<PAGE>
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, 2000
-------------------------------------------
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.
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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 (I.R.S. Employer Identification No.)
incorporation or organization)
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 November 8, 2000 was 49,359,729.
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STAMPS.COM INC.
QUARTERLY REPORT ON
FORM 10-Q
THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2000
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Consolidated Balance Sheets at September 30, 2000
and December 31, 1999
Unaudited Consolidated Statements of Operations for the
Three and Nine Months Ended September 30, 2000 and 1999
Unaudited Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 2000 and 1999
Notes to Unaudited Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk 26
PART II OTHER INFORMATION 27
Item 1. Legal Proceedings 27
Item 2. Change in Securities and Use of Proceeds 28
Item 3. Defaults Upon Senior Securities 28
Item 4. Submission of Matters to a Vote of Security Holders 28
Item 5. Other Information 28
Item 6. Exhibits and Reports on Form 8-K 28
Signatures 29
2
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PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
STAMPS.COM INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
-----------------------------
(unaudited)
ASSETS (In thousands)
<S> <C> <C>
Current assets:
Cash and short-term investments........................ $ 290,090 $ 374,746
Accounts receivable.................................... 1,879 134
Prepaid expenses....................................... 13,535 23,883
------------ -----------
Total current assets........................................ 305,504 398,763
Property and equipment, net................................. 49,184 9,702
Goodwill and other intangible assets, net................... 188,461 --
Other assets................................................ 6,063 1,977
------------ -----------
Total assets................................................ $ 549,212 $ 410,442
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit......................................... $ 1,917 $ 1,000
Accounts payable....................................... 6,509 2,707
Accrued expenses....................................... 7,196 4,004
Deferred revenue....................................... 2,546 182
Current portion of long-term debt and capital leases... 3,833 513
------------ -----------
Total current liabilities................................... 22,001 8,406
Long-term debt and capital leases, less current portion..... 4,109 438
Commitments and contingencies
Minority interest in consolidated subsidiary .......... 34,784 --
Stockholders' equity:
Common stock........................................... 49 42
Additional paid-in capital............................. 718,658 472,714
Notes receivable from stock sales...................... (101) (101)
Deferred compensation.................................. (25,075) (9,435)
Accumulated deficit.................................... (205,213) (60,683)
Treasury stock at cost................................. -- (939)
------------ -----------
Total stockholders' equity.................................. 488,318 401,598
------------ -----------
Total liabilities and stockholders' equity.................. $ 549,212 $ 410,442
============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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STAMPS.COM INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Revenues ................................................... $ 4,201 $ -- $ 9,911 $ --
Cost of revenues ........................................... 5,644 -- 19,131 --
----------- --------- ------------ ----------
Gross profit...................................... (1,443) -- (9,220) --
Operating expenses:
Sales and marketing.................................... 20,573 7,640 59,537 10,856
Research and development............................... 10,269 2,371 21,689 5,049
General and administrative............................. 11,436 3,363 25,817 5,766
Amortization of goodwill and other intangibles......... 13,772 -- 32,175 --
Acquired in-process research and development........... -- -- 2,000 --
Deferred compensation amortization..................... 3,123 1,050 9,022 2,510
----------- --------- ------------ ----------
59,173 14,424 150,240 24,181
----------- --------- ------------ ----------
Loss from operations ....................................... (60,616) (14,424) (159,460) (24,181)
Other income (expense):
Interest expense....................................... (213) (40) (377) (122)
Interest income........................................ 5,482 766 15,307 1,200
----------- --------- ------------ ----------
Net loss.................................................... $ (55,347) $ (13,698) $ (144,530) $ (23,103)
=========== ========= ============ ==========
Basic and diluted net loss per share........................ $ (1.15) $ (0.40) $ (3.11) $ (1.59)
=========== ======== ============ ==========
Weighted average shares outstanding used in basic and diluted
per-share calculation ...................................... 48,259 34,102 46,418 14,496
=========== ======== =========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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STAMPS.COM INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------
2000 1999
----------- ---------
(In thousands)
<S> <C> <C>
Operating activities:
Net loss............................................................. $ (144,530) $ (23,103)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization............................. 37,952 555
Amortization of deferred compensation..................... 9,022 2,510
Charge for acquired in-process research and development... 2,000 --
Changes in operating assets and liabilities, net of effects
of acquisition:
Accounts receivable................................. (1,738) --
Prepaid expenses.................................... 10,825 (7,167)
Accounts payable.................................... 1,422 1,939
Accrued expenses.................................... 2,944 2,696
Deferred revenue.................................... 2,363 --
---------- ---------
Net cash used in operating activities................................. (79,740) (22,570)
Investing activities:
Purchase of short-term investments, net......................... (119,576) (19,640)
Acquisition of property and equipment........................... (33,296) (4,562)
Acquisition of iShip.com, net of cash acquired.................. (2,111) --
Other........................................................... (5,495) (198)
---------- ---------
Net cash used in investing activities................................ (160,478) (24,400)
Financing activities:
Repayment of long-term debt and capital leases ................. 12 (150)
Repayment of line of credit .................................... (949) --
Issuance of redeemable preferred stock of subsidiary, net....... 34,784 --
Issuance of redeemable preferred stock, net..................... -- 28,299
Issuance of common stock........................................ 1,200 57,842
Repurchase of common stock...................................... 939 (939)
Proceeds from exercise of stock options......................... -- 6
---------- ---------
Net cash provided by financing activities............................. 35,986 85,058
Net (decrease) increase in cash and cash equivalents.................. (204,232) 38,088
Cash and cash equivalents at beginning of period...................... 326,820
1,966
---------- ---------
Cash and cash equivalents at end of period............................ 122,588 40,054
Short-term investments................................................ 167,502 21,144
---------- ---------
Cash and short-term investments....................................... $ 290,090 $ 61,198
========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
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STAMPS.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL INFORMATION WITH RESPECT TO SEPTEMBER 30, 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. (the "Company") and its wholly-owned and 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.
2. Acquisition of iShip.com
On March 7, 2000, 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
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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 $220.4 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):
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $4,201 $-- $9,911 $--
Net loss $(55,347) $(13,698) $(157,541) $(29,294)
Basic and diluted net loss per share $(1.15) $(0.40) $(3.03) $(1.31)
Shares used in per share calculation - basic 48,259 34,102 51,990 22,412
and diluted
</TABLE>
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
During the first half of this year, the Company sold approximately 42% of
EncrypTix, Inc., until then a wholly owned subsidiary, in a private financing of
approximately $35.8 million. The financing was completed in April 2000.
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
The Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" in the second quarter of fiscal year 2000.
SFAS 131 establishes standards of reporting information regarding operating
segments in annual financial statements and requires selected information for
those segments to be presented in interim financial reports issued to
stockholders.
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As of the beginning of the second quarter, the Company operates in three
specialized strategic business units (SBUs) focused on the enterprise, e-
commerce and small business market segments of mailing and shipping services.
The Small Business SBU provides small businesses and consumers with Internet
Postage and shipping services. The Enterprise SBU will offer companies with more
than 100 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.
There are no intersegment revenues between the three reportable segments.
Shared support service functions such as human resources, facilities management
and other infrastructure support groups are consolidated in general &
administrative and allocated to the three operating segments based on usage or
headcount, where practical. The information available to the chief operating
decision makers of the Company does not include allocations of assets and
liabilities to the Company's segments. As of September 30, 2000, revenues and
operating losses by reportable segment were as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended September 30, 2000 Nine Months Ended September 30, 2000
-------------------------------------------------------------------------------------------------------
Small Small
----- -----
Business Enterprise E-Commerce Business Enterprise E-Commerce
-------- ---------- ---------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 3,701 $ 500 $ -- $ 7,411 $ 2,500 $ --
Operating (32,947) (7,701) (2,281) (94,724) (18,106) (4,866)
expenses
</TABLE>
A reconciliation of combined operating losses for the reportable segments
to consolidated net loss is as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended September 30
September 30
---------------------------------------------------------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operating Revenues $4,201 $
--- $9,911 $
---
Total operating expenses for (42,929) $(13,374) (117,696) $(21,671)
reportable segments
Other losses /1/ (21,888) (1,050) (51,675) (2,510)
--------- -------- ---------- --------
Operating loss $ (60,616) $(14,424) $ (159,460) $(24,181)
========= ======== ========== ========
</TABLE>
1. For the three months ended September 30, 2000, Other Losses include
EncrypTix operating losses of $5.0 million, deferred compensation of
$3.1 million and amortization of goodwill of $13.8 million. For the
nine months ended September 30, 2000, Other Losses include EncrypTix
operating losses of $8.5 million, deferred compensation amortization
of $9.0 million, amortization of goodwill of $32.2 million and in-
process research and development charges of $2 million. Other Losses
also includes $1.1 million and $2.5 million of deferred compensation
for the three and nine month periods ended September 30, 1999,
respectively.
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
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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. Related Party Transactions
In February 2000, Mr. Payne (former Chairman of the Board and Chief
Executive Officer, and current director) 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, of which approximately 593,750 shares are
subject to repurchase by the Company. As of October 31, 2000, Mr. Payne's total
indebtedness under the margin account was approximately $6.7 million, which
amount consists of the purchase price of the 187,000 shares, accrued interest on
the purchase price and other fees and indebtedness incurred by Mr. Payne, less
the proceeds from his sale of the Company's common stock during the third
quarter.
In April 2000, the Company agreed to guarantee Mr. Payne's margin account
in the event the value of the shares pledged is 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 Company 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.
In addition, the Company has entered into a loan repayment agreement with
Mr. Payne and the brokerage firm where he maintains his margin account. Under
the terms of that agreement, the Company agrees to guarantee Mr. Payne's margin
account. The agreement further provides that, without previous notice to or
consent from Mr. Payne, the Company may require the sale of any or all shares of
Stamps.com stock held by Mr. Payne in order to satisfy any balances due under
the terms of Mr. Payne's margin account. More specifically, the Company may
require such sales in the event the closing price of Stamps.com on Nasdaq is
below $6 per share for three consecutive trading days or if the closing price of
Stamps.com on Nasdaq is greater than $30 per share on any trading day. The loan
repayment agreement also provides that the brokerage firm may not extend Mr.
Payne any additional credit, except to allow for the accrual of interest against
the outstanding balance of the margin account.
Mr. Payne agreed to sell a minimum of 100,000 shares of common stock during
each fiscal quarter (beginning the third fiscal quarter of 2000) in order to pay
down the indebtedness outstanding under the margin account. Pursuant to this
agreement, on August 29, 2000, Mr. Payne sold 7,500 shares at a price of $4.50
per share and 92,500 shares at a price of $4.3125 per share, which resulted in
aggregate repayment of indebtedness in the amount of approximately $430,000.
8. Subsequent Event
In October 2000, the Company experienced significant personnel changes at
the senior management level including the resignation of its Chief Executive
Officer and Chairman of the Board, its President and Chief Operating Officer,
its Chief Financial Officer and its Controller. Additionally, the Company's
Chief Marketing Officer departed in connection with the Company's recent
restructuring. Although the Board has appointed Bruce Coleman as interim Chief
Executive Officer and Kenneth McBride, the Company's previous Senior Director of
Finance, as the Company's acting Chief Financial Officer, permanent replacements
have not been appointed and the position of Controller remains open. The Company
does not currently anticipate that it will hire a new Chief Marketing Officer.
In October 2000, the Company implemented a new business strategy in an
effort to more rapidly decrease its operating losses and enhance its ability to
achieve profitability. This strategy involved a restructuring that reduced the
Company's total headcount by approximately 40%, which included full time, part
time and contract employees. The Company also announced that it would implement
other cost-cutting programs, including a significant reduction in and
redeployment of its sales and marketing expenses to those programs that have
demonstrated higher returns on investment. Finally, the Company is combining its
Enterprise and E-Commerce Business Units to reduce duplication of costs and
effort. The Company expects to take a one-time charge in the fourth quarter of
2000 relating to this restructuring.
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 uncertainty of the Internet mailing and shipping markets; our
ability to make our services widely available and the uncertainty of the
commercial adoption of our services; our ability to implement our new business
strategy; our ability to achieve profitability; pending litigation regarding
intellectual property infringement allegations; recent changes in our business
strategy and executive management; regulation of our business; projected
operating losses; strategic relationships, direct sales and distribution
arrangements; the security of our mailing and shipping services; competition;
the need for additional capital; and the commercial acceptance of our services.
Such statements are not guarantees of future performance and are subject to
certain risks,
9
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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 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 provides easy, convenient and cost-effective Internet-based
services for mailing or shipping letters, packages or parcels anywhere and at
anytime. Our core mailing and shipping services are designed to allow individual
consumers or employees of small businesses or larger enterprises to select a
carrier, print US postage or shipping labels from multiple carriers, schedule a
pick-up, track a package and apply enterprise-wide business rules to manage and
account for mailing and shipping costs. With all of our services, no additional
hardware is required; a customer can access our services through an existing
Internet connection and print postage or shipping labels with ordinary laser or
inkjet printers.
In October 2000, we experienced significant personnel changes at the senior
management level including the resignation of our Chief Executive Officer and
Chairman of the Board, our President and Chief Operating Officer, our Chief
Financial Officer and our Controller. Additionally, our Chief Marketing Officer
departed in connection with our recent restructuring. Although the Board has
appointed Bruce Coleman as interim Chief Executive Officer and Kenneth McBride,
our previous Senior Director of Finance, as our acting Chief Financial Officer,
permanent replacements have not been appointed and the position of Controller
remains open. We do not currently anticipate that we will hire a new Chief
Marketing Officer. We cannot predict how these changes in management will affect
our business. However, if we fail to attract and retain qualified individuals
for these senior management positions, our business, financial condition and
results of operations will be seriously harmed.
In October 2000, we implemented a new business strategy in an effort to
more rapidly decrease our operating losses and enhance our ability to achieve
profitability. This strategy involved a restructuring that reduced our total
headcount by approximately 40%, which included full time, part time and contract
employees. We also announced that we would implement other cost-cutting
programs, including a significant reduction in and redeployment of our sales and
marketing to those programs that have demonstrated higher returns on investment.
Finally, we are combining our Enterprise and E-Commerce Business Units to reduce
duplication of costs and effort. We expect to take a one-time charge in the
fourth quarter of 2000 relating to this restructuring. If our new business
strategy is not successful, we will not achieve profitability as currently
planned, if at all.
Our majority-owned subsidiary, EncrypTix, Inc., will leverage many of the
proprietary, Internet-based technologies developed by Stamps.com in the events,
travel and financial services industries. EncrypTix will enable sellers and
distributors of tickets and financial instruments to deliver value-bearing
instruments such as tickets, vouchers, boarding passes and gift certificates
over the Internet.
Small Business Services: Our small business services include our
traditional business of serving small businesses and consumers with our easy,
convenient and cost-effective 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 fees for
our Internet Postage Service and commission fees from our online store operated
by a third-party. Service fee revenues are generated from the two service plans
that we are currently offering to our users: Simple Plan and Power Plan. Under
the Simple 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. Beginning in
November
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2000, the monthly minimum fee will be increased to $4.49. The Power Plan was
introduced at the beginning of our second quarter of 2000, in response to
customer requests for a fixed monthly pricing plan. Under the Power Plan, a user
purchases postage at cost and pays $15.99 per month for unlimited use of our
service. For the third quarter of 2000, approximately 50% of our service fee
revenues was generated from Power Plan customers and the remaining 50% was from
Simple Plan customers. Service fees are calculated and charged at the end of a
monthly billing cycle.
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 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 100 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. USA, Inc., a
retail business, communication and postal services franchiser. There are
currently over 1,100 Mail Boxes Etc. franchises utilizing our services. Under
our current agreement with Mail Boxes Etc., we are to receive a fixed service
fee of $500,000 per month. Due to delays in delivering our products and a
dispute with Mail Boxes Etc. relating to certain product features, we have not
received payment under this contract since July 2000. We are currently working
with Mail Boxes Etc. in an effort to resolve this dispute and have taken a
reserve for unpaid amounts. On January 1, 2001, the fixed monthly service fee
converts to a per transaction fee. Given current transaction volume being
produced by Mail Boxes Etc. franchises, we do not expect in the short term to
achieve the level of monthly revenue that has been produced under the current
fixed monthly service fee arrangement. Furthermore, if transaction volumes do
not increase or if we are unable to resolve our current disputes with Mail Boxes
Etc., we can provide no assurances that our agreement will provide historical
levels of revenue or significant revenues at all.
E-commerce Services: Our e-commerce services strategic business unit will
be combined with our enterprise services strategic business unit as part of our
new business strategy. Although we currently have no plans to deploy e-commerce
services independent of our enterprise services, we may deploy e-commerce
services in the future. If we choose to apply our technologies to e-commerce
services our objective will be to address the growing shipping needs of e-
tailers and other online businesses, including auctioneers. These services could
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, if any, will likely be primarily generated from
recurring, transaction-based service fees.
The markets for our Internet postage and shipping are new, and their
development is subject to substantial uncertainty. Our success and financial
results are highly contingent upon our ability to address and develop these
markets. We cannot assure you that these markets will fully develop, if at all.
If a significant market for any of our services fails to develop or develops
slower than we expect, our business will fail. Additionally, if we do not
effectively manage, market and sell our Internet mailing and shipping services,
we may never achieve profitability and our business will be substantially harmed
and could fail. More specifically, we cannot be sure that our services will be
widely available in a timely manner or adopted, that they will successfully
process large numbers of user transactions or that our services will contain
features that appeal to the broad range of customers that we target. If we
experience problems with the availability, adoption, scalability or
functionality of our services or if we are unable to offer attractive service
enhancements in a timely manner, our ability to attract and retain customers and
our results of operations would be adversely impacted. See "Risk Factors--The
Internet postage and shipping markets are new and uncertain and our business may
not develop" and "-If we do not effectively manage, market and sell our Internet
mailing and shipping services or if we fail to make our services widely
available, we may never achieve profitability and our business will be
substantially harmed and could fail."
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 service fees, discounts on supplies offered through our
online store, or free postage, supplies or services. 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 the 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. See
"Risk Factors--We have a history of losses and expect to incur losses in the
future, and we may never achieve profitability."
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Results of Operations
Revenues
Small Business. Revenues from small business were approximately $3.7
million and $7.4 million for the three-month and nine-month periods ended
September 30, 2000, respectively. There were no revenues during the three-month
or nine-month periods ended September 30, 1999 as we launched our first service,
Internet Postage, on October 22, 1999. The increase for both periods was due
primarily to the acquisition of new customers and recurring revenue from
existing customers. The increase in the current quarter was due also to the
success of the Power Plan, which was introduced in the second quarter and
generates eight times the monthly revenue of a Simple Plan customer that incurs
the minimum Simple Plan monthly fee. We expect revenues to increase as we
continue to add new customers from both service plans.
Enterprise. Revenues from the enterprise segment were $0.5 million and $2.5
million for the three-month and nine-month periods ended September 30, 2000,
respectively. There were no revenues during the three-month or nine-month
periods ended September 30, 1999 as we did not have any shipping service
offerings until March 2000. Enterprise revenues were generated from Mail Boxes,
Etc., our largest customer to date of the enterprise service. Under our current
agreement with Mail Boxes Etc., we are to receive a fixed service fee of
$500,000 per month. On January 1, 2001, this fixed monthly service fee converts
to a per transaction fee under the terms of the agreement. We did not recognize
$1.0 million in revenue from Mail Boxes Etc. during the third quarter due to
delays in delivering our products and a dispute over certain product features.
The service is currently deployed at other customer sites on a free trial basis.
We expect that revenues will decrease as service fees from Mail Boxes Etc.
convert from a fixed monthly service fee to a transaction-based fee structure
pursuant to the terms of our agreement with them, and will thereafter increase
as we roll out our services on a commercial scale and attract more customers to
use our enterprise services to ship significant volumes of postage.
E-commerce. There were no revenues from the e-commerce segment for the
three-month or nine-month periods ended September 30, 2000 or 1999. In future
reports, revenue from e-commerce services, if any, will be reported as part of
the enterprise segment.
Cost of Revenues. Cost of revenues primarily consist of costs related to
customer service activities 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, allocation of overhead
and costs related to promotional items, such as free postage and scales. Costs
of revenues were $5.6 million and $19.1 million for the three-month and nine-
month periods ended September 30, 2000, respectively. As of September 30, 1999,
there were no costs of revenues because we had not recognized any revenues to
date. In accordance with EITF 00-14, "Accounting for Certain Sales Incentives,"
the Company reclassified from sales and marketing expense to cost of revenues
costs related to free postage and free scales given as promotional items to new
customers. The total reclassification was approximately $1.2 million and $5.3
million for the three and nine-month periods ended September 30, 2000,
respectively. We expect costs of revenues to increase as we continue to add new
customers and expand our service offerings in the enterprise segment.
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, sales or business development activities.
Sales and marketing expenses were $20.6 million and $59.5 million for the three-
month and nine-month periods ended September 30, 2000, respectively, compared to
$7.6 and $10.9 for the corresponding periods in 1999. The increase in sales and
marketing is principally due to our marketing campaigns and advertising of our
Internet-based services. We expect sales and marketing expenses to decrease
significantly as a result of our new business strategy.
Research and Development Expenses. Research and development expenses
principally consist of compensation for personnel involved in the development of
our Internet mailing and shipping services and expenditures for consulting
services and third-party software. Research and development expenses for the
three-month and nine-month periods ended September 30, 2000 were $10.3 million
and $21.7 million, respectively, compared to $2.4 million and $5.0 million for
the corresponding periods in 1999. The increase is due to higher personnel and
consulting costs associated with the ongoing development of our Internet-based
mailing and shipping services. Although we expect a reduced level of spending on
research and development activity, we believe that significant investments in
research and development are required to remain competitive and expect to
continue incurring significant research and development expenses.
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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-month
and nine-month periods ended September 30, 2000 were $11.4 million and $25.8
million, respectively, compared to $3.4 million and $5.8 million for the
corresponding periods in 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.
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. We incurred a charge of $2.0
million in acquired in-process research and development in March 2000 related to
our acquisition of iShip.com.
Deferred Compensation. 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-month
and nine-month periods ended September 30, 2000 was $5.3 million and $14.9
million, respectively, compared to $0.7 million and $1.1 million for the
three-month and nine-month periods ended September 30, 1999, respectively. The
increase is due to earnings on a higher average cash equivalent balance that
resulted from our initial public offering in June 1999 and our follow-on public
offering in December 1999.
Liquidity and Capital Resources
As of September 30, 2000, the Company had approximately $290.1 million in
cash and short-term investments. In June 1999, we completed our initial public
offering, which resulted in net proceeds of $57.8 million. In December 1999, we
completed a follow-on public offering, which resulted in net proceeds of $355.5
million. 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 $35.8 million in private financing from a group of financial and
strategic investors. The proceeds of this financing are being used by EncrypTix
for research and development, sales and marketing and general working capital
purposes. EncrypTix has entered into four agreements to provide lease financing
in the aggregate amount of $9.7 million.
Net cash used in operating activities was $79.7 million and $22.6 million
for the nine months ended September 30, 2000 and 1999, respectively. The
increase in net cash used in operating activities resulted primarily from
increases in net loss, principally due to higher sales and marketing expenses.
Net cash used in investing activities was $160.5 million for the nine
months ended September 30, 2000 compared to $24.4 million for the corresponding
period in 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 $36.0 million and $85.1
million for the nine months ended September 30, 2000 and 1999, respectively. The
difference in net cash provided by financing activities is primarily attributed
to our receipt of cash proceeds of approximately $57.8 million from our initial
public offering in June 1999.
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If our current cost-cutting programs associated with our new business
strategy are implemented successfully, we anticipate that our current cash
balances will be sufficient to fund our operations through June 2002. 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. See "Risk Factors--Our
growth and operating results could be impaired if we are unable to meet our
future capital requirements."
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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. THE
OCCURRENCE OF ANY OF THE FOLLOWING RISKS 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
The Internet postage and shipping markets are new and uncertain and our business
may not develop.
The markets for Internet postage and shipping are new, and their
development is subject to substantial uncertainty. Our success and financial
results are highly contingent upon our ability to address and develop these
markets. We cannot assure you that these markets will fully develop, if at all.
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, if customers will be willing to pay a fee to use
our service, or if potential users will select our services over services
offered by 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 that compete against Internet postage, any of which
could stop or negatively impact the commercial adoption of our Internet Postage
service.
While Internet postage is extremely important to our business, we also
depend heavily on the commercial acceptance of our enterprise Internet mailing
and shipping services. There can be no assurance that we will succeed in these
businesses. Similar to Internet postage, Internet mailing and shipping services
are at a very early stage and the market for these services has yet to develop.
We have not released these services on a commercial scale and we cannot be sure
that our services or that a substantial market for Internet mailing and shipping
services will develop, if at all.
If a significant market for any of our services fails to develop or
develops slower than we expect, our business will fail.
If we do not successfully attract and retain skilled personnel for permanent
management positions, we may not be able to effectively implement our business
plan.
In October 2000, we experienced significant personnel changes at the senior
management level including the resignation of our Chief Executive Officer and
Chairman of the Board, our President and Chief Operating Officer, our Chief
Financial Officer and our Controller. Additionally, our Chief Marketing Officer
departed in connection with our recent restructuring. Although the Board has
appointed Bruce Coleman as interim Chief Executive Officer and Kenneth McBride,
our previous Senior Director of Finance, as our an acting Chief Financial
Officer, permanent replacements have not been appointed and the positions of
Chief Operating Officer and Controller remain open. We do not currently
anticipate that we will have a new Chief Marketing Officer. On November 13,
2000, the Board appointed Bruce Coleman to the Board, filling the vacancy
created by Thomas H. Bruggere, who resigned on September 30, 2000. We cannot
predict how these changes in management will effect our business. However, if we
fail to attract and retain qualified individuals for these senior management
positions, our business, financial condition and results of operations will be
seriously harmed.
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Our success depends largely on the skills, experience and performance of
the members of our senior management and other key personnel. Any of the
individuals can terminate his or her employment with us at any time. If we lose
additional key employees and are unable to replace them with qualified
individuals, our business and operating results could be seriously harmed. In
addition, our future success will depend largely on our ability to continue
attracting and retaining highly skilled personnel. Like other companies in the
Internet and high technology industries, we face intense competition for
qualified personnel. As a result, we may be unable to successfully attract,
assimilate or retain qualified personnel. The failure to attract and retain the
necessary personnel could seriously harm our business, financial condition and
results of operations.
If our new business strategy is not successfully implemented, our financial
condition and results of operations will be adversely affected.
In October 2000, we implemented a new business strategy that involved
refocusing our resources on the most productive areas of our business in order
to more effectively capture the highest margin customer base. This new strategy
was accompanied by the appointment of a new management team, a 40% reduction in
our headcount, a plan to significantly reduce other expenditures, including
sales and marketing expense, and an increase in monthly service fees for our
Internet postage service. Our new strategy entails risks relating to our ability
to attract our targeted customers to offset potential customer losses in other
areas and the ability of our new management team to implement this strategy.
There is no guarantee our new management team will be able to effectively or
efficiently implement our new business strategy or that, if effectively
implemented, our business strategy will benefit us or help us achieve
profitability. Failure to execute our plan to significantly reduce expenses or
to attract new customers in high margin lines of business in significant numbers
will adversely effect our financial condition and results of operations. In
addition, a substantial loss of customers resulting from our new business
strategy could have an adverse impact on our financial condition and results of
operations.
If we do not effectively manage, market and sell our Internet mailing and
shipping services or if we fail to make our services widely available, we may
never achieve profitability and our business will be substantially harmed and
could fail.
We face numerous risks coincident with the introduction, sale and
commercial availability of our services because of our very limited experience
with the commercial rollout and use of our services. Specifically, our Internet
Postage service was introduced on October 22, 1999, our enterprise services have
yet to be deployed on any significant commercial scale, and our e-commerce
services are not yet, and may never be, available for commercial use. As a
result, we cannot be sure that our services will be widely available or adopted,
that they will successfully process large numbers of user transactions or that
our services will contain features that appeal to the broad range of customers
that we target. If we experience problems with the availability, adoption,
scalability or functionality of our services or if we are unable to offer
attractive service enhancements in a timely manner, our ability to attract and
retain customers and our results of operations will be adversely impacted. 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, customer
service operations, professional services group, network infrastructure or
systems.
In order to acquire customers and achieve wide distribution and use of our
services, we must develop and execute cost-effective marketing campaigns and
sales programs. Given the limited amount of time that our services have been
commercially available, we have very limited experience conducting marketing
campaigns. In addition, we have recently increased our emphasis on direct
selling efforts and have only recently retained the resources necessary to
support a direct sales channel. However, we have very limited experience
regarding our ability to acquire customers through a direct sales channel. As a
result of these limited marketing and sales experiences, we cannot predict our
ability to attract customers for our services, and we may fail to generate
significant interest in any of our services. Furthermore, we may be unable to
generate significant interest in our services in a cost-effective manner. If we
fail to generate interest in our services or to acquire customers in a cost-
effective manner, our results of operations will be adversely affected and we
may never achieve profitability.
The continued availability of our Internet Postage service is dependent
upon our service continuing to meet US Postal Service performance specifications
and regulations. If at any time our Internet Postage service fails to meet US
Postal Service requirements, we may be prohibited from offering this service and
our business would be severely negatively impacted. Meanwhile, our Internet
mailing and shipping services must meet the commercial demands of our customers,
which are expected to range from small businesses to large enterprises. We
cannot be sure that our
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services will appeal to or be adopted by such a wide range of customers. In
addition, given our limited experience selling our services to and implementing
our services with enterprise customers, we cannot predict the length of
enterprise sales cycles, the implementation times for our services or the extent
to which an enterprise will employ our services. If we fail to meet the demands
of our customers or if our customers implement and employ our services slower
than we expect, our business, results of operation and ability to achieve
profitability will be negatively affected.
Finally, our ability to obtain and retain customers depends on our customer
service capabilities. As part of our new business strategy, we are planning to
cut back some of our support offerings. 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 suits 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 in the United States District Court for the District of Delaware. The suit
originally alleged 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 against
us to drop allegations of patent infringement with respect to one patent and to
add allegations of patent infringement with respect to three other patents. On
July 28, 2000 the court entered Pitney Bowes' amended complaint.
On September 18, 2000, Pitney Bowes filed another patent infringement
lawsuit against us in the United States District Court for the Eastern District
of Texas, alleging that we are infringing four patents owned by Pitney Bowes
related to shipping. The suit seeks unspecified damages and a permanent
injunction from further alleged infringement.
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 against us.
If Pitney Bowes prevails in one or both of its suits against us, we may be
prevented from selling our mailing or shipping services on the Internet.
Additionally, the Pitney Bowes suits could result in limitations on how we
implement our services, delays and costs associated with redesigning our
services and payments of license fees, damages and other payments. Thus, if
Pitney Bowes prevails in either of its suits 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 on June 16, 1999, 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.
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We have a history of losses and expect to incur losses in the future, and we may
never achieve profitability.
As of September 30, 2000, we had an accumulated deficit of $205.2 million.
For the nine months ended September 30, 2000, we only generated $9.9 million of
revenue and had a negative gross profit of $9.2 million. This minimal revenue
amount can be attributed primarily to the fact that our Internet Postage service
has only been available since October 22, 1999 and that our enterprise and e-
commerce services have yet to be released on a commercial scale. Although we
have announced a new business strategy aimed at achieving positive gross margins
and eventual profitability, we expect to continue to incur significant sales and
marketing, research and development, and administrative expenses and therefore
could continue to incur net losses for several years. As a result of the
iShip.com acquisition in March 2000, our losses have increased because of
additional costs and expenses related to amortization of goodwill, other
intangibles and deferred compensation resulting from this acquisition; 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
and successfully implement our new business strategy to achieve and maintain
profitability.
In connection with the iShip.com acquisition that we completed in March
2000, we recorded 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.
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 and a consistent stream of transactions through our
shipping services. We currently charge our customers a fee to use our Internet
Postage service. Similarly, we
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expect to charge transaction fees for our enterprise 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.
The change in payment terms associated with a significant contract could
adversely affect our financial condition and results of operations.
In the three month and nine month periods ending September 30, 2000, we
derived 12% and 20% of our revenue, respectively, from Mail Boxes Etc.
Currently, under the terms of our contract with Mail Boxes Etc., we receive
fixed monthly service fees of $500,000 from Mail Boxes Etc. until December 31,
2000. Thereafter, our contract with Mail Boxes Etc. calls for a transaction-
based fee structure. We expect the amount of monthly revenue that we will
receive from Mail Boxes Etc. under a transaction-based fee structure to
initially be lower than the fixed fee structure. If we fail to increase our
customer base or our transaction-based fee structure with Mail Boxes Etc. yields
lower than expected revenues, our financial condition and results of operations
will be seriously affected. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Overview."
Third party assertions of violations of their intellectual property rights could
adversely affect our business.
In addition to the Pitney Bowes claims 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 61 patent applications in the United States, and 13 international
patent applications. 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, a court might hold any of our patents, trademarks
or service marks invalid or unenforceable. 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.
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 enterprise mailing and shipping services. Prior to
the recent restructuring related to our new business strategy, we had expanded
our operations significantly, and additional expansion may be required to
address the anticipated growth in our user base and market opportunities. To
manage any growth of operations, we may need to improve existing, and implement
new, systems, procedures and controls. In addition, we have substantially
reduced our rate of hiring; however, we may need to expand, train and manage an
increasing employee base. We may also need to expand our finance,
administrative and operations staff.
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We may not be able to manage our growth effectively. Our prior expansion
has placed, and our current restructuring will 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 services may not achieve commercial acceptance.
We have established strategic relationships with a number of third parties.
To date, our strategic relationships generally involve the promotion and
distribution of our services through our partners' products, services and Web
sites. Recently, we have increased our focus on the direct sales channel and
have entered into arrangements to have a third party direct sales force offer
our services. In return for promoting or selling our services, our partners may
receive revenue-sharing opportunities or per customer bounties. 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 have not yet resulted in significant
revenues, primarily because we have only recently commercially released our
Internet Postage service and our enterprise 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.
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) complete
dependence on Internet mailing and shipping services that currently do not have
broad market acceptance; (b) need to effectively deploy our sales and support
organizations; (c) ability to establish and promote our brand name; (d) ability
to manage our operations to meet the commercial demand for our services; (e)
development of and reliance on strategic and distribution relationships; (f)
ability to prevent and respond quickly to service interruptions; (g) ability to
minimize fraud and other security risks; (h) ability to compete with companies
with greater capital resources and brand awareness; (i) the effectiveness of our
new management team and its ability to successfully implement our new business
strategy, and (j) ability to maximize return on investment and manage our
expenditures.
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 brands for our mailing and shipping service in
order 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 and sales initiatives in an effort to establish our
brand awareness and services. We cannot be certain that we will effectively
deploy or have sufficient resources to build our brands 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 and our
enterprise customers could discontinue use of our mailing and shipping services.
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 centers 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 obtained insurance for some of these
disruptions; however, we cannot be certain that our coverage will be sufficient
to compensate us for losses that may occur due to these types of disruptions.
We have experienced unplanned system interruptions in the past and may
experience them again in the future. Unplanned interruptions that we have had in
the past have resulted in instances where current customers could not access
their accounts or purchase postage or supplies from our online store and
potential customers could not register for our services. Some of these past
interruptions have lasted several hours. Any substantial interruptions in the
future could result in the loss of data and could completely impair our ability
to process transactions, register new customers and generate revenues from our
services and our online store. 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
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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.
The effects of expansion may adversely affect our financial condition, results
of operations and existing stockholders.
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. Although we have no commitments or
agreements and are not currently engaged in discussions for any material
acquisitions or investments, we continue to evaluate strategic alternatives,
incremental revenue opportunities and derivative applications of our technology
and may pursue and develop those opportunities with strategic partners and
investors, both domestically and internationally. 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.
Given our limited operating history, we have not generated any significant
revenues from our operations. In addition, the market for Internet mailing and
shipping services is very new and uncertain. 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 services; (b) the costs of
defending ourselves in the Pitney Bowes litigation or against other intellectual
property claims; (c) the costs of our marketing and sales programs to establish,
promote and distribute our brand names and services; (d) the demand for our
services; (e) our ability to develop and maintain strategic distribution
relationships and a direct sales channel; (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, free postage
and other promotional items, 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.
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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 may need to raise additional capital in the future through the issuance of
additional equity or convertible debt securities or by borrowing money, and
additional funds may not be available on terms acceptable to us.
If our cost-cutting program associated with our new business strategy is
successfully implemented, we believe that our current cash balances will allow
us to fund our operations through June 2002. However, we may require substantial
working capital to fund our business and we may need to raise additional
capital. 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; our rate of customer acquisition and retention for our Internet mailing
and shipping services; and changes in technology. In addition, the various
elements of our business and growth strategies, including our plans to support
fully the commercial release of our services, our introduction of new products
and services and our investments in infrastructure will require additional
capital. We cannot be certain that additional funds will be available on
satisfactory terms when needed, if at all. If we are unable to raise additional
necessary capital in the future or generate sufficient working capital, we may
be required to curtail our operations significantly or obtain funding through
the relinquishment of significant technology or markets. Raising additional
capital through the sale of equity or convertible debt securities would have a
dilutive effect on existing stockholders, and securities we issue may have
rights superior to our common stock.
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 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.
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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 markets
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 mailing 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 is
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 Information Based Indicia Program. Pitney Bowes has a
software-based product commercially available and has a hardware-based product
in beta testing. Neopost Industrie has received commercial approval for a
software-based product and has a hardware-based product in beta testing.
Envelope Manager has a software product 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.
Internet postage may not be widely 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.
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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 (including online services) of the US Postal
Service, UPS, FedEx and other major carriers, instead of adopting our multi-
carrier, online service. Successful adoption of our shipping solutions may also
be impeded by insufficient cooperation from major carriers that we need to
provide our online services. Alternatively, traditional and/or potential
competitors with greater resources than us, like Pitney Bowes, may develop more
successful Internet solutions or deter acceptance of our service offerings. In
addition, companies including TanData Corporation, GoShip.com, BITS,
Inc./Intershipper.net, Kewill Systems, Accuship, Neopost Industrie, Virtan,
Inc./SmartShip, Return.com and ClickReturns.com are competing in shipping
services and/or offering their services through alliances with traditional major
shippers. 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 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
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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 our business 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 have employees and 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 as those laws may be
modified or as 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.
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Even though the US government has recently adopted more flexible export
rules for software, our ability to provide service in international markets may
still be impacted by the export control laws of the United States. Our software
technology may make us subject to stronger export controls in some instances,
and may prevent us from being able to export our products and 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. All of these shares are available for immediate sale, subject to
the volume and other restrictions under Rule 144 of the Securities Act of 1933.
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 September 30, 2000, the short-term investments, which consist
principally of corporate debt and commercial paper, approximated $167.5 million
and had a related weighted average interest rate of 6.6%. At September 30, 2000,
the line of credit balance totaled $1.9 million and the related interest rate
was 10.5 % (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
originally alleged 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. On July
28, 2000 the court entered Pitney Bowes' amended complaint.
On September 18, 2000, Pitney Bowes filed another patent infringement
lawsuit against us in the United States District Court for the Eastern District
of Texas, alleging that we are infringing four patents owned by Pitney Bowes
related to shipping. The suit seeks unspecified damages and a permanent
injunction from further alleged infringement.
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 in the amount of
$13.3 million plus other unspecified compensatory damages, punitive and
exemplary damages for securing a board member and investors for Stamps.com. On
November 6, 2000, the trial court granted summary judgment on the entire action
in favor of us and Mr. Ananda. While the plaintiffs may appeal the grant of
summary judgment, we believe that the grant of summary judgment will be upheld
in the event of appeal. Nevertheless, the outcome of this litigation is
uncertain and we can give no assurance that the plaintiffs will not prevail.
On August 23, 2000, DraftWorldwide, Inc., which formerly served as one of
our advertising and promotions agencies, filed a suit against us for alleged
breach of contract in the Circuit Court of Cook County, Illinois. The suit
alleges that we improperly terminated our contract with DraftWorldwide and seeks
damages of approximately $3.9 million plus interest and costs associated with
the lawsuit. The alleged damages consist primarily of monthly retainers that
DraftWorldwide claims to be due and owing as a result of the alleged improper
termination for the seven month period beginning June 2000 and ending December
2000. We believe that the agreement was terminated effective June 1, 2000, which
termination resulted from our belief that DraftWorldwide failed to perform
adequately under the contract, among other reasons. We are currently evaluating
the claims against us as well as potential counterclaims, and have not responded
to the suit. The outcome of this litigation is uncertain and we can give no
assurance that DraftWorldwide will not prevail.
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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.
On August 1, 2000, we entered into a Warrant Issuance Agreement with Cydcor
Limited ("Cydcor"). Under the terms of the agreement, we are obligated to issue
warrants to purchase shares of our common stock on a monthly basis. The number
of shares underlying each warrant is based upon a calculation that determines
net new customers that Cydcor obtains from direct sales of our Internet Postage
service. The warrants issuable under the agreement are exercisable for a period
of two years from the issuance date. Under the terms of this agreement, on
September 30, 2000, we issued Cydcor a warrant to purchase 5,281 shares of our
common stock at a price per share of $3.844. The Warrant Issuance Agreement and
form of warrant are filed as Exhibits 4.1 and 10.49 and to this Form 10-Q. The
offer and sale of this warrant and the shares of common stock issuable upon
conversion thereof is exempt from the registration requirements of the
Securities Act by virtue of Section 4(2) thereof.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 5. Other Information.
In October 2000, we experienced significant personnel changes at the senior
management level including the resignation of our Chief Executive Officer and
Chairman of the Board, our President and Chief Operating Officer, our Chief
Financial Officer and our Controller. Additionally, our Chief Marketing Officer
departed in connection with our recent restructuring. Although the Board has
appointed Bruce Coleman as interim Chief Executive Officer and Kenneth McBride,
our previous Senior Director of Finance, as our acting Chief Financial Officer,
permanent replacements have not been appointed and the positions of Chief
Operating Officer and Controller remain open. We do not currently anticipate
that we will hire a Chief Marketing Officer. On November 13, 2000, the Board
appointed Bruce Coleman to the Board, filling the vacancy created by Thomas H.
Bruggere, who resigned on September 30, 2000. We cannot predict how these
changes in management will affect our business. However, if we fail to attract
and retain qualified individuals for these senior management positions, our
business, financial condition and results of operations will be seriously
harmed.
In October 2000, we implemented a new business strategy in an effort to
more rapidly decrease our operating losses and enhance our ability to achieve
profitability. This strategy involved a restructuring that reduced our total
headcount by approximately 40%, which included full time, part time and contract
employees. We also announced that we would implement other cost-cutting
programs, including a significant reduction in and redeployment of our sales and
marketing efforts to those programs that have demonstrated higher returns on
investment. Finally, we are combining our Enterprise and E-Commerce Business
Units to reduce duplication of costs and effort. We expect to take a one-time
charge in the fourth quarter of 2000 relating to this restructuring. If our new
business strategy is not successful, we will not achieve profitability as
currently planned, if at all.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
4.1 Form of Common Stock Purchase Warrant between the Company and
Cydcor Limited.
10.47 + Manifest System Services and Co-Branding Agreement, dated as of
April 27, 1999, by and between iShip.com, Inc. and Mail Boxes Etc. USA, Inc.
10.48+ Amendment No. 1 to Manifest System Services and Co-Branding
Agreement, dated as of March 7, 2000, by and between iShip.com, Inc. and Mail
Boxes, Etc. USA, Inc.
10.49 Warrant Issuance Agreement, dated as of August 1, 2000 between
the Company and Cydcor Limited.
_______________________
+ Confidential treatment has been requested for certain portions of
this exhibit pursuant to 24b-2 under the Securities and Exchange Act, as
amended. In accordance with Rule 24b-2, these confidential portions have been
omitted from this exhibit and filed separately with the Securities and Exchange
Commission.
28
<PAGE>
27.1 Financial Data Schedule.
99.1* Press Release issued October 12, 2000 relating to resignation of
John M. Payne from position of Chairman of the Board of Directors and Chief
Executive Officer.
99.2 Press Release issued October 23, 2000 relating to the Company's
headcount reduction.
99.3 Press Release issued October 31, 2000 relating to appointment of
Bruce Coleman as interim Chief Executive Officer.
99.4 Press Release issued October 31, 2000 relating to the Company's
financial results for the third quarter of 2000 and cost-cutting measures.
----------------
* Incorporated by reference to Exhibit 99.2 on the Form 8-K filed by the
Company on October 13, 2000.
(b) Reports on Form 8-K.
On September 25, 2000, the Company filed a report on Form 8-K relating to
(1) an action filed against the Company by DraftWorldwide, Inc. alleging breach
of contract and (2) an action filed against the Company by Pitney Bowes alleging
patent infringement.
29
<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 14, 2000 /s/ Bruce Coleman
---------------------------- ---------------------------------------
Date Bruce Coleman
Chief Executive Officer
November 14, 2000 /s/ Kenneth McBride
---------------------------- ---------------------------------------
Date Kenneth McBride
Chief Financial Officer
(Principal Financial Officer)
30
