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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 1999
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
Commission file number 000-26427
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Stamps.com Inc.
(Exact Name of Registrant as Specified in Its Charter)
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Delaware 77-0454966
(Stateor Other Jurisdiction (I.R.S. Employer
of Incororationpor Organization) Identification No.)
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Address
3420 Ocean Park Boulevard, Suite 1040
Santa Monica, California 90405
Registrant's Telephone Number, Including Area Code: (310) 581-7200
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
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Name of each exchange
Title of each class on which registered
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Common Stock, $.001 par value The Nasdaq National Market
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Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by a check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of March 27, 2000 the approximate aggregate market value of voting stock
held by non-affiliates of the registrant was $765,000,000 (based upon the
closing price for shares of the Registrant's Common Stock as reported by The
Nasdaq National Market System on that date). As of March 27, 2000, there were
approximately 48,468,899 shares of the registrant's Common Stock issued and
outstanding.
Documents Incorporated By Reference
Portions of the Registrant's Proxy Statement for the 2000 Annual Meeting of
Stockholders, which is to be filed subsequent to the date hereof, are
incorporated by reference into Part III.
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STAMPS.COM INC.
FORM 10-K ANNUAL REPORT FOR THE YEAR ENDED DECEMBER 31, 1999
TABLE OF CONTENTS
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PART I.................................................................. 1
ITEM 1. BUSINESS .................................................. 1
ITEM 2. PROPERTIES................................................. 22
ITEM 3. LEGAL PROCEEDINGS.......................................... 22
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........ 22
PART II................................................................. 23
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS........................................ 23
ITEM 6. SELECTED FINANCIAL DATA.................................... 25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.................................. 26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................ 29
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE................................... 29
PART III................................................................ 30
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT......... 30
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................. 30
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............. 30
PART IV................................................................. 31
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K................................................... 31
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PART I.
This Annual Report on Form 10-K, including information incorporated herein
by reference, contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. These statements relate to expectations concerning
matters that are not historical facts. Words such as "projects," "believes,"
"anticipates," "plans," "expects," "intends," and similar words and
expressions are intended to identify forward-looking statements. Although
Stamps.com believes that such forward-looking statements are reasonable, we
cannot assure you that such expectations will prove to be correct. Important
language regarding factors that could cause actual results to differ
materially from such expectations are disclosed herein including, without
limitation, in the "Risk Factors" beginning on page 10. All forward-looking
statements attributable to Stamps.com are expressly qualified in their
entirety by such language. Stamps.com does not undertake any obligation to
update any forward-looking statements. You are also urged to carefully review
and consider the various disclosures we have made which describe certain
factors which affect our business, including the risk factors set forth at the
end of Part I, Item 1 of this Report, as well as our Registration Statement on
Form S-4 (No. 333-91377), as amended, as filed with the Securities and
Exchange Commission on February 14, 2000.
Stamps.com, iShip.com(TM), Stamps.com Internet Postage(TM) and the
Stamps.com logo are our trademarks. This Report also includes trademarks of
entities other than Stamps.com.
ITEM 1. BUSINESS
Overview
Stamps.com(TM) provides easy, convenient and cost-effective Internet
mailing and shipping services to small businesses, large corporations, e-
commerce vendors and individual consumers. We offer a one-stop service where
customers can choose the best carrier for any transaction based on cost
comparisons and delivery options. With Stamps.com's core mailing and shipping
services, customers can use their existing PC/printer setup and Internet
connection to select a carrier, print US postage or multi-carrier shipping
labels, schedule a pick-up and track a package.
Stamps.com was founded in September 1996 to investigate the feasibility of
entering into the US Postal Service's Information Based Indicia Program and
initiate the certification process for our Internet Postage service. In
January 1998, we were incorporated in Delaware as StampMaster, Inc. and
changed our name to Stamps.com Inc. in December 1998. We completed our initial
public offering in June 1999 and our common stock is listed on the Nasdaq
National Market under the symbol "STMP." In March 2000, we completed our
acquisition of iShip.com(TM), a Washington corporation that was initially
founded as MoveIt! Software, Inc. in May 1997 and changed its name to
iShip.com, Inc. in May 1998. As a result of the acquisition, iShip.com is a
wholly owned subsidiary of Stamps.com.
Our principal executive offices are located at 3420 Ocean Park Boulevard,
Suite 1040, Santa Monica, California 90405, and our telephone number is (310)
581-7200.
Stamps.com Internet Mailing and Shipping Services
Stamps.com Internet Postage(TM) Service. Our Internet Postage service is
approved by the US Postal Service and enables users to print information-based
indicia, or electronic stamps, over the Internet and directly onto envelopes,
labels or business documents using ordinary laser or inkjet printers. Our
service requires no additional hardware to purchase and print postage; the
user's existing PC, printer and Internet setup are sufficient. Accessing our
service is simple. Our free software can be downloaded from the Internet or
installed from a free CD-ROM. After installing the software and completing a
brief registration process, customers can purchase and print postage 24 hours
a day, seven days a week from their PCs. Customers are charged a monthly
convenience fee based on usage of our service. Our technology meets strict US
government security standards and our service incorporates US Postal Service-
mandated address verification features to enhance the efficiency of mail
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processing and delivery. In addition, our Internet Postage service is designed
to interact with word processing, contact and address management, accounting
and corporate applications to stamp letters, invoices, statements, checks and
other business documents automatically. On October 22, 1999, we commercially
launched our Internet Postage service. As of February 29, 2000, our customer
base consisted of over 150,000 users who had downloaded our software and
registered for our service.
Shipping and Tracking Services. As a result of our acquisition of Bellevue,
Washington-based iShip.com in March 2000, we have added Web-based technology
that is designed to provide a complete one-stop shipping and tracking
solution. Our shipping tools are designed to help consumers, small businesses
and large corporations price, ship, track and manage shipments over the
Internet. These services will enable a comparison of rates and services among
multiple carriers, including Airborne Express, FedEx, UPS, the US Postal
Service and Yellow Freight Systems. In addition, our multi-carrier shipping
solution is designed to provide simplified functionality for consumers, a
broader feature set for the small business, and extensive management tools for
the large corporate enterprise user. iShip.com's core service is designed to
enable shippers to: (a) select the optimal shipping solution every time they
ship a package; (b) print shipping labels from their desktop laser jet
printers or high-speed thermal printers; (c) track packages, including in-
bound packages; (d) send and receive e-mail notifications of the status of
shipped packages; (e) maintain a shipping log and history of packages shipped;
(f) generate reports to help them better manage their shipping process; and
(g) provide shipping data to the package carriers' back-end host systems.
Non-Mailing and Shipping Services. In addition to our core mailing and
shipping services, we continue to evaluate incremental revenue opportunities
and derivative applications of our technology and plan to pursue and develop
those opportunities with strategic partners and investors. For instance, we
announced on November 16, 1999 the formation of a subsidiary, EncrypTix, Inc.
to develop secure printing opportunities in the events, travel and financial
services industries. In February 2000, we granted EncrypTix a license to our
technology in those three specific fields of use. In addition, EncrypTix
raised approximately $30 million in private financing from a group of
financial and strategic investors that includes Vulcan Ventures, American
Express Travel Related Services Company, Inc., Galileo International,
GetThere.com, Inc., Loews Cineplex Entertainment Corporation, Mail Boxes Etc.
USA, Inc., Mitsubishi International Corporation, Sabre, Inc., SunAmerica
Investment Inc. and Tickets.com, Inc. As a result of the financing, we retain
almost two-thirds of the economic interest and over 90% of the voting control
of EncrypTix. EncrypTix provides highly secure, authenticated online printing
technologies for the events, movie, travel and financial service industries.
Utilizing many of the proprietary, Internet-based technologies developed by
Stamps.com, EncrypTix will enable sellers and distributors of tickets and
financial instruments to deliver value-bearing instruments such as tickets,
vouchers, boarding passes, checks and gift certificates over the Internet
through a customer's existing laser or inkjet printer. Similar to our Internet
Postage service, no specialized hardware device is required for the EncrypTix
service.
Overview of Our Industry
Growth of Internet Commerce
The Internet has emerged as a significant global communications medium,
enabling millions of people to share information and conduct business
electronically. According to International Data Corporation, the number of Web
users worldwide will grow from an estimated 142.2 million in 1998 to 502.4
million by 2003. In addition, International Data Corporation estimates that
the percentage of Web users buying goods and services on the Internet will
grow from 22% in December 1998 to 36% in December 2003. International Data
Corporation further estimates that the total value of goods and services
purchased over the Web will increase from approximately $50.4 billion in 1998
to approximately $1.3 trillion in 2003. Business-to-business commerce on the
Internet is expected to contribute significantly to the future growth of
Internet commerce. For example, International Data Corporation estimates that
business-to-consumer commerce on the Internet will grow from approximately
$14.9 billion in 1998 to approximately $177.7 billion in 2003 while business-
to-business commerce on the Internet will grow from approximately $35.5
billion in 1998 to approximately $1.1 trillion in 2003.
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Growth in Internet Usage by Small Businesses
The small office/home office and small business markets represent a large
and growing customer segment. According to International Data Corporation,
there were a combined 44.7 million small businesses and home offices in the
United States in 1998, a number which International Data Corporation forecasts
will grow to 57.6 million by 2002. For 1998, International Data Corporation
reported that small businesses with less than 100 employees numbered 7.4
million, of which 77% had fewer than 10 employees. In addition, home offices
numbered 37.3 million, of which 22.2 million were income-producing home
offices, and the remainder were home offices used for corporate after-hours
work or telecommuting.
We believe that small businesses increasingly will rely on the
functionality and pervasiveness of the Internet to reach and serve a large and
global group of end users. The reduced cost of selling and marketing on the
Internet, the ability to build and serve a large base of customers
electronically and the potential for personalized low-cost customer
interaction provide significant economic advantages. These overall benefits,
combined with accessibility, have led to adoption of the Internet by small
businesses and home offices. According to International Data Corporation,
there will be 30.2 million US home offices accessing the Internet by 2002.
According to Cyber Dialogue/FindSVP's 1999 US Small Business Internet Survey,
43% of businesses with fewer than 100 employees were estimated to be online in
1999. Of those small businesses that are currently online, 63% are already
ordering products online and are spending an average of $171 monthly on
postage. The Cyber Dialogue/FindSVP survey also found that 64% of online small
businesses have employees who are online multiple times a day. This increased
use of the Internet has resulted in small businesses becoming significant
participants in the electronic commerce market. International Data Corporation
estimates that small businesses accounted for $4.4 billion of electronic
commerce in 1998 and will account for approximately $100.4 billion of
electronic commerce activity in 2002.
Traditional Postage Industry and the Emergence of Internet Postage
According to the US Postal Service Annual Report, the total postage market
was $62.8 billion in 1999, of which $38.9 billion was represented by first
class, priority and express mail with the remainder consisting of other
classes of mail including periodicals, bulk and international. The US Postal
Service processed over 201 billion pieces of mail in 1998. Despite the growth
in the use of e-mail, the total US postage market increased by 4.3% in 1999
from 1998.
Despite this consistent growth in the postage market, the US Postal Service
has experienced continued public demand for more convenient access to US
Postal Service products and services; loss of revenue due to postal fraud; and
strong competition from overnight delivery services and online transaction
services.
Recently, the General Accounting Office, in a report issued on October 21,
1999, stated that competition from alternatives such as online invoicing, bill
payment and financial transactions could lead to declines in the U.S. Postal
Service's First Class Mail volume in the next decade. Specifically, the report
projects that First Class Mail will grow at an average annual rate of 1.8% in
fiscal years 1999 to 2002 and then decline at an average annual rate of 2.5%
in fiscal years 2003 to 2008. In addition, the Postal Service also forecasts
Standard A mail, which is primarily advertising mail and includes letters,
flats and parcels that are not sent by first-class mail or priority mail, to
increase by an average annual rate of 5.3% in fiscal years 1999 through 2002
and to increase by an average annual rate of 3.3% in fiscal years 2003 through
2008.
In response to these challenges, in 1995, the US Postal Service announced a
program for its first new postage method since the approval of the postage
meter in 1920. The Information Based Indicia Program is a ten-stage
certification process for commercial release of Information Based Indicia
products, or electronic postage, that can be purchased over the Internet and
printed from a computer using ordinary laser or inkjet printers. Indicia are a
new type of US Postal Service approved postage marks similar to stamps or
metered postage. Information Based Indicia, which are essentially digital
stamps, consist of a two dimensional bar code containing a digital signature
that make each indicium unique. Through the Information Based Indicia Program,
the US Postal Service is seeking to enhance user convenience with a new access
channel for postage that allows
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users to print postage from their PCs 24 hours a day, seven days a week. The
Information Based Indicia Program is intended to achieve the US Postal
Service's security and revenue objectives by incorporating technological
security features in each unique digitally-signed indicium and a secure
postage accounting vault to provide greater revenue security. All Internet
postage products, including any subsequent enhancements or additional
implementation of a product, must complete US Postal Service testing and
evaluation to ensure operational reliability, financial integrity and security
to become certified for commercial distribution. Overall, the Information
Based Indicia Program aims to provide improved, accurate mail processing and
increased productivity, a result which is intended to reduce US Postal Service
costs and postal fraud; increase service levels to under-served markets,
including the rapidly growing small office/home office and other small
business markets; and improve the US Postal Service's competitive position
against overnight delivery services.
The emergence of Internet postage though the US Postal Service's
Information Based Indicia Program has created an attractive channel for the
sale of postage, particularly to small office/home office and other small
businesses. According to a 1997 US Postal Service survey of over 1,600 home
offices, 98% of the respondents would likely use commercial software products
to print postage directly from their computers, 88% of the respondents did not
use a postage meter and 43% of the respondents purchased over $50 of postage
per month. We believe that small businesses consider cost-effective mail
generation, elimination of trips to the post office and the production of
professional-looking mail as key components of an effective mailing system.
Internet postage satisfies these requirements by providing 24 hours a day,
seven day a week access to metered mail from the desktop. Furthermore, when
considering the total cost of a traditional postage meter, including lease
fees for both the meter and scale, meter resetting fees and special ink
cartridges, small businesses pay a significant premium in addition to their
normal postage expenditures for leasing a postage meter. Leasing a postage
meter also requires space for additional hardware and the purchase of
specialized materials and supplies. Meanwhile, small businesses that find
leasing a postage meter uneconomical are still faced with the inconvenience of
travelling to the post office, ATM or other locations to purchase stamps.
Traditional Shipping Industry and the Emergence of Internet-Based Shipping
By 2003, Forrester Research predicts that the number of residential
packages shipped from online sales will top 2.1 billion per year. Forrester
Research also projects that total residential package deliveries will grow
from 2.98 million packages per day in 1999 to 6.53 million packages per day in
2003. International Data Corporation predicts a rise in the number of Internet
users making purchases, from 31 million in 1998 to more than 183 million in
2003. With the growth in e-commerce activities, there is also increasing
demand for package shipments relating to online commerce transactions in the
business-to-consumer and business-to-business markets. We believe that
technology will play an increasingly important role in creating efficiencies
in package shipments. In addition, we believe that a major goal of package
carriers is to capture shipping information electronically in order to reduce
costs, increase accuracy, and speed tracking and billing. The Internet
provides an ideal medium through which this information can be distributed and
managed.
The US Postal Service Certification Process for Our Internet Postage Service
All Internet postage products must complete extensive US Postal Service
testing and evaluation in the areas of operational reliability, financial
integrity and security to become certified for commercial distribution. Each
additional implementation of a particular product or function requires
additional evaluation and approval by the US Postal Service prior to
commercial delivery.
The US Postal Service certification process for Internet postage is a
standardized, ten-stage process concluding with commercial release. Each stage
requires US Postal Service review and authorization to proceed to the next
stage of the certification process. The US Postal Service has no published
timeline or estimated time to complete each of the ten stages of the program.
The most significant stage is the ninth stage, which requires a vendor to
complete three phases of beta testing.
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In March 1997, we submitted our letter of intent to join the Information
Based Indicia Program. From March 1997 through August 1998, we progressed
through the first eight stages of the US Postal Service certification process.
On August 24, 1998, the US Postal Service announced that we were approved for
beta testing and our Internet Postage service became the first software-based
postage solution approved by the US Postal Service for market testing. Between
August 24, 1998 and August 9, 1999, we successfully completed the three-phase
beta testing required by the US Postal Service's certification process. On
August 9, 1999, we became the first software-based Internet postage solution
approved for commercial release by the US Postal Service. On October 22, 1999,
we launched our service. As of February 29, 2000, our customer base consisted
of over 150,000 users who had downloaded our software and registered for our
service.
Our Strategic Business Units
In March 2000, we announced that we had organized into three specialized
strategic business units (SBUs) focused on the enterprise, e-commerce and
small business market segments of our core mailing and shipping services.
Enterprise Strategic Business Unit
The Stamps.com Enterprise SBU will offer companies with more than 1,000
employees an Internet-based, multi-carrier mailing and shipping service. The
Stamps.com 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. Employees can prepare packages for shipments, comparing rates and
services among carriers that include the US Postal Service, UPS, FedEx,
Airborne Express and Yellow Freight. Operations management can use centralized
administration tools to define shipping procedures, approve carriers and
rates, and set business rules to control shipping costs and quality. The
service is based on the application service provider (ASP) deployment model
and recurring, transaction-based revenue streams.
E-Commerce Services Strategic Business Unit
The Stamps.com E-commerce Services SBU addresses the growing shipping needs
of e-tailers and other online businesses, including auctioneers. Through
partnerships with premier auction Web sites, Stamps.com will provide mailing
and shipping services available at the conclusion of any transaction on the
Internet. These services will be embedded in auction Web sites, e-tailer
"shopping carts" and other points-of-purchase on various Web sites, enabling
buyers and sellers to select precise pricing and delivery terms from among a
variety of carrier choices.
Small Business Strategic Business Unit
Stamps.com's traditional business, serving small businesses and consumers
with our Internet Postage service, is now our Small Business SBU. This unit
will continue to offer an Internet-based solution for printing US Postal
Service-approved postage and expanded offerings of multi-carrier document and
package shipping to small businesses and home offices. Stamps.com's Internet
Postage service targets small businesses in need of a more efficient and cost-
effective way to send letters, documents, parcels and packages.
Our Strategic Distribution Partners
Our objective is to achieve significant market penetration through
relationships with strategic partners in each of the following categories:
. Web portals, content sites and Internet service providers, including
AOL;
. independent software vendors, including Intuit and Microsoft;
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. PC, printer and other original equipment manufacturers, including IBM
and Hewlett-Packard;
. shipping services providers, including Mail Boxes, Etc., UPS, FedEx,
Airborne Express and Yellow Freight; and
. office/postal supplies vendors, including 3M and Office Depot.
We believe we will benefit from these relationships by achieving positive
brand association and a cost-effective means of customer acquisition. We
believe our partners can utilize their relationships with us to derive
additional revenue opportunities and provide more value-added services to
their customers. Our current strategic partners include:
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3M ClickAction Galileo International Jfax Oxygen
ADP CompUSA Half.com Kinkos Register.com
Airborne Express Concentric Networks Hewlett-Packard Lotus Seiko Instruments
AllBusiness.com Corel HotOffice Mail Boxes, Etc. UPS
America Online DayTimer IBM Mattel USOPNet.com
Andale Deluxe Financial Services iGo.com Merrill Lynch US West
AnyDay.com Dymo/CoStar Inc.com Microsoft Westvaco
AuctionRover eBay Insight Mindspring Yellow Freight
AuctionWatch Efax Interland NetLedger ZDNet
Bank Of America ELetter Intuit Office.com
BigStep FedEx Janna Office Depot.com
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Our Marketing and Sales
We intend to establish a strong brand name by allocating significant
resources to our marketing and distribution efforts. We distribute our
Internet Postage software through our Web site and distribution partners. In
addition, we will rely on traditional direct marketing tactics and several
other channels to achieve distribution and branding of our mailing and
shipping services, including:
Web Sites. We intend to work with high traffic Web sites including portals,
commerce and content sites, and other highly visible Internet sites. This
channel will provide the opportunity for users to download our software and
access our Internet Postage service or to access our Web-based shipping
services.
Affiliate Programs. We intend to utilize the traffic and customers of other
online sites by offering revenue-sharing opportunities to affiliates that
provide a link on their Web site to download our Internet Postage software and
access our shipping and other related services. We can leverage our
affiliates' abilities to offer new, value-added services and increase repeat
visits to their site.
Preloaded/Bundled Hardware and Services. We intend to take advantage of
relationships with vendors of hardware products, including computers, printers
and label makers, and with Internet service providers to offer our software
and other services to buyers of their products. We can leverage our resellers'
ability to promote new features on commodity, non-differentiated products and
services.
Embedded Software. We intend to seek further partnerships with software
publishing companies. Software packages that would benefit from our current
services would include word processing, contact and address management,
accounting, billing and retail software.
Postal and Packaging Supplies. We will target companies in the postal and
packaging supplies industry, including manufacturers of envelopes, labels,
checks, forms, digital scales and postage meters.
Financial Services. We will seek distribution and co-branding opportunities
with banks and brokerages by incorporating our mailing and shipping services
into online banking and investing offered by financial service providers.
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Direct Sales. We will target corporate enterprise customers and specific
large industries or vertical markets where distributed use of the mail and
shipping services is prevalent, including insurance, travel and hospitality,
financial services, law firms or other businesses where branch offices or
agent organizational structures are common. We believe that significant
benefits in the form of usability, convenience and cost savings to large
corporate users may result from integrating our mailing and shipping services
into the everyday work flow.
Customer Retention Programs. We believe we can increase customer retention
by offering a superior level of customer support and continually enhancing our
service features to fully support all of our customers' mailing and shipping
needs. We will continue to conduct both informal and formal market research to
gain insight into what service enhancements are most important to both our
current and prospective customers. In addition, we will build loyalty by
offering exclusive savings to our customers through our existing partnerships
and seeking online partnerships with points-based usage programs that reward
our high revenue customers.
Our Competition
The market for Internet postage products and services is new and intensely
competitive. The US Postal Service approved our software-based Internet
postage service and E-Stamp Corporation's hardware-based Internet postage
service for commercial release on August 9, 1999. At present, two other
Internet postage vendors have hardware and software products available for
beta testing.
The following is a summary of our competitors in the Information Based
Indicia Program, including the status of each competitor's product in the US
Postal Service certification process:
E-Stamp Corporation. E-Stamp is a developer and marketer of a hardware-
based solution enabling users to generate postage transactions from their
existing personal computers and printers. E-Stamp was the first company to
gain US Postal Service approval for market testing of a hardware storage
device identified as the Postal Security Device. The US Postal Service
approved E- Stamp's PC Postal Security Device product for commercial release
on August 9, 1999. On February 15, 2000, E-Stamp announced that it received
approval from the US Postal Service to begin testing of a Web-based postage
product.
Neopost Industrie. Neopost is a large French postage company with a US
presence in the traditional postage meter industry. Similar to E-Stamp,
Neopost has developed an online postage product that requires a special
purpose hardware device, and announced their approval for Phase I beta testing
in September 1998. On March 29, 1999, Neopost announced that their software-
based postage product was approved for Phase I beta testing. Both of these
products entered Phase II beta testing in December 1999. Finally, Neopost has
commercially available a specialty metering device that can be attached to a
user's PC and allows a user to download postage to the device from the
Internet. This specialty metering device is not regulated by the Information
Based Indicia Program because it does not allow for the printing of postage
from standard inkjet or laser printers.
Pitney Bowes, Inc. Pitney Bowes is the current market leader in the
traditional postage meter business and had approximately $4.4 billion in
revenues in 1999. Pitney Bowes has developed a product similar to E-Stamp
which requires the use of a specialized hardware device for postage
transactions. In addition, Pitney Bowes has developed a software-based postage
product. On December 15, 1999, Pitney Bowes announced that it had received
approval from the US Postal Service to proceed to the third and final phase of
beta testing for both its hardware and software products. Pitney Bowes is
expected to commercially launch its software-based product as soon as the
first quarter of 2000.
In addition to competing with Internet postage vendors for market share of
Internet postage sales, we will also compete with traditional postage methods
including stamps and metered mail. While we believe our Internet Postage
service provides benefits over traditional postage methods, we cannot be
certain that Internet postage will be adopted by postage consumers on a
commercial scale, if at all. These customers may continue to use traditional
means to purchase postage, including purchasing postage from their local post
office. Any failure by us or other Internet postage vendors to displace
traditional postage methods would seriously impact our ability to compete with
providers of traditional postage.
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We may also face competition from hardware-based products. Although, we
believe our software-based solution is easier to use than hardware-based
products, hardware-based products have some advantages. For example, our
service requires a user to connect to the Internet each time the user prints
postage, while the hardware-based solution allows users to download postage
onto a storage device that is connected to the user's computer. If users of
hardware-based products do not transition to a software-based solution, we
could face continuing competition from this market.
As a result of the iShip.com acquisition in March 2000, we also compete
with companies that provide shipping solutions to businesses. Customers may
continue using the direct services of the US Postal Service, UPS, FedEx and
other major shippers, instead of adopting our online service. Alternatively,
potential competitors with greater resources than us, like Pitney Bowes, may
develop more successful Internet solutions. In addition, companies including
TanData Corporation, GoShip.com, BITS, Inc./Intershipper.net, Kewill Systems,
PackageNet and Virtan, Inc./SmartShip are competing in shipping services. We
also face a significant risk that large shipping companies will collaborate in
the development and operation of an online shipping system that could make our
Web-based shipping service obsolete.
Overall, we may not be able to maintain a competitive position against
current or future competitors as they enter the markets in which we compete.
This is particularly true with respect to competitors with greater financial,
marketing, service, support, technical, intellectual property and other
resources than us. Stamps.com's failure to maintain a competitive position
within the market could seriously harm our business, financial condition and
results of operations. For further discussion of the competitive risks and
factors to be considering in making an investment in our common stock, 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."
Our Internet Postage Service Technology
Our Internet Postage service is comprised of the following key components:
System Architecture. Our servers are located in a high-security, off-site
data center and operate with internally developed security software. These
servers create the data used to generate information-based indicia. These
servers also process postage purchases using secure technology that meets US
Postal Service security requirements. Our service currently uses a Windows-
based client application, which supports a variety of label and envelope
options and a wide range of printers. In addition, our application employs an
internally developed user authentication mechanism for additional security.
Transaction Processing. Our transaction processing servers are a
combination of secure, commercially available and internally-developed
technologies that are designed to provide secure and reliable transactions.
Our system implements hardware to meet government standards for security and
data integrity. The performance and scalability of our Internet Postage system
is designed to allow many users to process postage transactions through our
Web site.
Database Processing. Our database servers are designed and built with
industry-leading database technologies and can be built to scale incrementally
as needed.
Our Web-Based Shipping Services Technology
Our shipping services technology is comprised of the following key
components:
System Architecture. Our service is offered to customers via Internet
browsers, and its server environment utilizes Microsoft Windows NT. The
service is designed on a three-tier architecture comprised of customer,
transactional and database technology layers.
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Transaction Processing. Our transaction processing servers include a
combination of secure technologies that are designed to provide secure and
reliable transactions. The performance and scalability of our Internet
shipping system allow many users to process shipping transactions through our
Web site. Our production servers are located in a high security, off-site data
center, and our development and test data centers are located in our Bellevue,
Washington facilities, allowing us to test releases in stages.
Database Processing. Our database servers are designed and built with
industry leading database technologies and can be built to scale incrementally
as needed.
Our Intellectual Property
We rely on a combination of patent, trade secret, copyright and trademark
laws and contractual restrictions to establish and to protect our intellectual
property rights in products, services, know-how and information. We have three
issued US patents and have filed 26 patent applications in the United States,
and one international patent application. We have also applied to register a
number of trademarks and service marks. We plan to apply for other patents in
the future.
Despite efforts to protect our intellectual property rights, we face
substantial uncertainty regarding the impact that other parties' intellectual
property positions will have on our markets. In particular, Pitney Bowes has
sent formal comments to the US Postal Service asserting that intellectual
property of Pitney Bowes related to postage metering and systems would be
infringed by products meeting the requirements of the Information Based
Indicia Program's specifications. Furthermore, in June 1999, Pitney Bowes
filed two separate lawsuits in the United States District Court for the
District of Delaware against both us and E-Stamp alleging infringement of
Pitney Bowes patents. For a discussion of claims by Pitney Bowes and risks
associated with intellectual property, please refer to "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" and "Legal Proceedings."
Employees
As of December 31, 1999, we had 216 full-time employees, of which 58 were
employed in research and development, 94 were employed in sales and marketing
and 29 were employed in administrative positions. None of our employees are
represented by a labor union, and we consider our employee relations to be
good.
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Risk Factors
You should carefully consider the following risks and the other information
in this Report and our other filings with the SEC before you decide to invest
in our company or to maintain or increase your investment. The risks and
uncertainties described below are not the only ones facing Stamps.com.
Additional risks and uncertainties may also adversely impact and impair our
business. If any of the following risks actually occur, our business, results
of operations or financial condition would likely suffer. In such case, the
trading price of our common stock could decline, and you may lose all or part
of your investment.
This Report contains forward-looking statements based on the current
expectations, assumptions, estimates and projections about Stamps.com and the
Internet industry. These forward-looking statements involve risks and
uncertainties. Our actual results could differ materially from those discussed
in these forward-looking statements as a result of certain factors, as more
fully described in this section and elsewhere in this Report. Stamps.com does
not undertake to update publicly any forward-looking statements for any
reason, even if new information becomes available or other events occur in the
future.
We face risks associated with our operations
If we do not effectively manage the commercial release of our Internet mailing
and shipping services, our business will be harmed.
On August 9, 1999, our Internet Postage service was approved by the US
Postal Service for commercial release. On October 22, 1999, we began to offer
our Internet Postage service commercially. Our Internet shipping services have
not yet been introduced on a commercial scale. We face numerous risks
coincident with the introduction of our services. For example, our mailing and
shipping services have not yet been subjected to the demands of widespread
commercial use. We cannot be sure that our services will successfully process
large numbers of user transactions. If we experience problems with the
scalability or functionality of our services, our full commercial deployment
could be delayed and our results of operations would be adversely impacted.
The continued commercial roll-out of our Internet Postage service is
dependent upon our service continuing to meet US Postal Service performance
specifications and regulations. For example, our service must continue to
perform according to US Postal Service specifications in order to receive
additional license certificates necessary to add customers. Meanwhile, our
Internet mailing and shipping services must meet the commercial demands of our
customers, which are primarily expected to range from small businesses to
large enterprises. We are currently conducting a national customer
registration campaign, particularly for our Internet Postage service; however,
we have very limited experience conducting marketing campaigns, and we may
fail to generate significant interest. Additionally, we have limited
experience selling our services to enterprise customers and cannot predict the
length of enterprise sales cycles or implementation times for our services. On
the other hand, if we experience extensive interest in our services, we may
fail to meet the expectations of customers due to limited experience in
operating our services and the strains this demand will place on our Web site,
network infrastructure and systems.
Our ability to obtain and retain customers depends on the attractiveness of
our service to our customers and on our customer service capabilities. If we
are unable at any time to address customer service issues adequately or to
provide a satisfactory customer experience for current or potential customers,
our business and reputation may be harmed.
Success by Pitney Bowes in its suit against us alleging patent infringement
could prevent us from offering our Internet Postage service and severely harm
our business or cause it to fail.
On June 16, 1999, Pitney Bowes filed a patent infringement lawsuit against
us. The suit alleges that we are infringing two patents held by Pitney Bowes
related to postage application systems and electronic indicia. The suit seeks
treble damages, a preliminary and permanent injunction from further alleged
infringement, attorneys' fees and other unspecified damages. We answered the
complaint on August 6, 1999, denying the allegations of patent infringement
and asserting a number of affirmative defenses. Pitney Bowes filed a similar
complaint in early June 1999 against one of our competitors, E-Stamp
Corporation, alleging infringement of seven Pitney Bowes patents.
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The outcome of the litigation that Pitney Bowes has brought against us is
uncertain. Therefore, we can give no assurance that Pitney Bowes will not
prevail in its suit against us.
If Pitney Bowes prevails in its suit against us, we may be prevented from
selling postage on the Internet. Alternatively, the Pitney Bowes suit could
result in limitations on how we implement our service, delays and costs
associated with redesigning our service and payments of license fees and other
payments. Thus, if Pitney Bowes prevails in its suit against us, our business
could be severely harmed or fail.
In addition, the litigation could result in significant expenses and
diversion of management time and other resources.
On August 17, 1998, Pitney Bowes issued a press release stating that it
holds dozens of US patents related to computer-based postage metering and that
it intended to engage in discussions with other marketers of computer-based
postal products to license Pitney Bowes technology. Prior to Pitney Bowes
filing a lawsuit against us, we were in license discussions with Pitney Bowes.
We intend to continue these discussions; however, we cannot predict whether
these discussions will continue, the outcome of these discussions or the
impact of Pitney Bowes' intellectual property claims on our business or the
Internet postage market. If Pitney Bowes is able to prevail in its claims
against us and if we do not enter into a license relationship with Pitney
Bowes, our business could be impacted severely or fail. In addition, as
described above, Pitney Bowes could obtain monetary and injunctive relief
against us.
The Internet postage and shipping markets are new and uncertain and our
business may not develop.
The markets for Internet postage and shipping have not developed, and their
development is subject to substantial uncertainty. We cannot assure you that
these markets will develop.
We depend heavily on the commercial acceptance of our Internet Postage
service. We cannot predict if our target customers will choose the Internet as
a means of purchasing postage, or if customers will be willing to pay a fee to
use our service, or if potential users will select our system over our
competitors. Our target customers often have alternatives to the US Postal
Service and shipping services, including online invoicing, bill payment and
financial transactions. The General Accounting Office, in a report issued on
October 21, 1999, stated that competition from these alternatives could lead
to substantial declines in the US Postal Service's First Class Mail volume in
the next decade. These trends could limit the market opportunity for our
Internet Postage service. In addition, the US Postal Service could suspend,
terminate or offer services which compete against Internet postage, any of
which could stop or negatively impact the commercial adoption of our Internet
Postage service.
In addition, our acquisition of iShip.com in March 2000 represents our
entry into the market for online shipping services. There can be no assurance
that we will succeed in this business. The market for online shipping services
is new and uncertain and may not develop. In addition, we have not released
our shipping services on a commercial scale and we currently have no customers
and no revenues attributable to our online shipping services. Our ability to
obtain and retain customers will depend on the attractiveness of our service
to our customers and on our customer service capabilities. If we experience
significant system, customer service, security or other problems once we begin
commercial operation of our shipping services, customers may stop using or
refuse to try these and other services we offer. In addition, shippers may
terminate or limit their relationships with us. The occurrence of these
problems could have a material adverse effect on our business, financial
condition or results of operations.
The integration of our company and iShip.com will present significant
challenges. We may not be able to realize the benefits we anticipate from the
acquisition of iShip.com.
As a result of our acquisition of iShip.com in March 2000, we face
significant challenges in integrating organizations, operations, technology,
product lines and services in a timely and efficient manner and in retaining
key personnel and strategic partnerships of both companies. Cost synergies,
revenue growth, technological development and other synergistic benefits may
not materialize. Diversion of management attention, loss of management-level
and other highly qualified employees, and an inability to integrate
management, systems and operations of these two companies may all result from
the acquisition. The failure to integrate our company and
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iShip.com successfully and to manage the challenges presented by the
integration process may result in our company and iShip.com not achieving the
anticipated potential benefits of the acquisition. Delays encountered in the
transition process could have a material adverse effect upon the combined
company.
Further, the physical expansion in facilities that have occurred as a
result of this acquisition may result in disruptions that seriously impair our
business. In particular, we now have operations in multiple facilities in
geographically distant areas. We are not experienced in managing facilities or
operations in geographically distant areas.
We have a history of losses and expect to incur losses in the future, and we
may never achieve profitability.
As of December 31, 1999, we had not generated any significant revenues and
had a deficit accumulated during the development stage of $60.7 million. Our
lack of revenues can be attributed primarily to the fact that our Internet
Postage service had not been released commercially until October 22, 1999. Due
to the need to establish our brand and service, we expect to incur increasing
sales and marketing, research and development, and administrative expenses and
therefore could continue to incur net losses for at least the next several
years or longer. As a result, we will need to generate significant revenues to
achieve and maintain profitability.
Since inception, iShip.com did not generate any significant revenues and
had an accumulated deficit of $10.6 million as of December 31, 1999. As a
result of the iShip.com acquisition, we expect that our losses will increase
even more significantly because of additional costs and expenses related to an
increase in the number of employees; an increase in sales and marketing
activities; additional facilities and infrastructure; and assimilation of
operations and personnel.
In connection with the iShip.com acquisition, we will record a significant
amount of intangibles, the amortization of which will significantly and
adversely affect our operating results. To the extent we do not generate
sufficient cash flow to recover the amount of the investment recorded, the
investment may be considered impaired and could be subject to an immediate
write-down of up to the full amount of the investment. In this event, our net
loss in any given period could be greater than anticipated and the market
price of our stock could decline. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Our ability to generate gross margins generally assumes that if a market
for our services develops, we must generate significant revenues from a large
base of active customers. We currently charge our customers a fee to use our
Internet Postage service. We have yet to determine how customers will be
charged for our Internet shipping services. In order to attract customers, we
may run special promotions and offer discounts on fees, postage and supplies.
However, given the lack of an established or proven commercial market for our
services, we cannot be sure that customers will be receptive to our fee
structures. Even if we are able to establish a sizeable base of users, we
still may not generate sufficient gross margins to become profitable. In
addition, our ability to generate revenues or achieve profitability could be
adversely affected by special promotions or changes to our pricing plans. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
If we cannot effectively manage our growth, our ability to provide services
will suffer.
Our reputation and ability to attract, serve and retain our customers
depend upon the reliable performance of our Web site, network infrastructure
and systems. We have a limited basis upon which to evaluate the capability of
our systems to handle controlled or full commercial availability of our
Internet Postage service or our online shipping services. We have recently
expanded our operations significantly, and further expansion will be required
to address the anticipated growth in our user base and market opportunities.
To manage the expected growth of operations and personnel, we will need to
improve existing and implement new systems, procedures and controls. In
addition, we will need to expand, train and manage an increasing employee
base. We will also need to expand our finance, administrative and operations
staff. As a result of the iShip.com acquisition, we will need to assimilate
substantially all of iShip.com's operations into our operations.
We may not be able to manage our growth effectively. Our current expansion
has and will continue to place a significant strain on our managerial,
operational and financial resources. Our current and planned personnel,
systems, procedures and controls may be inadequate to support our future
operations. If we are unable to manage
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our growth effectively or experience disruptions during our expansion, our
business will suffer and our financial condition and results of operations
will be seriously affected.
If we are unable to maintain and develop our strategic relationships and
distribution arrangements, our Internet mailing and shipping services may not
achieve commercial acceptance.
We have established strategic relationships with a number of third parties.
Our strategic relationships generally involve the promotion and distribution
of our service through our partners' products, services and Web sites.
Additionally, some of our relationships provide for the inclusion of our logo
or promotional offers for our service in packaging and marketing materials
utilized by our partners. In return for promoting our service, our partners
may receive revenue-sharing opportunities. In order to achieve wide
distribution of our service, we believe we must establish additional strategic
relationships to market our service effectively. If one or more of our
partners terminates or limits its relationship with us, our business could be
severely harmed or fail. We have limited experience in establishing and
maintaining strategic relationships and we may fail in our efforts to
establish and maintain these relationships.
Our current strategic relationships, including those established by
iShip.com, have not yet resulted in significant revenues, primarily because we
have only recently commercially released our Internet Postage service and our
online shipping services have yet to be released on a commercial scale. As a
result, our strategic partners may not view their relationships with us as
significant or vital to their businesses and consequently, may not perform
according to our expectations. We have little ability to control the efforts
of our strategic partners and, even if we are successful in establishing
strategic relationships, these relationships may not be successful.
We face risks typical of early stage companies and of new and rapidly changing
markets.
You should consider our prospects in light of the risks and difficulties
frequently encountered by early stage companies and those in new and rapidly
evolving markets. These risks include, among other things, our (a) ability to
meet and maintain government specifications for our Internet Postage service,
specifically US Postal Service requirements; (b) complete dependence on
Internet mailing and shipping services that currently do not have broad market
acceptance; (c) need to expand our sales and support organizations; (d)
ability to establish and promote our brand name; (e) ability to expand our
operations to meet the commercial demand for our services; (f) development of
and reliance on strategic and distribution relationships; (g) ability to
prevent and respond quickly to service interruptions; (h) ability to minimize
fraud and other security risks; and (i) ability to compete with companies with
greater capital resources and brand awareness.
If we do not achieve the brand recognition necessary to succeed in the
Internet mailing and shipping markets, our business will suffer.
We must quickly build our Stamps.com brand to gain market acceptance for
our services. We believe it is imperative to our long term success that we
obtain significant market share for our services before other competitors
enter the Internet postage and shipping markets. We must make substantial
expenditures on product development, strategic relationships and marketing
initiatives in an effort to establish our brand awareness. In addition, we
must devote significant resources to ensure that our users are provided with a
high quality online experience supported by a high level of customer service.
We cannot be certain that we will have sufficient resources to build our brand
and realize commercial acceptance of our services. If we fail to gain market
acceptance for our services, our business will suffer dramatically or may
fail.
System and online security failures could harm our business and operating
results.
Our services depend on the efficient and uninterrupted operation of our
computer and communications hardware systems. In addition, we must provide a
high level of security for the transactions we execute. We rely
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on internally-developed and third-party technology to provide secure
transmission of postage and other confidential information. Any breach of
these security measures would severely impact our business and reputation and
would likely result in the loss of customers. Furthermore, if we are unable to
provide adequate security, the US Postal Service could prohibit us from
selling postage over the Internet.
Our systems and operations are vulnerable to damage or interruption from a
number of sources, including fire, flood, power loss, telecommunications
failure, break-ins, earthquakes and similar events. We have entered into an
Internet hosting agreement with Exodus Communications, Inc. to maintain our
Internet postage servers at Exodus' data center in Southern California. Our
operations depend on Exodus' ability to protect its and our systems in its
data center against damage or interruption. Exodus does not guarantee that our
Internet access will be uninterrupted, error-free or secure. Our servers are
also vulnerable to computer viruses, physical, electrical or electronic break-
ins and similar disruptions. We have experienced minor system interruptions in
the past and may experience them again in the future. Any substantial
interruptions in the future could result in the loss of data and could
completely impair our ability to generate revenues from our service. We do
have a business interruption plan that we continue to refine and update;
however, we do not presently have a full disaster recovery plan in effect to
cover loss of facilities and equipment. In addition, we do not have a "fail-
over" site that mirrors our infrastructure to allow us to operate from a
second location. We have business interruption insurance; however, we cannot
be certain that our coverage will be sufficient to compensate us for losses
that may occur as a result of business interruptions.
A significant barrier to electronic commerce and communications is the
secure transmission of confidential information over public networks. Anyone
who is able to circumvent our security measures could misappropriate
confidential information or cause interruptions in our operations. We may be
required to expend significant capital and other resources to protect against
potential security breaches or to alleviate problems caused by any breach. We
rely on specialized technology, both within our own infrastructure and that
provided by Exodus, to provide the security necessary for secure transmission
of postage and other confidential information. Advances in computer
capabilities, new discoveries in security technology, or other events or
developments may result in a compromise or breach of the algorithms we use to
protect customer transaction data. Should someone circumvent our security
measures, our reputation, business, financial condition and results of
operations could be seriously harmed. Security breaches could also expose us
to a risk of loss or litigation and possible liability for failing to secure
confidential customer information. As a result, we may be required to expend a
significant amount of financial and other resources to protect against
security breaches or to alleviate any problems that they may cause.
If we do not expand our product and service offerings, our business may not
grow.
We may establish subsidiaries, enter into joint ventures or pursue the
acquisition of new or complementary businesses, products or technologies in an
effort to enter into new business areas, diversify our sources of revenue and
expand our product and service offerings outside the Internet postage market.
We have no commitments or agreements and are not currently engaged in
discussions for any material acquisitions or investments. We continue to
evaluate incremental revenue opportunities and derivative applications of our
technology and may pursue and develop those opportunities with strategic
partners and investors. To the extent we pursue new or complementary
businesses, we may not be able to expand our service offerings and related
operations in a cost-effective or timely manner. We may experience increased
costs, delays and diversions of management's attention when integrating any
new businesses or service. We may lose key personnel from our operations or
those of any acquired business. Furthermore, any new business or service we
launch that is not favorably received by users could damage our reputation and
brand name in the Internet postage and shipping or other markets that we
enter. We also cannot be certain that we will generate satisfactory revenues
from any expanded services or products to offset related costs. Any expansion
of our operations would also require significant additional expenses, and
these efforts may strain our management, financial and operational resources.
Additionally, future acquisitions may also result in potentially dilutive
issuances of equity securities, the incurrence of additional debt, the
assumption of known and unknown liabilities, and the amortization of expenses
related to goodwill and other intangible
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assets, all of which could have a material adverse effect on our business,
financial condition and operating results. New issuances of securities may
also have rights, preferences and privileges senior to those of our common
stock.
Fluctuations in our operating results could cause our stock price to fall.
Prior to our commercial launch on October 22, 1999, we had not generated
any revenues from our operations. Accordingly, we have a limited basis upon
which to predict future operating results. We expect that our revenues,
margins and operating results will fluctuate significantly due to a variety of
factors, many of which are outside of our control. These factors include: (a)
the success of the commercial release of our Internet Postage and online
shipping services; (b) the costs of defending ourselves in the Pitney Bowes
litigation or against other intellectual property claims; (c) the costs of our
marketing programs to establish and promote the Stamps.com brand name; (d) the
demand for our Internet Postage and shipping services; (e) our ability to
develop and maintain strategic distribution relationships; (f) the number,
timing and significance of new products or services introduced by both us and
our competitors; (g) our ability to develop, market and introduce new and
enhanced services on a timely basis; (h) the level of service and price
competition; (i) the increases in our operating expenses as we expand
operations; and (j) general economic factors.
Our cost of revenues includes costs for systems operations, customer
service, Internet connection and security services; all of these costs will
fluctuate depending upon the demand for our services. In addition, a
substantial portion of our operating expenses is related to personnel costs,
marketing programs and overhead, which cannot be adjusted quickly and are
therefore relatively fixed in the short term. Our operating expense levels are
based, in significant part, on our expectations of future revenues. If our
expenses precede increased revenues, both gross margins and results of
operations would be materially and adversely affected.
Due to the foregoing factors and the other risks discussed in this annual
report, you should not rely on period-to-period comparisons of our results of
operations as an indication of future performance. It is possible that in some
future periods our results of operations will be below the expectations of
public market analysts and investors. In this event, the market price of our
common stock is likely to decline.
We rely on a relatively new management team and need additional personnel to
grow our business.
Our management team is relatively new. We hired our Chairman and Chief
Executive Officer in October 1998, our President and Chief Operating Officer
in October 1999 and our Chief Financial Officer in September 1998. We have
also recently hired or intend to hire senior managers for our strategic
business units. There can be no assurance that we will successfully assimilate
our recently hired managers or that we can successfully locate, hire,
assimilate and retain qualified key management personnel. Our business is
largely dependent on the personal efforts and abilities of our senior
management, including our Chairman and Chief Executive Officer, our President
and Chief Operating Officer, and our Chief Financial Officer. Any of our
officers or employees can terminate his or her employment relationship at any
time. The loss of these key employees or our inability to attract or retain
other qualified employees could have a material adverse effect on our results
of operations and financial condition.
Our future success depends on our ability to attract, retain and motivate
highly skilled technical, managerial, marketing and customer service
personnel. Also, our success will also depend on a successful integration of
iShip.com's management with our senior management team. We plan to hire
additional personnel in all areas of our business. Competition for qualified
personnel is intense, particularly in the Internet and high technology
industries. As a result, we may be unable to successfully attract, assimilate
or retain qualified personnel. Further, we may be unable to retain the
employees we currently employ or attract additional technical personnel. The
failure to retain and attract the necessary personnel could seriously harm our
business, financial condition and results of operations.
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Third party assertions of violations of their intellectual property rights
could adversely affect our business.
In addition to the Pitney Bowes claim described above, as is customary with
technology companies, we may receive or become aware of correspondence
claiming potential infringement of other parties' intellectual property
rights. We could incur significant costs and diversion of management time and
resources to defend claims against us regardless of their validity. We may not
have adequate resources to defend against these claims and any associated
costs and distractions could have a material adverse effect on our business,
financial condition and results of operations. As an alternative to
litigation, we may seek licenses for other parties' intellectual property
rights. We may not be successful in obtaining all of the necessary licenses on
commercially reasonable terms, if at all. Any loss resulting from intellectual
property litigation could severely limit our operations, cause us to pay
license fees, or prevent us from doing business.
A failure to protect our own intellectual property could harm our competitive
position.
We rely on a combination of patent, trade secret, copyright and trademark
laws and contractual restrictions to establish and protect our rights in our
products, services, know-how and information. We have three issued US patents
and have filed 26 patent applications in the United States, and one
international patent application. We have also applied to register a number of
trademarks and service marks. We plan to apply for other patents, trademarks
and service marks in the future. We may not receive patents for any of our
patent applications. Even if patents are issued to us, claims issued in these
patents may not protect our technology. In addition, any of our patents,
trademarks or service marks might be held invalid or unenforceable by a court.
If our patents fail to protect our technology or our trademarks and service
marks are successfully challenged, our competitive position could be harmed.
Even if our patents are upheld or are not challenged, third parties may
develop alternative technologies or products without infringing our patents.
We generally enter into confidentiality agreements with our employees,
consultants and other third parties to control and limit access and disclosure
of our confidential information. These contractual arrangements or other steps
taken to protect our intellectual property may not prove to be sufficient to
prevent misappropriation of technology or deter independent third party
development of similar technologies. Additionally, the laws of foreign
countries may not protect our services or intellectual property rights to the
same extent as do the laws of the United States.
Our growth and operating results could be impaired if we are unable to meet
our future capital requirements.
We believe that our current cash balances will allow us to fund our
operations through fiscal year 2001. However, we may require substantial
working capital to fund our business and we may need to raise additional
capital. We cannot be certain that additional funds will be available on
satisfactory terms when needed, if at all. Our future capital needs depend on
many factors, including market acceptance of our postage and shipping
services; the level of promotion and advertising of our postage and shipping
services; the level of our development efforts; rate of customer acquisition
and retention of our postage and shipping services; and changes in technology.
The various elements of our business and growth strategies, including our
plans to support fully the commercial release of our service, our introduction
of new products and services and our investments in infrastructure will
require additional capital. If we are unable to raise additional necessary
capital in the future, we may be required to curtail our operations
significantly or obtain funding through the relinquishment of significant
technology or markets. Also, raising additional equity capital would have a
dilutive effect on existing stockholders.
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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.
We use and depend on third party equipment and software that may not be
Year 2000 compliant. If Year 2000 issues prevent our customers from accessing
the Internet or our Web site, processing transactions or using their credit
cards, our business will suffer. Any failure of our third party equipment,
software or services to operate properly could require us to incur
unanticipated expenses, which could seriously harm our business and operating
results.
We face risks associated with our market
If we do not respond effectively to technological change, our services could
become obsolete and our business will suffer.
The development of our services and other technology entails significant
technical and business risks. To remain competitive, we must continue to
enhance and improve the responsiveness, functionality and features of our
online operations. The Internet and the electronic commerce industry are
characterized by rapid technological change; changes in user and customer
requirements and preferences; frequent new product and service introductions
embodying new technologies; and the emergence of new industry standards and
practices.
The evolving nature of the Internet or the Internet postage and shipping
markets could render our existing technology and systems obsolete. Our success
will depend, in part, on our ability to license or acquire leading
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technologies useful in our business; enhance our existing services; develop
new services or features and technology that address the increasingly
sophisticated and varied needs of our current and prospective users; and
respond to technological advances and emerging industry and regulatory
standards and practices in a cost-effective and timely manner.
Future advances in technology may not be beneficial to, or compatible with,
our business. Furthermore, we may not be successful in using new technologies
effectively or adapting our technology and systems to user requirements or
emerging industry standards on a timely basis. Our ability to remain
technologically competitive may require substantial expenditures and lead
time. If we are unable to adapt in a timely manner to changing market
conditions or user requirements, our business, financial condition and results
of operations could be seriously harmed.
If we are unable to compete successfully, particularly against large,
traditional providers of postage products such as Pitney Bowes who enter the
online postage and shipping markets, our revenues and operating results will
suffer.
The market for Internet postage products and services is new and we expect
it to be intensely competitive. At present, E-Stamp has a hardware-based
product commercially available and has announced that it begun testing a Web-
based product through the Information Based Indicia Program. Pitney Bowes and
Neopost Industrie are each seeking certification for both hardware and
software products through the Information Based Indicia Program. Pitney Bowes
and Neopost each have hardware products available for beta testing and Pitney
Bowes is expected to commercially launch its software-based product as soon as
the first quarter of 2000. If any of our competitors, including Pitney Bowes,
provide the same or similar service as us, our operations could be adversely
impacted. See "--Success by Pitney Bowes in its suit against us alleging
patent infringement could prevent us from offering our Internet Postage
service and severely harm our business or cause it to fail."
Internet postage may not be adopted by customers. These customers may
continue to use traditional means to purchase postage, including purchasing
postage from their local post office. If Internet postage becomes a viable
market, we may not be able to establish or maintain a competitive position
against current or future competitors as they enter the market. Many of our
competitors have longer operating histories, larger customer bases, greater
brand recognition, greater financial, marketing, service, support, technical,
intellectual property and other resources than us. As a result, our
competitors may be able to devote greater resources to marketing and
promotional campaigns, adopt more aggressive pricing policies and devote
substantially more resources to Web site and systems development than us. This
increased competition may result in reduced operating margins, loss of market
share and a diminished brand. We may from time to time make pricing, service
or marketing decisions or acquisitions as a strategic response to changes in
the competitive environment. These actions could result in reduced margins and
seriously harm our business.
If the market for Internet postage develops, we could face competitive
pressures from new technologies or the expansion of existing technologies
approved for use by the US Postal Service. We may also face competition from a
number of indirect competitors that specialize in electronic commerce and
other companies with substantial customer bases in the computer and other
technical fields. Additionally, companies that control access to transactions
through a network or Web browsers could also promote our competitors or charge
us a substantial fee for inclusion. Our competitors may also be acquired by,
receive investments from or enter into other commercial relationships with
larger, better-established and better-financed companies as use of the
Internet and other online services increases. In addition, changes in postal
regulations could adversely affect our service and significantly impact our
competitive position. We may be unable to compete successfully against current
and future competitors, and the competitive pressures we face could seriously
harm our business.
As a result of the iShip.com acquisition in March 2000, we also compete
with companies that provide shipping solutions to businesses. Customers may
continue using the direct services of the US Postal Service, UPS and other
major shippers, instead of adopting our online service. Alternatively,
potential competitors with greater resources than iShip.com, like Pitney
Bowes, may develop more successful Internet solutions. In addition,
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companies including TanData Corporation, GoShip.com, BITS,
Inc./Intershipper.net, Kewill Systems, PackageNet and Virtan, Inc./SmartShip
are competing in shipping services. We also face a significant risk that large
shipping companies will collaborate in the development and operation of an
online shipping system that could make our Internet shipping services
obsolete.
The success of our business will depend on the continued growth of the
Internet and the acceptance by customers of the Internet as a means for
purchasing postage and shipping services.
Our success depends in part on widespread acceptance and use of the
Internet as a way to purchase postage and shipping services. This practice is
at an early stage of development, and market acceptance of Internet postage
and shipping services is uncertain. We cannot predict the extent to which
customers will be willing to shift their purchasing habits from traditional to
online postage and/or shipping services. To be successful, our customers must
accept and utilize electronic commerce to satisfy their product needs. Our
future revenues and profits, if any, substantially depend upon the acceptance
and use of the Internet and other online services as an effective medium of
commerce by our target users.
The Internet may not become a viable long-term commercial marketplace due
to potentially inadequate development of the necessary network infrastructure
or delayed development of enabling technologies and performance improvements.
The commercial acceptance and use of the Internet may not continue to develop
at historical rates. Our business, financial condition and results of
operations would be seriously harmed if use of the Internet and other online
services does not continue to increase or increases more slowly than expected;
the infrastructure for the Internet and other online services does not
effectively support future expansion of electronic commerce or our services;
concerns over security and privacy inhibit the growth of the Internet; or the
Internet and other online services do not become a viable commercial
marketplace.
US Postal Service regulation may cause disruptions or the discontinuance of
our business.
We are subject to continued US Postal Service scrutiny and other government
regulations. The US Postal Service could change its certification requirements
or specifications for Internet postage or revoke the approval of our service
at any time. Any changes in requirements or specifications for Internet
postage could adversely affect our pricing, cost of revenues, operating
results and margins by increasing the cost of providing our Internet postage
service. For example, the US Postal Service could decide to charge Internet
postage vendors fees for the enrollment of each unique customer of the
Internet postage product, which would be a cost that we would either absorb or
pass through to customers. The US Postal Service could also decide that
Internet postage should no longer be an approved postage service due to
security concerns or other issues. Our business would suffer dramatically if
we are unable to adapt our Internet Postage service to any new requirements or
specifications or if the US Postal Service were to discontinue Internet
postage as an approved postage method. Alternatively, the US Postal Service
could 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 "--If we are unable to
compete successfully, particularly against large, traditional providers of
postage products like Pitney Bowes who enter the online postage and shipping
markets, our revenues and operating results will suffer."
In addition, US Postal Service regulations may require that our personnel
with access to postal information or resources receive security clearance
prior to doing relevant work. We may experience delays or disruptions if our
personnel cannot receive necessary security clearances in a timely manner, if
at all. The regulations may limit our ability to hire qualified personnel. For
example, sensitive clearance may only be provided to US citizens or aliens who
are specifically approved to work on US Postal Service projects.
Our operating results could be impaired if we or the Internet become subject
to additional government regulation and legal uncertainties.
With the exception of US Postal Service and Department of Commerce
regulations, we are not currently subject to direct regulation by any domestic
or foreign governmental agency, other than regulations applicable to
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businesses generally, and laws or regulations directly applicable to
electronic commerce. However, due to the increasing popularity and use of the
Internet, it is possible that a number of laws and regulations may be adopted
with respect to the Internet, relating to user privacy; pricing; content;
copyrights; distribution; characteristics and quality of products and
services; and export controls.
The adoption of any additional laws or regulations may hinder the expansion
of the Internet. A decline in the growth of the Internet could decrease demand
for our products and services and increase our cost of doing business.
Moreover, the applicability of existing laws to the Internet is uncertain with
regard to many issues, including property ownership, export of specialized
technology, sales tax, libel and personal privacy. Our business, financial
condition and results of operations could be seriously harmed by any new
legislation or regulation. The application of laws and regulations from
jurisdictions whose laws do not currently apply to our business, or the
application of existing laws and regulations to the Internet and other online
services could also harm our business.
We offer our services in multiple states and plan to expand both
domestically and internationally. These jurisdictions may claim that we are
required to qualify to do business as a foreign corporation in each state or
foreign country. Our failure to qualify as a foreign corporation in a
jurisdiction where we are required to do so could subject us to taxes and
penalties. Other states and foreign countries may also attempt to regulate our
services or prosecute us for violations of their laws. Further, we might
unintentionally violate the laws of foreign jurisdictions and those laws may
be modified and new laws may be enacted in the future.
If we market our services internationally, government regulation could disrupt
our operations.
One element of our strategy is to provide services in international
markets. Our ability to provide our Internet Postage service in international
markets would likely be subject to rigorous governmental approval and
certification requirements similar to those imposed by the US Postal Service.
For example, our Internet Postage service cannot currently be used for
international mail because foreign postal authorities do not currently
recognize information-based indicia postage. If foreign postal authorities
accept postage generated by our service in the future, and if we obtain the
necessary foreign certification or approvals, we would be subject to ongoing
regulation by foreign governments and agencies. To date, efforts to create a
certification process in Europe and other foreign markets are in a preliminary
stage and these markets may not prove to be a viable opportunity for us. As a
result, we cannot predict when, or if, international markets will become a
viable source of revenues for a postage service similar to ours.
Our ability to provide service in international markets may also be
impacted by the export control laws of the United States. Our software
technology makes us subject to stronger export controls, and may prevent us
from being able to export our products and 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.
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<PAGE>
Additional shares held by existing stockholders may be sold into the public
market, which could cause our stock price to decline.
Public sales of substantial amounts of common stock purchased in private
financings prior to our initial public offering or upon the exercise of stock
options or warrants could adversely affect the prevailing market price of our
common stock. On December 22, 1999, upon the expiration of a lock-up entered
into in connection with our initial public offering, an additional 2.1 million
shares of our outstanding common stock were available for immediate sale. On
February 7, 2000, a lock-up entered into in connection with our follow-on
public offering expired for approximately 6.8 million shares of our
outstanding common stock and, on March 6, 2000, the follow-on offering lock-up
expired for all remaining shares subject to the lock-up. All of the shares
subject to the lock-up were available for immediate sale, subject to the
volume and other restrictions under Rule 144 of the Securities Act of 1933. Of
these shares, approximately 22.5 million held by investment funds may be
distributed by them from time to time to their investors. Upon distribution,
those shares will be available for immediate sale.
Sales of substantial amounts of common stock in the public market, or the
perception that these sales could occur, could adversely affect the prevailing
market price for our common stock and could impair our ability to raise
capital through a public offering of equity securities.
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ITEM 2. PROPERTIES
Our corporate headquarters are located in a 90,000 square foot facility in
Santa Monica, California under a lease expiring on May 31, 2004. We also have a
14,000 square foot facility in Irvine, California under a lease expiring in
March 2004. Finally, we assumed a lease in the iShip.com acquisition for
approximately 21,000 square feet in Bellevue, Washington expiring in August
2004 and have entered into a lease for 76,000 square feet in Bellevue,
Washington which expires in March 2009. We believe that our current facilities
and other facilities that will be available to us will be adequate to
accommodate our needs for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
On June 16, 1999, Pitney Bowes sued us for alleged patent infringement in
the United States District Court for the District of Delaware. The suit alleges
that we are infringing two patents held by Pitney Bowes related to postage
application systems and electronic indicia. The suit seeks treble damages, a
preliminary and permanent injunction from further alleged infringement,
attorneys' fees and other unspecified damages. We answered the complaint on
August 6, 1999, denying the allegations of patent infringement and asserting a
number of affirmative defenses. Pitney Bowes filed a similar complaint in early
June 1999 against one of our competitors, E-Stamp Corporation, alleging
infringement of seven Pitney Bowes patents.
The outcome of the litigation that Pitney Bowes has brought against us is
uncertain. Therefore, we can give no assurance that Pitney Bowes will not
prevail in its suit against us. See "Risk Factors--Success by Pitney Bowes in
its suit against us alleging patent infringement could prevent us from offering
our Internet Postage service and severely harm our business or cause it to
fail."
On December 29, 1999, three individual plaintiffs filed a suit against us
for alleged breach of oral contract, quantum meruit, fraud and negligent
representation in the California Superior Court for the County of Los Angeles.
The complaint was amended on January 28, 2000 to add Mohan Ananda, one of our
directors, as a defendant and to remove one of the plaintiffs from the suit.
The suit alleges that the plaintiffs were due cash consideration for securing a
board member and investors for Stamps.com. The complaint seeks $13.3 million
plus other unspecified compensatory damages, punitive and exemplary damages and
attorneys' fees and costs incurred. We answered the complaint on March 8, 2000,
denying the allegations and asserting a number of affirmative defenses. The
outcome of this litigation is uncertain and we can give no assurance that the
plaintiffs will not prevail.
We are not currently involved in any other material legal proceedings, nor
have we been involved in any such proceeding that has had or may have a
significant effect on our company. We are not aware of any other material legal
proceedings pending against us.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the quarter
ended December 31, 1999.
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PART II.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
Market Information
Our common stock has traded on The Nasdaq National Market under the symbol
"STMP" since June 25, 1999. Prior to that time, there was no public market for
our common stock. The following table sets forth the range of high and low
closing sales prices reported on The Nasdaq National Market for our common
stock for the periods indicated.
<TABLE>
<CAPTION>
High Low
------ ------
<S> <C> <C>
Fiscal 1999
Second Quarter (June 25, 1999 through June 30, 1999)........ $17.50 $13.25
Third Quarter............................................... $48.00 $22.25
Fourth Quarter.............................................. $88.25 $30.69
Fiscal 2000
First Quarter (through March 27, 2000)...................... $47.50 $24.50
</TABLE>
Recent Share Prices
The following table sets forth the closing sales prices per share of our
common stock on The Nasdaq National Market on (i) December 31, 1999 and (ii)
March 27, 2000.
<TABLE>
<CAPTION>
Closing
Price
-------
<S> <C>
December 31, 1999................................................ $41.625
March 27, 2000................................................... $25.50
</TABLE>
Holders
As of March 27, 2000, there were 287 stockholders of record and
approximately 48,468,899 shares of our common stock issued and outstanding.
Dividend Policy
We have never declared nor paid cash dividends on our capital stock. We
currently intend to retain all available funds for use in the operation and
expansion of our business and do not anticipate paying any cash dividends in
the foreseeable future.
Recent Sales of Unregistered Securities
We made the following unregistered sales of common stock during the quarter
ended December 31, 1999:
In October 1999, we entered into a common stock and warrant purchase
agreement with AOL for the purchase of up to $11 million of common stock by AOL
and the issuance of a warrant which allows AOL to purchase up to 50% of the
number of shares of common stock issued to AOL. The warrant also allows for the
purchase of additional shares of common stock (50% of the unexercised portion
of the warrant) in the event we are unable to cure a material breach of the
payment provisions of our marketing agreement with AOL.
On October 29, 1999, we issued 178,638 shares of our common stock under the
purchase agreement for $6.0 million in the aggregate, or $33.588 per share. On
December 10, 1999, concurrent with the closing of our follow-on public
offering, we issued an additional 148,862 shares of our common stock under the
purchase agreement for $5.0 million in the aggregate, or $33.588 per share. In
addition, AOL now holds a warrant to
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<PAGE>
purchase 163,750 shares, or 50% of the total of 327,500 shares of common stock
issued to AOL under the purchase agreement. The warrant may be exercised at any
time on or before October 29, 2002, unless the term of exercisability is
extended to compensate for any required regulatory filings.
The foregoing transaction did not involve a public offering, and we believe
that such transaction was exempt from the registration requirements of the
Securities Act by virtue of Section 4(2) thereof or Regulation D promulgated
thereunder. The recipient in such transaction represented its intention to
acquire the securities for investment only and not with a view to or for sale
in connection with any distribution thereof, and appropriate legends were
affixed to the share certificates and instruments issued in such transaction.
All recipients had adequate access, through its existing and continuing
relationships with us, to information about our company.
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<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Period from Period from
January 9, 1998 January 9, 1998
Year ended (inception) to (inception) to
December 31, December 31, December 31,
1999 1998 1999
------------ --------------- ---------------
(unaudited)
(in thousands, except per share data)
<S> <C> <C> <C>
Statement of Operations Data:
Revenues.......................... $ 358 $ -- $ 358
Loss from operations.............. (58,976) (4,180) (63,156)
Net loss.......................... (56,487) (4,196) (60,683)
Basic and diluted net loss per
share............................ $ (2.59) $ (0.85) $ (4.50)
Weighted average shares
outstanding used in basic and
diluted per-share calculation.... 21,824 4,956 13,474
</TABLE>
<TABLE>
<CAPTION>
As of
December 31,
----------------
1999 1998
-------- -------
(in thousands)
<S> <C> <C>
Balance Sheet Data:
Cash and short-term investments............................. $374,746 $ 3,470
Working capital............................................. 390,357 1,385
Total assets................................................ 410,442 4,425
Line of credit, capital lease obligations and other long-
term liabilities........................................... 1,951 1,473
Total stockholders' equity (deficit)........................ 401,598 (3,951)
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion and analysis of our financial condition and results
of operations should be read in conjunction with the "Selected Financial Data"
and our financial statements and the related notes thereto. This discussion
contains forward-looking statements that involve risks and uncertainties that
could cause actual results to differ materially from historical results or
anticipated results including those set forth in "Risk Factors" beginning on
page 10 of this Report.
Overview
We offer a convenient, cost-effective and easy-to-use service for purchasing
and printing postage over the Internet. On October 22, 1999, we commercially
launched our Internet Postage service. To date, our operating activities have
consisted primarily of efforts to promote our brand, build market awareness,
attract new customers, recruit personnel, build operating infrastructure and
develop our Web site and associated systems used to process customers' orders
and payments. As of February 29, 2000, our customer base consisted of over
150,000 users who had downloaded our software and registered for our service.
As a result of our acquisition of iShip.com in March 2000, we have added
Web-based technology that is designed to provide a complete one-stop shipping
and tracking solution. Our shipping tools are designed to help consumers, small
businesses and large corporations price, ship, track and manage shipments over
the Internet. These services will enable a comparison of rates and services
among multiple carriers, including Airborne Express, FedEx, UPS, the US Postal
Service and Yellow Freight Systems.
For Internet Postage, we currently offer a single service plan to our users.
Under this plan, a user purchases postage at cost and is charged a monthly
convenience fee based upon how much postage he or she uses during the month.
The current plan assesses a convenience fee of 10% of the value of postage
printed during a month. The plan has a monthly minimum fee of $1.99 and a
monthly maximum fee of $19.99. Convenience fees are calculated and charged at
the end of a monthly billing cycle. Although we have established a single
pricing plan, we may need to change our pricing plan given the lack of an
established or proven commercial market for Internet postage. From time to
time, we may offer special promotions to attract new customers. Currently,
these promotions involve waiving or discounting convenience fees, discounts on
supplies offered through Stamps.com's online store, or free postage. We cannot
predict the impact of any promotion or pricing plan changes and our ability to
generate revenues or achieve profitability could be adversely affected by
special promotions or changes to pricing plans. Furthermore, given the lack of
an established or proven commercial market, 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 may never
achieve profitability."
For Internet-based shipping services, iShip.com recognized no revenues
through December 31, 1999, as it had not yet commenced revenue-based
operations. In April 1998, iShip.com began providing its Internet-based
shipping services, including label printing and package tracking to users.
Under an agreement with Mail Boxes Etc., we will receive service and
transaction-based license fees from Mail Boxes Etc. and its participating
franchisees. We currently provide free information regarding "zip-to-zip"
shipping charges to eBay auction buyers and sellers, and it is contemplated
that in the future eBay shippers will pay us a fee when they print shipping
labels using our shipping services. To date, the iShip.com package tracking and
pricing utilities have been offered at no charge to the user with the belief
that offering these free basic services will increase the customer base. In
addition, at the present time we offer at no charge to users a tool which
allows prospective buyers on auction web sites to determine the cost of
shipping a potential purchase, although in the future we intend to charge users
for the use of a more fully-integrated shipping application for auction web
sites. With the current limited use of these services and the lack of a
commercial market for Internet-shipping services, we cannot be sure that these
anticipated fees will be our ultimate pricing approach or that these fees will
generate significant revenues, if at all. As a result, we cannot predict
whether any contemplated pricing or fee structure
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<PAGE>
will ever generate revenues or profits. See "Risk Factors--We have a history of
losses and expect to incur losses in the future and may never achieve
profitability."
Some options and shares granted to our employees from January 9, 1998
(inception) through December 31, 1999 have been considered to be compensatory.
Deferred compensation associated with such options and shares amounted to $12.0
million and $1.25 million for the fiscal years ended December 31, 1999 and
1998. Of these amounts, $5.7 million and $167,000 was charged to operations for
the fiscal years ended December 31, 1999 and 1998. The balance of $7.4 million
will be amortized over the vesting periods of the applicable options through
the fiscal year ending December 31, 2003.
In November 1999, we formed a subsidiary, EncrypTix, Inc. to develop secure
printing opportunities in the events, travel and financial services industries.
In February 2000, we granted EncrypTix a license to our technology in those
three specific fields of use. In addition, EncrypTix raised approximately $30
million in private financing from a group of financial and strategic investors.
EncrypTix will provide highly secure, authenticated online printing
technologies for the events, movie, travel and financial service industries.
Utilizing many of the proprietary, Internet-based technologies developed by
Stamps.com, EncrypTix will enable sellers and distributors of tickets and
financial instruments to deliver value-bearing instruments such as tickets,
vouchers, boarding passes, checks and gift certificates over the Internet
through a customer's existing laser or inkjet printer. Similar to our Internet
Postage service, no specialized hardware device is required for the EncrypTix
service. As a result of the February 2000 financing, we retain almost two-
thirds of the economic interest and over 90% of the voting control of
EncrypTix. For financial statement purposes, our interest in EncrypTix will be
accounted for by consolidating its results with ours and recording a minority
interest in profit, loss and equity.
On March 7, 2000, we completed our acquisition of iShip.com. In connection
with the acquisition, up to 8,000,000 shares of our common stock will be issued
in exchange for all outstanding iShip.com capital stock, options and warrants.
In addition, upon completion of the merger, we recorded a significant amount of
intangibles, the amortization of which will significantly and adversely affect
our operating results. The merger resulted in goodwill of approximately $230
million, which will be amortized over a four-year period. To the extent we do
not generate sufficient cash flow to recover the amount of the investment
recorded, the investment may be considered impaired and could be subject to an
immediate write-down of up to the full amount of the investment. In this event,
our net loss in any given period could be greater than anticipated. See "Risk
Factors--We have a history of losses and expect to incur losses in the future,
and we may never achieve profitability" and "--Fluctuations in our operating
results could cause our stock price to fall."
Results of Operations
Sales and Marketing. Sales and marketing expenses principally consist of
costs associated with strategic relationships, advertising and promotional
expenditures, compensation and related expenses for personnel engaged in
marketing and business development activities. Sales and marketing expenses for
the year ended December 31, 1999 were approximately $35.2 million compared to
$600,000 for the period from January 9, 1998 (inception) to December 31, 1998.
We began the first phase of beta testing in August 1998 and therefore incurred
minimal sales and marketing expenses during the period ended December 31, 1998.
The increase in sales and marketing expenses is principally due to the
marketing campaign and advertising of the launch of the Internet Postage
solution in October 1999, as well as an increase in marketing personnel. We
expect sales and marketing expenses to increase significantly as we fully roll-
out our mailing and shipping services and continue to promote our brand and
services through new strategic relationships and marketing campaigns.
Research and Development. Research and development expenses principally
consist of compensation for personnel involved in the development of the
Internet Postage service and expenditures for consulting services and third-
party software. Research and development expenses for the year ended December
31, 1999 were $7.4 million compared to $1.5 million for the period from January
9, 1998 (inception) to December 31, 1998. The increase is due to higher
personnel and consulting costs and, to a lesser extent, other expenses
associated
27
<PAGE>
with the ongoing development of the Internet Postage service. We believe that
significant investments in research and development are required to remain
competitive and expect to incur increasing research and development expenses.
General and Administrative. General and administrative expenses principally
consist of compensation and related costs for executive and administrative
personnel, facility costs, fees for legal and other professional services, and
amortization of deferred compensation. General and administrative expenses for
the year ended December 31, 1999 were $14.3 million compared to $2.0 million
for the period from January 9, 1998 (inception) to December 31, 1998. Of the
$12.3 million increase, $5.5 million is due to amortization of deferred
compensation. The remaining increase is principally due to increased headcount
and the expansion of facilities related to the growth of the business, as well
as to legal fees related to the Pitney Bowes patent infringement claim. We
expect general and administrative expenses to increase as the business grows
and to incur additional costs related to the Pitney Bowes patent infringement
claim.
Interest Income (Expense), Net. Interest income (expense), net consists of
income from cash and cash equivalents net of interest expense related to
financing obligations. Interest income (expense), net for the year ended
December 31, 1999 was $2.5 million compared to $(16,000) for the period from
January 9, 1998 (inception) to December 31, 1998. This increase is due to
earnings on a higher average cash equivalent balance as a result of our initial
public offering in June 1999 and our follow-on public offering in December
1999.
Liquidity and Capital Resources
As of December 31, 1999 and 1998, we had approximately $374.7 million and
$3.5 million in cash and short-term investments, respectively. In June 1999, we
completed our initial public offering in which the underwriters sold to the
public 5,750,000 shares of common stock at $11.00 per share. The net proceeds
from the offering were $10.23 per share, or $58.8 million in the aggregate. In
December 1999, we completed a follow-on public offering in which the
underwriters sold to the public 5,750,000 shares of common stock at $65.00 per
share. Our net proceeds from the offering were $61.83 per share, or $355.5
million in the aggregate. We regularly invests excess funds in short-term money
market funds and commercial paper and does not engage in hedging or speculative
activities.
In February 2000, our majority-owned subsidiary, EncrypTix, raised
approximately $30.0 million in private financing from a group of financial and
strategic investors. The proceeds of this financing will be used by EncrypTix
for research and development, sales and marketing and general working capital
purposes.
In October 1999, we entered into a distribution and marketing agreement with
AOL that will require aggregate payments of $56.0 million through April 2002.
In addition, under this agreement, AOL purchased $6.0 million of common stock
(178,638 shares at $33.588 per share) in October 1999 and purchased
$5.0 million of common stock (148,862 shares at $33.588 per share) concurrent
with the closing of our follow-on public offering. AOL also holds a three-year
warrant to purchase up to an additional 163,750 shares at an exercise price of
$33.588 per share.
In May 1999, we entered into a facility lease agreement for the corporate
headquarters with aggregate minimum lease payments of approximately $4.8
million through May 2004. We also entered into an agreement with
Intuit/Quicken.com in May 1999, which requires aggregate payments by the
Company of $3.3 million through 2000.
Net cash used in operating activities was $67.5 million for the year ended
December 31, 1999 compared to $3.1 million for the period from January 9, 1998
(inception) to December 31, 1998. The increase in net cash used in operating
activities resulted primarily from increases in net loss.
Net cash used in investing activities was $57.7 million for the year ended
December 31, 1999 compared to $1.9 million for the period from January 9, 1998
(inception) to December 31, 1998. The increase in net cash
28
<PAGE>
used in investing activities resulted primarily from the purchase of short-term
investments and increased capital expenditures for computer equipment,
purchased software and office equipment.
Net cash provided by financing activities was $450.1 million for the year
ended December 31, 1999 compared to $6.9 million for the period from January 9,
1998 (inception) to December 31, 1998. The increase in net cash provided by
financing activities resulted principally from the initial public offering in
June 1999 and follow-on offering and December 1999.
We anticipate that our current cash balances will be sufficient to fund our
operations, including the acquired operations of iShip.com, through fiscal year
2001. However, we may require substantial working capital to fund our business
and may need to raise additional capital. The Company 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
the Company is unable to meet future capital requirements."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Stamps.com's financial statements, schedules and supplementary data, as
listed under Item 14, appear in a separate section of this Report beginning on
page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
29
<PAGE>
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated by reference from the information in our proxy statement for
the 2000 Annual Meeting of Stockholders which we will file with the Securities
and Exchange Commission within 120 days of the end of the fiscal year to which
this report relates.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference from the information in our proxy statement for
the 2000 Annual Meeting of Stockholders which we will file with the Securities
and Exchange Commission within 120 days of the end of the fiscal year to which
this report relates.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference from the information in our proxy statement for
the 2000 Annual Meeting of Stockholders which we will file with the Securities
and Exchange Commission within 120 days of the end of the fiscal year to which
this report relates.
30
<PAGE>
PART IV.
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report.
1. Financial Statements. The following financial statements of
Stamps.com are included in a separate section of this Annual Report on Form
10-K commencing on the pages referenced below:
Stamps.com Consolidated Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants................................. F-1
Consolidated Balance Sheets at December 31, 1999 and 1998................ F-2
Consolidated Statements of Operations for the year ended December 31,
1999, the period from January 9, 1998 (date of inception) to December
31, 1998 and the period from January 9, 1998 (date of inception) to
December 31, 1999 ...................................................... F-3
Consolidated Statements of Stockholders' Equity (Deficit) for the period
from January 9, 1998 (date of inception) through December 31, 1998 and
for the year ended December 31, 1999.................................... F-4
Consolidated Statements of Cash Flows for the year ended December 31,
1999, the period from January 9, 1998 (date of inception) to December
31, 1998 and the period from January 9, 1998 (date of inception) to
December 31, 1999....................................................... F-5
Notes to Consolidated Financial Statements............................... F-6
</TABLE>
iShip.com Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditor's Report................................... F-19
Balance Sheets at December 31, 1999 and 1998............................. F-20
Statements of Operations for the years ended December 31, 1999 and 1998,
the period from May 27, 1997 (date of inception) to December 31, 1997
and the period from May 27, 1997 (date of inception) to December 31,
1999 ................................................................... F-21
Statement of Stockholders' Equity for the period from May 27, 1997 (date
of inception) through December 31, 1997 and for the years ended December
31, 1998 and 1999....................................................... F-22
Statements of Cash Flows for the years ended December 31, 1999 and 1998,
the period from May 27, 1997 (date of inception) to December 31, 1998
and the period from May 27, 1997 (date of inception) to December 31,
1999.................................................................... F-23
Notes to Financial Statements............................................ F-24
Unaudited Pro Forma Condensed Combined Financial Information
<CAPTION>
Page
----
<S> <C>
Unaudited Pro Forma Condensed Combined Financial Information............. F-32
Unaudited Pro Forma Condensed Combined Balance Sheet as of December 31,
1999.................................................................... F-33
Unaudited Pro Forma Condensed Combined Statement of Operations for the
year ended December 31, 1999............................................ F-34
Notes to Unaudited Pro Forma Condensed Combined Financial Information.... F-35
</TABLE>
2. Financial Statement Schedules. All financial statement schedules of
Stamps.com have been omitted because they are not applicable, not required,
or the information is included in the consolidated financial statements or
notes thereto.
31
<PAGE>
3. Exhibits. The following Exhibits are incorporated herein by reference
or are filed with this report as indicated below:
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
2.1 Agreement and Plan of Merger, dated as of October 22, 1999, by and
among the Company, Rocket Acquisition Corp. and iShip.com, Inc.(1)
2.2 Amendment No. 1 to Agreement and Plan of Merger, dated as of February
14, 2000, by and among the Company, Rocket Acquisition Corp. and
iShip.com, Inc.(4)
3.1 Certificate of Incorporation.(2)
3.2 Bylaws of the Company.(2)
4.1 Specimen common stock certificate.(2)
10.1 Series A Stock Purchase Warrant, dated May 1, 1998, between the
Company and Silicon Valley Bank.(2)
10.2 Amended and Restated Investors' Rights Agreement, dated February 17,
1999, between the Company and the investors named therein.(2)
10.3 Patent Assignment from Mohan P. Ananda to the Company, dated January
20, 1998.(2)
10.4 Assignment and License Agreement between the Company and Mohan P.
Ananda, dated January 20, 1998.(2)
10.5 Employment Offer Letter, dated October 29, 1998, by and between the
Company and John M. Payne.(2)
10.6 Employment Agreement dated, January 20, 1998, by and between the
Company and Mohan P. Ananda.(2)
10.7 1998 Stock Plan and Forms of Notice of Grant and Stock Option
Agreement.(2)
10.8 1999 Stock Incentive Plan.(2)
10.9 1999 Employee Stock Purchase Plan.(2)
10.10 Form of Indemnification Agreement between the Company and its
directors and officers.(2)
10.11 Lease Agreement, dated August 27, 1998, between the Company and
Spieker Properties, L.P. and Amendment No. One, dated January 8,
1999.(2)
10.12+ Advertising Insertion Order, dated December 16, 1998, between the
Company and America Online, Inc. ("AOL").(2)
10.13 Master Lease Agreement between the Company and FirstCorp, dated June
5, 1998.(2)
10.14 Quick Start Loan and Security Agreement, dated May 1, 1998, between
the Company and Silicon Valley Bank.(2)
10.15 Employment Offer Letter, dated August 7, 1998, between the Company and
John W. LaValle.(2)
10.16 Consulting Agreement, dated February 1, 1999, between the Company and
Loren Smith.(2)
10.17 Lease, dated April 12, 1999, between the Company and Spieker
Properties, L.P.(2)
10.18+ Sponsorship Agreement, dated May 14, 1999, between the Company and
Intuit, Inc.(2)
10.19+ Distributor Agreement, dated December 10, 1998, between the Company
and Westvaco.(2)
10.20+ Distributor Agreement, dated January 15, 1999, between the Company and
Office Depot, Inc.(2)
10.21+ Distributor Agreement, dated March 31, 1999, between the Company and
Seiko Instruments USA, Inc.(2)
10.22+ Distributor Agreement, dated March 30, 1999, between the Company and
Avery Dennison Office Products Company.(2)
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number
-------
<C> <S>
10.23+ Distributor Agreement, dated March 11, 1999, between the Company and
Dymo-Costar Corporation.(2)
10.24 Series A Preferred Stock and Warrant Purchase Agreement, dated
February 26, 1998, between the Company and certain investors.(2)
10.25 Amended and Restated Voting Agreement, dated February 17, 1999,
between the Company and certain investors.(2)
10.26 Separation Agreement and Release, dated May 13, 1999, between the
Company and Mohan Ananda.(2)
10.27 License Agreement, dated May 13, 1999, between the Company and Mohan
Ananda.(2)
10.28 Series C Preferred Stock Purchase Agreement, dated February 17, 1999,
between the Company and certain investors.(2)
10.29 Amendment Letter to AOL, dated June 4, 1999.(2)
10.30 Nondisclosure Agreement and Agreement to Release University from
damages caused by testing, dated December 6, 1998.(2)
10.31 Nondisclosure Agreement and Agreement to Release Carnegie Mellon, Inc.
from damages caused by testing, dated April 22, 1997.(2)
10.32 Letter of Intent from Stampmaster, Inc. and US Postal Service response
letter between Stampmaster, Inc. and the US Postal Service, dated
February 21, 1997 and April 23, 1997, respectively.(2)
10.33 Consulting Agreement, dated June 21, 1999, between the Company and
Carolyn Ticknor.(2)
10.34+ Interactive Marketing and Distribution Agreement, dated October 15,
1999, between AOL and the Company.(3)
10.35 Common Stock and Warrant Purchase Agreement, dated October 20, 1999,
between AOL and the Company.(3)
10.36 Common Stock Purchase Warrant, dated October 29, 1999, between AOL and
the Registrant.(3)
10.37 Consulting Agreement dated October 20, 1999 between the Company and
Marvin Runyon.(3)
10.38 Amended and Restated Consulting Services Agreement dated November 15,
1999 between the Company and Marvin Runyon.(4)
10.39 Employment Offer Letter dated as of October 20, 1999 between the
Company and Loren E. Smith.(5)
21.1 Subsidiaries of the Company.(3)
23.1 Consent of Arthur Andersen LLP.(5)
23.2 Consent of Moss Adams LLP.(5)
24.1 Power of Attorney (included on the signature page to this Report).(5)
27.1 Financial Data Schedule.(5)
</TABLE>
- --------
(1) Incorporated by reference to the Company's Form 8-K filed with the
Securities and Exchange Commission (the "Commission") on October 29, 1999
(File No. 000-26427).
(2) Incorporated by reference to the Company's Registration Statement on Form
S-1 filed with the Commission (File No. 333-77025).
(3) Incorporated by reference to the Company's Registration Statement on Form
S-1 filed with the Commission (File No. 333-90115).
(4) Incorporated by reference to the Company's Registration Statement on Form
S-4 filed with the Commission (File No. 333-91377)
(5) Filed with the Commission with this Annual Report on Form 10-K.
+ Confidential treatment requested and received as to certain portions.
(b) Reports on Form 8-K:
Report on Form 8-K, dated October 22, 1999, was originally filed on
October 29, 1999 and amended on December 28, 1999 (Filing merger agreement
and required financial statements for the iShip.com acquisition).
33
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of Stamps.com Inc.:
We have audited the accompanying consolidated balance sheets of Stamps.com
Inc. (a Delaware corporation in the development stage) and subsidiaries as of
December 31, 1999 and 1998, and the related consolidated statements of
operations, stockholders' equity (deficit) and cash flows for the year ended
December 31, 1999 and the period from January 9, 1998 (date of inception)
through December 31, 1998. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Stamps.com Inc. and
subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for the year ended December 31, 1999 and the
period from January 9, 1998 (date of inception) through December 31, 1998 in
conformity with accounting principles generally accepted in the United States.
/s/ Arthur Andersen LLP
Los Angeles, California
January 19, 2000
F-1
<PAGE>
STAMPS.COM INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-------------------
1999 1998
--------- --------
(In thousands,
except par value)
<S> <C> <C>
Assets
Current assets:
Cash and short-term investments......................... $ 374,746 $ 3,470
Accounts receivable..................................... 134 --
Prepaid advertising..................................... 21,530 --
Other prepaid expenses.................................. 2,353 48
--------- --------
Total current assets...................................... 398,763 3,518
Property and equipment, net............................... 9,702 670
Other assets, net......................................... 1,977 237
--------- --------
Total assets.............................................. $ 410,442 $ 4,425
========= ========
Liabilities and Stockholders' Equity
Current liabilities:
Line of credit.......................................... $ 1,000 $ 1,000
Accounts payable........................................ 2,707 392
Accrued expenses........................................ 2,465 192
Accrued payroll and related............................. 1,389 141
Accrued professional.................................... 150 200
Deferred revenue........................................ 182 --
Current portion of capital lease obligations............ 513 208
--------- --------
Total current liabilities................................. 8,406 2,133
Capital lease obligations, less current portion........... 438 265
Commitments and contingencies (See Note 2 and 5)
Redeemable preferred stock, $.001 par value (Series A, B
& C):.................................................. -- 5,978
Authorized shares none in 1999 and 10,000 in 1998.....
Issued and outstanding none in 1999 and 9,783 in
1998.................................................
Stockholders' equity (deficit):
Preferred stock, $.001 par value:....................... -- --
Authorized shares 5,000 in 1999 and none in 1998......
Issued and outstanding none in 1999 and 1998..........
Common stock, $.001 par value:.......................... 42 7
Authorized shares 95,000 in 1999 and 20,000 in 1998...
Issued shares 41,689 and outstanding shares 40,985 in
1999; Issued and outstanding shares 6,901 in 1998....
Additional paid-in capital.............................. 472,714 1,438
Notes receivable from stock sales....................... (101) (117)
Deferred compensation................................... (9,435) (1,083)
Deficit accumulated during the development stage........ (60,683) (4,196)
Treasury stock at cost (705 outstanding)................ (939) --
--------- --------
Total stockholders' equity (deficit)...................... 401,598 (3,951)
--------- --------
Total liabilities and stockholders' equity (deficit)...... $ 410,442 $ 4,425
========= ========
</TABLE>
See accompanying notes.
F-2
<PAGE>
STAMPS.COM INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Period from Period from
January 9, 1998 January 9, 1998
Year ended (inception) to (inception) to
December 31, December 31, December 31,
1999 1998 1999
------------ --------------- ---------------
(In thousands, except per share data)
<S> <C> <C> <C>
Revenues.......................... $ 358 $ -- $ 358
Cost of revenues.................. 2,430 -- 2,430
-------- ------- --------
Gross profit.................... (2,072) -- (2,072)
Expenses:
Research and development........ 7,363 1,532 8,895
Sales and marketing............. 35,208 632 35,840
General and administrative...... 14,333 2,016 16,349
-------- ------- --------
Total costs and expenses...... 56,904 4,180 61,084
-------- ------- --------
Loss from operations.............. (58,976) (4,180) (63,156)
Other income (expense):
Interest expense................ (173) (28) (201)
Interest income................. 2,662 12 2,674
-------- ------- --------
Net loss.......................... $(56,487) $(4,196) $(60,683)
======== ======= ========
Basic and diluted net loss per
share............................ $ (2.59) $ (0.85) $ (4.50)
======== ======= ========
Weighted average shares
outstanding used in basic and
diluted per-share calculation.... 21,824 4,956 13,474
======== ======= ========
</TABLE>
See accompanying notes.
F-3
<PAGE>
STAMPS.COM INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Deficit
Note Accumulated
Shares of common stock Common Additional Receivable During the Treasury
-------------------------- Stock Paid-In From Stock Deferred Development Stock at
Issued In Treasury Issued Capital Sales Compensation Stage Cost Total
------------ ------------- ------ ---------- ---------- ------------ ----------- -------- --------
(In thousands, except share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 9,
1998 (inception)....... -- -- $-- $ -- $ -- $ -- $ -- $ -- $ --
Issuance of common
stock.................. 4,913 -- 5 61 (18) -- -- -- 48
Issuance of restricted
common stock........... 1,988 -- 2 127 (99) -- -- -- 30
Deferred compensation... -- -- -- 1,250 -- (1,250) -- -- --
Amortization of deferred
compensation........... -- -- -- -- -- 167 -- -- 167
Net loss................ -- -- -- -- -- -- (4,196) -- (4,196)
------------ ---------- ---- -------- ----- -------- -------- ----- --------
Balance at December 31,
1998................... 6,901 -- 7 1,438 (117) (1,083) (4,196) -- (3,951)
Exercise of stock
options................ 91 -- -- 9 -- -- -- -- 9
Repurchase of common
stock.................. -- (705) -- -- 7 -- -- (939) (932)
Conversion of redeemable
preferred stock........ 22,870 -- 23 34,255 -- -- -- -- 34,278
Issuance of common
stock.................. 11,827 -- 12 422,952 -- -- -- -- 422,964
Repayment on note
receivable............. -- -- -- -- 9 -- -- -- 9
Deferred compensation
arising from issuance
of options............. -- -- -- 11,995 -- (11,995) -- -- --
Deferred compensation
arising from issuance
of warrants............ -- -- -- 2,065 -- (2,065) -- -- --
Amortization of deferred
compensation........... -- -- -- -- -- 5,708 -- -- 5,708
Net loss................ -- -- -- -- -- -- (56,487) -- (56,487)
------------ ---------- ---- -------- ----- -------- -------- ----- --------
Balance at December 31,
1999................... 41,689 (705) $ 42 $472,714 $(101) $ (9,435) $(60,683) $(939) $401,598
============ ========== ==== ======== ===== ======== ======== ===== ========
</TABLE>
See accompanying notes.
F-4
<PAGE>
STAMPS.COM INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period from Period from
January 9, January 9,
1998 1998
Year ended (inception) to (inception) to
December 31, December 31, December 31,
1999 1998 1999
------------ -------------- --------------
(In thousands)
<S> <C> <C> <C>
Operating activities:
Net loss........................... $(56,487) $(4,196) $(60,683)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization.... 1,285 82 1,367
Amortization of deferred
compensation.................... 5,708 167 5,875
Changes in operating assets and
liabilities:
Accounts receivable............. (134) -- (134)
Prepaid expenses................ (23,835) (48) (23,883)
Accounts payable................ 2,315 392 2,707
Accrued expenses................ 3,471 533 4,004
Deferred revenue................ 182 -- 182
-------- ------- --------
Net cash used in operating
activities......................... (67,495) (3,070) (70,565)
Investing activities:
Purchase of short-term investments,
net............................... (46,422) (1,504) (47,926)
Capital expenditures............... (9,557) (195) (9,752)
Other.............................. (1,742) (209) (1,951)
-------- ------- --------
Net cash used in investing
activities......................... (57,721) (1,908) (59,629)
Financing activities:
Net proceeds from line of credit... -- 1,000 1,000
Repayment of capital lease
obligations....................... (264) (82) (346)
Issuance of redeemable preferred
stock, net........................ 28,300 5,978 34,278
Issuance of common stock........... 422,964 48 423,012
Repurchase of common stock......... (939) -- (939)
Proceeds from exercise of stock
options........................... 9 -- 9
-------- ------- --------
Net cash provided by financing
activities......................... 450,070 6,944 457,014
-------- ------- --------
Net increase in cash and
equivalents........................ 324,854 1,966 326,820
Cash and cash equivalents at
beginning of period................ 1,966 -- --
-------- ------- --------
Cash and cash equivalents at end of
period............................. 326,820 1,966 326,820
Short-term investments.............. 47,926 1,504 47,926
-------- ------- --------
Cash and short-term investments..... $374,746 $ 3,470 $374,746
======== ======= ========
Cash paid for:
Interest........................... $ 173 $ 28 $ 201
======== ======= ========
Noncash investing and financing
activity:
Issuance of common stock in exchange
for a patent and a trademark name.. $ -- $ 30 $ 30
======== ======= ========
Equipment acquired under capital
lease.............................. $ 742 $ 555 $ 1,297
======== ======= ========
Issuance of notes receivable from
stock sales........................ $ -- $ 117 $ 117
======== ======= ========
</TABLE>
See accompanying notes.
F-5
<PAGE>
STAMPS.COM INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Description of Business and Basis of Presentation
Stamps.com Inc. (Stamps.com Inc. or the Company), incorporated in Delaware
on January 9, 1998, offers a convenient, cost-effective and easy-to-use
service for purchasing and printing postage over the Internet. Although the
Company launched its Internet postage service on a national basis on October
22, 1999, it is considered a development stage enterprise, as there has not
yet been significant revenues from this principal service.
The Company is subject to the normal risks associated with a development
stage enterprise in the technology industry and involved in e-commerce. These
risks include, among others, the risks associated with product development, US
Postal Service regulation, acceptance of the product by end users and the
ability to raise additional capital to sustain operations.
Principles of Consolidation
The consolidated financial statements include the accounts of Stamps.com
Inc. and its 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 stockholder's equity
(deficit).
F-6
<PAGE>
STAMPS.COM INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes the Company's cash and short-term
investments as of December 31 (in thousands):
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Cash and equivalents:
Cash...................................................... $ 5,691 $ 261
Commercial paper.......................................... 187,948 --
Money market.............................................. 113,974 1,705
Corporate notes........................................... 10,069 --
U.S. Government and agency securities..................... 8,488 --
Certificates of deposit................................... 650 --
-------- ------
Cash and equivalents.................................... 326,820 1,966
Short-term investments:
Corporate notes and bonds................................. 23,108 --
Commercial paper.......................................... 17,636 1,504
U.S. Government and agency securities..................... 7,182 --
-------- ------
Short-term investments.................................. 47,926 1,504
-------- ------
Cash and short-term investments....................... $374,746 $3,470
======== ======
</TABLE>
Fair Value of Financial Instruments
Carrying amounts of certain of the Company's financial instruments,
including cash and equivalents, accrued payroll, and other accrued
liabilities, approximate fair value because of their short maturities. The
fair values of investments are determined using quoted market prices for those
securities or similar financial instruments.
Concentration of Risk
The Company's cash and short-term investment portfolio is diversified and
consists primarily of investment grade securities. Investments are held with
high-quality financial institutions, government and government agencies, and
corporations, thereby reducing credit risk concentrations. Interest rate
fluctuations impact the carrying value of the portfolio.
Reclassifications
Certain reclassifications have been made to prior periods to conform to
current period presentations.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization
are computed principally on a straight-line method over the shorter of the
estimated useful life of the asset or the lease term, ranging from three to
five years. Assets acquired under capitalized lease arrangements are recorded
at the present value of the minimum lease payments. Amortization of assets
capitalized under capital leases is computed using the straight-line method
over the life of the asset or term of the lease, whichever is shorter.
Expenditures for repairs and maintenance are charged to expense as incurred.
F-7
<PAGE>
STAMPS.COM INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Property and equipment is comprised of the following at December 31 (in
thousands):
<TABLE>
<CAPTION>
1999 1998
------- ----
<S> <C> <C>
Furniture and equipment....................................... $ 3,030 $ 32
Computers and software........................................ 7,587 718
Leasehold improvements........................................ 432 --
------- ----
11,049 750
Accumulated depreciation and amortization..................... (1,347) (80)
------- ----
$ 9,702 $670
======= ====
</TABLE>
During 1999 and 1998, depreciation expense including the amortization on
equipment under capital leases, was approximately $1,270,000 and $80,000,
respectively.
Other Assets
Patents, trademarks and other intangibles are included in other assets in
the accompanying balance sheets and are carried at cost less accumulated
amortization. Amortization is calculated on a straight-line basis over the
estimated useful lives of the assets, ranging from 5 to 15 years.
Revenue Recognition
Revenue from postage convenience fees is based on the amount of postage
used by the customer and is recognized over the period that services are
provided. Deferred revenue consists of annual prepaid fees billed in advance.
Commissions from the sale of products by a third party vendor to our customer
base are recognized as revenue when earned and collection is probable.
Computation of Net Loss per Share
Earnings per share are computed by dividing the net earnings available to
common stockholders for the period by the weighted average number of common
shares outstanding during the period. Diluted earnings per share is computed
by dividing the net earnings for the period by the weighted average number of
common and common equivalent shares outstanding during the period.
Common equivalent shares, representing 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 as their effect is anti-dilutive.
F-8
<PAGE>
STAMPS.COM INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table sets forth the computation of basic and diluted
earnings (loss) per share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Period from Period from
January 9, 1998 January 9, 1998
(inception) to (inception) to
Fiscal Year Ended December 31, December 31,
December 31, 1999 1998 1999
----------------- --------------- ---------------
<S> <C> <C> <C>
Net loss.................. $(56,487) $(4,196) $(60,683)
Weighted average common
shares used to compute
basic net loss per
share.................... 21,824 4,956 13,474
Effect of dilutive
securities .............. -- -- --
-------- ------- --------
Weighted average common
shares used to compute
dilutive net loss per
share ................... 21,824 4,956 13,474
======== ======= ========
Basic and diluted net loss
per share................ $ (2.59) $ (0.85) $ (4.50)
======== ======= ========
</TABLE>
Advertising Costs
The Company generally expenses the costs of producing advertisements when
the advertising first runs, and expenses the costs of communicating and
placing the advertising in the period in which the advertising space or
airtime is used.
Internet advertising expenses are recognized based on specifics of the
individual agreements. Under impression based agreements, advertising expense
is recognized using the ratio of the number of impressions delivered over the
total number of contracted impressions while agreements based on a period of
time recognize advertising expense on the straight-line basis over the term of
the contract.
Income Taxes
The Company accounts for income taxes in accordance with FASB 109,
"Accounting for Income Taxes." Under this method, deferred tax liabilities and
assets are determined based on the difference between the financial statements
and the tax basis of assets and liabilities using the enacted tax rate in
effect for the years in which the differences are expected to reverse.
Research and Development Costs
Research and development costs are expensed as incurred. These costs
primarily consist of salaries, development materials, supplies and applicable
overhead expenses of personnel directly involved in the research and
development of new technology and service offerings.
Stock-Based Compensation
SFAS No. 123, "Accounting for Stock-Based Compensation" (SFAS 123)
encourages, but does not require, companies to record compensation cost for
stock-based employee compensation plans at fair value. The Company has chosen
to continue to account for stock-based compensation using the intrinsic-value
method prescribed in Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees."
F-9
<PAGE>
STAMPS.COM INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Website Development Costs
The Company developed and maintains its website. Costs associated with the
website consist primarily of software purchased from third parties. The
Company capitalizes costs of computer software obtained for internal use in
web design and network operations. These capitalized costs are amortized based
on their estimated useful life. Payroll and related costs are not capitalized,
as the amounts are immaterial and principally relate to maintenance. Internal
costs related to the development of website content are expensed as incurred.
Recent Accounting Pronouncements
Effective January 1, 1999, the Company adopted the provisions of Statement
of Position No. 98-1, "Software for Internal Use", which provides guidance on
accounting for the costs of computer software developed or obtained for
internal use.
2. Legal Proceedings
On June 16, 1999, Pitney Bowes filed a patent infringement lawsuit against
the Company. The suit alleges that the Company is 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.
The Company 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 the
Company's competitors, E-Stamp Corporation, alleging infringement of seven
Pitney Bowes patents.
The outcome of the litigation that Pitney Bowes has brought against the
Company is uncertain. Therefore, the Company can give no assurance that Pitney
Bowes will not prevail in its suit against the Company.
If Pitney Bowes prevails in its claims against the Company, it may be
prevented from selling postage on the Internet. Alternatively, the Pitney
Bowes suit could result in limitations on how the Company implements its
service, delays and costs associated with redesigning its service and payments
of license fees and other payments. In addition, the litigation could result
in significant expenses and diversion of management time and other resources.
Thus, if Pitney Bowes prevails in its suit against the Company, its business
could be severely harmed or fail. The company believes a reasonable
possibility exists that a loss may be incurred. Due to the preliminary stage
of this lawsuit, the Company cannot provide an estimate of possible loss or
range at this time.
On December 29, 1999, three individual plaintiffs filed a suit against the
Company 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 one of the
Company's directors as a defendant and to remove one of the plaintiffs from
the suit. The suit alleges that the plaintiffs were due cash consideration for
securing a board member and investors for the Company. The complaint seeks
$13.3 million plus other unspecified compensatory damages, punitive and
exemplary damages and attorneys' fees and costs incurred. The Company answered
the complaint on March 8, 2000, denying the allegations and asserting a number
of affirmative defenses. The outcome of this litigation is uncertain and the
Company can give no assurance that the plaintiffs will not prevail. Due to the
preliminary stage of this lawsuit, the Company cannot provide an estimate of
possible loss or range at this time.
3. Line of Credit
On May 1, 1998, the Company entered into a credit line agreement with a
lender. The initial $300,000 borrowing base was increased to $1 million based
on the Company's net equity balance, as defined, through
F-10
<PAGE>
STAMPS.COM INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998. Borrowings bear interest at the lender's prime rate plus 1%
(9.5% at December 31, 1999) and are collateralized by certain of the Company's
assets. The credit line agreement matures on January 31, 2000.
In connection with this indebtedness agreement, the Company issued a
detachable warrant which permits the holder to purchase 7,050 shares of the
Company's Common Stock for $.27 per share. The term of this warrant is for a
period of seven years from the date of grant. The warrant was valued using the
Black-Scholes pricing model. The compensation element will be recognized over
the vesting period.
4. Income Taxes
The provision for income taxes consists solely of minimum state taxes. The
Company's effective tax rate differs from the statutory federal income tax
rate primarily as a result of the establishment of a valuation allowance for
the future benefits to be received from the net operating loss carryforwards
and research tax credit carryforwards. The tax effect of temporary differences
that give rise to a significant portion of the deferred tax assets and
liabilities at December 31, 1999 and 1998 are presented below (in thousands).
<TABLE>
<CAPTION>
1999 1998
-------- -------
<S> <C> <C>
Deferred tax assets (liabilities):
Net operating loss carryforwards....................... $ 19,243 $ 537
Research credits....................................... 527 150
Depreciation........................................... (389) (28)
Capitalized start-up costs............................. 2,993 988
Accruals............................................... 141 46
-------- -------
Total deferred tax assets................................ 22,515 1,693
Valuation allowance...................................... (22,515) (1,693)
-------- -------
Net deferred tax assets.................................. $ -- $ --
======== =======
</TABLE>
Because the Company is uncertain as to when and if it may realize its
deferred tax assets, the Company has placed a valuation allowance against its
otherwise recognizable deferred tax assets.
The Company has a net operating loss carryforward of $46,392,000 and
$55,023,000 for federal and state income tax purposes, respectively, at
December 31, 1999, which can be carried forward to offset future taxable
income. The Company also has available a tax credit carryforward at December
31, 1999 of $527,000, which can be carried forward to offset future taxable
liabilities. The Company's federal net operating loss expires in 2018 and
2019, state net operating loss expires in 2007, and credits expire in 2018 and
2019. The Federal Tax Reform Act of 1986 and similar state tax laws contain
provisions which may limit the net operating losses carryforwards to be used
in any given year upon the occurrence of certain events, including a
significant change in ownership interests. The provision for income taxes is
comprised of (in thousands):
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Current
Federal......................................................... $-- $--
State........................................................... 1 1
---- ----
1 1
Deferred.......................................................... -- --
---- ----
Provision for income taxes...................................... $ 1 $ 1
==== ====
</TABLE>
F-11
<PAGE>
STAMPS.COM INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Differences between the provision for income taxes and income taxes at the
statutory federal income tax rate are as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
-------- -------
<S> <C> <C>
Income tax at statutory federal rate..................... $(19,205) $(1,369)
State income taxes, net of federal benefit............... (2,954) (226)
Effect of tax credits.................................... (377) (150)
Effect of permanent differences.......................... 2,144 53
Change in valuation allowance............................ 20,393 1,693
-------- -------
$ 1 $ 1
======== =======
</TABLE>
5. Commitments
Capital and Operating Leases
The Company leases certain equipment under capital lease arrangements
expiring on various dates through 2002. Included in property and equipment are
the following assets held under capital lease at December 31 (in thousands):
<TABLE>
<CAPTION>
1999 1998
------ ----
<S> <C> <C>
Computer equipment............................................. $1,297 $555
Accumulated amortization....................................... (303) (58)
------ ----
$ 994 $497
====== ====
</TABLE>
Following is a schedule of future minimum lease payments under capital
leases and under operating leases that have initial or remaining noncancelable
lease terms in excess of one year at December 31, 1999 (in thousands):
<TABLE>
<CAPTION>
Capital Operating
------- ---------
<S> <C> <C>
Years ending December 31:
2000.................................................. $ 578 $ 943
2001.................................................. 353 1,023
2002.................................................. 108 1,065
2003.................................................. -- 1,112
2004.................................................. -- 472
------ ------
1,039 $4,615
======
Less amount representing interest....................... (88)
------
Present value of net minimum lease payments ($513
payable currently)..................................... $ 951
======
</TABLE>
Total rent expense for the year ended December 31, 1999 and 1998 was
$751,000 and $109,000, respectively. The rent expense for fiscal year 1998
includes $23,000 paid to a stockholder/officer for rental of office space.
F-12
<PAGE>
STAMPS.COM INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Advertising
In October 1999, the Company entered into a three-year marketing and
distribution agreement with America Online, Inc. ("AOL"). This partnership is
an expansion of the existing agreement with AOL made in December 1998. Under
the new agreement, the Company will be provided with a specific number of
advertising impressions across several AOL brands featuring it as the
exclusive provider of Internet postage services. Stamps.com software will also
be included in AOL branded CD-ROMs for distribution.
In consideration, the Company has committed to pay $56.0 million over the
three-year term of the agreement. Of the $56.0 million total commitment, $18.5
million was paid in 1999 and $10.25 million, $16.25 million and $11 million
will be paid in 2000, 2001 and 2002, respectively. Under the contract, the
Company will receive internet impressions, distribution of the Company's
software on AOL CD's and downloads of the Company's software on AOL
partnership web sites. Expense related to impressions is recognized as the
impressions are provided under the contract. Expense related to CD's and
downloads will be recognized on a straight-line basis over the remaining
contract period from the date the CD's and downloads are provided.
In connection with the new AOL agreement, the Company issued 178,638 shares
of common stock in October 1999 for $6.0 million in the aggregate, or $33.588
per share. In December 1999, the Company issued an additional 148,862 shares
of common stock for $5.0 million in the aggregate, or $33.588 per share,
pursuant to a warrant issued in October 1999. The total shares owned by AOL as
a result of the transactions is 327,500. AOL presently holds unexercised
warrants to purchase 163,750 shares at $33.588 per share from the original
October issuance.
The price per share issued to AOL in October 1999 was determined by taking
the average of the closing prices of the Company's common stock over the 15
trading days preceding October 20, 1999. The fair value of the warrants issued
were measured in October 1999. The estimated fair value of the warrants were
determined using the Black-Scholes option pricing model. The issuance of these
equity instruments resulted in a compensation element of $2.1 million. The
$2.1 million will be recognized as expense over the 3 year contract period
commencing in October 1999.
In May 1999, the Company entered into a Sponsorship Agreement with Intuit
Inc. (Intuit) that markets its Internet postage service on various Intuit
internet sites and software. In exchange for this sponsorship, the Company is
required to pay $3.3 million ($1.6 million in 1999 and $1.7 million in 2000).
Additional payments may be required if this Sponsorship Agreement results in
certain customer levels. The related expense will be recognized as the
services are provided.
6. Related Party Transactions
In October 1999, a director entered into a three-year consulting agreement
with the Company to provide strategic planning services. In exchange for his
consulting services, the director received an option to purchase 36,000 shares
of common stock at $35.625 per share. A compensation element for these options
will be recorded each month as the options vest, based on the Black-Scholes
valuation method.
In November 1999, this agreement was amended to provide that the director
will receive consulting fees of $2,000 per day for any special projects on
which the Company requires his services.
In June 1999, the Company entered into a consulting services agreement with
a director to provide us with strategic planning and business development
advice, and other consulting services that the Company may request. In
exchange for these services, the Company granted the director an option to
purchase 10,000 shares of
F-13
<PAGE>
STAMPS.COM INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
common stock at an exercise price of $11.00 per share. During 1999, a
compensation element of approximately $240,000 was calculated using the Black-
Scholes valuation method for the options earned during the period. This
agreement expired on October 1, 1999.
In February 1999, a director entered into a three-year consulting agreement
with the Company to provide marketing and strategic planning services. In
exchange for his consulting services, the director will receive consulting
fees of $120,000 per annum and an option to purchase 135,000 shares of common
stock at $0.33 per share. During 1999, a compensation element of approximately
$1.4 million was calculated using the Black-Scholes valuation model for the
options earned during the period. This agreement was terminated in October
1999 upon the director's appointment as an officer of the Company. This change
in status will result in a new measurement date for the remaining unvested
options. The compensation expense resulting for the new measurement date will
be recognized over the remaining vesting period.
The Company paid $61,000 in March 1998 to Safeware Corporation for employee
salary and patent prosecution expenses incurred to obtain a patent. These
patent prosecution expenses consisted primarily of fees paid to patent counsel
and fees paid to the US Patent and Trademark Office. A director of the Company
is the majority shareholder in Safeware Corporation. The Company also
reimbursed the director for approximately $20,000 for expenses incurred on its
behalf.
7. Stockholders' Equity
Stock Issuances
In June 1999, the Company completed an initial public offering of 5,750,000
shares of its Common Stock, the net proceeds of which aggregated $57.8
million. Upon the closing of this offering, the Company repurchased 704,595
shares of Common Stock for $939,460 and converted all the Company's Redeemable
Preferred Stock into an aggregate of 22,870,479 shares of Common Stock.
In December 1999, the Company completed a follow-on public offering in
which the underwriters sold to the public 5,750,000 shares of the Company's
Common Stock. The Company's net proceeds from the offering were $354.1
million.
Restricted Stock
During 1998, the Company issued restricted stock to an employee and a
director totaling 1,988,475 shares. Part of the purchase price included a full
recourse note payable to the Company for $99,000. These shares vested one-
fourth on May 30, 1999 and the remaining shares vest monthly over the
subsequent thirty-six months. The Company issued these shares at prices which
included approximately $650,000 of a compensation element. The $650,000 is
being recognized as expense over the vesting periods and has been presented as
a reduction of stockholders' equity (deficit) in the accompanying balance
sheets.
Common Stock
In June 1999, the Board of Directors declared a stock dividend of 3 shares
of Common Stock for every 2 shares of Common Stock then outstanding, an action
which also resulted in an adjustment to the conversion ratio of the Series A,
B and C redeemable preferred stock to a three-for-two basis. The stock
dividend became effective on the date that the Company's initial public
offering of Common Stock closed. Accordingly, the accompanying financial
statements and footnotes have been restated to reflect the stock dividend. In
addition the board changed the number of authorized shares of Common Stock and
Preferred Stock to 95,000,000 and 5,000,000 shares, respectively. Prior to
June 1999, the number of authorized shares of common stock and preferred stock
was 40,000,000 shares and 15,500,000 shares, respectively.
F-14
<PAGE>
STAMPS.COM INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Redeemable Preferred Stock
In February 1999, the Board of Directors approved the sale of Series C
Redeemable Preferred Stock and the Company issued 5,464,486 shares of its
Series C Redeemable Preferred Stock at $5.49 per share.
In February 1998, the Company issued 3,762,500 shares of its Series A
Redeemable Preferred Stock at $0.40 per share and warrants to acquire
6,020,000 shares of the Company's Series B Redeemable Preferred Stock at $0.75
per share. In August and October 1998, 6,020,000 shares of Series B Redeemable
Preferred Stock were issued under these warrants.
In connection with the Company's Initial Public Offering in June 1999, all
shares of Series A, B, and C Preferred Stock converted into 22,870,479 shares
of Common Stock.
Notes Receivable
In connection with the issuance of Common Stock during the period, the
Company exchanged shares with a fair value of $117,000 for notes receivable of
the same amount. These notes receivable bear interest at 9% per annum and are
payable in February 2003.
8. Employee Stock Plans
Stock Incentive Plans
The 1999 Stock Incentive Plan (the "1999 Plan") serves as the successor to
the 1998 Stock Plan (the "Predecessor Plan). The 1999 Plan became effective in
June 1999. At that time, all outstanding options under the Predecessor Plan
were transferred to the 1999 Plan, and no further option grants can be made
under the Predecessor Plan. All outstanding options under the Predecessor Plan
continue to be governed by the terms and conditions of the existing option
agreements for those grants, unless our compensation committee decides to
extend one or more features of the 1999 Plan to those options.
In October 1999, the Company's Board of Directors approved an increase of
2,500,000 shares to the number of shares eligible to be granted under the 1999
Plan from the initial authorization of 7,290,000 shares of the common stock.
Upon stockholder approval of the increase, the total shares authorized for
issuance under the 1999 will be 11,019,551, which amount includes an automatic
annual increase to the share reserve of 3% of the Company's outstanding common
shares on the last trading day in December. The increase on January 1, 2000
was 1,229,551 shares based on 40,985,054 shares outstanding on the last day of
December 1999.
In no event will this annual increase exceed 1,564,715 shares. In addition,
no participant in the 1999 Plan may be granted stock options or direct stock
issuances for more than 1,125,000 shares of common stock in total in any
calendar year.
Options granted under the 1999 Plan vest 25% per year, and the Board of
Directors has the discretion with respect to vesting periods applicable to a
particular grant. Each option granted has a 10 year contractual life. During
1999 and 1998, the Company issued options to purchase 5,001,454 and 2,347,471
shares of common stock, respectively, at prices which included approximately
$11,995,000 of a compensation element in 1999 and $600,000 in 1998. The total
of $12,595,000 is being recognized as expense over the vesting periods of the
related options and has been presented as a reduction of stockholders' equity
(deficit) in the accompanying balance sheets. The current year amortization of
deferred compensation expense of $5,708,000 is included as a general and
administrative expense.
F-15
<PAGE>
STAMPS.COM INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A summary of stock option activity is as follows (in thousands, except per
share amounts):
<TABLE>
<CAPTION>
Options Outstanding
--------------------------
Weighted
Options Number Average
Available of Exercise
for Grant Options Price
--------- ------- --------
<S> <C> <C> <C>
Balance at January 9, 1998 (inception)............ 7,290 -- $ --
Granted........................................... (2,347) 2,347 .07
Forfeited......................................... 36 (36) .03
Exercised......................................... -- -- --
------ ----- ------
Balance at December 31, 1998...................... 4,979 2,311 .06
------ ----- ------
Granted........................................... (4,877) 4,877 10.72
Forfeited......................................... 252 (252) .74
Exercised......................................... -- (91) .15
Increase in available options..................... 2,500 -- --
------ ----- ------
Balance at December 31, 1999...................... 2,854 6,845 $ 8.35
====== ===== ======
</TABLE>
The following tables summarize information concerning outstanding and
exercisable options at December 31, 1999 (in thousands, except number of years
and per share amounts):
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Remaining Exercise Exercise
Contractual Price Price
Number Life (in per Number per
Range of Exercise Prices Outstanding Years) Share Exercisable Share
------------------------ ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.05-$2.99............... 3,957 8.7 $ 0.19 3,957 $ 0.19
$3.00-$5.60............... 1,554 9.3 $ 4.12 1,554 $ 4.12
$5.61-$39.50.............. 1,210 9.7 $34.18 1,210 $34.18
$39.51-$81.00............. 124 9.9 $65.30 124 $65.30
----- -----
Total................... 6,845 6,845
===== =====
</TABLE>
SFAS No. 123, "Accounting for Stock-Based Compensation," ("SFAS 123"),
requires the Company to disclose pro forma information regarding option grants
made to its employees. SFAS 123 specifies certain valuation techniques that
produce estimated compensation charges that are included in the pro forma
results below. These amounts have not been reflected in the Company's
Consolidated Statement of Operations, because APB 25, "Accounting for Stock
Issued to Employees," specifies that no compensation charge arises when the
price of the employees' stock options equal the market value of the underlying
stock at the grant date, as in the case of options granted to the Company's
employees.
SFAS 123 pro form numbers are as follows for December 31 (in thousands,
except per share amounts and percentages):
<TABLE>
<CAPTION>
1999 1998
-------- -------
<S> <C> <C>
Net income--as reported................................. $(56,487) $(4,196)
Net income--pro forma................................... $(58,542) $(4,247)
Basic and diluted net income per common share-as
reported............................................... $ (2.59) $ (0.85)
Basic and diluted net income per common share--pro
forma.................................................. $ (2.68) $ (0.86)
</TABLE>
F-16
<PAGE>
STAMPS.COM INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Under SFAS 123, the fair value of each option grant is estimated on the
date of grant using the Black-Scholes option pricing model with the following
weighted average assumptions:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Expected dividend yield.......................................... -- --
Risk-free interest rate.......................................... 5.50% 5.50%
Expected volatility.............................................. 50% --
Expected life (in years)......................................... 4 5
</TABLE>
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimates, in management's opinion the existing models do not necessarily
provide a reliable single measure of the fair value of the Company's options.
Employee Stock Purchase Plan
In June 1999, the Company's Board of Directors adopted an Employee Stock
Purchase Plan ("the Purchase Plan") which allows eligible employees of the
Company and eligible employees of the Company's participating subsidiaries to
purchase shares of common stock, at semi-annual intervals, with their
accumulated payroll deductions.
Eligible participants may contribute up to 15% of cash earnings through
payroll deductions, and the accumulated deductions will be applied to the
purchase of shares on each semi-annual purchase date. The purchase price per
share will be equal to 85% of the fair market value per share on the
participant's entry date into the offering period or, if lower, 85% of the
fair market value per share on the semi-annual purchase date.
Upon adoption of the plan, 300,000 shares of common stock were reserved for
issuance. This reserve will automatically increase on the first trading day in
January each year, beginning in calendar year 2000, by an amount equal to 1%
of the total number of outstanding shares of our common stock on the last
trading day in December in the prior year. The increase on January 1, 2000 was
409,851 shares based on 40,985,054 shares outstanding on December 31, 1999. In
no event will any annual increase exceed 521,571 shares.
As of December 31, 1999, no shares have been issued under the Purchase
Plan.
Savings Plan
During 1999, the Company implemented a savings plan for all eligible
employees, which qualifies under Section 401(k) of the Internal Revenue Code.
Participating employees may contribute up to 15% of their pretax salary, but
not more than statutory limits. The Company matches 100% of the first 1.5% a
participant contributes.
9. Events Subsequent to Date of Auditor's Report (Unaudited)
Change in Subsidiary Ownership
On February 17, 2000, the Company announced that it sold approximately 38%
of EncrypTix, Inc., until then a wholly-owned subsidiary of the Company, in a
private financing of approximately $30 million.
F-17
<PAGE>
STAMPS.COM INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
iShip.com Acquisition
On March 7, 2000, the Company closed its acquisition of iShip.com, a
development stage enterprise developing Internet-based shipping technology. In
connection with the merger, up to 8 million shares will be exchanged for all
outstanding stock, options and warrants of iShip.com.
The acquisition will be accounted for using the purchase method of
accounting. Accordingly, a portion of the purchase price will be allocated to
the tangible and intangible assets acquired and liabilities assumed based on
their respective fair values on the acquisition date. The company is currently
in process of preparing the final purchase price allocation and determining the
useful lives of the assets acquired. It is anticipated that the purchase will
result in intangible assets of approximately $230 million.
10. Quarterly Information (unaudited)
<TABLE>
<CAPTION>
Quarter ended
-------------------------------------
March June September December
------- ------- --------- --------
(in thousands, except per share
data)
<S> <C> <C> <C> <C>
Fiscal Year 1999:
Revenues.............................. $ -- $ -- $ -- $ 358
Loss from operations.................. (3,688) (6,069) (14,424) (34,796)
Net loss.............................. (3,686) (5,719) (13,698) (33,384)
Basic and diluted net loss per share.. $ (0.53) $ (0.66) $ (0.40) $ (0.91)
Weighted average shares outstanding
used in basic and diluted per-share
calculation.......................... 6,901 8,692 34,102 36,611
</TABLE>
<TABLE>
<CAPTION>
Quarter ended
----------------------------------
March June September December
------ ------ --------- --------
(in thousands, except per share
data)
<S> <C> <C> <C> <C>
Fiscal Year 1998:
Revenues................................ $ -- $ -- $ -- $ --
Loss from operations.................... (363) (504) (806) (2,506)
Net loss................................ (363) (504) (809) (2,520)
Basic and diluted net loss per share.... $(0.09) $(0.10) $(0.17) $ (0.44)
Weighted average shares outstanding used
in basic and diluted per-share
calculation............................ 4,241 4,898 4,898 5,788
</TABLE>
F-18
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Stockholders
iShip.com, Inc.
We have audited the accompanying balance sheet of iShip.com, Inc. (a
development stage company) as of December 31, 1998 and 1999, and the related
statements of operations, stockholders' equity and cash flows for the period
from inception (May 27, 1997) to December 31, 1997, the years ended December
31, 1998 and 1999 and the period from inception (May 27, 1997) to December 31,
1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of iShip.com, Inc. as of
December 31, 1998 and 1999, and the results of its operations and its cash
flows for the period from inception (May 27, 1997) to December 31, 1997, the
years ended December 31, 1998 and 1999 and for the period from inception (May
27, 1997) to December 31, 1999, in conformity with generally accepted
accounting principles.
/s/ Moss Adams LLP
Seattle, Washington
March 15, 2000
F-19
<PAGE>
iSHIP.COM, INC.
(A Development Stage Company)
BALANCE SHEET
DECEMBER 31, 1998 AND 1999
ASSETS
<TABLE>
<CAPTION>
1998 1999
----------- ------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents......................... $ 386,384 $ 2,069,704
Investments....................................... 990,676 --
Prepaid expenses and other........................ 12,516 271,073
----------- ------------
Total current assets............................ 1,389,576 2,340,777
----------- ------------
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, net........... 237,094 6,416,577
----------- ------------
$ 1,626,670 $ 8,757,354
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable.................................. $ 42,320 $ 1,160,902
Accrued liabilities............................... 19,514 189,457
Current portion of notes payable.................. 7,200 634,210
Current portion of capital lease obligations...... 48,900 3,141,986
----------- ------------
Total current liabilities....................... 117,934 5,126,555
----------- ------------
LONG-TERM LIABILITIES
Notes payable, net of current portion............. 79,218 1,419,857
Capital lease obligations, net of current
portion.......................................... 79,486 28,307
Deferred officers' compensation................... 168,750 --
Deferred rent payable............................. 50,845 111,859
----------- ------------
Total long-term liabilities..................... 378,299 1,560,023
----------- ------------
COMMITMENTS (Note 6)
STOCKHOLDERS' EQUITY
Series A Preferred stock, $.0005 par value,
8,986,668 shares authorized, issued and
outstanding; liquidation preference of
$3,370,001....................................... 4,493 4,493
Series B Preferred stock, $.0005 par value,
12,800,000 shares authorized, shares issued and
outstanding; none at December 31, 1998 10,133,334
at December 31, 1999, liquidation preference of
$7,600,000 at December 31, 1999.................. -- 5,067
Common stock, $0.0005 par value, 60,000,000 shares
authorized, shares issued and outstanding;
6,543,448 at December 31, 1998, and 7,562,519 at
December 31, 1999................................ 3,272 3,782
Additional paid-in capital........................ 3,583,605 20,943,534
Deferred compensation............................. (169,213) (8,305,570)
Deficit accumulated during the development stage.. (2,291,720) (10,580,530)
----------- ------------
Total stockholders' equity...................... 1,130,437 2,070,776
----------- ------------
$ 1,626,670 $ 8,757,354
=========== ============
</TABLE>
See accompanying notes.
F-20
<PAGE>
iSHIP.COM, INC.
(A Development Stage Company)
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Period from Period from
Inception Inception
(May 27, 1997) Year Ended December 31, (May 27, 1997)
to December 31, ------------------------ to December 31,
1997 1998 1999 1999
--------------- ----------- ----------- ---------------
<S> <C> <C> <C> <C>
REVENUES................ $ -- $ -- $ -- $ --
--------- ----------- ----------- ------------
OPERATING EXPENSES
General and
administrative....... 257,369 1,044,640 3,969,217 5,271,226
Research and
development.......... 203,966 801,734 2,574,704 3,580,404
Selling and
marketing............ 500 79,224 1,884,950 1,964,674
Product
implementation....... 19,297 53,574 139,573 212,444
--------- ----------- ----------- ------------
Total operating
expenses........... 481,132 1,979,172 8,568,444 11,028,748
--------- ----------- ----------- ------------
OPERATING LOSS.......... (481,132) (1,979,172) (8,568,444) (11,028,748)
--------- ----------- ----------- ------------
OTHER INCOME (EXPENSE)
Interest income....... -- 73,030 207,444 280,474
Interest expense...... -- (8,879) (115,224) (124,103)
Rental and other
income............... 72,204 32,229 187,414 291,847
--------- ----------- ----------- ------------
Total other income.. 72,204 96,380 279,634 448,218
--------- ----------- ----------- ------------
NET LOSS................ $(408,928) $(1,882,792) $(8,288,810) $(10,580,530)
========= =========== =========== ============
</TABLE>
See accompanying notes.
F-21
<PAGE>
iSHIP.COM, INC.
(A Development Stage Company)
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Preferred Stock Preferred Stock Deficit
---------------- ----------------- Accumulated
Series A Series B Common Stock Additional During the
---------------- ----------------- ---------------- Paid-in Deferred Development
Shares Amount Shares Amount Shares Amount Capital Compensation Stage
--------- ------ ---------- ------ --------- ------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, May 27, 1997
(inception)............ -- $ -- -- $ -- -- $ -- $ -- $ -- $ --
Common stock issued... -- -- -- -- 6,132,448 3,066 370 -- --
Preferred stock
issued............... 1,600,000 800 -- -- -- -- 599,200 -- --
Deferred
compensation......... -- -- -- -- -- -- 2,623 (2,623) --
Amortization of
deferred
compensation......... -- -- -- -- -- -- -- 2,623 --
Net loss.............. -- -- -- -- -- -- -- -- (408,928)
--------- ------ ---------- ------ --------- ------ ----------- ----------- ------------
BALANCE, December 31,
1997................... 1,600,000 800 -- -- 6,132,448 3,066 602,193 -- (408,928)
--------- ------ ---------- ------ --------- ------ ----------- ----------- ------------
Common stock issued... -- -- -- -- 411,000 206 17,242 -- --
Preferred stock
issued............... 7,386,668 3,693 -- -- -- -- 2,766,308 -- --
Deferred
compensation......... -- -- -- -- -- -- 197,862 (197,862) --
Amortization of
deferred
compensation......... -- -- -- -- -- -- -- 28,649 --
Net loss.............. -- -- -- -- -- -- -- -- (1,882,792)
--------- ------ ---------- ------ --------- ------ ----------- ----------- ------------
BALANCE, December 31,
1998................... 8,986,668 4,493 -- -- 6,543,448 3,272 3,583,605 (169,213) (2,291,720)
--------- ------ ---------- ------ --------- ------ ----------- ----------- ------------
Common stock issued... -- -- -- -- 1,019,071 510 146,367 -- --
Preferred stock
issued............... -- -- 10,133,334 5,067 -- -- 7,594,933 -- --
Stock and stock
options granted to
consultants.......... -- -- -- -- -- -- -- -- --
Deferred
compensation......... -- -- -- -- -- -- 9,618,629 (9,618,629) --
Amortization of
deferred
compensation......... -- -- -- -- -- -- -- 1,482,272 --
Net loss.............. -- -- -- -- -- -- -- -- (8,288,810)
--------- ------ ---------- ------ --------- ------ ----------- ----------- ------------
BALANCE, December 31,
1999................... 8,986,668 $4,493 10,133,334 $5,067 7,562,519 $3,782 $20,943,534 $(8,305,570) $(10,580,530)
========= ====== ========== ====== ========= ====== =========== =========== ============
</TABLE>
See accompanying notes.
F-22
<PAGE>
iSHIP.COM, INC.
(A Development Stage Company)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Period from Period from
Inception Inception
(May 27, 1997) Year Ended December 31, (May 27, 1997)
to December 31, ------------------------ to December 31,
1997 1998 1999 1999
--------------- ----------- ----------- ---------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES
Net loss.............. $(408,928) $(1,882,792) $(8,288,810) $(10,580,530)
Adjustments to
reconcile net loss to
net cash from
operating activities
Depreciation and
amortization......... 15,511 80,872 510,056 606,439
Amortization of
deferred
compensation......... 2,623 28,649 1,482,272 1,513,544
Amortization of
discount of
investments.......... -- (48,445) (9,324) (57,769)
Stock and stock
options issued for
services............. 375 2,448 2,100 4,923
Changes in assets and
liabilities
Prepaid expenses and
other............... (37,850) 25,334 (258,557) (271,073)
Accounts payable..... 2,377 39,943 1,118,582 1,160,902
Accrued liabilities.. 201 19,313 169,943 189,457
Deferred officers'
compensation........ 150,000 18,750 (168,750) --
Deferred rent
payable............. -- 50,845 61,014 111,859
--------- ----------- ----------- ------------
Net cash used in
operating
activities......... (275,691) (1,665,083) (5,381,474) (7,322,248)
--------- ----------- ----------- ------------
CASH FLOWS FROM
INVESTING ACTIVITIES
Purchase of property
and equipment........ (5,321) (142,030) (3,599,053) (3,746,404)
Proceeds from sale of
investments.......... -- 1,050,000 1,000,000 2,050,000
Purchase of
investments.......... -- (1,992,231) -- (1,992,231)
--------- ----------- ----------- ------------
Net cash used in
investing
activities........... (5,321) (1,084,261) (2,599,053) (3,688,635)
--------- ----------- ----------- ------------
CASH FLOWS FROM
FINANCING ACTIVITIES
Proceeds from long-
term debt............ -- 86,418 1,967,649 2,054,067
Proceeds from issuance
of common stock...... 3,061 15,000 144,777 162,838
Proceeds from issuance
of preferred stock... 600,000 2,770,001 7,600,000 10,970,001
Net change in stock
subscription
receivable........... (96,098) 96,098 -- --
Net change in
stockholder
advances............. 4,525 (4,525) -- --
Payments on capital
lease obligations.... (11,600) (46,140) (48,579) (106,319)
--------- ----------- ----------- ------------
Net cash provided by
financing
activities......... 499,888 2,916,852 9,663,847 13,080,587
--------- ----------- ----------- ------------
INCREASE IN CASH AND
CASH EQUIVALENTS...... 218,876 167,508 1,683,320 2,069,704
CASH AND CASH
EQUIVALENTS
Beginning of period... -- 218,876 386,384 --
--------- ----------- ----------- ------------
End of period......... $ 218,876 $ 386,384 $ 2,069,704 $ 2,069,704
========= =========== =========== ============
NONCASH TRANSACTIONS
Stock warrant issued
in favor of loan
fees................. $ -- $ -- $ 20,000 $ 20,000
========= =========== =========== ============
Equipment purchased
through capital
lease................ $ 186,126 $ -- $ 3,090,486 $ 3,276,612
========= =========== =========== ============
CASH PAID FOR
INTEREST.............. $ -- $ 8,879 $ 55,776 $ 64,655
========= =========== =========== ============
</TABLE>
See accompanying notes.
F-23
<PAGE>
iSHIP.COM, INC.
(A Development State Company)
NOTES TO FINANCIAL STATEMENTS
Note 1--Summary of Significant Accounting Policies
Development Stage Operations--iShip.com, Inc. (the Company), a Washington
corporation, was incorporated on May 27, 1997 under the name MoveIt! Software,
Inc. On May 18, 1998, the Company changed its name to iShip.com, Inc. The
Company's office is located in Bellevue, Washington.
Since inception, the Company has been developing and marketing Internet
applications that enable customers to price, ship, track and manage shipments
over the Internet. In April 1998, the Company began providing its Internet-
based shipping services to users. In April 1999, the Company entered into a
five-year agreement with Mail Boxes Etc. to be the exclusive provider of an
Internet-based retail package manifest system to its approximately 3,000
domestic retail centers. In October 1999, a beta version of this service was
deployed in ten retail centers. In May 1999, the Company entered into a five-
year agreement with eBay to provide shipping services to eBay auction
customers. The first phase of this service launched on eBay in July 1999.
Through December 31, 1999, the Company has offered its package tracking and
pricing applications at no charge to the user.
On March 7, 2000, the Company was acquired by Stamps.com, an Internet
Postage service provider (See Note 10).
Use of Estimates--The preparation of the 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 accompanying notes. Actual results could differ from those
estimates.
Cash and Cash Equivalents--For the purposes of the statement of cash flows,
cash and cash equivalents are defined as short-term, highly liquid investments
that are readily convertible to cash and are so near maturity that
fluctuations in interest rates lead to insignificant risk of changes in
investment value.
Fair Value of Financial Instruments--The Company's financial instruments,
including cash, cash equivalents, and accounts payable are carried at cost,
which approximates their fair value because of the short-term maturity of
these instruments. Long-term obligations are carried at cost, which
approximates fair value due to the proximity of the implicit rates of these
financial instruments and the prevailing market rates for similar instruments.
Equipment and Leasehold Improvements--Equipment and leasehold improvements
are stated at cost. The Company provides depreciation on the cost of its
equipment using straight-line methods over estimated useful lives of three and
five years. Amortization of leasehold improvements is extended over the term
of the lease. Expenditures for repairs and maintenance are charged to expense
as incurred.
Impairment of Long-Lived Assets--The Company evaluates the recoverability
of long-lived assets in accordance with "SFAS" No. 121, "Accounting for the
Impairment of Long-Lived Assets to be Disposed of." SFAS No. 121 requires
identification of impairment of long-lived assets in the event the net book
value of such assets exceeds the future undiscounted cash flows attributable
to such assets. To date, no such impairment has been indicated. Should there
be an impairment in the future, the Company will measure the amount of the
impairment based on the discounted future cash flows from the impaired assets.
Research and Development Costs--Research and development costs are charged
to expense as incurred. These costs primarily consist of salaries, development
materials, supplies and applicable overhead expenses of personnel directly
involved in the research and development of new technology.
F-24
<PAGE>
iSHIP.COM, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Website Development Costs--The Company developed and maintains its website.
Costs associated with the website consist primarily of software purchased from
third parties. Currently, the Company capitalized costs of computer software
obtained for internal use in web design and network operations. These
capitalized costs are amortized based on their useful life. Payroll and
related costs are not capitalized, as the amounts are immaterial and
principally related to maintenance. Costs related to development of website
content are expensed as incurred.
Advertising--The Company expenses advertising costs as incurred. No
advertising costs were incurred during the period from inception (May 27,
1997) to December 31, 1999.
Stock-Based Compensation--The Company accounts for stock-based compensation
to employees using the intrinsic value method, whereby, compensation cost is
recognized when the exercise price at the date of grant is less than the fair
market value of the Company's common stock. The Company discloses the proforma
effect of compensation cost based on the fair value method for determining
compensation cost. Stock-based compensation awarded to non-employees is
determined using the fair value method. Compensation cost is recognized over
the service or vesting period.
Risk Concentrations--Financial instruments that potentially subject the
Company to a concentration of credit risk consist of cash, cash equivalents
and short-term investments. Cash, cash equivalents and short-term investments
are deposited with high credit, quality financial institutions.
Income Taxes--Income taxes are accounted for using an asset and liability
approach, which requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of temporary differences
between the financial statement and tax basis of assets and liabilities at the
applicable enacted tax rates. Generally accepted accounting principles require
a valuation allowance against deferred tax assets if, based on the weight of
available evidence, it is more likely than not that some or all of its
deferred tax assets will not be realized.
Stock Split--On August 6, 1999 the Board of Directors approved a 2 for 1
split of the Company's Common and Preferred Stock and an increase in the
number of authorized Common Stock shares to 60,000,000 and authorized
Preferred Stock shares to 21,786,688. Accordingly, the share information in
the accompanying financial statements and footnotes has been restated to
reflect the stock split.
Recent Accounting Pronouncements--In June 1998, the Financial Accounting
Standards Board issued SFAS No. 133, "Accounting for Derivatives and Hedging
Activities." SFAS 133 is effective for all fiscal quarters beginning with the
quarter ending June 30, 1999. SFAS 133 establishes accounting and reporting
standards of derivative instruments, including certain derivative instruments
imbedded in other contracts, and for hedging activities. In July 1999, the
FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Date of FASB Statement No. 133," ("SFAS
137"). SFAS 137 deferred the effective date until the first fiscal quarter
ended on or following June 30, 2000. The Company will adopt SFAS 133 in its
quarter ending June 30, 2000 and does not expect such adoption to have a
material impact on the Company's results of operations, financial position or
cash flows.
Note 2--Investment Securities
Investment securities are classified as "available-for-sale" under
generally accepted accounting principles. Available-for-sale securities are
recorded at estimated fair value, with the net unrealized gain or loss
included as a separate component of stockholders' equity, net of the related
tax effect. Realized gains or losses on dispositions are based on the net
proceeds and the adjusted carrying amount of securities sold, using the
specific identification method.
F-25
<PAGE>
iSHIP.COM, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
At December 31, 1998, the Company had commercial paper with an amortized
cost of $990,676, which approximated fair value and matured in 1999.
Note 3--Equipment and Leasehold Improvements
Equipment is recorded at cost and consists of the following at December 31:
<TABLE>
<CAPTION>
1998 1999
-------- ----------
<S> <C> <C>
Computer hardware...................................... $245,865 $5,745,052
Computer software...................................... 87,612 506,970
Furniture and fixtures................................. -- 216,350
Leasehold improvements................................. -- 554,645
-------- ----------
333,477 7,023,017
Accumulated depreciation and amortization.............. (96,383) (606,439)
-------- ----------
$237,094 $6,416,578
======== ==========
</TABLE>
Included in equipment at December 31, 1999 is $3,276,612 held under capital
lease with accumulated amortization of $139,594. At December 31, 1998 included
in equipment is $186,125 held under capital lease with accumulated
amortization of $77,552.
Note 4--Notes Payable
The Company has a Loan and Security Agreement with a bank for $2,950,000 of
which $2.5 million is available for equipment purchases through February 19,
2000 and $450,000 is available through a revolving line maturing on August 19,
2000. Borrowings under the non-revolving equipment line of credit are payable
in 30 equal monthly installments beginning in March 2000. Interest is payable
monthly and accrues at the annual rate of the bank's prime rate plus 0.50%.
Outstanding borrowings against the equipment line were $86,418 at December 31,
1998 and $2,054,067 at December 31, 1999. There were no outstanding borrowings
under the revolving line at December 31, 1998 and 1999.
In connection with the Loan and Security Agreement, the Company issued a
Common Stock purchase warrant which permits the holder to purchase up to
10,000 shares of the Company's Common Stock at a purchase price of the lesser
of $2.50 per share and the price per share received by the Company in the next
round of financing. The warrant is exercisable only (i) after the Company's
initial public offering, (ii) immediately prior to a change in control and
(iii) with the written consent of the Company. The fair value of the purchase
warrants has been estimated at $20,000 using the Black-Scholes option-pricing
model. The Company capitalized the fair value, which is being amortized on a
straight-line method over the repayment period.
Required principal payments for years ending December 31 are as follows:
<TABLE>
<S> <C>
2000.............................................................. $ 634,210
2001.............................................................. 826,335
2002.............................................................. 593,522
----------
$2,054,067
==========
</TABLE>
Note 5--Deferred Officers' Compensation
Three key officers of the Company deferred their salaries during the first
nine months of development stage operations. The deferred compensation totaled
$168,750 as of December 31, 1998. The deferred compensation was paid in 1999.
F-26
<PAGE>
iSHIP.COM, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Note 6--Capital Leases and Commitments
The Company leases office space and certain leasehold improvements, office
furniture, and computer equipment under various capital and operating leases
through June 30, 2001. Future minimum lease payments required under non-
cancelable capital and operating leases are as follows:
<TABLE>
<CAPTION>
Capitalized Operating
Years Ending December 31, Leases Leases
------------------------- ----------- ----------
<S> <C> <C>
2000............................................... $3,243,620 $ 753,480
2001............................................... 28,752 475,132
2002............................................... -- 485,822
2003............................................... -- 496,519
2004............................................... -- 293,976
---------- ----------
Total minimum lease payments....................... 3,272,372 $2,651,872
==========
Less amount representing interest at 4.4% to
13.4%............................................. (102,079)
----------
Present value of minimum lease payments (includes
current portion of $3,141,986).................... $3,170,293
==========
</TABLE>
Given the Company's development stage operations, only a portion of the
standard lease payments, on certain agreements, are required in early months.
The difference between the actual lease payments and the standard monthly
payments are recorded as deferred rent payable. Total deferred rent was
$50,845 as of December 31, 1998 and $111,859 as of December 31, 1999.
Rental expense on operating leases totaled $15,753 in 1997, $277,584 in
1998, $538,669 in 1999 and $832,000 in the period from inception to December
31, 1999.
The Company subleases a portion of the office space. Rental income from the
sublease totaled $82,113 in 1998, $187,414 in 1999, and $269,527 for the
period from inception to December 31, 1999.
Subsequent to December 31, 1999, the Company entered into two non-
cancelable operating lease agreement for additional office space. One lease
has an initial term of 8 years with two renewal terms of five years each. The
initial lease term will commence fifteen days following landlord's substantial
completion of the building improvements. The estimated time period for
commencement is in the first quarter of 2001. Base rent will be paid monthly
based on an escalating rent schedule ranging from $23.00 per square foot in
the initial year to $27.36 per square foot in the eighth year. The estimated
rentable square feet are 75,510. The additional lease has a 24 month term with
base rents paid monthly based on an escalating rent schedule ranging from
$21.00 per square foot in the initial year to $22.00 per square foot in the
second year. The estimated rentable square feet are 14,573.
Note 7--Preferred Stock
Transactions--The Company issued 1,600,000 shares in 1997 and 7,386,668
shares in 1998 of Series A Preferred Stock at $0.375 per share. The Company
issued 10,133,334 shares of Series B Preferred Stock in 1999 at $0.75 per
share. No direct costs were incurred in relation to the shares issued.
Preference in Liquidation--In the event of voluntary or involuntary
liquidation, distribution of assets, dissolution or winding-up of the Company
before any distribution or payment to holders of the Company's common stock,
the holders of Series A Preferred Stock are entitled to receive payment of
$0.375 per outstanding share, and the holders of Series B Preferred Stock are
entitled to receive payment of $0.75 per outstanding share.
Dividends--Dividends payable to holders of preferred stock are at the
discretion of the Company's Board of Directors. As of December 31, 1997, 1998
and 1999, no dividends had been declared.
F-27
<PAGE>
iSHIP.COM, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Conversion Rights--A holder of preferred stock, at the holder's option, has
the right to convert shares of preferred stock into common stock on a one-for-
one basis, subject to adjustment for stock splits and dilutive issuances. In
addition, the preferred stock would automatically convert to common stock in
the event of a change in control or the closing of an underwritten public
offering that establishes a valuation of the Company of at least $75 million
and results in gross proceeds of at least $15 million or upon the conversion
of two-thirds of the shares of preferred stock originally issued. A change in
control occurred as a result of the merger in March, 2000.
Voting Rights--The holders of preferred stock are entitled to one vote for
each share and are entitled to vote on all matters on which the holders of
common stock have the right to vote.
Stock Warrant--On April 27, 1999 the Company issued a warrant to a
strategic partner for a maximum of 2,666,666 shares of the Company's Series B
Preferred Stock at an exercise price of $1.50 per share. The actual number of
shares purchasable under the warrant is equal to the quotient of the amount in
excess of a specified dollar amount the Company receives in a specified one-
year period pursuant to the agreement between the Company and this strategic
partner divided by $0.75, and in any event may not exceed 2,666,666 shares.
The specified one-year period begins on the earlier of March 1, 2000 and the
date on which a certain threshold is reached pursuant to the agreement between
the Company and this strategic partner. The warrant terminates on the earlier
of April 27, 2004 and the consummation of a merger or acquisition of the
Company occurring after the specified one-year period. The Company is valuing
the warrant at its fair value, which at December 31, 1999 is zero. The fair
value is determined using the Black-Scholes option-pricing model based on the
lowest estimated number of shares of the Company's Series B Preferred Stock to
be purchasable under the warrant. At April 27, 1999 and December 31, 1999, as
no amounts have been received by the Company pursuant to the agreement, the
lowest estimated number of shares to be purchasable under the warrant is zero,
resulting in zero fair value. The fair value of the warrant will be adjusted,
as events occur, until completion of performance. Costs resulting from the
warrant, if any, will be recognized based on increases in the fair value of
the warrant.
Note 8--Stock Option Plan
The Company has a stock option plan under which employees and consultants
may be awarded incentive or nonstatutory stock options. The plan authorizes
the grant of options for the purchase of up to 5,660,000 shares of common
stock. In February 2000, the Board of Directors approved an increase of
500,000 shares to the option pool. Under the plan, the option exercise price
for incentive stock options may not be less than the fair market value of the
Company's common stock at the date of grant as determined by the Board of
Directors, but for nonstatutory stock options may be less than the fair market
value of the Company's common stock at the date of grant as determined by the
Board of Directors. However, all option grants under the plan to 10%
shareholders may not be less than 110% of fair market value of the Company's
common stock at the date of grant as determined by the Board of Directors.
Options expire no later than ten years from the grant date, and vesting is
established at the time of grant provided that options shall become
exercisable at the rate of at least 20% per year over five years.
The Company has issued options to employees which, based on the intrinsic
value method, include a compensation element of $184,500 in 1998, $9,095,436
in 1999, and $9,279,936 in the period from inception to December 31, 1999. The
compensation element has been recorded as additional paid-in capital and
deferred compensation and is being amortized to expense over the vesting
periods of the related options.
The Company has granted options to consultants with fair values at grant
date of $2,623 in 1997, $13,362 in 1998, $523,193 in 1999 and $539,178 in the
period from inception to December 31, 1999. The fair value of the options
granted has been recorded as additional paid-in capital and deferred
compensation expense and is being amortized to expense over the related
service period. The fair value has been determined using the Black-Scholes
option-pricing model with the following assumptions on the date of grant: 0%
dividend yield, forfeiture rate and volatility, risk free rate of return of
4.47% and 6.18%, and expected life of five years.
F-28
<PAGE>
iSHIP.COM, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Stock option activity is as follows:
<TABLE>
<CAPTION>
Common Shares Weighted
----------------------- Average
Available Options Exercise Options
for Grant Outstanding Price Exercisable
---------- ----------- -------- -----------
<S> <C> <C> <C> <C>
Inception, May 27, 1997....... -- -- -- --
Authorized.................. 5,660,000 -- --
Granted..................... (1,785,000) 1,785,000 $0.0375
Exercised................... -- (10,000) $0.0375
---------- ---------- -------
Balance, December 31, 1997.... 3,875,000 1,775,000 $0.0375 --
=======
Granted..................... (759,000) 759,000 $0.0375
Exercised................... -- (411,000) $0.0365
---------- ---------- -------
Balance, December 31, 1998.... 3,116,000 2,123,000 $0.0390 420,312
=======
Granted..................... (2,982,406) 2,982,406 $0.6251
Exercised................... -- (1,008,194) $0.0883
Forfeited................... 443,500 (443,500) $0.8972
---------- ---------- -------
Balance, December 31, 1999.... 577,094 3,653,712 $0.4232 533,184
========== ========== ======= =======
</TABLE>
The following summarizes options outstanding at December 31, 1999:
<TABLE>
<CAPTION>
Weighted
Average Weighted
Range of Remaining Average
Exercise Number Contractual Exercise Number
Price Outstanding Life Price Exercisable
-------- ----------- ----------- -------- -----------
<S> <C> <C> <C> <C>
$.075 - .15 1,538,746 8.43 $0.099 533,184
$.30 - .40 1,141,666 9.43 $0.370 --
$1.00 973,300 9.79 $1.000 --
</TABLE>
Had the compensation cost for stock options been determined using the fair
value method, the proforma net loss would have increased by $7,400 to $416,328
for the period from inception to December 31, 1997, by $5,700 to $1,888,492
for the year ended December 31, 1998, by $30,500 to $8,319,310 for the year
ended December 31, 1999 and by $43,600 to $10,624,130 for the period from
inception to December 31, 1999.
The weighted average fair value of the options granted was estimated to be
$.01 in the period from inception to December 31, 1997, $.027 in 1998 and
$3.35 in 1999 using the Black-Scholes option-pricing model with the following
assumptions on the date of grant: 0% dividend yield and volatility, 5%
forfeitures per year, risk-free interest rate of 4.47% to 6.30%, expected
lives of nine years.
Note 9--Income Taxes
At December 31, 1999, the Company has net operating loss carryforwards for
federal income tax purposes of approximately $8,700,000 and research credit
carryforwards of $288,900 available to offset future federal taxable income,
if any. The net operating loss and research credit carryforwards generally
expire in 2012 thru 2019. The Internal Revenue Code may limit the net
operating loss carryforwards to be used in any given year upon the occurrence
of certain events, including significant change in ownership interest.
F-29
<PAGE>
iSHIP.COM, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Deferred taxes are comprised of the following at December 31:
<TABLE>
<CAPTION>
1998 1999
--------- -----------
<S> <C> <C>
Deferred tax assets
Net operating loss................................ $ 643,000 $ 2,958,000
Research credits.................................. 109,000 288,900
Deferred compensation............................. 57,000 0
other............................................. 17,300 25,500
--------- -----------
Total deferred tax asset............................ 826,300 3,272,400
Valuation allowance................................. (826,300) (3,272,400)
--------- -----------
$ -- $ --
========= ===========
</TABLE>
A valuation allowance for the full amount of the net deferred tax asset has
been recorded as realization in the near term is not reasonably assured. The
provision for income taxes differs from the amount computed by applying the
statutory federal income tax rate of 34% to earnings before taxes due to the
valuation allowance established for the current and prior year's net operating
loss and nondeductible items.
A reconciliation of the income tax benefit to the amounts computed by
applying the federal statutory income tax rate to loss before income tax is as
follows:
<TABLE>
<CAPTION>
Period from Period from
Inception Inception (May
(May 27, 1997) Year Ended December 31, 27, 1997)
to December ------------------------------ December 31,
31, 1997 1998 1999 1999
--------------- ------------- --------------- ---------------
Amount % Amount % Amount % Amount %
--------- ---- -------- --- ---------- --- ---------- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Income tax benefit at
federal statutory
rate................... $139,000 34% $640,000 34% $2,818,000 34% $3,597,000 34%
Deferred stock
compensation........... (1,000) -- (10,000) (1) (504,000) (6) (515,000) (5)
Research credits and
other.................. (1,200) -- 59,500 3 132,100 2 190,400 2
Change in valuation
allowance.............. (136,800) (34) (689,500) (36) (2,446,100) (30) (3,272,400) (31)
--------- ---- -------- --- ---------- --- ---------- ---
$ -- -- % $ -- --% $ -- --% $ -- --%
========= ==== ======== === ========== === ========== ===
</TABLE>
Note 10--Merger Agreement and Subsequent Event
In October 1999, the Company entered into a merger agreement with
Stamps.com Inc. an enterprise developing an Internet-based postage service for
end-users. On February 3, 2000, the Company obtained $2 million of subordinate
bridge financing from Stamps.com Inc.
On March 7, 2000, upon obtaining approval from the Company's shareholders
and Stamps.com's stockholders, the merger was consummated. Under the terms of
the merger agreement, the Company's preferred and common shareholders, warrant
holders and option holders exchanged their securities in the Company for the
equivalent of 8 million shares of Stamps.com common stock. Included in the 8
million shares to be received are amounts reserved for issuance under the
terms of the outstanding stock options and warrants of the Company for which
the holders received options and warrants for the purchase of Stamps.com
common stock. The exercise price of the outstanding options and warrants was
adjusted to reflect the share exchange ratio.
Upon consummation of the merger the $2 million of bridge financing was
converted to due to parent.
F-30
<PAGE>
iSHIP.COM, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
The merger agreement reflects a change in control, which accelerated the
vesting of options to purchase an estimate of 930,000 shares of the Company's
common stock or one-third of all outstanding unvested options granted prior to
October 21, 1999. The accelerated vesting will result in a compensation charge
in March 2000 estimated to be $1.4 million.
F-31
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
On October 22, 1999, Stamps.com entered into a merger agreement to acquire
iShip.com in exchange for up to 8,000,000 shares of Stamp.com's common stock.
Stamps.com's management has prepared the following unaudited pro forma
condensed combined financial information to give effect to this acquisition.
The Unaudited Pro Forma Condensed Combined Statements of Operations for the
period ended December 31, 1999 gives effect to the iShip.com acquisition as if
it had taken place on January 1, 1999.
The pro forma adjustments, which are based upon available information and
certain assumptions that Stamps.com believes are reasonable in the
circumstances, are applied to the historical financial statements of
Stamps.com and iShip.com. The iShip.com acquisition will be accounted for
using the purchase method of accounting. Stamps.com allocation of purchase
price is based upon management's current estimates of the fair value of assets
acquired and liabilities assumed in accordance with Accounting Principles
Board No. 16.
The purchase price allocations reflected in the accompanying unaudited pro
forma condensed combined financial statements may be different from the final
allocation of the purchase price due to the different periods of time used in
the calculations and such differences may be material. The Company expects to
complete a valuation and other procedures during the second quarter of 2000.
As part of the merger agreement, 800,000 shares of the total 8,000,000
shares of Stamps.com common stock will be deposited into an escrow account
immediately preceeding the close of this transaction. The escrow amount is
intended to compensate Stamps.com for any inaccuracy or breach of any
representation, warranty, covenant or agreement of iShip.com 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 accompanying unaudited pro forma condensed combined financial
information should be read in conjunction with the historical financial
statements and the notes thereto for both Stamps.com and iShip.com, which are
included elsewhere. The unaudited pro forma condensed combined financial
information is provided for informational purposes only and does not purport
to represent what Stamps.com's financial position or results of operations
would actually have been had the iShip.com acquisition occurred on such dates
or to project Stamps.com's results of operations or financial position for any
future period.
F-32
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF DECEMBER 31, 1999
(Amounts in thousands)
<TABLE>
<CAPTION>
PRO FORMA
STAMPS.COM ISHIP.COM ADJUSTMENTS TOTAL
---------- --------- ----------- --------
<S> <C> <C> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents.......... $374,746 $2,070 $ -- $376,816
Accounts receivable................ 134 -- -- 134
Prepaid expenses................... 23,883 271 -- 24,154
-------- ------ -------- --------
Total current assets............... 398,763 2,341 -- 401,104
Property and equipment, net........ 9,702 6,416 -- 16,118
Intangibles, net................... -- -- 232,071 (2) 232,071
Other assets....................... 1,977 -- -- 1,977
-------- ------ -------- --------
Total assets................... $410,442 $8,757 $232,071 $651,270
======== ====== ======== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
-----------------------------
Current liabilities:
Line of credit..................... $ 1,000 $ -- $ -- $ 1,000
Accounts payable................... 2,707 1,161 -- 3,868
Accrued expenses................... 4,186 808 -- 4,994
Current portion of capital lease
obligations....................... 513 3,142 -- 3,655
-------- ------ -------- --------
Total current liabilities.......... 8,406 5,111 -- 13,517
Long-term liabilities.............. 438 1,560 -- 1,998
Stockholders' equity (deficit)..... 401,598 2,086 (15,179)(3) 635,755
247,250 (4)
-------- ------ -------- --------
Total liabilities and
stockholders' equity
(deficit)..................... $410,442 $8,757 $232,071 $651,270
======== ====== ======== ========
</TABLE>
See notes to unaudited pro forma condensed combined financial information.
F-33
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
PRO FORMA
STAMPS.COM ISHIP.COM ADJUSTMENTS TOTAL
---------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues......................... $ 358 $ -- $ -- $ 358
Cost of sales.................... 2,430 -- -- 2,430
--------- ------- -------- ---------
Gross profit..................... (2,072) -- (2,072)
Operating expenses:
Research and development......... 7,363 2,714 -- 10,077
Sales and marketing.............. 35,208 1,885 -- 37,093
General and administrative....... 14,333 3,969 61,813 (5) 80,115
--------- ------- -------- ---------
56,904 8,568 61,813 127,285
Loss from operations............. (58,976) (8,568) (61,813) (126,927)
Other income (expense):
Interest expense................. (173) (99) -- (272)
Interest income.................. 2,662 207 -- 2,869
Other, net....................... -- 187 -- 187
--------- ------- -------- ---------
Net loss......................... $ (56,487) $(8,273) $(61,813) $(124,143)
========= ======= ======== =========
Basic and diluted net loss per
share........................... $ (2.59) $ (4.49)
========= =========
Weighted average shares
outstanding used in basic and
diluted per share calculation... 21,824 5,819 27,643
========= ======== =========
</TABLE>
See notes to unaudited pro forma condensed combined financial information.
F-34
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL INFORMATION
The pro forma financial information gives effect to the following pro forma
adjustments:
The iShip.com merger will be accounted for using the purchase method of
accounting. In connection with the acquisition, Stamps.com will issue up to 8
million shares of Common Stock in exchange for all of the outstanding shares
of iShip.com capital stock, options and warrants. For purposes of these pro
forma financial statements, the estimated purchase price is approximately
$249.3 million based on $34.63 per share and the issuance of 7.2 million
shares of common stock (8 million less the escrow amount of 800,000). The
$34.63 per share amount is the average closing price of our Common Stock on
the Nasdaq National Market for the 30 consecutive trading days ending on and
including the third day prior to March 7, 2000 (closing date).
The iShip.com shares were first converted to Stamps.com equivalent shares
by taking the number of iShip.com shares over the total number of iShip.com
shares multiplied by 7,200,000 to arrive at Stamps.com shares for each
iShip.com share. This calculation has been made for purposes of these
financial statements only and does not represent the final exchange ratio,
which will be determined on the third trading day prior to the closing of the
transaction.
The purchase price was determined as follows (in thousands):
<TABLE>
<CAPTION>
iShip.com Stamps.com
shares shares Fair Value
--------- ---------- ----------
<S> <C> <C> <C>
Shares...................................... 26,682 5,819 $201,520
Warrants.................................... 2,677 584 20,218
Vested stock options........................ 1,644 359 12,419
Unvested stock options...................... 2,010 438 15,179
------ ----- --------
33,013 7,200 $249,336
====== ===== ========
</TABLE>
The fair value of "shares" was calculated by taking the value of the
Stamps.com shares ($34.63 per share) times the number of Stamps.com shares to
be exchanged.
With respect to stock options exchanged as part of the iShip.com merger,
all vested and unvested iShip.com options exchanged for Stamps.com options are
included as part of the purchase price based on their fair value. The fair
value of the shares underlying options and warrants was calculated by taking
the vested and unvested options and warrants to purchase Stamps.com shares
(1,381,000 options) times the fair value of the stock ($34.63 per share).
Proceeds to be received from the option holders upon exercise are estimated to
be approximately $1.5 million based on the weighted average exercise price of
$0.42 per outstanding option at December 31, 1999. The aggregate exercise
price of the warrants is $5,000,000. These amounts are excluded from the fair
value calculations.
The pro forma financial information has been prepared on the basis of
assumptions described in these notes and include assumptions relating to the
allocation of the consideration paid for the assets and liabilities of
iShip.com based on preliminary estimates of their fair value. The actual
allocation of such consideration may differ from that reflected in the pro
forma financial information after valuations and other procedures to be
performed after the closing of the iShip.com acquisition.
F-35
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL INFORMATION--(Continued)
Below is a table of the estimated acquisition cost, purchase price
allocation and annual amortization of the intangible assets acquired (in
thousands):
<TABLE>
<CAPTION>
Annual
Amortization Amortization
Life of Intangibles
------------ --------------
<S> <C> <C> <C>
Estimated Acquisition Cost:
Estimated purchase price............ $249,336
========
Purchase Price Allocation:
Estimated fair value of net tangible
assets of iShip.com at December 31,
1999............................... 2,086
Deferred compensation on unvested
stock options assumed.............. 15,179 4 3,795
Intangible assets acquired:
Goodwill............................ 232,071 4 58,018
--------
$249,336
========
</TABLE>
Tangible assets of iShip.com acquired in the iShip.com merger principally
include cash and fixed assets. Liabilities of iShip.com assumed in the
iShip.com merger principally include accounts payable, accrued payroll and
long-term debt.
2. The pro forma adjustment is for goodwill allocation of $232.07 million.
3. The pro forma adjustment is for deferred stock compensation associated
with the unvested iShip.com stock options to acquire approximately 2 million
shares of iShip.com common stock to be assumed by Stamps.com.
4. The pro forma adjustment to "shareholders' equity" reflects the
elimination of iShip.com's shareholders' equity ($2.1 million) and the impact
of the issuance of Stamps.com's common stock ($249.3 million) in connection
with the iShip.com merger.
5. The pro forma adjustment is for amortization of deferred stock
compensation associated with the unvested iShip.com stock options assumed by
Stamps.com over the remaining vesting period of $3.8 million and amortization
of goodwill of $58 million for the year ended December 31, 1999.
F-36
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form
10-K to be signed on its behalf by the undersigned, thereunto duly authorized,
in the City of Santa Monica, State of California, on the 29th day of March,
2000.
STAMPS.COM INC.
By: /s/ John M. Payne
___________________________________
John M. Payne
Chairman and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, the undersigned hereby constitute and
appoint John M. Payne and John W. LaValle, his true and lawful attorney-in-fact
and agent, with full power of substitution and resubstitution, for him and in
his name, place and stead, in any and all capacities, to sign any and all
amendments to this Report, and to file the same, with exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agent, full power and
authority to do and perform each and every act and thing requisite or necessary
to be done in connection therewith, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent, or his substitute or substitutes, may lawfully do
or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons in the capacities and on the
dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ John M. Payne Chairman of the Board and March 29, 2000
____________________________________ Chief Executive Officer
John M. Payne (Principal Executive
Officer)
/s/ Loren E. Smith President, Chief Operating March 29, 2000
____________________________________ Officer and Director
Loren E. Smith
/s/ John W. LaValle Chief Financial Officer and March 29, 2000
____________________________________ Executive Vice President
John W. LaValle (Principal Financial
Officer)
/s/ Candelario J. Andalon Controller (Principal March 29, 2000
____________________________________ Accounting Officer)
Candelario J. Andalon
/s/ Mohan P. Ananda Director March 29, 2000
____________________________________
Mohan P. Ananda
/s/ David C. Bohnett Director March 29, 2000
____________________________________
David C. Bohnett
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Jeffrey J. Brown Director March 29, 2000
____________________________________
Jeffrey J. Brown
/s/ Thomas H. Bruggere Director March 29, 2000
____________________________________
Thomas H. Bruggere
/s/ Thomas N. Clancy Director March 29, 2000
____________________________________
Thomas N. Clancy
/s/ G. Bradford Jones Director March 29, 2000
____________________________________
G. Bradford Jones
/s/ Marvin Runyon Director March 29, 2000
____________________________________
Marvin Runyon
/s/ John A. Duffy Director March 29, 2000
____________________________________
John A. Duffy
/s/ Stephen M. Teglovic Director March 29, 2000
____________________________________
Stephen M. Teglovic
/s/ Carolyn M. Ticknor Director March 29, 2000
____________________________________
Carolyn M. Ticknor
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
2.1 Agreement and Plan of Merger, dated as of October 22, 1999, by and
among the Company, Rocket Acquisition Corp. and iShip.com, Inc.(1)
2.2 Amendment No. 1 to Agreement and Plan of Merger, dated as of February
14, 2000, by and among the Company, Rocket Acquisition Corp. and
iShip.com, Inc.(4)
3.1 Certificate of Incorporation.(2)
3.2 Bylaws of the Company.(2)
4.1 Specimen common stock certificate.(2)
10.1 Series A Stock Purchase Warrant, dated May 1, 1998, between the
Company and Silicon Valley Bank.(2)
10.2 Amended and Restated Investors' Rights Agreement, dated February 17,
1999, between the Company and the investors named therein.(2)
10.3 Patent Assignment from Mohan P. Ananda to the Company, dated January
20, 1998.(2)
10.4 Assignment and License Agreement between the Company and Mohan P.
Ananda, dated January 20, 1998.(2)
10.5 Employment Offer Letter, dated October 29, 1998, by and between the
Company and John M. Payne.(2)
10.6 Employment Agreement dated, January 20, 1998, by and between the
Company and Mohan P. Ananda.(2)
10.7 1998 Stock Plan and Forms of Notice of Grant and Stock Option
Agreement.(2)
10.8 1999 Stock Incentive Plan.(2)
10.9 1999 Employee Stock Purchase Plan.(2)
10.10 Form of Indemnification Agreement between the Company and its
directors and officers.(2)
10.11 Lease Agreement, dated August 27, 1998, between the Company and
Spieker Properties, L.P. and Amendment No. One, dated January 8,
1999.(2)
10.12+ Advertising Insertion Order, dated December 16, 1998, between the
Company and America Online, Inc. ("AOL").(2)
10.13 Master Lease Agreement between the Company and FirstCorp, dated June
5, 1998.(2)
10.14 Quick Start Loan and Security Agreement, dated May 1, 1998, between
the Company and Silicon Valley Bank.(2)
10.15 Employment Offer Letter, dated August 7, 1998, between the Company and
John W. LaValle.(2)
10.16 Consulting Agreement, dated February 1, 1999, between the Company and
Loren Smith.(2)
10.17 Lease, dated April 12, 1999, between the Company and Spieker
Properties, L.P.(2)
10.18+ Sponsorship Agreement, dated May 14, 1999, between the Company and
Intuit, Inc.(2)
10.19+ Distributor Agreement, dated December 10, 1998, between the Company
and Westvaco.(2)
10.20+ Distributor Agreement, dated January 15, 1999, between the Company and
Office Depot, Inc.(2)
10.21+ Distributor Agreement, dated March 31, 1999, between the Company and
Seiko Instruments USA, Inc.(2)
10.22+ Distributor Agreement, dated March 30, 1999, between the Company and
Avery Dennison Office Products Company.(2)
10.23+ Distributor Agreement, dated March 11, 1999, between the Company and
Dymo-Costar Corporation.(2)
10.24 Series A Preferred Stock and Warrant Purchase Agreement, dated
February 26, 1998, between the Company and certain investors.(2)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
10.25 Amended and Restated Voting Agreement, dated February 17, 1999,
between the Company and certain investors.(2)
10.26 Separation Agreement and Release, dated May 13, 1999, between the
Company and Mohan Ananda.(2)
10.27 License Agreement, dated May 13, 1999, between the Company and Mohan
Ananda.(2)
10.28 Series C Preferred Stock Purchase Agreement, dated February 17, 1999,
between the Company and certain investors.(2)
10.29 Amendment Letter to AOL, dated June 4, 1999.(2)
10.30 Nondisclosure Agreement and Agreement to Release University from
damages caused by testing, dated December 6, 1998.(2)
10.31 Nondisclosure Agreement and Agreement to Release Carnegie Mellon, Inc.
from damages caused by testing, dated April 22, 1997.(2)
10.32 Letter of Intent from Stampmaster, Inc. and US Postal Service response
letter between Stampmaster, Inc. and the US Postal Service, dated
February 21, 1997 and April 23, 1997, respectively.(2)
10.33 Consulting Agreement, dated June 21, 1999, between the Company and
Carolyn Ticknor.(2)
10.34 Interactive Marketing and Distribution Agreement, dated October 15,
1999, between AOL and the Company.(3)
10.35 Common Stock and Warrant Purchase Agreement, dated October 20, 1999,
between AOL and the Company.(3)
10.36 Common Stock Purchase Warrant, dated October 29, 1999, between AOL and
the Registrant.(3)
10.37 Consulting Agreement dated October 20, 1999 between the Company and
Marvin Runyon.(3)
10.38 Amended and Restated Consulting Services Agreement dated November 15,
1999 between the Company and Marvin Runyon.(4)
10.39 Offer Letter dated as of October 20, 1999 between the Company and
Loren E. Smith.(5)
21.1 Subsidiaries of the Company.(3)
23.1 Consent of Arthur Andersen LLP.(5)
23.2 Consent of Moss Adams LLP.(5)
24.1 Power of Attorney (included on the signature page to this Report).(5)
27.1 Financial Data Schedule.(5)
</TABLE>
- --------
(1) Incorporated by reference to the Company's Form 8-K filed with the
Securities and Exchange Commission (the "Commission") on October 29, 1999
(File No. 000-26427).
(2) Incorporated by reference to the Company's Registration Statement on Form
S-1 filed with the Commission (File No. 333-77025).
(3) Incorporated by reference to the Company's Registration Statement on Form
S-1 filed with the Commission (File No. 333-90115).
(4) Incorporated by reference to the Company's Registration Statement on Form
S-4 filed with the Commission (File No. 333-91377)
(5) Filed with the Commission with this Annual Report on Form 10-K.
+ Confidential treatment requested and received as to certain portions.
<PAGE>
Ex 10.39
Mr. Loren E. Smith
P.O. Box 953
El Prado, NM 87529-0953
October 20, 1999
Dear Loren,
On behalf of Stamps.com Inc. (the "Company"), I am pleased to offer you the
-------
position of President and Chief Operating Officer.
The terms of your new position with the Company are as set forth below:
1. Position.
--------
a. You will become President and Chief Operating Officer for the
Company. In your position, you will report directly to John Payne,
the Company's Chairman and Chief Executive Officer.
b. You agree to the best of your ability and experience that you will
at all times loyally and conscientiously perform all of the duties
and obligations required of and from you pursuant to the express
and implicit terms hereof, and to the reasonable satisfaction of
the Company. During the term of your employment, you further agree
that you will devote all of your business time and attention to the
business of the Company, the Company will be entitled to all of the
benefits and profits arising from or incident to all such work
services and advice, you will not render commercial or professional
services of any nature to any person or organization, whether or
not for compensation, without the prior written consent of the
Company's Board of Directors, and you will not directly or
indirectly engage or participate in any business that is
competitive in any manner with the business of the Company. Nothing
in this letter agreement will prevent you from (i) accepting
speaking or presentation engagements in exchange for honoraria;
(ii) from serving on boards of charitable organizations; (iii) from
serving on boards of companies for which you are a director as of
the date of this letter or companies which are not competitive with
the Company; or (iv) from owning no more than one percent (1%) of
the outstanding equity securities of a corporation whose stock is
listed on a national stock exchange. Your services will be rendered
on a seven-day-a-week basis from all locations where you may be,
whether at the Company's headquarters or elsewhere, including your
home.
<PAGE>
Page 2
2. Start Date. Subject to fulfillment of any conditions imposed by this
----------
letter agreement, you will commence this new position full time with
the Company on October 20, 1999.
3. Proof of Right to Work. For purposes of federal immigration law, you
----------------------
will be required to provide to the Company documentary evidence of your
identity and eligibility for employment in the United States. Such
documentation must be provided to us within three (3) business days of
your date of hire, or our employment relationship with you may be
terminated.
4. Compensation.
------------
a. Base Salary. You will be paid a monthly salary of $20,833.33,
-----------
which is equivalent to $250,000 on an annualized basis. Your salary
will be payable in two equal payments per month pursuant to the
Company's regular payroll policy. In connection with the
commencement of your employment with the Company, your consulting
agreement will terminate and you shall receive no additional cash
payments under that agreement.
b. Annual Review. Your base salary will be reviewed at the end of
-------------
each calendar year as part of the Company's normal salary review
process. This review will be coupled with an equity compensation
review.
c. Bonus. You will be eligible for an annual bonus of at least
-----
$100,000 based upon objective performance achievement.
5. Stock Options.
-------------
Grant. In connection with the commencement of your employment, the
-----
Company will recommend that the Board of Directors grant you an option
to purchase 300,000 shares of the Company's Common Stock ("Shares"),
------
with an exercise price equal to the closing price on Nasdaq of the
Company's Common Stock on October 20, 1999 ($35.625 per share). These
option shares will vest in 24 equal monthly installments beginning on
October 20, 1999. Vesting will, of course, depend on your continued
employment with the Company. The option will be an incentive stock
option to the maximum extent allowed by the tax code and will be
subject to the terms of the Company's 1999 Stock Incentive Plan and the
Stock Option Agreement between you and the Company.
Your Stock Option Agreement will include a change in control addendum
which provides for two years of vesting acceleration if a change in
control occurs prior to your one year anniversary with the Company. If
the change in control occurs subsequent to your one-year anniversary,
you will receive full vesting acceleration. These acceleration terms
apply only in an acquiror of the company does not assume
<PAGE>
Page 3
your options. If the options are assumed and you are involuntarily
terminated (as defined in the change in control addendum) within 18
months of the change in control your vesting will fully accelerate.
Options for Professional Services; Director Options. On your hire
---------------------------------------------------
date, your consulting agreement with the Company will be of no further
force and effect; provided, however, that the options granted to you
under that agreement to purchase 135,000 shares of the Company's Common
Stock shall continue to vest on the same schedule and under the same
terms. In addition, options to purchase 108,000 shares of the Company's
Common Stock granted to you as a member of the Company's Board of
Directors shall continue to vest on the same schedule and under the
same terms.
6. Benefits.
--------
a. Insurance Benefits. The Company will provide you with standard
------------------
medical and dental insurance benefits available to all executive
employees of the Company.
b. Vacation. You will be entitled to four weeks paid vacation per
--------
year.
c. Other Benefits. The Company will provide you an allowance for
--------------
other expenses and benefits that you and the Company may mutually
agree upon from time to time.
7. Confidential Information and Invention Assignment Agreement. Your
-----------------------------------------------------------
acceptance of this offer and commencement of employment with the
Company is contingent upon the execution, and delivery to an officer
of the Company, of the Company's Confidential Information and
Invention Assignment Agreement, a copy of which is enclosed for your
review and execution (the "Confidentiality Agreement"), prior to or on
-------------------------
your Start Date.
8. Confidentiality of Terms. You agree to follow the Company's strict
------------------------
policy that employees must not disclose, either directly or
indirectly, any information, including any of the terms of this
agreement, regarding salary, bonuses, or stock purchase or option
allocations to any person, including other employees of the Company;
provided, however, that you may discuss such terms with members of
your immediate family and any legal, tax or accounting specialists who
provide you with individual legal, tax or accounting advice.
9. At-Will Employment. Notwithstanding the Company's obligation described
------------------
in Section 8 above, your employment with the Company will be on an "at
will" basis, meaning that either you or the Company may terminate your
employment at any time for any reason or no reason, without further
obligation or liability.
<PAGE>
Page 4
10. Offer Expiration. This offer is valid through October 20, 1999.
----------------
11. Background Check. In connection with your consideration for
----------------
employment, the Company requires all applicants to undergo an
investigative background check. Consumer reports, driving records, and
criminal activity reports are obtained. This offer is contingent upon
all of the aforementioned reports showing satisfactory results .
We are all delighted to be able to extend you this offer and look forward to
working with you. To indicate your acceptance of the Company's offer, please
sign and date this letter in the space provided below and return it to me, along
with a signed and dated copy of the Confidentiality Agreement. This letter,
together with the Confidentiality Agreement, set forth the terms of your
employment with the Company and supersede any prior representations or
agreements (including your consulting agreement with the Company) whether
written or oral. This letter may not be modified or amended except by a written
agreement, signed by the Company and by you.
Very truly yours,
Stamps.com Inc.
By: /s/John W. LaValle
-----------------------------------
JOHN W. LaVALLE
Title: Sr. VP, CFO
ACCEPTED AND AGREED:
LOREN E. SMITH
/s/ Loren E. Smith
- ----------------------------------
Signature
October 20, 1999
- ----------------------------------
Date
Enclosure: Confidential Information and Invention Assignment Agreement
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report included in this Form 10-K, into the Company's previously filed
Registrant Statement file Number 333-81733.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Los Angeles, California
March 29, 2000
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Annual Report on Form 10-K of
Stamps.com Inc. for the year ended December 31, 1999 and the incorporation by
reference in registration statement number 333-81733 of Stamps.com Inc. on
Form S-8 of our audit report dated March 15, 2000 on the financial statements
of iShip.com, Inc.
/s/ Moss Adams LLP
Moss Adams LLP
Seattle, Washington
March 28, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K
AND IS QUALIFIED IN ITS ENTIREITY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 374,746
<SECURITIES> 0
<RECEIVABLES> 134
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 398,763
<PP&E> 11,049
<DEPRECIATION> (1,347)
<TOTAL-ASSETS> 410,442
<CURRENT-LIABILITIES> 8,406
<BONDS> 0
0
0
<COMMON> 42
<OTHER-SE> 401,556
<TOTAL-LIABILITY-AND-EQUITY> 410,442
<SALES> 358
<TOTAL-REVENUES> 358
<CGS> 2,430
<TOTAL-COSTS> 59,334
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (173)
<INCOME-PRETAX> (56,487)
<INCOME-TAX> 0
<INCOME-CONTINUING> (56,487)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (56,487)
<EPS-BASIC> (2.59)
<EPS-DILUTED> (2.59)
</TABLE>
