA 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.
Pro forma net loss per share is computed using the weighted average number of
common shares outstanding, including the pro forma effects of the automatic
conversion of the Company's Series A, B and C Preferred Stock into shares of the
Company's Common Stock effective upon the closing of the Company's Initial
Public Offering as if such conversion occurred at inception or the date of
original issuance, if later. Pro forma diluted earnings per share is computed
using the pro forma weighted average number of common and common equivalents
shares outstanding during the period, to the extent such shares are dilutive.
5. INCOME TAXES
As a result of net losses and the Company's inability to recognize a benefit
for its deferred tax assets, the Company did not record a provision for income
taxes in the three months ended September 30, 1999 and September 30, 1998 and
the nine months ended September 30, 1999 and the period from January 9, 1998
(inception) to September 30, 1998.
6. SUBSEQUENT EVENTS:
ACQUISITION
In October 1999, the Company entered into a merger agreement with iShip.com,
a development stage enterprise developing Internet-based shipping technology. In
connection with the proposed merger, an aggregate of up to 8,000,000 of the
Company's common stock will be issued and reserved for issuance. The agreement
is subject to governmental approval, shareholder approval by both companies, and
other customary conditions.
The acquisition will be accounted for using the purchase method of
accounting. Accordingly, a portion of the purchase price will be allocated to
the tangible and intangible assets acquired and liabilities assumed based on
their respective fair values on the acquisition date. The company is currently
in process of preparing the final purchase price allocation and determining the
useful lives of the assets acquired. This is anticipated that the purchase would
result in intangible assets of approximately $455 million, based on the last
reported sales price of Stamps.com's common stock on October 29, 1999.
1999 STOCK OPTION PLAN
In October 1999, the Company's Board of Directors approved an increase of
2,500,000 shares to the number of shares eligible to be granted under the 1999
Stock Option Plan. Upon stockholder approval of the increase, the total shares
authorized for issuance under the 1999 Stock Option Plan will be 9,790,000.
MARKETING AGREEMENT AND EQUITY INVESTMENT
In October 1999, the Company entered into a three-year marketing and
distribution agreement with America Online, Inc. ("AOL"). This partnership is an
expansion of our agreement with AOL made in December 1998. Under the new
agreement, the Company will be provided with a specific number of advertising
impressions across several AOL brands featuring it as the exclusive provider of
Internet postage services. Stamps.com software will also be included in AOL
branded CD-ROMs for distribution.
In consideration, the Company has committed to pay $56.0 million over the
three-year term of the agreement. Of the $56.0 million total commitment, $20.5
million will be paid during the twelve months ended September 30, 2000. The
Company is recognizing these fees as sales and marketing expense over the term
of the contract based primarily on the ratio of the number of impressions
delivered over the total number contracted.
In connection with the new AOL agreement, the Company issued 178,638 shares
of common stock, under the purchase agreement, for $6 million in the aggregate
or $33.588 per share. AOL also agreed to invest an additional $5 million in
Company stock. The purchase price will be the lesser of (a) $33.588 or (b) the
price per share determined in an underwritten public offering, net of
underwriter discounts or commissions, consummated within six months of the date
of the purchase agreement. The Company also
<PAGE>
issued AOL a warrant, which is exercisable at $33.588 per share for 50 percent
of the total Common shares purchased by AOL. The warrant also allows for the
purchase of additional Common shares (50 percent of the unexercised portion of
the warrant) in the event the Company is unable to cure a material breach of the
payment provisions of the marketing and distribution agreement.
PUBLIC OFFERING
In November 1999, the Company filed a Registration Statement under Form S-1 to
offer 5,750,000 shares of its common stock, assuming the exercise of the
underwriter's over-allotment option, in a public offering.
<PAGE>
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; integration of acquired businesses; 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; Year 2000 compliance; 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 registration
statement on Form S-1, as amended, related to our public offering filed with the
Securities and Exchange Commission ("SEC") on November 8, 1999, 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 registration statement on form S-1 filed with the
SEC on November 8, 1999, 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. offers a convenient, cost-effective and easy-to-use service
for purchasing and printing postage over the Internet. We were incorporated in
January 1998. On October 22, 1999, we commercially launched our Internet Postage
service. 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.
We are currently offering two different service plans to our users: a
Business Plan and a Personal Plan. Under each plan, a user purchases postage at
cost and is charged a monthly convenience fee based on how much postage he or
she uses during the month. The Business Plan, which is targeted at high volume
users of postage, such as home offices and small offices and businesses,
assesses a convenience fee equal to 10% of the postage used during the month.
This plan has a monthly minimum fee of $3.99 and a monthly maximum fee of
$19.99. The Personal Plan, which is targeted at light volume personal users of
postage, charges a flat rate monthly convenience fee of $1.99 that allows a
customer to use up to $25 of postage per month. If a Personal Plan customer
uses more than $25 in postage in any given month, a 15% convenience fee on the
amount of additional postage used over $25 will be added to the $1.99 flat rate.
The maximum charge under the Personal Plan is $19.99 per month. The Personal
Plan offers customers the ability to pre-pay one year's worth of $1.99 fees at a
discounted rate of $19.99 with all other terms of the Personal Plan the same as
described. Under both plans, convenience fees are calculated and charged at the
end of a monthly billing cycle. Although we have established these initial
pricing programs, we may need to change them given the lack of an established or
proven commercial market for Internet postage.
Certain options and shares granted to our employees from January 9, 1998
(inception) through September 30, 1999 have been considered to be compensatory.
Deferred compensation associated with such options and shares amounted to $1.25
million for the fiscal year ended December 31, 1998 and $9.51 million for the
nine months ended September 30, 1999. Of these amounts, $167,000 was charged to
operations for the fiscal year ended December 31, 1998, $2.51 million was
charged to operations for the nine months ended September 30, 1999 and the
balance of $8.1 million will be amortized over the vesting periods of the
applicable options through the fiscal year ending December 31, 2003.
In October 1999, we signed a definitive agreement to acquire iShip.com, a
privately-held company located in Bellevue, Washington. iShip.com has developed
Web-based technology that provides a complete, one-stop Internet shipping and
tracking solution. iShip,com's tools are designed to help consumers, small
businesses and large corporations price, ship, track and manage
<PAGE>
shipments over the Internet. iShip.com's service will enable comparison of rates
and services among multiple carriers, including Airborne Express, Federal
Express, UPS, the US Postal Service and Yellow Freight.
Upon completion of this acquisition, up to 8,000,000 shares of common stock
will be issued in exchange for all outstanding iShip.com capital stock, options
and warrants. In addition, if the iShip.com acquisition is completed, we will
record a significant amount of intangibles, the amortization of which will
significantly and adversely affect our operating results. Based on our closing
price of $57.50 per share on October 29, 1999, we expect these intangibles to
equal approximately $455 million, which will be amortized over a four-year
period.
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. We anticipate that the iShip.com acquisition will close during
the fourth quarter of 1999. The iShip.com acquisition is subject to a number of
closing conditions, including stockholder approval by both iShip.com and
Stamps.com and other customary conditions. As a result, we cannot be certain
that the iShip.com acquisition will be completed.
Results of Operations
Three Months Ended September 30, 1999 compared to September 30, 1998
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
September 30, 1999 were $2.4 million compared to $0.3 million for the three
months ended September 30, 1998. The increase is due to higher personnel and
consulting costs and costs associated with the ongoing development of our
Internet Postage service. We believe that significant investments in research
and development are required to remain competitive and expect to continue
incurring significant research and development expenses.
Sales and Marketing Expenses. Sales and marketing expenses consist of costs
associated with our strategic relationships, advertising and promotional
expenditures, compensation and related expenses for personnel engaged in
marketing and business development activities. Sales and marketing expenses were
$7.6 million for the three months ended September 30, 1999. We began our first
phase of beta testing in August 1998. Therefore, we incurred no sales and
marketing expenses during the three months ended September 30, 1998. The
increase in sales and marketing is principally due to our marketing campaign and
advertising of the launch of our Internet postage service in October 1999, as
well as our increase in marketing personnel. We expect sales and marketing
expenses to increase significantly as we fully roll out our Internet postage
service and continue to promote our brand through new strategic relationships
and marketing campaigns.
General and Administrative Expenses. General and administrative expenses
principally consist of compensation and related costs for executive and
administrative personnel, facility fees, fees for legal and other professional
services, and amortization of deferred compensation. General and administrative
expenses for the three months ended September 30, 1999 were $4.4 million
compared to $0.5 million for the three months ended September 30, 1998. Of the
$3.9 million increase, $1.0 million is due to amortization of deferred
compensation. The remaining 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.
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 September 30, 1999 was $726,000 compared to $(2,600) for the three months
ended September 30, 1998. The increase is due to earnings on a higher average
cash equivalent balance as a result of our initial public offering in June 1999.
Results of Operations
Nine Months Ended September 30, 1999 and September 30, 1998
Research and Development Expenses. Research and development expenses for the
nine months ended September 30, 1999 were $5.0 million compared to $0.5 million
for the period from January 9, 1998 (inception) to September 30, 1998. The
increase is principally due to higher personnel and consulting costs.
<PAGE>
Sales and Marketing Expenses. Sales and marketing expenses for the nine
months ended September 30, 1999 were $10.9 million compared to zero for the
period from January 9, 1998 (inception) to September 30, 1998. The increase is
principally due to our marketing campaign and advertising of the launch of our
Internet Postage solution in October 1999, as well as to an increase in
marketing personnel.
General and Administrative Expenses. General and administrative expenses for
the nine months ended September 30, 1999 were $8.3 million compared to $1.1
million for the period from January 9, 1998 (inception) to September 30, 1998.
Of the $7.2 million increase, $2.5 million is due to amortization of deferred
compensation. The remaining increase is principally due to higher personnel and
facility costs, and professional service fees, including costs related to the
Pitney Bowes infringement claim.
Interest Income (Expense), Net. Interest income (expense), net for the nine
months ended September 30, 1999 was $1.1 million compared to $(2,000) for the
period from January 9, 1998 (inception) to September 30, 1998. This increase is
due to earnings on a higher average cash equivalent balance attributable to our
initial public offering in June 1999.
Liquidity and Capital Resources
As of September 30, 1999, we had approximately $61.2 million in cash and cash
equivalents. In June 1999, we completed an initial public offering in which the
underwriters sold to the public 5,750,000 shares of common stock at $11.00 per
share. Our proceeds from the offering were $10.23 per share, or $58.8 million
in the aggregate. We regularly invest excess funds in short-term money market
funds and commercial paper and we do not engage in hedging or speculative
activities.
In October 1999, we entered into a distribution and marketing agreement with
AOL that will require aggregate payments by us of $56.0 million through April
2002. In addition, under this agreement, AOL purchased $6.0 million of our
common stock in October 1999 and has agreed to purchase $5.0 million of our
common stock concurrent with the closing of our secondary offering. AOL also
holds a three-year warrant to purchase up to 50% of the total number of shares
it purchases from us.
In May 1999, we entered into a facility lease agreement for our corporate
headquarters with aggregate minimum lease payments of approximately $4.8 million
through May 2004. We also entered into an agreement with Intuit/Quicken.com in
May 1999, which requires aggregate payments by us of $3.3 million through 2000.
Net cash used in operating activities was $22.6 million for the nine months
ended September 30, 1999 compared to $1.4 million for the period from January 9,
1998 (inception) to September 30, 1998. 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 $4.8 million for the nine months
ended September 30, 1999 compared to $0.2 million for the period from January 9,
1998 (inception) to September 30, 1998. The increase in net cash used in
investing activities resulted primarily from increased capital expenditures for
computer equipment, purchased software and office equipment.
Net cash provided by financing activities was $85.1 million for the nine
months ended September 30, 1999 compared to $2.3 million for the period from
January 9, 1998 (inception) to September 30, 1998. The increase in net cash
provided by financing activities resulted principally from the initial public
offering in June 1999.
We anticipate that our current cash balances together with the proceeds of
our proposed public offering of 5,000,000 shares of common stock (5,750,000
shares if the underwriters' overallotment option is exercised) will be
sufficient to fund our operations and the operations of iShip.com after its
acquisition for at least the next 24 months. 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.
<PAGE>
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 Postage
service, 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 service commercially. We will face numerous risks coincident with the
introduction of our services. For example, our software and Internet Postage
service have not yet been subjected to the demands of widespread commercial
use. We cannot be sure that our service will successfully process large numbers
of user transactions. If we experience problems with the scalability or
functionality of our Internet Postage service, our full commercial deployment
could be delayed and our results of operations would be adversely impacted.
We currently are limited to a total of 100,000 customers until the US
Postal Service completes an evaluation of our service at those customer levels.
We are currently conducting a national customer registration campaign; however,
we have very limited experience conducting marketing campaigns, and we may fail
to generate significant interest. On the other hand, if we experience extensive
interest in our services, we may fail to meet the expectations of customers due
to our limited experience in operating our service 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 during and after our national launch 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.
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
<PAGE>
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.
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 market for Internet postage has not developed, and its development is
subject to substantial uncertainty. We cannot assure you that the Internet
postage market will develop. We depend 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 U.S. Postal Service's First Class Mail volume in
the next decade. Such trends could limit the market opportunity for our
Internet Postage service.
In addition, if the iShip.com acquisition is completed, we will enter the
market for online shipping services. There can be no assurance that iShip.com
will succeed as a business. The market for online shipping services is new and
uncertain and may not develop. iShip.com faces many risks frequently
experienced by early stage companies and companies in new, rapidly changing
markets. iShip.com has not released its services commercially. It currently has
no customers and no revenues, and its ability to obtain and retain customers
will depend on the attractiveness of its service to its customers and on its
customer service capabilities. If iShip.com experiences significant system,
customer service, security or other problems once it begins commercial
operation, customers may stop using or refuse to try iShip.com's services. In
addition, shippers may terminate or limit their relationships with iShip.com.
The occurrence of these problems could have a material adverse effect on
iShip.com's and our business, financial condition or results of operations.
<PAGE>
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.
The iShip.com acquisition is subject to a number of contingencies,
including approval of the acquisition by the stockholders of both iShip.com and
Stamps.com and other customary closing conditions. As a result, there can be no
assurance that the iShip.com acquisition will be completed. If the acquisition
is not completed, the trading price of our common stock may fall.
If the iShip.com acquisition is completed, we will 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 would occur as a result
of this acquisition may result in disruptions that seriously impair our
business. In particular, if the iShip.com acquisition is completed, we will
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 September 30, 1999, we had not generated any revenues and had a
deficit accumulated during the development stage of $27.3 million. 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. Due to the
need to establish our brand and service, we expect to incur increasing sales
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, we will need to generate significant revenues to
achieve and maintain profitability.
Our ability to generate gross margins generally assumes that if a market
for Internet postage 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. See "Business--Our Internet Postage Service".
However, given the lack of an established or proven commercial market for
Internet postage, we cannot be sure that customers will be receptive to our fee
structure. Even if we are able to establish a sizeable base of users, we still
may not generate sufficient gross margins to become profitable.
Since inception, iShip.com has not generated any significant revenues and
had an accumulated deficit of $5.9 million as of September 30, 1999. If the
iShip.com acquisition is completed, 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.
<PAGE>
If the iShip.com acquisition is completed, we will record a significant
amount of intangibles, the amortization of which will significantly and
adversely affect our operating results. Based on our closing price of $57.50 per
share on October 29, 1999, we expect these intangibles to equal approximately
$455 million, which will be amortized over a four-year period. 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 such event,
our net loss in any given period could be greater than anticipated and the
market price of our stock could decline.
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. 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. If the iShip.com
acquisition is completed, 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 Postage service 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 service 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 service, we believe we must establish additional strategic relationships to
market our service effectively. 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 have not yet resulted in significant
revenues, primarily because we have only recently commercially released our
Internet Postage service. 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.
In addition, if the iShip.com acquisition is completed, iShip.com will be
dependent on strategic relationships with eBay, Mail Boxes Etc., UPS, Yellow
Freight Systems and the other major U.S. shipping services. If one or more of
these companies terminates or limits its relationship with iShip.com, its
business could be severely harmed or fail. iShip.com has limited experience in
establishing strategic relationships and it may not be able to develop and
maintain them sufficiently for its business to succeed.
<PAGE>
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:
. ability to meet and maintain government specifications for our service,
specifically US Postal Service requirements;
. complete dependence on a service that currently does not have broad market
acceptance;
. need to expand our sales and support organizations;
. ability to establish and promote our brand name;
. ability to expand our operations to meet the commercial demand for our
service;
. development of and reliance on strategic and distribution relationships;
. ability to prevent and respond quickly to service interruptions;
. ability to minimize fraud and other security risks; and
. 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
postage market, our business will suffer.
We must quickly build our Stamps.com brand to gain market acceptance for
our service. 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 market. 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 service. If we fail to gain market acceptance for
our service, 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
<PAGE>
of data and could completely impair our ability to generate revenues from our
service. We do not presently have a formal disaster recovery plan in effect. 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 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.
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.
With the exception of our agreement to acquire iShip.com, 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 such as ticketing,
couponing and enterprise mailing systems and plan to 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
establising or 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 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:
. the success of the commercial release of our Internet Postage service;
. the costs of defending ourselves in the Pitney Bowes litigation or against
other intellectual property claims;
. the costs of our marketing programs to establish and promote the Stamps.com
brand name;
<PAGE>
. the demand for our Internet Postage service;
. our ability to develop and maintain strategic distribution relationships;
. the number, timing and significance of new products or services introduced by
both us and our competitors;
. our ability to develop, market and introduce new and enhanced services on a
timely basis;
. the level of service and price competition;
. the increases in our operating expenses as we expand operations; and
. 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 service. 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 fall.
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. 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, if we complete the iShip.com acquisition, 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, 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.
<PAGE>
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.
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 18 patent applications in the United States, and one
international patent application. We have also applied to register several
trademarks and service marks. We plan to apply for other patents 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 might be held invalid or
unenforceable by a court. If our patents fail to protect our technology, 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.
In addition, if the iShip.com acquisition is completed, we will face
additional risks that third parties will challenge iShip.com's intellectual
property rights. The costs of defending against any such litigation, including
the diversion of management time and resources, could adversely affect our
business, financial condition and results of operations. The loss of any
intellectual property litigation could severely limit iShip.com's operations,
cause it to pay license fees, or prevent it from doing business.
iShip.com also has applied for one patent for its intellectual property. The
failure to obtain this patent, or to obtain patents on future proprietary
technology or trademark protection for its brand name, could have a material
adverse effect on iShip.com's and our business, financial condition and results
of operations.
If the internal and third-party equipment and software that we use are not Year
2000 compliant, our operating results, brand and reputation could be impaired
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 not 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 comply with these "Year 2000"
requirements.
<PAGE>
We use and depend on third-party equipment and software that may not be
Year 2000 compliant. If Year 2000 issues prevent our users from accessing the
Internet or our service, purchasing postage or using their credit cards, our
business and operations will suffer. Any failure of our third-party equipment
or software to operate properly could result in system and online security
failures and require us to incur unanticipated expenses, resulting in serious
harm to our business, operating results and financial condition. For example,
we rely on the US Postal Service's secure postage accounting vault to purchase
postage credit for our customers. If the US Postal Service systems are not Year
2000 compliant, users of our service may not be able to purchase additional
postage.
Our failure to make our service Year 2000 compliant could result in:
. a decrease in sales of our service;
. an increase in the allocation of resources to address Year 2000 problems of
our users without additional revenue commensurate with the dedication of our
resources; and
. an increase in litigation costs relating to losses suffered by our users due
to Year 2000 problems.
Furthermore, the purchasing patterns of users or potential users may be
affected by Year 2000 issues as companies expend significant resources to
correct their current systems. These expenditures may result in reduced funds
available to purchase our service, which could seriously harm our business,
operating results and financial condition. We have conducted a preliminary
review of our internal computer systems to identify the systems that could be
affected by the Year 2000 issue. Based on this preliminary review, we believe
that our internal software systems are Year 2000 compliant. However, we
continually evaluate our systems and intend to develop a contingency plan to
address any Year 2000 issues.
At this time, we have not yet developed a contingency plan to address
situations that may result if we, or our vendors, are unable to achieve Year
2000 compliance. While we do not believe a contingency plan is necessary, the
cost of developing and implementing this plan, if necessary, could be material.
Any failure of our material systems, our vendors' material systems or the
Internet to be Year 2000 compliant could have material adverse consequences for
us. These consequences could include service interruptions or other
difficulties in operating our service effectively or conducting other
fundamental parts of our business. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Year 2000".
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 and the proceeds of our proposed
public offering of 5,750,000 shares of common stock will allow us to fund our
operations, including the operation of iShip.com following its anticipated
acquisition, for at least the next 24 months. 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.
<PAGE>
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 plan to invest the proceeds of this offering 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 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.
<PAGE>
We face risks associated with our market
If we do not respond effectively to technological change, our service could
become obsolete and our business will suffer.
The development of our service 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 market 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 service;
. develop new services 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 market, 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 Pitney Bowes and Neopost Industrie are
seeking certification through the Information Based Indicia Program and have
hardware products available for beta testing. All three of these vendors have
also announced that they intend to offer software-based solutions; one of
these, Pitney Bowes, has a software-based product in beta testing. If any of
our competitors, including Pitney Bowes, could provide the same or similar
service as us, our operations could be adversely impacted. See "--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".
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,
<PAGE>
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.
If the iShip.com acquisition is completed, we will 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 iShip.com's online service. Alternatively,
potential competitors with greater resources than iShip.com, such as Pitney
Bowes, may develop more successful Internet solutions. In addition, companies
including GoShip.com, Intershipper.net, Kewill Systems, PackageNet and SmartShip
are competing in shipping services. iShip.com also faces a significant risk that
large shipping companies will collaborate in the development and operation of an
online shipping system that could make iShip.com's service 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.
Our success depends in part on widespread acceptance and use of the
Internet as a way to purchase postage. This practice is at an early stage of
development, and market acceptance of Internet postage is uncertain. We cannot
predict the extent to which customers will be willing to shift their purchasing
habits from traditional to online postage purchasing. 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 Internet
postage;
. 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.
<PAGE>
US Postal Service regulation may cause disruptions or the discontinuance of our
business.
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 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 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 amend its requirements to
make certification easier to obtain, which could lead to more competition from
third parties. See "--If we are unable to compete successfully, particularly
against large, traditional providers of postage products such as Pitney Bowes
who enter the online postage market, 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.
<PAGE>
We offer our Internet Postage service 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
Internet Postage service 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 Internet Postage service internationally, government
regulation could disrupt our operations.
One element of our strategy is to provide service in international markets.
Our ability to provide 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 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 services.
If we achieve significant international acceptance of our Internet Postage
service, 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We are exposed to interest rate risk for our cash equivalent
investments and line of credit. At September 30, 1999, our cash equivalent
investments, which consist principally of corporate debt and commercial paper,
approximated $60 million and had a related weighted average interest rate of
5.27%. At September 30, 1999, our line of credit balance totaled $1 million and
the related interest rate was 9.25% (the bank's prime rate + 1%).
If market interest rates continue to rise, the value of our 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, investments grade, interest-bearing instruments.
<PAGE>
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. The suit is still pending. 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.
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".
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.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
On October 20, 1999, our board of directors appointed John M. Payne, our
President and Chief Executive Officer, to the position of Chairman of the Board.
In connection with his appointment as Chairman, Mr. Payne resigned his position
as President and our board appointed Loren E. Smith to the position of President
and Chief Operating Officer. Mr. Smith and Thomas H. Bruggere, the former
Chairman of the Board, each remain a member of our board of directors.
On October 15, 1999, we entered into a three-year marketing and
distribution agreement with America Online, Inc. This partnership is an
expansion of our agreement with AOL made in December 1998, and under the
agreement, we will become the exclusive provider of postage software available
across several AOL brands including AOL, CompuServe, Netscape Netcenter, and
Digital City. Our software will also be bundled on AOL, Netscape and CompuServe
branded CD-ROMs. Under the new agreement, we will make aggregate payments of $56
million over three years to AOL. In addition, AOL has agreement to make an $11
million equity investment in Stamps.com.
On October 22, 1999, we announced the commercial availability of our
Internet Postage service.
On October 22, 1999, we signed a definitive agreement to acquire iShip.com,
a privately-held company located in Bellevue, Washington. Under the terms of the
agreement, we will issue up to 8,000,000 shares of our common stock for all
outstanding shares, options and warrants of iShip.com. The acquisition will be
accounted for under the purchase method of accounting and has been approved by
the board of directors of both companies. We anticipate that the iShip.com
acquisition will close during the fourth quarter of 1999. The iShip.com
acquisition is subject to a number of closing conditions, including stockholder
approval and other customary conditions. As a result, we cannot be certain that
the iShip.com acquisition will be completed. The definitive agreement and plan
of merger is filed as Exhibit 2.1 to our Current Report on Form 8-K dated
October 22, 1999 and filed with the Commission on October 29, 1999.
On October 22, 1999, our board of directors agreed to amend the company's
1999 Stock Incentive Plan to increase the number of shares authorized for
issuance under the plan from 7,290,000 shares to 9,790,000 shares, an increase
of 2,500,000 shares. The plan amendment will be effective upon approval by the
company's stockholders, which approval will be sought at the same stockholder
meeting that will be held for purposes of approving the iShip acquisition.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K.
Current Report on Form 8-K dated July 21, 1999 and filed with the
Commission on July 26, 1999.
<PAGE>
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)
November 10, 1999 /s/ John W. LaValle
- ----------------------------- ---------------------------------------
Date John W. LaValle
Senior Vice President of Operations and
Chief Financial Officer
(Principal Financial and Accounting Officer)
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