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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________
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, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 000-26427
______________________
Stamps.com Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 77-0454966
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
Address
3420 Ocean Park Boulevard, Suite 1040
Santa Monica, California 90405
Registrant's Telephone Number, Including Area Code: (310) 581-7200
______________________
Securities registered pursuant to Section 12(b) of
the Act: None Securities registered pursuant to
Section 12(g) of the Act:
Title of each class Name of each exchange
------------------- ---------------------
Common Stock, $.001 par value The Nasdaq National Market
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. [_]
The Registrant does not have different classes of Common Stock. As of March
27, 2001 the approximate aggregate market value of voting stock held by
non-affiliates of the registrant was $131,000,000 (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, 2001, there were approximately
50,171,630 shares of the registrant's Common Stock issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders currently expected to be held on June 14, 2001, as filed with the
Securities and Exchange Commission under the Securities Exchange Act of 1934, as
amended, are incorporated by reference in Part III of this Report.
================================================================================
STAMPS.COM INC.
FORM 10-K ANNUAL REPORT FOR THE YEAR ENDED DECEMBER 31, 2000
TABLE OF CONTENTS
Page
PART I.......................................................................................................... 2
ITEM 1. BUSINESS.................................................................................... 2
ITEM 2. PROPERTIES................................................................................... 23
ITEM 3. LEGAL PROCEEDINGS............................................................................ 24
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......................................... 25
PART II.......................................................................................................... 26
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS..................... 26
ITEM 6. SELECTED FINANCIAL DATA...................................................................... 27
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS........ 28
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK................................... 32
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................................................. 32
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE......... 32
PART III......................................................................................................... 33
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT........................................... 33
ITEM 11. EXECUTIVE COMPENSATION....................................................................... 33
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............................... 33
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................................... 33
PART IV.......................................................................................................... 34
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K............................. 34
1
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," "estimates," "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 11. 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.
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-based services for mailing or shipping letters, packages or parcels
anywhere in the United States and at anytime. Our core mailing and shipping
services are designed to allow individual consumers or employees of small
businesses or larger enterprises to select a carrier, print US postage or
shipping labels from multiple carriers, schedule a pick-up, track a package and
apply enterprise-wide business rules to manage and account for mailing and
shipping costs. With all of our services, no additional hardware is required; a
customer can access our services through an existing Internet connection and
print postage or shipping labels with ordinary laser or inkjet printers.
Recent Developments
In October 2000, we implemented a new business strategy in an effort to
more rapidly decrease our operating losses and enhance our ability to achieve
profitability. This strategy involved an initial restructuring to focus on our
core business of Internet postage and shipping that reduced our total number of
employees by approximately 40% to 315 employees, which included full time, part
time and contract employees. We announced other cost-cutting programs, including
a significant reduction and redeployment of our sales and marketing expenses to
those programs that have demonstrated higher returns on investment. We also
combined our Enterprise and E-Commerce Business Units to reduce duplication of
costs and effort. In conjunction with the implementation of our new business
strategy, we are also considering other strategic alternatives that may be
available to us, including the possible sale of all or part of our business.
Additionally, as a result of our new focus, we exited some of our longer-term
fixed-price marketing deals in favor of variable cost marketing deals, and
restructured our customer support service.
In October 2000, we experienced a significant change in personnel at
the senior management level including the resignation of our Chief Executive
Officer and Chairman of the Board, our President and Chief Operating Officer,
our Chief Financial Officer, our Chief Marketing Officer and our Controller. The
Board appointed Bruce Coleman as interim Chief Executive Officer and as a
director, Kenneth McBride as acting Chief Financial Officer and Marvin Runyon as
our new Chairman of the Board.
In February 2001, in an effort to more rapidly decrease our operating
losses, and continue with our new business strategy to reach profitability
sooner, we reduced the total number of employees by approximately an additional
50% to 150 employees, which include full time, part time and contract employees.
We will continue to focus on our core business of Internet postage and shipping,
as well as other cost-cutting programs associated with our new business
strategy, including re-deployment of our sales and customer service groups,
exiting fixed price
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marketing deals, and entering into variable cost marketing deals. For instance,
in October 2000 we ceased payments on, and in February 2001 we terminated, our
marketing agreement with America Online, Inc. which we expect to result in
savings to our company of approximately $27 million over the next two years.
In March 2001, David Bohnett resigned from our Board of Directors. We
expect to continue to experience changes in personnel at the senior management
and Board level as part of our restructuring process.
Corporate Information
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 for use of the service. We have two separate service
plans to address the needs of different customers, the Simple Plan and the Power
Plan. The Simple Plan targets lower usage customers and provides postage at face
value for a monthly convenience fee of 10% of the value of postage printed.
There is a monthly minimum fee of $4.49 under the Simple Plan. The Power Plan
targets higher usage customers and provides unlimited postage at face value for
a flat monthly fee of $18.99.
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 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 March 27, 2001, our customer base consists of over 300,000
customers who have downloaded our software and registered for one of our service
plans.
Shipping and Tracking Services. As a result of our acquisition of
Bellevue, Washington-based iShip.com, Inc. 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 enable a comparison of rates and services among
multiple carriers, including Airborne Express, FedEx, United Parcel Service, and
the US Postal Service. 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;
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(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. During fiscal year
2000, a version of the iShip system was deployed to over 1,400 franchisees of
Mail Boxes Etc. USA, Inc.
As of December 31, 2000, we were continuing to pursue the development
of our enterprise shipping services that were derived wholly from our March 2000
acquisition of iShip.com, Inc. However, on March 2, 2001, United Parcel Service
and Mail Boxes Etc. USA, Inc. jointly announced that United Parcel Service would
acquire Mail Boxes Etc. USA, Inc. Mail Boxes Etc. USA, Inc. represented a
significant future source of revenue and market leverage for our enterprise
shipping services. Mail Boxes Etc. USA, Inc. was also a significant customer of
United Parcel Service. United Parcel Service has informed us that it is unlikely
to have Mail Boxes Etc. USA, Inc. continue to use our online shipping services
in the future. These events bring into doubt the realization of revenue from our
investment in iShip.com, Inc. We plan to evaluate the value of the iShip.com,
Inc. assets and record an appropriate reduction to the remaining goodwill in the
first quarter of 2001. See "Risk Factors--The change in payment terms associated
with a significant contract or the termination of that contract could adversely
affect our financial condition and results of operations."
Other Services. On November 16, 1999, we announced the formation of a
subsidiary, EncrypTix, Inc., to develop secure printing opportunities in the
events, travel and financial services industries. In February 2000, we invested
$1.0 million and granted EncrypTix a license to our technology in those three
specific fields of use. EncrypTix raised approximately $35 million in private
financing. On March 12, 2001, EncrypTix ceased operations and effected a general
assignment of its assets for the benefit of its creditors. EncrypTix took this
action due to the inability to secure additional funding. We do not expect to be
impacted by any of EncrypTix's resulting liabilities. Additionally, we
terminated our license agreement with EncrypTix and maintain limited licenses to
various EncrypTix intellectual property.
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 is expected to grow from an estimated 240 million in 1999 to 602
million by 2003. In addition, International Data Corporation estimates that the
percentage of Web users buying goods and services on the Internet is expected to
grow from 29% in 2000 to 38% in 2003. International Data Corporation further
estimates that the total value of goods and services purchased over the Web is
expected to increase from approximately $130.5 billion in 1999 to approximately
$1.6 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 U.S. business-to-consumer
commerce on the Internet is expected to grow from approximately $41 billion in
2000 to approximately $160 billion in 2004 while U.S. business-to-business
commerce on the Internet is expected to grow from approximately $100 billion in
2000 to approximately $840 billion in 2004.
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 41.8 million small businesses and home offices in the
United States in 1999, a number which International Data Corporation forecasts
will grow to 51.8 million by 2003. For 1999, International Data Corporation
reported that small businesses with less than 100 employees numbered 7.5
million, of which 77% had fewer than 10 employees. In addition, home offices
numbered 34.3 million, of which 18.8 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
can 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, the number of U.S.
home offices accessing the Internet is expected to increase from 21.6 million in
1999 to 34.4 million in 2003. Similarly, IDC forecasts that the number of small
businesses online is expected to grow from 3.8 million in 1999 to 5.9 million in
2003. We believe 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
approximately $8 billion of electronic commerce in 1999 and is expected to
account for approximately $72.8 billion of electronic commerce activity in 2003.
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 $40.4 billion was represented by
first class, priority and express mail with the remainder consisting of other
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classes of mail including periodicals, bulk and international. The US Postal
Service processed over 201 billion pieces of mail in 1999. 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.
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 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.
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
According to a report by the Colography Group, a third-party research
firm specializing in the shipping market, the 1999 shipping market size was
$44.9 billion representing 8.1 billion overnight, 2 and 3 day, and ground
parcels, letters and packages including US Postal Service Priority Mail, Express
Mail and Parcel Post. United Parcel Service, FedEx, Airborne & US Postal Service
accounted for $43.3 billion or 96% of the market.
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
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costs, increase accuracy, and speed tracking and billing. We also believe the
Internet provides an ideal medium through which this information can be
distributed and managed. As part of our restructuring program, we are
considering whether we will be able to capitalize on this opportunity. See
"Recent Developments" above.
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.
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 March 27, 2001, our customer base
consists of over 300,000 customers who have downloaded our software and
registered for one of our service plans.
Our Marketing and Sales
Internet Postage
Our Internet Postage service is currently targeted primarily at small
businesses and home offices. As part of our new business strategy, we intend to
continue building our recurring revenue customer base through a re-allocation of
resources within our sales and marketing groups, and continued distribution
efforts through our existing partnerships. We have reduced the size of our
internal sales force to focus on deployment within existing accounts and account
management. We will continue to distribute our Internet Postage software through
our Web site, distribution partners and CD-ROMs. In addition, we intend to
utilize traditional marketing programs, and several other channels to acquire
customers of our Internet Postage service, including:
Web Sites. We work with approximately 35 strategic partners to leverage
their Web sites to distribute our Internet Postage software. This channel
provides users the opportunity to download our software and access our Internet
Postage service from multiple places on the Web. We have a partnership with
Microsoft Office which makes our software available for download from the Office
update section of their website.
Affiliate Programs. We utilize the traffic and customers of other
online sites through our affiliate sales channel program that is automated
through Be Free, Inc. We offer revenue-sharing opportunities to our affiliates,
individual Web sites that allow us to provide a link on their Web site to
download our Internet Postage software. We leverage our affiliates' abilities to
offer new, value-added services and increase repeat visits to their site. We
currently have over 34,000 active affiliates in our program.
Preloaded/Bundled Hardware and Services. We have several 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 leverage our resellers' ability to
promote new features on commodity, non-differentiated products and services. We
have bundling partnerships with Hewlett-Packard, Micron and IBM among others.
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Postal and Packaging Supplies. We have several relationships with
companies in the postal and packaging supplies industry, including manufacturers
of envelopes, labels, checks, forms, digital scales and postage meters. In
addition, we have a strategic partnership with Office Depot in which we offer
Internet Postage related products for sale through a co-branded online store.
Third-Party Direct Sales. We currently have partners through which our
service is marketed by independent third party sales forces. These sales
representatives call on small businesses primarily in commercialized areas of
urban markets. Our largest relationship is with Cydcor, which has several
hundred representatives marketing our Internet Postage service. As part of our
new business strategy, we will continue to look at possibly expanding this
channel to include other potential sales forces.
Customer Retention Programs. We believe we can increase customer
retention by enhancing our service features to fully support all of our
customers' mailing and shipping needs. As part of our new business strategy, we
intend 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.
Internet Shipping
Our Internet based multi-carrier shipping services are targeted
primarily at large corporate enterprise customers and retail shipping centers.
We have an agreement with Mail Boxes Etc. USA, Inc. to deploy our iShip solution
to all of their approximately 3,500 domestic franchises. As of March 27, 2001,
our shipping system has been deployed to over 1,400 Mail Boxes Etc. USA, Inc.
centers across the U.S. We also 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. We intend to continue the use of direct selling for our corporate
enterprise customers.
On March 2, 2001, United Parcel Service and Mail Boxes Etc. USA, Inc.
jointly announced that United Parcel Service would acquire Mail Boxes Etc. USA,
Inc. Mail Boxes Etc. USA, Inc. represented a significant future source of
revenue and market leverage for our online shipping services. United Parcel
Service has informed us that it is unlikely to have Mail Boxes Etc. USA, Inc.
continue to use our online shipping services. See "Risk Factors--The change in
payment terms associated with a significant contract or the termination of that
contract could adversely affect our financial condition and results of
operations."
Our Competition
The market for Internet postage products and services is new and
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. In April 2000, Pitney Bowes announced that
its software-based Internet postage product had been approved for commercial
release and subsequently launched. A third competitor, Neopost, received US
Postal Service approval for a software-based Internet Postage solution but has
not launched the product to-date. Based on current information available from
the US Postal Service, Stamps.com believes that it has over 75% of total
Internet Postage customers.
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:
Neopost Industrie. Neopost is a large French postage company with a US
presence in the traditional postage meter industry. Neopost has developed an
online postage product that requires a special purpose hardware device, and
announced commercial approval from the US Postal Service on May 12, 2000 but has
not launched the product to-date. Neopost announced that their software-based
postage product received commercial approval from the US Postal Service on
September 18, 2000, but has not launched the product to-date. 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 open system
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Information Based Indicia Program because it does not allow for the printing of
postage from standard inkjet or laser printers.
Envelope Manager. Envelope Manager provides desktop mailing software
that complies with US Postal Service regulations. Envelope Manager focuses on
technology development that enables customers to obtain ZIP+4 information via
the Internet, modem, LAN or CD-ROM. Envelope Manager launched an Internet
postage service commercially in 2000, and we believe they have a small market
share due to the short time their product has been available.
Pitney Bowes, Inc. Pitney Bowes is the current market leader in the
traditional postage meter business and had approximately $3.9 billion in
revenues in 2000. Pitney Bowes has developed a software-based Internet postage
product. In April 2000, Pitney Bowes announced that their software-based product
received commercial approval from the US Postal Service and subsequently
launched to the public.
E-Stamp Corporation. E-Stamp developed and marketed 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 November
27, 2000, E-Stamp Corporation issued a press release announcing it would phase
out its Internet postage business in order to focus on its web-based shipping
and logistics businesses. As of February 28, 2001 E-Stamp no longer offers
Internet Postage to customers.
In addition to competing with Internet postage vendors for market share
of Internet postage sales, we 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.
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.
We also compete with companies that provide shipping solutions to
businesses. Customers may continue using the direct services of the US Postal
Service, United Parcel Service, 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 Virtran,
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, 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."
8
Our Internet Postage Service Technology
Our Internet Postage service technology 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.
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 67 patent applications in the United
States, and 12 international patent applications. 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 business. 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. On April 13, 2000, Pitney Bowes asked the court for permission to amend
its complaint to drop allegations of patent infringement with respect to one
patent and to add allegations of patent infringement with respect to three other
patents. On July 28, 2000 the court entered Pitney Bowes' amended complaint.
9
In September 2000, Pitney Bowes filed another patent infringement
lawsuit against us in the United States District Court for the Eastern District
of Texas, alleging that we are infringing four patents owned by Pitney Bowes
related to shipping. The suit seeks unspecified damages and a permanent
injunction from further alleged infringement. We answered the complaint on
December 1, 2000, denying the allegations of patent infringement and asserting a
number of affirmative defenses.
On December 13, 2000, Cybershop (a British Columbia, Canada
partnership) and its general partners filed suit against us in the U.S. District
Court for the Southern District of Texas, alleging that in 1998 a third party
fraudulently transferred ownership of the Internet domain name "stamps.com" away
from Cybershop and subsequently transferred it to us. The third party is also a
named defendant in the suit. The complaint seeks legal resolution and
recognition of Cybershop's ownership of the "stamps.com" domain name and seeks
unspecified monetary damages against the third party. On January 9, 2001, we
filed a motion to dismiss the suit. On February 16, 2001, Cybershop filed an
amended complaint, alleging new causes of action, including conversion, invasion
of privacy, trespass, and private nuisance, and seeking declaratory judgment for
return of the domain name registration to Cybershop. On March 5, 2001, we filed
a motion to dismiss the amended complaint.
For a discussion of claims by Pitney Bowes and Cybershop and risks
associated with intellectual property, please refer to "Risk Factors--Success by
Pitney Bowes in its suits against us alleging patent infringement could prevent
us from offering our Internet Postage and iShip services and severely harm our
business or cause it to fail," "Risk Factors--Success by Cybershop in its suit
against us seeking damages and recognition of its ownership of the domain name
"stamps.com" could prevent us from using the domain name "stamps.com" and could
require a change of name of the Company, severely harming our business or
causing it to fail" and "Legal Proceedings."
Employees
As part of our restructuring in October 2000, we reduced our total
number of employees by approximately 40% to 315 employees, which included full
time, part time and contract employees. In February 2001, in a continuing effort
to streamline operations and achieve profitability, we further reduced our total
number of employees by approximately an additional 50% to 150 employees, which
included full time, part time and contract employees. As of March 27, 2001, we
have approximately 150 employees. None of our employees are represented by a
labor union.
10
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.
Risks Related to Our Business
Because we have a limited operating history, there is limited information upon
which you can evaluate our business.
We are still in the early stages of our development, and our limited
operating history makes it difficult to evaluate our business and prospects. Our
Internet Postage service has only been available since October 22, 1999 and our
enterprise shipping services have yet to be commercially released. Due to our
limited operating history, it is difficult or impossible to predict future
results of operations, including operating expenses and revenues. Moreover, due
to our limited operating history, any evaluation of our business and prospects
must be made in light of the risks and uncertainties often encountered by
early-stage companies in Internet-related markets. Many of these risks are
discussed in the subheadings below, and include our (a) ability to meet and
maintain government specifications for our Internet Postage service,
specifically US Postal Service requirements; (b) complete dependence on Internet
Postage and shipping services that currently do not have substantial market
acceptance; (c) potential 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, when it arises; (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 are unsuccessful in addressing these risks or in executing our
new business strategy, our business, results of operations and financial
condition would be materially and adversely affected.
Our revenues and operating results may fluctuate in future periods and we may
fail to meet expectations, which may cause the price of our common stock to
decline.
Given our limited operating history, we have not generated any
significant revenues from our operations. Our revenues and operating results are
difficult to predict and may fluctuate significantly from period-to-period
particularly because our Internet Postage and shipping services are new and our
prospects uncertain. If revenues or operating results fall below the
expectations of investors or public market analysts, the price of our common
stock could decline substantially. Factors that might cause our revenues,
margins and operating results to fluctuate include the factors described in the
subheadings below as well as: (a) the success of our Internet Postage and
shipping services; (b) the costs of defending ourselves in litigation; (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; (j) US Postal Service
regulation and policies; (k) the success of implementing our new business
strategy and of reducing expenses; and (l) general economic factors.
11
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. Moreover, our new business strategy of
reducing expenses may directly and correspondingly cause our revenues to
substantially decline.
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
operating results as an indication of future performance.
We have a history of losses, expect to incur losses in the future and may never
achieve profitability, which may reduce the trading price of our common stock.
Since we began operations in 1998, we have incurred substantial
operating losses in every period. As a result of accumulated operating losses,
we have a significant accumulated deficit of $273.6 million as of December 31,
2000. Since inception, we have funded our business through selling our stock,
not from cash generated by our business. We expect to continue to incur
significant sales and marketing, research and development, and administrative
expenses and therefore could continue to experience net losses and negative cash
flows for several years, and perhaps for the duration of our corporate
existence. For the year ended December 31, 2000, we have only generated $15.2
million in revenues. Even if sales of our products and services begin to grow,
we may not generate sufficient revenues to achieve profitability in the future.
In addition, as a result of our acquisition of iShip.com, Inc. in March
2000, our losses have increased, and our losses could continue to increase,
because of additional costs and expenses related to: amortization of goodwill
and other intangibles and deferred compensation resulting from the acquisition;
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, Inc. acquisition, we
recorded a significant amount of intangibles, the amortization of which will
significantly and adversely affect our operating results. As of December 31,
2000, the un-amortized intangibles related to the iShip.com, Inc. acquisition is
$175.3 million. On March 2, 2001, United Parcel Service and Mail Boxes Etc. USA,
Inc. jointly announced that United Parcel Service would acquire Mail Boxes Etc.
USA, Inc. Mail Boxes Etc. USA, Inc. represented a significant future source of
revenue and market leverage for our enterprise shipping services. Mail Boxes
Etc. USA, Inc. was also a significant customer of United Parcel Service. United
Parcel Service has informed us that it is unlikely to have Mail Boxes Etc. USA,
Inc. continue to use our online shipping services in the future. In light of the
March 2, 2001 events, we may be required to record an appropriate reduction to
the remaining goodwill in the first quarter of 2001. In this event, our net loss
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."
Overall, we will need to generate significant revenues and successfully
implement our new business strategy to achieve and maintain profitability.
We recently implemented new pricing plans that may adversely affect our future
revenues and profitability.
Our ability to generate gross margins depends upon the ability to
generate significant revenues from a large base of active customers. We recently
changed our pricing plans for our Internet Postage service and we have yet to
determine how customers will be charged for our Internet shipping services. In
order to attract customers in the future, we may run special promotions and
offer discounts on fees, postage and supplies. We cannot be sure that customers
will be receptive to the new fee structure for our Internet Postage service or
to the fee structure that we will implement for our Internet shipping services.
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 additional changes to our pricing plans.
12
The change in payment terms associated with a significant contract or the
termination of that contract could adversely affect our financial condition and
results of operations.
For the year ended December 31, 2000, we derived approximately 20% of
our revenue from Mail Boxes Etc. USA, Inc. Under the terms of our contract with
Mail Boxes Etc. USA, Inc., we received fixed monthly service fees of $500,000
until December 31, 2000. Thereafter, our contract with Mail Boxes Etc. USA, Inc.
calls for a per-package transaction-based fee structure. We expect the amount of
monthly revenue that we will receive from Mail Boxes Etc. USA, Inc. under the
transaction-based fee structure to initially be lower than the fixed fee
structure. If our transaction-based fee structure with Mail Boxes Etc. USA, Inc.
yields lower than expected revenues, our financial condition and results of
operations will be adversely affected. In addition, due to delays in delivering
our products and a dispute with Mail Boxes Etc. USA, Inc. relating to certain
product features, as of December 31, 2000, we had not received payment of $2.0
million of service fees and therefore we had not recognized that amount of
revenue. We are currently working with Mail Boxes Etc. USA, Inc. in an effort to
amicably resolve this dispute. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Overview."
On March 2, 2001, United Parcel Service and Mail Boxes Etc. USA, Inc.
jointly announced that United Parcel Service would acquire Mail Boxes Etc. USA,
Inc. Mail Boxes Etc. USA, Inc. represented a significant future source of
revenue and market leverage for our online shipping services. United Parcel
Service has informed us that it is unlikely to have Mail Boxes Etc. USA, Inc.
continue to use our online shipping services.
If our new business strategy is not successfully implemented, our financial
condition and results of operations will be adversely affected.
In October 2000, we implemented a new business strategy that involved
refocusing our resources on the most productive areas of our business in order
to more effectively capture the highest margin customer base. This new strategy
was accompanied by the appointment of a new management team, an approximate 40%
reduction in the number of our employees to 315 employees, a plan to
significantly reduce other expenditures, including sales and marketing expense,
and an increase in monthly service fees for our Internet Postage service. In
February 2001, in an effort to more rapidly decrease our operating losses, and
continue with our new business strategy to reach profitability sooner, we
reduced the total number of employees by approximately an additional 50% to 150
employees. We will continue to focus on our core business of Internet postage
and shipping, as well as other cost-cutting programs associated with our new
business strategy, including re-deployment of our sales and customer service
groups, exiting fixed price marketing deals, and entering into variable cost
marketing deals. Our new strategy entails risks relating to our ability to
attract our targeted customers to offset potential customer losses in other
areas and the ability of our new management team to implement this strategy.
There is no guarantee our new management team will be able to effectively or
efficiently implement our new business strategy or that, if effectively
implemented, our business strategy will benefit us or help us achieve
profitability. Failure to execute our plan to significantly reduce expenses or
to attract new customers in high margin lines of business in significant numbers
will adversely effect our financial condition and results of operations. In
addition, our new business strategy could result in a substantial loss of
customers which would have an adverse impact on our financial condition and
results of operations.
We may not be able to successfully identify and consummate viable strategic
alternatives.
In conjunction with the implementation of our new business strategy, we
are considering other strategic alternatives that may be available to us,
including the possible sale of all or part of our business. However, there can
be no assurance that we will be able to find a buyer, or that a buyer would be
willing to acquire all or part of our business at an acceptable price or on
acceptable terms.
Recent personnel changes may interfere with our operations.
In October 2000, we experienced significant personnel changes at the
senior management level including the resignation of our Chief Executive Officer
and Chairman of the Board, our President and Chief Operating Officer, our Chief
Financial Officer and our Controller. Additionally, our Chief Marketing Officer
departed in connection with our October 2000 restructuring. Although the Board
has appointed Bruce Coleman as interim Chief Executive Officer and Kenneth
McBride, our Vice President of Finance, as acting Chief Financial Officer,
13
permanent replacements have not been appointed. We do not currently anticipate
that we will hire a new Chief Marketing Officer. On November 13, 2000, Bruce
Coleman was appointed to the Board, filling the vacancy created by Thomas H.
Bruggere, who resigned on September 30, 2000. In October 2000, we reduced our
total number of employees by approximately 40% to 315 employees, and in February
2001, we reduced the total number of our employees by approximately an
additional 50% to 150 employees, which included full time, part time and
contract employees. These transitions have resulted and will continue to result
in some disruption to our ongoing operations. If we fail to attract and retain
qualified individuals for these senior management positions, our business,
financial condition and results of operations will be seriously harmed.
If we do not successfully attract and retain skilled personnel for permanent
management and other key personnel positions, we may not be able to effectively
implement our business plan.
Our success depends largely on the skills, experience and performance
of the members of our senior management and other key personnel. Any of the
individuals can terminate his or her employment with us at any time. If we lose
additional key employees and are unable to replace them with qualified
individuals, our business and operating results could be seriously harmed. In
addition, our future success will depend largely on our ability to continue
attracting and retaining highly skilled personnel. 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
personnel. The failure to attract and retain the necessary personnel could
seriously harm our business, financial condition and results of operations.
We can not predict the effects of our restructuring program.
As described under "Recent Developments," we have implemented a
restructuring program. We can not predict the financial or operational effects
of this restructuring program on our business or our future financial
performance. We have reduced the number of our employees and believe that our
cash consumption rate has been significantly reduced. We can not assure you that
these reductions will continue in future periods or result in a positive effect
on the trading price of our stock.
The success of our business will depend upon acceptance by customers of our
Internet Postage and shipping services.
We expect that our Internet Postage and enterprise Internet shipping
services will generate a significant portion of our near-term future revenues.
Accordingly, we depend heavily on the commercial acceptance of our Internet
Postage and enterprise Internet shipping services. If we fail to successfully
gain commercial acceptance of our Internet Postage and enterprise Internet
shipping services, we will be unable to generate significant revenues. To date,
a substantial market for Internet Postage and enterprise Internet shipping
services has not developed, and we cannot assure you that it will develop. More
specifically, we cannot predict if our target customers will choose the Internet
as a means of purchasing postage or of facilitating their mailing and shipping
transactions, if customers will be willing to pay a fee to use our service, or
if potential users will select our system over our competitors' or over
alternative methods such as online invoicing, bill payment and financial
transactions.
The success of our business will depend upon our ability to make our Internet
Postage and shipping services widely available, and to achieve widespread
adoption of our services.
We face numerous risks in conjunction with the introduction, sale and
commercial availability of our services because of our very limited experience
with the commercial rollout and use of our services. Specifically, our Internet
Postage service was introduced on October 22, 1999 and our enterprise Internet
shipping services have yet to be deployed. As a result, we cannot be sure that
our services will be widely available or adopted, that they will successfully
process large numbers of user transactions or that our services will contain
features that appeal to the broad range of customers that we target. If we
experience problems with the availability, adoption, scalability or
functionality of our services or if we are unable to offer attractive service
enhancements in a timely manner, our ability to attract and retain customers and
our results of operations will be adversely impacted.
If we do not achieve the brand recognition necessary to succeed in the Internet
postage 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 our competitors do. 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
14
services. In addition, our new business strategy of reducing expenses could
limit our ability to establish our brand awareness. If we fail to gain market
acceptance for our services, our business will suffer dramatically or may fail.
If we fail to effectively market and sell our Internet Postage and shipping
services, we may never achieve profitability and our business will be
substantially harmed and could fail.
In order to acquire customers and achieve wide distribution and use of
our services, we must develop and execute cost-effective marketing campaigns and
sales programs. Given the limited amount of time that our services have been
commercially available, if at all, we have very limited experience conducting
marketing campaigns. In addition, we have recently increased our emphasis on
direct selling efforts and have only recently retained the resources necessary
to support a direct sales channel. However, we have very limited experience
regarding our ability to acquire customers through a direct sales channel. In
connection with our new business strategy, we have significantly reduced our
marketing budget, which could prevent us from pursuing certain marketing
campaigns and sales programs. As a result of these limited marketing and sales
experiences, and our reduced marketing budget, we cannot predict our ability to
attract customers for our services, and we may fail to generate significant
interest in any of our services. Furthermore, we may be unable to generate
significant interest in our services in a cost-effective manner. If we fail to
generate interest in our services or to acquire customers in a cost-effective
manner, our results of operations will be adversely affected and we may never
achieve profitability.
If we fail to meet the demands of our customers, our business will be
substantially harmed and could fail.
Our Internet Postage and shipping services must meet the commercial
demands of our customers, which are expected to range from small businesses to
large enterprises. We cannot be sure that our services will appeal to or be
adopted by such a wide range of customers. In addition, given our limited
experience selling our services to and implementing our services with enterprise
customers, we cannot predict the length of enterprise sales cycles, the
implementation times for our services or the extent to which an enterprise will
employ our services. Our technology also may not be capable of servicing the
needs of these large enterprise customers. Moreover, our ability to obtain and
retain customers depends on our customer service capabilities. As part of our
new business strategy, we have significantly reduced our support offerings. If
we are unable at any time to address customer service issues adequately or to
provide a satisfactory customer experience for current or potential customers,
our business and reputation may be harmed. If we experience extensive interest
in our services, we may fail to meet the expectations of customers due to
limited experience in operating our services and the strains this demand will
place on our Web site, customer service operations, professional services group,
network infrastructure or systems. If we fail to meet the demands of our
customers or if our customers implement and employ our services more slowly than
we expect, our business, results of operation and ability to achieve
profitability will be negatively affected.
If we cannot grow our business, and effectively manage that growth, our business
will be adversely affected and could fail.
Our new business strategy of significantly reducing expenses could have
a substantial impact on our ability to develop and introduce new products and
services; attract, serve and retain new customers; reliably improve our Web
site, network infrastructure and systems; implement new systems, procedures and
controls; and increase brand awareness. If our business begins to grow, we may
not be able to manage our growth effectively. A period of business expansion
could place a significant strain on our managerial, operational and financial
resources. Our personnel, systems, procedures and controls may be inadequate to
support our future operations. If we are unable to manage our growth effectively
or experience disruptions during periods of expansion, our business will suffer
and our financial condition and operating results will be seriously affected.
Success by Pitney Bowes in its suits against us alleging patent infringement
could prevent us from offering our Internet Postage and iShip services and
severely harm our business or cause it to fail.
On June 16, 1999, Pitney Bowes sued us for alleged patent infringement
in the United States District Court for the District of Delaware. The suit
originally alleged that we are infringing two patents held by Pitney Bowes
related to postage application systems and electronic indicia. The suit seeks
treble damages, a preliminary and permanent injunction from further alleged
infringement, attorneys' fees and other unspecified damages. We answered the
complaint on August 6, 1999, denying the allegations of patent infringement and
asserting a number of
15
affirmative defenses. Pitney Bowes filed a similar complaint in early June 1999
against one of our competitors, E-Stamp Corporation, alleging infringement of
seven Pitney Bowes patents. On April 13, 2000, Pitney Bowes asked the court for
permission to amend its complaint to drop allegations of patent infringement
with respect to one patent and to add allegations of patent infringement with
respect to three other patents. On July 28, 2000 the court entered Pitney Bowes'
amended complaint.
On September 18, 2000 Pitney Bowes filed another patent infringement
lawsuit against us in the United States District Court for the Eastern District
of Texas, alleging that we are infringing four patents owned by Pitney Bowes
related to shipping. The suit seeks unspecified damages and a permanent
injunction from further alleged infringement. We answered the complaint on
December 1, 2000, denying the allegations of patent infringement and asserting a
number of affirmative defenses.
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 suits against us. See "Legal Proceedings."
If Pitney Bowes prevails in its suits against us, we may be prevented
from selling postage on the Internet. Alternatively, the Pitney Bowes suits
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 suits against us, our business
could be severely harmed or fail. In addition, the litigation could result in
significant expenses and diversion of management time and other resources.
On August 17, 1998, Pitney Bowes issued a press release stating that it
holds dozens of US patents related to computer-based postage metering and that
it intended to engage in discussions with other marketers of computer-based
postal products to license Pitney Bowes technology. Prior to Pitney Bowes filing
a lawsuit against us, 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.
Success by Cybershop in its suit against us seeking damages and recognition of
its ownership of the domain name "stamps.com" could prevent us from using the
domain name "stamps.com" and could require a change of name of the Company,
severely harming our business or causing it to fail.
On December 13, 2000, Cybershop (a British Columbia, Canada
partnership) and its general partners filed suit against us in the U.S. District
Court for the Southern District of Texas, alleging that in 1998 a third party
fraudulently transferred ownership of the Internet domain name "stamps.com" away
from Cybershop and subsequently transferred it to us. The third party is also a
named defendant in the suit. The complaint seeks legal resolution and
recognition of Cybershop's ownership of the "stamps.com" domain name and seeks
unspecified monetary damages against the third party. On January 9, 2001, we
filed a motion to dismiss the suit. On February 16, 2001, Cybershop filed an
amended complaint, alleging new causes of action, including conversion, invasion
of privacy, trespass, and private nuisance, and seeking declaratory judgment for
return of the domain name registration to Cybershop. On March 5, 2001, we filed
a motion to dismiss the amended complaint. The outcome of the litigation is
uncertain, and we can give no assurance that Cybershop will not prevail in the
suit against us.
If Cybershop prevails in its claims against us, we may be liable for
monetary damages. Additionally, if Cybershop is successful in the lawsuit, we
may be required to relinquish the domain name "stamps.com" and transfer the
domain name registration to Cybershop. Relinquishing ownership of the
"stamps.com" domain name would require us to use a different domain name as the
primary Internet address and web page for our company, and we may need to change
the name of our company itself from "Stamps.com Inc." as well. Changing the name
of our company, and using a new Internet domain name, could significantly and
negatively affect our brand recognition and customer acquisition and retention.
Furthermore, a change in our company name or Internet domain name could result
in significant costs in seeking to build new brand recognition. Thus, if
Cybershop prevails in its suit against us, our business could be severely harmed
or even fail. See "Legal Proceedings."
16
Even if Cybershop's claim is unsuccessful, the Cybershop litigation
could result in significant expenses and diversion of management time and other
resources that could negatively affect our business.
Third party assertions of violations of their intellectual property rights could
adversely affect our business.
Substantial litigation regarding intellectual property rights exists in
our industry. Third parties may currently have, or may eventually be issued,
patents upon which our products or technology infringe. Any of these third
parties might make a claim of infringement against us. We may become
increasingly aware of, or we may increasingly receive 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. In addition, litigation in which we are
accused of infringement might cause product development delays, require us to
develop non-infringing technology or require us to enter into royalty or license
agreements, which might not be available on acceptable terms, or at all. If a
successful claim of infringement were made against us and we could not develop
non-infringing technology or license the infringed or similar technology on a
timely and cost-effective basis, our business could be significantly harmed. Any
loss resulting from intellectual property litigation could severely limit our
operations, cause us to pay license fees, or prevent us from doing business. See
"Legal Proceedings."
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, such as confidentiality agreements
and licenses, to establish and protect our rights in our products, services,
know-how and information. We have three issued United States patents, and have
filed 67 United States patent applications and 12 international patent
applications. We have also applied to register a number of trademarks and
service marks. We plan to apply for other patents, trademarks and service marks
in the future. We may not receive patents for any of our patent applications.
Even if patents are issued to us, claims issued in these patents may not protect
our technology. In addition, a court might hold any of our patents, trademarks
or service marks invalid or unenforceable. Even if our patents are upheld or are
not challenged, third parties may develop alternative technologies or products
without infringing our patents. If our patents fail to protect our technology or
our trademarks and service marks are successfully challenged, our competitive
position could be harmed. We also 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. See "Risk Factors--Success by Cybershop in its suit against us seeking
damages and recognition of its ownership of the domain name "stamps.com" could
prevent us from using the domain name "stamps.com" and could require a change of
name of our Company, severely harming our business or causing it to fail."
If we are unable to maintain and develop our strategic relationships and
distribution arrangements, our Internet Postage and shipping services may not
achieve commercial acceptance.
We have established strategic relationships with a number of third
parties. To date, our strategic relationships generally involve the promotion
and distribution of our services through our partners' products, services and
Web sites. Recently, we have increased our focus on the direct sales channel and
have entered into arrangements to have a third party direct sales force offer
our services. In return for promoting or selling our services, our partners may
receive revenue-sharing opportunities or per-customer bounties. In order to
achieve wide distribution of our services, we believe we must establish
additional strategic relationships to market our services effectively. If one or
more of our partners terminates or limits its relationship with us, our business
could be severely harmed or fail. We have limited experience in establishing and
maintaining strategic relationships, and we may fail in our efforts to establish
and maintain these relationships.
Our current strategic relationships have not yet resulted in
significant revenues, primarily because we have only recently commercially
released our Internet Postage service, and our enterprise shipping services have
not yet
17
been commercially released. 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.
System and online security failures could harm our business and operating
results.
Our services depend on the efficient and uninterrupted operation of our
computer and communications hardware systems. In addition, we must provide a
high level of security for the transactions we execute. We rely on
internally-developed and third-party technology to provide secure transmission
of postage and other confidential information. Any breach of these security
measures would severely impact our business and reputation and would likely
result in the loss of customers. Furthermore, if we are unable to provide
adequate security, the US Postal Service could prohibit us from selling postage
over the Internet.
Our systems and operations are vulnerable to damage or interruption
from a number of sources, including fire, flood, power loss, telecommunications
failure, break-ins, earthquakes and similar events. We have entered into an
Internet hosting agreement with Exodus Communications, Inc. to maintain our
Internet Postage servers at Exodus' data center in Southern California. Our
operations depend on Exodus' ability to protect its and our systems in its data
center against damage or interruption. Exodus does not guarantee that our
Internet access will be uninterrupted, error-free or secure. Our servers are
also vulnerable to computer viruses, physical, electrical or electronic
break-ins and similar disruptions. We have experienced minor system
interruptions in the past and may experience them again in the future. Any
substantial interruptions in the future could result in the loss of data and
could completely impair our ability to generate revenues from our service. We do
have a business interruption plan that we continue to refine and update;
however, we do not presently have a full disaster recovery plan in effect to
cover loss of facilities and equipment. In addition, we do not have a
"fail-over" site that mirrors our infrastructure to allow us to operate from a
second location. We have business interruption insurance; however, we cannot be
certain that our coverage will be sufficient to compensate us for losses that
may occur as a result of business interruptions.
A significant barrier to electronic commerce and communications is the
secure transmission of confidential information over public networks. Anyone who
is able to circumvent our security measures could misappropriate confidential
information or cause interruptions in our operations. We may be required to
expend significant capital and other resources to protect against potential
security breaches or to alleviate problems caused by any breach. We rely on
specialized technology, both within our own infrastructure and that provided by
Exodus, to provide the security necessary for secure transmission of postage and
other confidential information. Advances in computer capabilities, new
discoveries in security technology, or other events or developments may result
in a compromise or breach of the algorithms we use to protect customer
transaction data. Should someone circumvent our security measures, our
reputation, business, financial condition and results of operations could be
seriously harmed. Security breaches could also expose us to a risk of loss or
litigation and possible liability for failing to secure confidential customer
information. As a result, we may be required to expend a significant amount of
financial and other resources to protect against security breaches or to
alleviate any problems that they may cause.
The effects of expansion may adversely affect our financial condition, results
of operations and existing stockholders.
We may establish subsidiaries, enter into joint ventures or pursue the
acquisition of new or complementary businesses, products or technologies in an
effort to enter into new business areas, diversify our sources of revenue and
expand our product and service offerings outside the Internet postage market.
Although 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, both domestically and internationally. To the extent we
pursue new or complementary businesses, we may not be able to expand our service
offerings and related operations in a cost-effective or timely manner. We may
experience increased costs, delays and diversions of management's attention when
integrating any new businesses or service. We may lose key personnel from our
operations or those of any acquired business. Furthermore, any new business or
service we launch that is not favorably received by users could damage our
reputation and brand name in the Internet postage and shipping or other markets
that we enter. We also cannot be certain that we will generate satisfactory
revenues
18
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 incurring of additional debt, the assumption
of known and unknown liabilities, and the amortization of expenses related to
goodwill and other intangible assets, all of which could have a material adverse
effect on our business, financial condition and operating results. New issuances
of securities may also have rights, preferences and privileges senior to those
of our common stock.
We may need to raise additional capital in the future through the issuance of
additional equity or convertible debt securities or by borrowing money, and
additional funds may not be available on terms acceptable to us.
If our cost-cutting program associated with our new business strategy
is successfully implemented, we believe that our current cash balances will
allow us to fund our operations through June 2002. However, we may require
substantial working capital to fund our business and we may need to raise
additional capital. Our future capital needs depend on many factors, including
market acceptance of our postage and shipping services; the level of promotion
and advertising of our postage and shipping services; the level of our
development efforts; our rate of customer acquisition and retention for our
Internet Postage and shipping services; and changes in technology. In addition,
the various elements of our business and growth strategies, including our plans
to support fully the commercial release of our services, our introduction of new
products and services and our investments in infrastructure will require
additional capital. We cannot be certain that additional funds will be available
on satisfactory terms when needed, if at all. If we are unable to raise
additional necessary capital in the future or generate sufficient working
capital, we may be required to curtail our operations significantly or obtain
funding through the relinquishment of significant technology or markets. Raising
additional capital through the sale of equity or convertible debt securities
would have a dilutive effect on existing stockholders, and securities we issue
may have rights superior to our common stock.
We could be required to register as an investment company and become subject to
substantial regulation that would interfere with our ability to conduct our
business.
We invest in short-term instruments consistent with prudent cash
management and not primarily for the purpose of achieving investment returns.
This could result in our being treated as an investment company under the
Investment Company Act of 1940 and therefore being required to register as an
investment company under the Investment Company Act. The Investment Company Act
requires the registration of companies which are engaged primarily in the
business of investing, reinvesting or trading in securities or which are engaged
in investing, reinvesting, owning, holding or trading in securities and over 40%
of whose assets on an unconsolidated basis (other than government securities and
cash) consist of investment securities. While we do not believe that we are
engaged primarily in the business of investing, reinvesting or trading in
securities, we may invest our cash and cash equivalents in government securities
to the extent necessary to avoid having over 40% of our assets consist of
investment securities. Government securities are defined as securities issued by
the U.S. government and certain federal agencies. These securities generally
yield lower rates of income than other short-term instruments in which we have
invested to date. Accordingly, investing substantially all of our cash and cash
equivalents in government securities could result in lower levels of interest
income, which could cause our losses to increase.
If we were required to register as an investment company under the
Investment Company Act, we would become subject to substantial regulation with
respect to our capital structure, management, operations, transactions with
affiliated persons, if any, and other matters, incur substantial costs and
experience a disruption of our business. Application of the provisions of the
Investment Company Act to us would materially and adversely affect our business,
prospects, financial condition and results of operations.
19
Risks Related to Our Industry
US Postal Service regulations and fee assessments may cause disruptions or
discontinuance of our business, may increase the cost of our service and may
affect the adoption of Internet postage as a new method of mailing.
We are subject to continued US Postal Service scrutiny and other
government regulations. The continued availability of our Internet Postage
service is dependent upon our service continuing to meet US Postal Service
performance specifications and 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. If at any time our Internet Postage
service fails to meet US Postal Service requirements, we may be prohibited from
offering this service and our business would be severely and negatively
impacted. 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. Any
changes in requirements or specifications for Internet postage could adversely
affect our pricing, cost of revenues, operating results and margins by
increasing the cost of providing our Internet Postage service. For example, the
US Postal Service could decide to charge Internet postage vendors fees for the
enrollment of each unique customer of the Internet postage product, which would
be a cost that we would either absorb or pass through to customers. The US
Postal Service has in fact invoiced each Internet postage vendor $8 for each
digital certificate required for each consumer of Internet postage to securely
print postage. We are currently discussing the necessity of this charge with the
US Postal Service. If we are required to pay this per customer charge, the cost
of our service could increase and the adoption of Internet postage as a new
method of mailing could be adversely affected.
The US Postal Service could also decide that Internet postage should no
longer be an approved postage service due to security concerns or other issues.
Our business would suffer dramatically if we are unable to adapt our Internet
Postage service to any new requirements or specifications or if the US Postal
Service were to discontinue Internet postage as an approved postage method.
Alternatively, the US Postal Service could introduce competitive programs or
amend Internet postage requirements to make certification easier to obtain,
which could lead to more competition from third parties or the US Postal Service
itself. See "Risk Factors--If we are unable to compete successfully,
particularly against large, traditional providers of postage products like
Pitney Bowes who enter the online postage and shipping markets, our revenues and
operating results will suffer."
In addition, US Postal Service regulations may require that our
personnel with access to postal information or resources receive security
clearance prior to doing relevant work. We may experience delays or disruptions
if our personnel cannot receive necessary security clearances in a timely
manner, if at all. The regulations may limit our ability to hire qualified
personnel. For example, sensitive clearance may only be provided to US citizens
or aliens who are specifically approved to work on US Postal Service projects.
If we are unable to compete successfully, particularly against large,
traditional providers of postage products such as Pitney Bowes who enter the
online postage and shipping markets, our revenues and operating results will
suffer.
The market for Internet postage products and services is new and is
intensely competitive. At present, Pitney Bowes has a software-based product
commercially available and has a hardware-based product in beta testing. Neopost
Industrie has hardware and software products in beta testing. If any of our
competitors, including Pitney Bowes, provide the same or similar service as we
provide, our operations could be adversely impacted. See
"Business--Competition."
Internet postage may not be adopted by customers. These customers may
continue to use traditional means to purchase postage, including purchasing
postage from their local post office. If Internet postage becomes a viable
market, we may not be able to establish or maintain a competitive position
against current or future competitors as they enter the market. Many of our
competitors have longer operating histories, larger customer bases, greater
brand recognition, greater financial, marketing, service, support, technical,
intellectual property and other resources than us. As a result, our competitors
may be able to devote greater resources to marketing and promotional campaigns,
adopt more aggressive pricing policies and devote substantially more resources
to Web site and systems development than us. This increased competition may
result in reduced operating margins, loss of market share and
20
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.
We also compete with companies that provide shipping solutions to
businesses. Customers may continue using the direct services (including online
services) of the US Postal Service, United Parcel Service, FedEx and other major
shippers, instead of adopting our multi-carrier, online service. Successful
adoption of our shipping solutions may also be impeded by insufficient
cooperation from major carriers that we need to provide our online services.
Alternatively, traditional and/or potential competitors with greater resources
than ours, like Pitney Bowes, may develop more successful Internet solutions or
deter acceptance of our service offerings. In addition, companies including
TanData Corporation, GoShip.com, BITS, Inc./Intershipper.net, Kewill Systems,
Accuship, Neopost Industrie, Virtan, Inc./SmartShip Return.com and
ClickReturns.com are competing in shipping services and/or offering their
services through alliances with traditional major shippers. We also face a
significant risk that large shipping companies will collaborate in the
development and operation of an online shipping system that could make our
Internet shipping services obsolete.
On March 2, 2001, United Parcel Service and Mail Boxes Etc. USA, Inc.
jointly announced that United Parcel Service would acquire Mail Boxes Etc. USA,
Inc. Mail Boxes Etc. USA, Inc. represented a significant future source of
revenue and market leverage for our online shipping services. United Parcel
Service has informed us that it is unlikely to have Mail Boxes Etc. USA, Inc.
continue to use our online shipping services.
If we do not respond effectively to technological change, our services could
become obsolete and our business will suffer.
The development of our services and other technology entails
significant technical and business risks. To remain competitive, we must
continue to enhance and improve the responsiveness, functionality and features
of our online operations. The Internet and the electronic commerce industry are
characterized by rapid technological change; changes in user and customer
requirements and preferences; frequent new product and service introductions
embodying new technologies; and the emergence of new industry standards and
practices.
The evolving nature of the Internet or the Internet postage and
shipping markets could render our existing technology and systems obsolete. Our
success will depend, in part, on our ability to license or acquire leading
technologies useful in our business; enhance our existing services; develop new
services or features and technology that address the increasingly sophisticated
and varied needs of our current and prospective users; and respond to
technological advances and emerging industry and regulatory standards and
practices in a cost-effective and timely manner.
Future advances in technology may not be beneficial to, or compatible
with, our business. Furthermore, we may not be successful in using new
technologies effectively or adapting our technology and systems to user
requirements or emerging industry standards on a timely basis. Our ability to
remain technologically competitive may require substantial expenditures and lead
time. If we are unable to adapt in a timely manner to changing market conditions
or user requirements, our business, financial condition and results of
operations could be seriously harmed.
21
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 large 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.
Our operating results could be impaired if we or the Internet become subject to
additional government regulation and legal uncertainties.
With the exception of US Postal Service and Department of Commerce
regulations, we are not currently subject to direct regulation by any domestic
or foreign governmental agency, other than regulations applicable to businesses
generally, and laws or regulations directly applicable to electronic commerce.
However, due to the increasing popularity and use of the Internet, it is
possible that a number of laws and regulations may be adopted with respect to
the Internet, relating to user privacy; pricing; content; copyrights;
distribution; characteristics and quality of products and services; and export
controls.
The adoption of any additional laws or regulations may hinder the
expansion of the Internet. A decline in the growth of the Internet could
decrease demand for our products and services and increase our cost of doing
business. Moreover, the applicability of existing laws to the Internet is
uncertain with regard to many issues, including property ownership, export of
specialized technology, sales tax, libel and personal privacy. Our business,
financial condition and results of operations could be seriously harmed by any
new legislation or regulation. The application of laws and regulations from
jurisdictions whose laws do not currently apply to our business, or the
application of existing laws and regulations to the Internet and other online
services could also harm our business.
We have employees and offer our services in multiple states, and we may
in the future expand 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.
We may in the future begin 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
22
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. Regulations and standards of the
Universal Postal Union and other international bodies may also limit our ability
to provide international mail services.
If we enter the international market, 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.
Risks Related to Our Stock
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.
Shares of our common stock held by existing stockholders may be sold into the
public market, which could cause the price of our common stock to decline.
If our stockholders sell into the public market substantial amounts of
our common stock purchased in private financings prior to our initial public
offering, or purchased upon the exercise of stock options or warrants, or if
there is a perception that these sales could occur, the market price of our
common stock could decline. All of these shares are available for immediate
sale, subject to the volume and other restrictions under Rule 144 of the
Securities Act of 1933. These sales also could impair our future ability to
raise capital through the sale of equity or equity-related securities at a time
and price that we deem appropriate.
Our stock price may be highly volatile and could drop, particularly because our
business depends on the Internet.
The trading price of our common stock has fluctuated widely in the
past, and is expected to continue to do so in the future, as a result of a
number of factors, many of which are outside our control. In addition, the stock
market has experienced extreme price and volume fluctuations that have affected
the market prices of many technology and Internet-related companies and that
have often been unrelated or disproportionate to the operating performance of
these companies. These broad market fluctuations and the perception of the
valuation of the Internet company sector could adversely affect the
market price of our common stock.
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 office facility in Irvine, California under a lease
expiring in March 2004. We also have 27,000 square feet of space in Bellevue,
Washington under a lease terminating in April 2001, and an additional 14,500
square feet of space under a lease that expires in April 2002. Also in Bellevue,
Washington, we have entered into a lease for 92,000 square feet of space that
commences in March of 2001 and expires in 2009. Subsequent to our restructuring,
we are in the process of marketing spaces in Santa Monica and Bellevue for
sublet. We have incorporated lease payments for excess space into our
restructuring charge.
23
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
originally alleged that we are infringing two patents held by Pitney Bowes
related to postage application systems and electronic indicia. The suit seeks
treble damages, a preliminary and permanent injunction from further alleged
infringement, attorneys' fees and other unspecified damages. We answered the
complaint on August 6, 1999, denying the allegations of patent infringement and
asserting a number of affirmative defenses. Pitney Bowes filed a similar
complaint in early June 1999 against one of our competitors, E-Stamp
Corporation, alleging infringement of seven Pitney Bowes patents. On April 13,
2000, Pitney Bowes asked the court for permission to amend its complaint to drop
allegations of patent infringement with respect to one patent and to add
allegations of patent infringement with respect to three other patents. On July
28, 2000 the court entered Pitney Bowes' amended complaint.
On September 18, 2000 Pitney Bowes filed another patent infringement
lawsuit against us in the United States District Court for the Eastern District
of Texas, alleging that we are infringing four patents owned by Pitney Bowes
related to shipping. The suit seeks unspecified damages and a permanent
injunction from further alleged infringement. We answered the complaint on
December 1, 2000, denying the allegations of patent infringement and asserting a
number of affirmative defenses.
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 suits against us alleging patent infringement could prevent us from offering
our Internet Postage and iShip services and severely harm our business or cause
it to fail."
On or about December 29, 1999, three individual plaintiffs filed a
lawsuit against us 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. Plaintiffs asserted claims for breach of oral contract, quantum meruit,
fraud and negligent misrepresentation. The plaintiffs alleged that they had an
oral contract with Stamp Master, who allegedly was one of our predecessors,
pursuant to which Stamp Master agreed to pay them "cash for cash compensation"
for their services in securing investments for Stamp Master or in finding
individuals to serve as board members. They further alleged that after
successfully placing an individual on our board of directors and after that
board member successfully obtained financing on our behalf, they were entitled
to cash compensation for those efforts. The plaintiffs sought $13.3 million in
compensatory damages, plus other unspecified compensatory damages, punitive and
exemplary damages and attorneys' fees and costs incurred.
On January 23, 2001, the Court granted a summary judgment motion filed
by us and Mr. Ananda. Accordingly, judgment has been granted in favor of us and
Mr. Ananda and the case has been dismissed. However, the plaintiffs have
notified the court that they intend to appeal the judgment against them to an
appellate court.
On August 23, 2000, DraftWorldwide, Inc., which formerly served as one
of our advertising and promotions agencies, filed a suit against us for alleged
breach of contract in the Circuit Court of Cook County, Illinois. The suit
alleged that we improperly terminated our contract with DraftWorldwide and
sought damages of approximately $3.9 million plus interest and costs associated
with the lawsuit. We denied the allegations contained in the complaint, and
filed our own counterclaim, alleging that DraftWorldwide had breached the
contract by failing to adequately perform under the contract and had acted in
bad faith in negotiating an adjustment to the terms of the contract, as provided
for in the contract. The parties recently reached a mutually acceptable
resolution of the suit which will result in both parties' dismissal, with
prejudice, of their respective claims against each other in the very near
future.
On December 13, 2000, Cybershop (a British Columbia, Canada
partnership) and its general partners filed suit against us in the U.S. District
Court for the Southern District of Texas, alleging that in 1998 a third party
fraudulently transferred ownership of the Internet domain name "stamps.com" away
from Cybershop and subsequently transferred it to us. The third party is also a
named defendant in the suit. The complaint seeks legal resolution and
recognition of Cybershop's ownership of the "stamps.com" domain name and seeks
unspecified monetary damages against the third party. On January 9, 2001, we
filed a motion to dismiss the suit. On
24
February 16, 2001, Cybershop filed an amended complaint, alleging new causes of
action, including conversion, invasion of privacy, trespass, and private
nuisance, and seeking declaratory judgment for return of the domain name
registration to Cybershop. On March 5, 2001, we filed a motion to dismiss the
amended complaint. The outcome of the litigation is uncertain, and we can give
no assurance that Cybershop will not prevail. See "Risk Factors--Success by
Cybershop in its suit against us seeking damages and recognition of its
ownership of the domain name "stamps.com" could prevent us from using the domain
name "stamps.com" and could require a change of name of the Company, severely
harming our business or causing it to fail."
On or about April 6, 2000, Metro Fulfillment, Inc. filed a lawsuit
against Weigh-Tronix, Inc. for breach of contract, fraud, negligent
misrepresentation, intentional inference with contract, negligent interference,
breach of implied warranty and breach of express warranty. Metro Fulfillment,
Inc. alleges that pursuant to its agreement with Weigh-Tronix, Inc., Metro
Fulfillment, Inc. was not required to pay for postal scales that were purchased
from Weigh-Tronix, Inc. until Metro Fulfillment, Inc. had actually sold those
scales to end users. These sales were supposed to be sold through our Web site.
Metro Fulfillment, Inc. further alleged that Weigh-Tronix, Inc. breached the
agreement by seeking payment before the scales were actually sold to customers
in breach of the agreement. Weigh-Tronix, Inc. in turn filed a third party
complaint against us and Metro Fulfillment, Inc. for breach of contract and
several common counts. The third party complaint seeks approximately $700,000.00
in compensatory damages, plus interest and attorney's fees. We have filed an
answer to the third party complaint denying the allegations of the lawsuit.
On February 28, 2001, Metro Fulfillment, Inc. filed a lawsuit against
us stemming from services allegedly performed by Metro Fulfillment, Inc. under a
Fulfillment Services Agreement. The complaint alleges claims for breach of
contract, common counts and negligent misrepresentation. The complaint seeks
damages of approximately $1.3 million. We are currently reviewing the complaint
and anticipate filing an answer denying the allegations in that complaint.
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, 2000.
25
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.
High Low
---- ---
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......................................... $47.50 $ 19.31
Second Quarter........................................ $16.75 $ 7.31
Third Quarter......................................... $ 7.94 $ 3.56
Fourth Quarter........................................ $ 3.94 $ 2.25
Fiscal 2001
First Quarter (through March 27, 2001)................ $ 3.03 $ 2.80
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, 2000 and (ii)
March 27, 2001.
Closing
Price
December 31, 2000.......................................... $2.78
March 27, 2001............................................. $2.62
Holders
As of March 27, 2001, there were approximately 1,457 stockholders of
record and approximately 50,171,630 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 did not have any unregistered sales of common stock during the
quarter ended December 31, 2000.
26
ITEM 6. SELECTED FINANCIAL DATA
Period from
January 9, 1998
(inception) to
Year ended December 31, December 31,
------------------------ ----------------
2000 1999 1998
------------------------ ----------------
(in thousands, except per share data)
Statement of Operations Data:
Revenues......................................................... $ 15,234 $ 358 $ --
Cost of sales.................................................... 23,691 2,430 --
Research and development......................................... 33,051 7,363 1,532
Sales and marketing.............................................. 72,966 35,208 632
General and administrative....................................... 102,191 14,333 2,016
Provision for loss on loan with former officer................... 3,346 -- --
Restructuring charges............................................ 11,475 -- --
Loss from operations............................................. (231,486) (58,976) (4,180)
Interest income (expense), net................................... $ 18,436 $ 2,489 $ (16)
Net loss......................................................... (212,949) (56,487) (4,196)
Basic and diluted net loss per share............................. $ (4.54) $ (2.59) $ (0.85)
Weighted average shares outstanding used in basic and diluted
per-share calculation......................................... 46,888 21,824 4,956
As of December 31,
-----------------------------
2000 1999
------------ ------------
(in thousands)
Balance Sheet Data:
Cash and short-term investments............................................... $ 247,939 $ 374,746
Working capital............................................................... 234,645 390,357
Total assets.................................................................. 486,938 410,442
Line of credit, capital lease obligations and other long-term liabilities..... 9,114 1,951
Total stockholders' equity.................................................... 422,761 401,598
27
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 11 of this Report.
Overview
Stamps.com provides easy, convenient and cost-effective Internet-based
services for mailing or shipping letters, packages or parcels anywhere in the
United States and at anytime. Our core mailing and shipping services are
designed to allow individual consumers or employees of small businesses or
larger enterprises to select a carrier, print US postage or shipping labels from
multiple carriers, schedule a pick-up, track a package and apply enterprise-wide
business rules to manage and account for mailing and shipping costs. With all of
our services, no additional hardware is required; a customer can access our
services through an existing Internet connection and print postage or shipping
labels with ordinary laser or inkjet printers.
In October 2000, we implemented a new business strategy in an effort to
more rapidly decrease our operating losses and enhance our ability to achieve
profitability. This strategy involved an initial restructuring to focus on our
core business of Internet postage and shipping, that reduced our total number of
employees by approximately 40% to 315 employees, which included full time, part
time and contract employees. We took a one-time charge in the fourth quarter of
2000 of $11.5 million that consists primarily of employee severance, reserves
established for exiting contractual arrangements and fixed asset write-offs. We
also announced other cost-cutting programs, including a significant reduction
and redeployment of our sales and marketing expenses to those programs that have
demonstrated higher returns on investment. We combined our Enterprise and E-
Commerce Business Units to reduce duplication of costs and effort. Additionally,
as a result of our new focus, we exited some of our longer-term fixed-price
marketing deals in favor of variable cost marketing deals, and restructured our
customer support service.
In October 2000, we experienced a significant change in personnel at the
senior management level including the resignation of our Chief Executive Officer
and Chairman of the Board, our President and Chief Operating Officer, our Chief
Financial Officer, our Chief Marketing Officer and our Controller. The Board
appointed Bruce Coleman as interim Chief Executive Officer and as a director,
Kenneth McBride as acting Chief Financial Officer and Marvin Runyon as our new
Chairman of the Board. We cannot predict how these changes in management will
affect our business. However, if we fail to attract and retain qualified
individuals for these senior management positions, our business, financial
condition and results of operations will be adversely affected. If our new
business strategy is not successful, we will not achieve profitability as
currently planned, if at all.
In February 2001, in an effort to more rapidly decrease our operating
losses, and continue with our new business strategy, we reduced the total number
of employees by approximately an additional 50% to 150 employees, which included
full time, part time and contract employees. We expect to take a one-time charge
in the first quarter of 2001 related to this reduction in workforce. We also
continued our focus on exiting fixed price marketing deals, and entering into
variable cost marketing deals. For instance, in February 2001, we terminated our
marketing agreement with America Online, Inc. which we expect to result in
savings to our company of approximately $27 million over the next two years.
Additionally, we restructured our customer support service for greater
efficiency.
In March 2001, David Bohnett resigned from our Board of Directors. We
expect to continue to experience changes in personnel at the senior management
and Board level as part of our restructuring process.
On November 16, 1999, we announced the formation of a subsidiary,
EncrypTix, Inc., to develop secure printing opportunities in the events, travel
and financial services industries. In February 2000, we invested $1.0 million
and granted EncrypTix a license to our technology in those three specific fields
of use. EncrypTix raised approximately $35 million in private financing. On
March 12, 2001, EncrypTix ceased operations and effected a general assignment of
its assets for the benefit of its creditors. EncrypTix took this action due to
the inability to
28
secure additional funding. We do not expect to be impacted by any of EncrypTix's
resulting liabilities. Additionally, we terminated our license agreement with
EncrypTix and maintain limited licenses to various EncrypTix intellectual
property.
On March 7, 2000, we completed the acquisition of iShip.com, Inc.
pursuant to which iShip.com, Inc. became our wholly-owned subsidiary. iShip.com,
Inc. was a development stage enterprise developing Internet-based shipping
technology. In connection with the acquisition, we issued approximately 5.6
million shares of our common stock in exchange for all outstanding shares of
iShip.com, Inc. capital stock and reserved an additional 1.6 million shares of
our common stock for issuance upon the exercise of iShip.com, Inc. options and
warrants we assumed in connection with the acquisition. The acquisition was
accounted for as a purchase. In connection with the iShip.com, Inc. acquisition,
we recorded a significant amount of goodwill and intangibles, the amortization
of which will significantly and adversely affect our operating results. As of
December 31, 2000, the un-amortized intangibles related to the iShip.com, Inc.
acquisition is $175.3 million. On March 2, 2001, United Parcel Service and Mail
Boxes Etc. USA, Inc. jointly announced that United Parcel Service would acquire
Mail Boxes Etc. USA, Inc. Mail Boxes Etc. USA, Inc. represented a significant
future source of revenue and market leverage for our enterprise shipping
services. Mail Boxes Etc. USA, Inc. was also a significant customer of United
Parcel Service. United Parcel Service has informed us that it is unlikely to
have Mail Boxes Etc. USA, Inc. continue to use our online shipping services in
the future. In light of the March 2, 2000 events, we may be required to record
an appropriate reduction to the remaining goodwill in the first quarter of 2001.
On August 23, 2000, DraftWorldwide, Inc., which formerly served as one
of our advertising and promotions agencies, filed a suit against us for alleged
breach of contract in the Circuit Court of Cook County, Illinois. The suit
alleged that we improperly terminated our contract with DraftWorldwide and
sought damages of approximately $3.9 million plus interest and costs associated
with the lawsuit. We denied the allegations contained in the complaint, and
filed our own counterclaim, alleging that DraftWorldwide had breached the
contract by failing to adequately perform under the contract and had acted in
bad faith in negotiating an adjustment to the terms of the contract, as provided
for in the contract. The parties recently reached a mutually acceptable
resolution of the suit which will result in both parties' dismissal, with
prejudice, of their respective claims against each other in the very near
future.
Internet Postage Services: We offer an Internet Postage service
targeted at consumers and small businesses with less than 100 employees. Service
fee revenues for our Internet Postage service are generated from the two service
plans that we are currently offering to our users, the Simple Plan and the Power
Plan. Under the Simple Plan, a user purchases postage at face value for a
monthly convenience fee of 10% of the value of postage printed. Prior to
November 2000, there was a monthly minimum fee of $1.99 and a monthly maximum
fee of $19.99 under the Simple Plan. Beginning in November 2000, the monthly
minimum fee was increased to $4.49 for new customers and the monthly maximum fee
was discontinued. All customers who existed at the time of the price increase
remain at the $1.99 minimum level. The Power Plan was introduced at the
beginning of our second quarter of 2000, in response to customer requests for a
fixed monthly pricing plan for unlimited usage. Under the Power Plan, a user
purchases unlimited postage at face value, for a flat monthly fee of $18.99. For
the fourth quarter of 2000, over 50% of our service fee revenues was generated
from Power Plan customers. Service fees are calculated and charged at the end of
a monthly billing cycle.
We also generate revenues from controlled access advertising to our
existing customer base, and revenue share and bounty arrangements. As we
continue to grow our customer base for the Internet Postage service, and
implement our new business strategy, we expect to see an increase in our
revenues for 2001 as compared to our revenues in 2000.
Internet Shipping Services: We offer an Internet-based, multi-carrier
mailing and shipping service that is targeted both at small businesses with less
than 100 employees and at large companies with more than 100 employees. We
believe that our enterprise service for corporations with 100 or more employees
will enable them to centrally manage and control costs from mailing and shipping
activities across multiple carriers and can be distributed to thousands of
corporate desktops using only a Web browser. The largest customer to date of the
enterprise service is Mail Boxes Etc. USA, Inc., a retail business,
communication and postal services franchiser. There are currently over 1,400
Mail Boxes Etc. USA, Inc. franchises utilizing our services. Under our 2000
29
agreement with Mail Boxes Etc. USA, Inc., we received a fixed service fee of
$500,000 per month until December 31, 2000. Due to delays in delivering our
products and a dispute with Mail Boxes Etc. USA, Inc. relating to certain
product features, as of December 31, 2000 we had not received payment of $2.0
million of service fees, and as such we had not recognized that amount of
revenue. We are currently working with Mail Boxes Etc. USA, Inc. in an effort to
resolve this dispute. On January 1, 2001, the fixed monthly service fee
converted to a per transaction fee. Given current transaction volume being
produced by Mail Boxes Etc. USA, Inc. franchises, we do not expect in the short
term to achieve the level of monthly revenue that has been produced under the
year 2000 fixed monthly service fee arrangement.
On March 2, 2001, United Parcel Service and Mail Boxes Etc. USA, Inc.
jointly announced that United Parcel Service had agreed to acquire Mail Boxes
Etc. USA, Inc., the largest customer of our enterprise shipping services. As a
result of that announcement, the uncertainty around our relationship with Mail
Boxes Etc. USA, Inc. and our ability to collect year 2000 service fees has
increased.
Results of Operations
Years Ended December 31, 2000 and 1999
Revenue. Revenue is derived primarily from two sources: (1) service
fees charged to customers for the ability to print postage directly from their
printer, and (2) professional contract revenue, received from Mail Boxes Etc.
USA, Inc., for shipping tools used by Mail Boxes Etc. USA, Inc. franchise
locations. Total revenue increased from $358,000 to $15,234,000 for the years
ended December 31, 1999 and 2000, respectively. The increase in service revenue
is primarily due to a growth in the customer base from approximately 187,000 to
300,000, at December 31, 1999 and 2000, respectively, and recognizing a full
year's worth of revenue in 2000, as opposed to two months in 1999 (the postage
service product was launched on October 22, 1999). The professional contract
revenue in 2000 relates to the Mail Boxes Etc. USA, Inc. agreement that was
initiated in 2000. Other revenue consists primarily of bounties and commissions
on sales of products to our customers by third parties. The bounty and
commission agreements were also initiated in 2000.
Cost of Sales. Cost of sales principally consists of customer service,
free postage and system operating costs. Cost of sales was $23.7 million for the
year ended December 31, 2000, compared to $2.4 million for the year ended
December 31, 1999. The increase is primarily attributable to conducting
operations for twelve months in 2000 as opposed to two months in 1999. During
2000 we significantly increased customer service capacity and initiated
promotional programs that included a free postage offering, both of which are
recognized as cost of sales. We expect that cost of sales will decrease
significantly as a percent of revenue in 2001 as we have reduced our workforce
and have reduced the amount of free postage given to new customers.
Sales and Marketing. Sales and marketing expenses principally consist
of costs associated with strategic relationships, advertising and promotional
expenditures, and compensation and related expenses for personnel engaged in
marketing and business development activities. Sales and marketing expenses were
approximately $73.0 million compared to $35.2 million for the years ended
December 31, 2000 and 1999, respectively. The increase in sales and marketing
expenses is principally due to the marketing campaign and advertising subsequent
to the launch of the Internet Postage solution in October 1999. We expect sales
and marketing expenses to decrease significantly in 2001 as we narrow our sales
and marketing focus and efforts.
Research and Development. Research and development expenses principally
consist of compensation for personnel involved in the development of the
Internet Postage and enterprise shipping service and expenditures for consulting
services and third-party software. Research and development expenses for the
year ended December 31, 2000 were $33.1 million compared to $7.4 million for the
year ended December 31, 1999. The increase is due to higher personnel and
consulting costs and other expenses associated with the ongoing development of
the Internet Postage and enterprise shipping services. We expect that research
and development costs will decrease significantly in 2001 as we have reduced our
workforce and have narrowed our development efforts.
30
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 years ended December 31, 2000 and 1999 were $102.2 million and
$14.3 million, respectively. The increase is principally due to the increased
number of employees, the expansion of facilities related to the growth of the
business, legal fees and, most significantly, the amortization of goodwill
related to the iShip.com, Inc. acquisition and the amortization of deferred
compensation. We expect general and administrative expenses to decrease
significantly as we have reduced our workforce in October 2000 and February
2001.
Restructuring Charge. In October 2000, we restructured to more
effectively focus on core business opportunities in the postage and shipping
industries. As a part of that restructuring, we eliminated approximately 40% of
the workforce, ceased payments under and subsequently exited our marketing
agreement with America Online, Inc., discontinued use of certain assets, and
recorded a restructuring charge of $11.5 million that consists primarily of
employee severance, reserves established for exiting contractual arrangements
and leases, and property and equipment write-offs.
Interest Income (Expense), Net. Interest income (expense), net consists
of income from cash equivalents and short term investments, net of interest
expense related to financing obligations. Net interest income for the years
ended December 31, 2000 and 1999 were $18.4 million and $2.5 million,
respectively. 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.
Years Ended December 31, 1999 and 1998
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 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, 2000 and 1999, we had approximately $247.9 million
and $374.7 million 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 invest excess funds in short-term money
market funds and commercial paper and do not engage in hedging or speculative
activities.
In the first quarter of 2000, our majority-owned subsidiary, EncrypTix,
raised approximately $34.8 million in private financing from a group of
financial and strategic investors. The proceeds of this financing were used by
EncrypTix for research and development, sales and marketing and general working
capital purposes. On March 12, 2001, EncrypTix ceased operations and effected a
general assignment of its assets for the benefit of its creditors. EncrypTix
took this action due to the inability to secure additional funding. We do not
expect to be impacted by any of EncrypTix's resulting liabilities. Additionally,
we terminated our license agreement with EncrypTix and maintain limited licenses
to various EncrypTix intellectual property.
In May 1999, we entered into a facility lease agreement for the
corporate headquarters with aggregate lease payments of approximately $4.8
million through May 2004. Also, in March 2000 we entered into a facility lease
agreement for a Bellevue, Washington facility with aggregate lease payments of
approximately $17 million. For all excess space that resulted from our October
2000 and February 2001 restructurings, we are actively marketing the space for
sublet.
Net cash used in operating activities was $123.3 million and $67.5
million for the years ended December 31, 2000 and 1999, respectively. The
increase in net cash used in operating activities resulted primarily from
increases in net loss.
Net cash used in investing activities was $163.3 million and $57.7
million for the years ended December 31, 2000 and 1999, respectively. The
increase in net cash used in investing activities resulted primarily from the
purchase of short-term investments and increased capital expenditures.
31
Net cash provided by financing activities was $29.3 million and $450.1
million for the years ended December 31, 2000 and 1999, respectively. The
decrease in net cash provided by financing activities resulted principally from
the initial public offering in June 1999 and follow-on offering in December
1999.
We anticipate that our current cash balances will be sufficient to fund our
operations through June 2002. However, we may require substantial working
capital to fund our business and may need to raise additional capital. We cannot
be certain that additional funds will be available on satisfactory terms when
needed, if at all. See "Risk Factors--We may need to raise additional capital in
the future through the issuance of additional equity or convertible debt
securities or by borrowing money, and additional funds may not be available on
terms acceptable to us."
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Our exposure to market rate risk for changes in interest rates relates
primarily to our investment portfolio. We have not used derivative financial
instruments in our investment portfolio. Our 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. At December 31,
2000, our short-term investments approximated $174.4 million and had a related
weighted average interest rate of 6.0%. Interest rate fluctuations impact the
carrying value of the portfolio. We do not believe that the future market risks
related to the above securities will have material adverse impact on our
financial position, results of operations or liquidity.
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.
32
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Identification of Directors. The information under the caption
"Election of Directors," appearing in the Company's Proxy Statement for the 2001
Annual Meeting of Stockholders is incorporated herein by reference.
(b) Identification of Key Executive Officers. The information under the
caption "Executive Officers and Key Employees," appearing in the Company's Proxy
Statement for the 2001 Annual Meeting of Stockholders is incorporated herein by
reference.
(c) Compliance with Section 16(a) of the Exchange Act. The information
under the caption "Section 16(a) Beneficial Ownership Reporting Compliance,"
appearing in the Company's Proxy Statement for the 2001 Annual Meeting of
Stockholders is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information under the caption "Executive Compensation and Other
Information," appearing in the Company's Proxy Statement for the 2001 Annual
Meeting of Stockholders is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information under the caption "Ownership of Securities," appearing
in the Company's Proxy Statement for the 2001 Annual Meeting of Stockholders is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information under the heading "Certain Transactions," appearing in
the Company's Proxy Statement for the 2001 Annual Meeting of Stockholders is
incorporated herein by reference.
33
PART IV.
ITEM 14. 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
Page
----
Report of Independent Public Accountants........................................................ F-1
Consolidated Balance Sheets at December 31, 2000 and 1999....................................... F-2
Consolidated Statements of Operations for the years ended December 31, 2000 and December 31,
1999 and the period from January 9, 1998 (date of inception) to December 31, 1998............ F-3
Consolidated Statements of Stockholders' Equity for the years ended December 31, 2000 and
December 31, 1999 and the period from January 9, 1998 (date of inception) to December 31,
1998......................................................................................... F-4
Consolidated Statements of Cash Flows for the years ended December 31, 2000 and December 31,
1999 and the period from January 9, 1998 (date of inception) to December 31, 1998............ F-6
Notes to Consolidated Financial Statements...................................................... F-7
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.
3. Exhibits. The following Exhibits are incorporated herein by
reference or are filed with this report as indicated below:
Exhibit
Number Description
------ -----------
1.1 Form of Underwriting Agreement.(2)
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 Amended and Restated Certificate of Incorporation of the Company.
(2)
3.2 Bylaws of the Company.(2)
4.1 Specimen common stock certificate.(2)
4.2 Form of Common Stock Purchase Warrant between the Company and
Cydcor Limited.(15)
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)
34
Exhibit
Number Description
------ -----------
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.(2)
10.13 Master Lease Agreement between the 4Company 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)
35
Exhibit
Number Description
------ -----------
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 America Online, Inc., 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.(7)
10.34+ Interactive Marketing and Distribution Agreement, dated October
15, 1999, between America Online, Inc. and the Company.(3)
10.35 Common Stock and Warrant Purchase Agreement, dated October 20,
1999, between America Online, Inc. and the Company.(3)
10.36 Common Stock Purchase Warrant, dated October 29, 1999, between
America Online, Inc. and the Company.(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.(11)
10.40 Common Stock Purchase Warrant, dated August 20, 1999, between the
Company and Imperial Bank (Assumed by the Company on March 7, 2000
in connection with the iShip.com, Inc. acquisition).(12)
10.41 Letter dated March 22, 2000 regarding the Company's Assumption of
the Imperial Bank Warrant.(12)
10.42 Common Stock Purchase Warrant, dated April 29, 1999, between the
Company and Mail Boxes Etc. USA, Inc. (Assumed, Amended and
Restated on March 7, 2000 in connection with the iShip.com, Inc.
acquisition).(12)
10.43 Lease Agreement dated as of May 7, 2000 between Sterling Realty
Organization Co. and iShip.com, Inc.(12)
36
Exhibit
Number Description
------ -----------
10.44+ License Agreement dated as of February 9, 2000 by and between the
Company and EncrypTix, Inc.(12)
10.45 Amended and Restated Loan Repayment Agreement dated as of August
10, 2000 by and among the Company, Salomon Smith Barney Inc. and
John M. Payne.(13)
10.46 Revolving Note Secured by Stock Pledge Agreement dated as of April
12, 2000 between the Company and John M. Payne.(13)
10.47 Stock Pledge Agreement dated as of April 12, 2000 between the
Company and John M. Payne.(13)
10.48+ Manifest System Services and Co-Branding Agreement dated as of
April 27, 1999 by and between iShip.com, Inc. and Mail Boxes Etc.
USA, Inc.(15)
10.49+ Amendment No. 1 dated as of March 7, 2000 to the April 27, 1999
Manifest System Services and Co-Branding Agreement by and between
iShip.com, Inc. and Mail Boxes Etc. USA, Inc.(15)
10.50 Common Stock Warrant Issuance Agreement dated as of August 1, 2000
between the Company and Cydcor Limited.(15)
10.51 Separation Letter Agreement dated as of December 20, 2000 by and
between the Company and John M. Payne.(16)
10.52 Consulting Services Agreement dated as of December 20, 2000 by and
between the Company and John M. Payne.(16)
10.53 Confidential Information and Invention Assignment Agreement dated
as of December 20, 2000 by and between the Company and John M.
Payne.(16)
10.54 Security Agreement dated as of November 30, 2000 by and between the
Company and John M. Payne.(16)
10.55 Note Secured by Security Agreement dated as of November 30, 2000 by
and between the Company and John M. Payne.(16)
10.56++ Termination Agreement dated as of February 23, 2001 by and between
America Online, Inc. and the Company.(18)
10.57++ Market Agreement, dated as of May 15, 2000, by and between the
Company and Cydcor Limited.(18)
10.58++ Addendum No. 1 dated as of August 1, 2000 to the May 15, 2000
Market Agreement by and between the Company and Cydcor Limited.(18)
10.59 Amendment dated February 13, 2001 to the December 20, 2000
Separation Letter Agreement by and between the Company and John M.
Payne.(18)
10.60 Letter Agreement regarding Resignation dated September 22, 2000 by
and between the Company and Loren Smith.(18)
10.61 Letter Agreement regarding Resignation dated October 26, 2000 by
and between the Company and John La Valle.(18)
37
Exhibit
Number Description
------ -----------
10.62 Employment Offer Letter dated October 23, 1999 by and between the
Company and Bruce Coleman.(18)
21.1 Subsidiaries of the Company.(3)
23.1 Consent of Arthur Andersen LLP.(18)
24.1 Power of Attorney.(Included on signature pages hereto)
99.1 Form of Notice of Grant of Stock Option.(5)
99.2 Form of Stock Option Agreement.(5)
99.3 Form of Addendum to Stock Option Agreement--Involuntary Termination
Following Corporate Transaction/Change in Control.(5)
99.4 Form of Addendum to Stock Option Agreement--Limited Stock
Appreciation Right.(5)
99.5 Form of Stock Issuance Agreement.(5)
99.6 Form of Addendum to Stock Issuance Agreement--Involuntary
Termination Following Corporate Transaction/Change in Control.(5)
99.7 Form Automatic Stock Option Agreement.(5)
99.8 Form Notice of Grant of Non-Employee Director--Automatic Stock
Option (Initial).(5)
99.9 Form Notice of Grant of Non-Employee Director--Automatic Stock
Option (Annual).(5)
99.10 Form of Enrollment/Change Form for Employee Stock Purchase Plan.(5)
99.11 Form of Stock Purchase Agreement for Employee Stock Purchase
Plan.(5)
99.12 Press Release, dated July 21, 1999, announcing recent
developments.(6)
99.13 Press Release, dated July 12, 1999, announcing the appointments of
Carolyn Ticknor as a Board Director and Christopher Hylen as a
Senior Vice President of Marketing.(7)
99.14 Press Release, dated August 9, 1999, announcing US Postal Service
approval of the Company's Internet Postage service for commercial
release.(7)
99.15 Press Release, dated October 25, 1999, announcing the Company's
agreement to acquire iShip.com, Inc.(1)
99.16 Action by Written Consent of the Shareholders of iShip.com, Inc.(4)
99.17 Proxy Card for Acquisition of iShip.com, Inc.(4)
99.18 Tax Representation Letter of the Company Regarding the Acquisition
of iShip.com, Inc.(4)
38
Exhibit
Number Description
------ -----------
99.19 Tax Representation Letter of iShip.com, Inc. Regarding its
Acquisition by the Company.(4)
99.20 Press Release, dated March 8, 2000, announcing the completion of
the Company's acquisition of iShip.com, Inc.(8)
99.21 Press Release, dated March 22, 2000, announcing the appointments of
John A. Duffy and Stephen M. Teglovic to the Company's Board of
Directors.(9)
99.22 iShip.com, Inc. Amended and Restated 1997 Stock Plan.(10)
99.23 Form of Option Assumption Agreement (iShip.com, Inc. Option
Shares).(10)
99.24 Press Release, dated October 9, 2000, announcing the resignation of
Loren Smith as President and Chief Operating Officer, the
resignation of John LaValle as Chief Financial Officer and the
resignation of Candelario Andalon as Comptroller.(14)
99.25 Press Release, dated October 12, 2000, announcing the resignation
of John M. Payne as Chief Executive Officer and Chairman of the
Board, the resignation of Tom Bruggere as a Board director, the
appointment of Kenneth McBride as acting Chief Financial Officer
and the appointment of Marvin Runyon as Chairman of the Board.(14)
99.26 Press Release, dated October 23, 2000, announcing the Company's
workforce reduction and cost-cutting measures.(15)
99.27 Press Release, dated October 31, 2000, announcing the appointment
of Bruce Coleman as interim Chief Executive Officer.(15)
99.28 Press Release, dated October 31, 2000, announcing the Company's
cost-cutting measures.(15)
99.29 Press Release, dated December 27, 2000, announcing the resignation
of John M. Payne as a Board director of the Company and of
EncrypTix, Inc., and the appointments of Jeffrey Brown and Bruce
Coleman as Board directors of EncrypTix, Inc.(16)
99.30 Press Release, dated March 12, 2001, announcing the cessation of
EncrypTix, Inc.'s operations and the effectuation of a general
assignment for the benefit of its creditors.(17)
99.31++ Mutual General Release, dated March 7, 2001, by and between the
Company and DraftWorldwide, Inc., and Joint Stipulation of
Dismissal.(18)
___________________
(1) Incorporated herein by reference to the Company's Form 8-K filed with the
Securities and Exchange Commission on October 29, 1999 (File No.
000-26427).
(2) Incorporated herein by reference to the Company's Registration Statement on
Form S-1, originally filed with the Securities and Exchange Commission on
April 26, 1999, as subsequently amended (File No. 333-77025).
(3) Incorporated herein by reference to the Company's Registration Statement on
Form S-1, originally filed with the Securities and Exchange Commission on
November 2, 1999, as subsequently amended (File No. 333-90115).
39
(4) Incorporated herein by reference to the Company's Registration Statement on
Form S-4, originally filed with the Securities and Exchange Commission on
November 19, 1999, as subsequently amended (File No. 333-91377).
(5) Incorporated herein by reference to the Company's Registration Statement on
Form S-8 filed with the Securities and Exchange Commission on June 28,
1999.
(6) Incorporated herein by reference to the Company's Form 8-K filed with the
Securities and Exchange Commission on July 26, 1999 (File No. 000-26427).
(7) Incorporated herein by reference to the Company's Form 10-Q filed with the
Securities and Exchange Commission on August 9, 1999.
(8) Incorporated herein by reference to the Company's Form 8-K filed with the
Securities and Exchange Commission on March 9, 2000 (File No. 000-26427).
(9) Incorporated herein by reference to the Company's Form 8-K filed with the
Securities and Exchange Commission on March 22, 2000 (File No. 000-26427).
(10) Incorporated herein by reference to the Company's Registration Statement on
Form S-8 filed with the Securities and Exchange Commission on March 30,
2000.
(11) Incorporated herein by reference to the Company's Annual Report on Form
10-K, originally filed with the Securities and Exchange Commission on March
30, 2000, as subsequently amended (File No. 000-26427).
(12) Incorporated herein by reference to the Company's Form 10-Q filed with the
Securities and Exchange Commission on May 15, 2000.
(13) Incorporated herein by reference to the Company's Form 10-Q filed with the
Securities and Exchange Commission on August 14, 2000.
(14) Incorporated herein by reference to the Company's Form 8-K filed with the
Securities and Exchange Commission on October 13, 2000 (File No.
000-26427).
(15) Incorporated herein by reference to the Company's Form 10-Q filed with the
Securities and Exchange Commission on November 14, 2000.
(16) Incorporated herein by reference to the Company's Form 8-K filed with the
Securities and Exchange Commission on December 29, 2000 (File No.
000-26427).
(17) Incorporated herein by reference to the Company's Form 8-K filed with the
Securities and Exchange Commission on March 12, 2001 (File No. 000-26427).
(18) Filed with the Securities and Exchange Commission with this Annual Report
on Form 10-K.
+ Confidential treatment requested and received as to certain portions.
++ Confidential treatment has been requested for certain confidential portions
of this exhibit pursuant to Rule 24b-2 under the Securities Exchange Act of
1934, as amended. In accordance with Rule 24b-2, these confidential
portions have been omitted from this exhibit and filed separately with the
Securities and Exchange Commission.
40
(b) Reports on Form 8-K:
On October 13, 2000, the Company filed a report on Form 8-K relating to
the resignation of Loren Smith as President and Chief Operating Officer, the
resignation of John LaValle as Chief Financial Officer, the resignation of
Candelario Andalon as Comptroller, the resignation of John M. Payne as Chief
Executive Officer and Chairman of the Board, the resignation of Tom Bruggere as
a Board director, the appointment of Kenneth McBride as acting Chief Financial
Officer and the appointment of Marvin Runyon as Chairman of the Board.
On December 29, 2000, the Company filed a report on Form 8-K relating
to (1) the resignation of John M. Payne as a Board director of the Company and
of EncrypTix, Inc., (2) the terms of John M. Payne's resignation from the
Company, and (3) the appointments of Jeffrey Brown and Bruce Coleman as Board
directors of EncrypTix, Inc.
On March 12, 2001, the Company filed a report on Form 8-K relating to
the cessation of EncrypTix, Inc.'s operations and the effectuation of a general
assignment for the benefit of its creditors.
41
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) and subsidiaries as of December 31,
2000 and 1999, and the related consolidated statements of operations,
stockholders' equity and cash flows for the two years ended December 31, 2000
and 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, 2000 and 1999, and the results of their
operations and their cash flows for the two years ended December 31, 2000 and
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
February 22, 2001
F-1
STAMPS.COM INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
----------------------
2000 1999
--------- ---------
(in thousands, except par value)
Assets
Current assets:
Cash and cash equivalents .................................................... $ 69,536 $ 326,820
Short-term investments ....................................................... 174,393 47,926
Restricted cash .............................................................. 4,010 --
Accounts receivable, net of allowance of $619 in 2000 ........................ 2,546 134
Note receivable from former officer, net of allowance of $3,346 in 2000 ...... 3,181 --
Prepaid advertising .......................................................... 2,965 21,530
Other current assets ......................................................... 2,220 2,353
--------- ---------
Total current assets ....................................................... 258,851 398,763
Property and equipment, net ..................................................... 45,585 9,702
Goodwill, net of accumulated amortization of $42,738 in 2000 .................... 166,450 --
Other assets .................................................................... 16,052 1,977
--------- ---------
Total assets ............................................................. $ 486,938 $ 410,442
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Line of credit ............................................................... $ -- $ 1,000
Accounts payable ............................................................. 3,656 2,707
Accrued expenses ............................................................. 9,702 2,615
Accrued payroll and related .................................................. 5,211 1,389
Deferred revenue ............................................................. 1,809 182
Current portion of capital lease obligations ................................. 3,828 513
--------- ---------
Total current liabilities ....................................................... 24,206 8,406
Capital lease obligations, less current portion ................................. 5,286 438
Minority interest ............................................................... 34,765 --
Commitments and contingencies (See Notes 4 and 7)
Stockholders' equity:
Common stock, $.001 par value ................................................ 49 42
Authorized shares 95,000 in 2000 and 1999
Issued and outstanding shares 49,654 in 2000. Issued shares 41,689 and
outstanding shares 40,985 in 1999
Additional paid-in capital ................................................. 708,087 472,714
Note receivable from stock sales ......................................... (101) (101)
Deferred compensation ...................................................... (11,642) (9,435)
Accumulated deficit ........................................................ (273,632) (60,683)
Treasury stock at cost, 0 and 705 outstanding in 2000 and 1999, respectively -- (939)
--------- ---------
Total stockholders' equity ............................................... 422,761 401,598
--------- ---------
Total liabilities and stockholders' equity ............................. $ 486,938 $ 410,442
========= =========
See accompanying notes.
F-2
STAMPS.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Period from
January 9, 1998
(inception) to
Year ended December 31, December 31,
---------------------- --------------
2000 1999 1998
--------- --------- ---------------
(in thousands, except per share data)
Revenues:
Service revenue .......................................... $ 8,682 $ 358 --
Professional contract revenue ............................ 3,085 -- --
Other revenue ............................................ 3,467 -- --
--------- --------- ---------
Total revenue .......................................... 15,234 358 --
--------- --------- ---------
Cost of revenues ............................................ 23,691 2,430 --
--------- --------- ---------
Gross profit ............................................. (8,457) (2,072) --
Expenses:
Research and development ................................. 33,051 7,363 1,532
Sales and marketing ...................................... 72,966 35,208 632
General and administrative ............................... 102,191 14,333 2,016
Provision for loss on loan to former officer ........... 3,346 -- --
Restructuring charges .................................. 11,475 -- --
--------- --------- ---------
Total expenses ......................................... 223,029 56,904 4,180
--------- --------- ---------
Loss from operations ........................................ (231,486) (58,976) (4,180)
Other income (expense):
Interest expense ......................................... (766) (173) (28)
Interest income .......................................... 19,202 2,662 12
Other income ............................................. 101 -- --
--------- --------- ---------
Net loss .................................................... $(212,949) $ (56,487) $ (4,196)
========= ========= =========
Basic and diluted net loss per share ........................ $ (4.54) $ (2.59) $ (0.85)
========= ========= =========
Weighted average shares outstanding used in basic and diluted
per-share calculation .................................... 46,888 21,824 4,956
========= ========= =========
See accompanying notes.
F-3
STAMPS.COM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Notes
Common Additional Receivable
Shares of Common Stock Stock Paid-in from Stock Deferred
----------------------
Issued Treasury Issued Capital Sales Compensation
-------- ----------- ---------- ----------- ------------- -------------
(in thousands)
Balance at January 9, 1998 (inception)....... -- -- $ -- $ -- $ -- $ --
Issuance of common stock..................... 4,913 -- 5 61 (18) --
Issuance of restricted stock................. 1,988 -- 2 127 (99) --
Deferred compensation........................ -- -- -- 1,250 -- (1,250)
Amortization of deferred compensation........ -- -- -- -- -- 167
Net loss..................................... -- -- -- -- -- --
-------- ---------- --------- ----------- ------------ -----------
Balance at December 31, 1998................. 6,901 -- 7 1,438 (117) (1,083)
Exercise of stock options.................... 91 -- -- 9 -- --
Repurchase of common stock................... -- (705) -- -- 7 --
Conversion of redeemable preferred stock..... 22,870 -- 23 34,255 -- --
Issuance of common stock..................... 11,827 -- 12 422,952 -- --
Repayment on note receivable................. -- -- -- -- 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
Net loss..................................... -- -- -- -- -- --
-------- ---------- --------- ----------- ------------ -----------
Balance at December 31, 1999................. 41,689 (705) 42 472,714 (101) (9,435)
Treasury
Accumulated Stock at
Deficit Cost Total
-------------- ---------- ---------
Balance at January 9, 1998 (inception)....... $ -- $ -- $ --
Issuance of common stock..................... -- -- 48
Issuance of restricted stock................. -- -- 30
Deferred compensation........................ -- -- --
Amortization of deferred compensation........ -- -- 167
Net loss..................................... (4,196) -- (4,196)
---------- --------- ---------
Balance at December 31, 1998................. (4,196) -- (3,951)
Exercise of stock options.................... -- -- 9
Repurchase of common stock................... -- (939) (932)
Conversion of redeemable preferred stock..... -- -- 34,278
Issuance of common stock..................... -- -- 422,964
Repayment on note receivable................. -- -- 9
Deferred compensation arising from issuance of
options................................... -- -- --
Deferred compensation arising from issuance of
warrants.................................. -- -- --
Amortization of deferred compensation........ -- -- 5,708
Net loss..................................... (56,487) -- (56,487)
---------- --------- ---------
Balance at December 31, 1999................. (60,683) (939) 401,598
F-4
STAMPS.COM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (continued)
Notes
Shares of Common Stock Common Additional Receivable
---------------------- Stock Paid-in from Stock Deferred
Issued Treasury Issued Capital Sales Compensation
--------- ----------- ---------- ----------- ------------- --------------
(in thousands)
Exercise of stock options.................... 2,255 -- 2 1,543 -- --
Shares purchased under the ESPP.............. 138 -- -- 920 -- --
Retirement of treasury stock................. -- 705 (1) (938) -- --
Issuance of common stock in conjunction with
iShip acquisition, net.................... 5,572 -- 6 193,682 -- --
Deferred compensation arising from purchase of
iShip..................................... -- -- -- 51,789 -- (24,662)
Amortization of deferred compensation........ -- -- -- -- -- 10,832
Deferred compensation related to terminated
employees................................. -- -- -- (11,623) -- 11,623
Net loss..................................... -- -- -- -- -- --
--------- -------- --------- --------- ---------- ---------
Balance at December 31, 2000................. 49,654 -- $ 49 $ 708,087 $ (101) $ (11,642)
========= ======== ========= ========= ========== =========
Treasury
Accumulated Stock at
Deficit Cost Total
------------- ---------- ----------
Exercise of stock options.................... -- -- 1,545
Shares purchased under the ESPP.............. -- -- 920
Retirement of treasury stock................. -- 939 --
Issuance of common stock in conjunction with
iShip acquisition, net.................... -- -- 193,688
Deferred compensation arising from purchase of
iShip..................................... -- -- 27,127
Amortization of deferred compensation........ -- -- 10,832
Deferred compensation related to terminated
employees................................. -- -- --
Net loss..................................... (212,949) -- (212,949)
------------- ---------- ----------
Balance at December 31, 2000................. $(273,632) $ -- $ 422,761
============= ========== ==========
See accompanying notes.
F-5
STAMPS.COM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Period from
January 9, 1998
(inception) to
Year ended December 31, December 31,
------------------------------- ---------------
2000 1999 1998
------------- ------------- ---------------
(in thousands)
Operating Activities
Net Loss.................................................. $ (212,949) $ (56,487) $ (4,196)
Adjustments to reconcile net loss to net cash used
in operating activities
Provision for doubtful accounts....................... 4,029 -- --
Depreciation and amortization......................... 54,938 1,285 82
Amortization of deferred compensation................. 10,832 5,708 167
Charge for acquired in-process research and
development........................................... 2,000 -- --
Loss on disposal and writedown of assets.............. 2,756 -- --
Changes in operating assets and liabilities, net of
acquisition of iShip
Accounts receivable................................. (3,095) (134) --
Note receivable from former officer................. (6,527) -- --
Prepaid expenses.................................... 18,698 (23,835) (48)
Other assets........................................ (4,762) -- --
Accounts payable.................................... (1,435) 2,315 392
Accrued expenses.................................... 10,601 3,471 533
Deferred revenue.................................... 1,627 182 --
------------- ------------- ---------------
Net cash used in operating activities........................ (163,289) (67,495) (3,070)
Investing activities
Purchase of short-term investments, net................... (126,467) (46,422) (1,504)
Purchase of restricted cash investments................... (4,010) -- --
Capital expenditures...................................... (30,701) (9,557) (195)
Acquisition of iShip.com, net of cash acquired............... (2,111) -- --
Other..................................................... (820) (1,742) (209)
------------- ------------- ---------------
Net cash used in investing activities........................ (163,289) (57,721) (1,908)
Financing activities
Net proceeds from issuance of debt........................ 10,325 -- 1,000
Repayment of capital lease obligations.................... (7,938) (264) (82)
Issuance of preferred stock by subsidiary, net............ 34,765 28,300 5,978
Issuance of common stock under ESPP....................... 920 422,964 48
Repurchase of common stock................................ -- (939) --
Proceeds from exercise of stock options................... 1,545 9 --
------------- ------------- ---------------
Net Cash provided by financing activities.................... 29,292 450,070 6,944
Net increase (decrease) in cash and equivalents.............. (257,284) 324,854 1,966
Cash and cash equivalents at beginning of period............. 326,820 1,966 --
------------- ------------- ---------------
Cash and cash equivalents at end of period................... 69,536 326,820 1,966
Short term investments....................................... 174,393 47,926 1,504
------------- ------------- ---------------
Cash and short term investments.............................. $ 243,929 $ 374,746 $ 3,470
============= ============= ===============
Cash paid for:
Interest.................................................. $ 576 $ 173 $ 28
============= ============= ===============
Non-cash investing and financing activity:
Issuance of common stock in exchange for a patent and a
trademark name.......................................... $ -- $ -- $ 30
============= ============= ===============
Equipment acquired under capital lease, net of
acquisition of iShip.................................... $ 10,481 $ 742 $ 555
============= ============= ===============
Issuance of note receivable for stock sales.............. $ -- $ -- $ 117
============= ============= ===============
Retirement of treasury stock............................. $ (939) $ -- $ --
============= ============= ===============
Reduction in deferred compensation related to terminated
employees............................................... $ (11,623) $ -- $ --
============= ============= ===============
See accompanying notes
F-6
STAMPS.COM INC. AND SUBSIDIARIES
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, provides easy, convenient and cost-effective
Internet-based services for mailing or shipping letters, packages or parcels
anywhere in the United States and at anytime. The Company's core mailing and
shipping services are designed to allow individual consumers or employees of
small businesses or larger enterprises to select a carrier, print US postage or
shipping labels from multiple carriers, schedule a pick-up, track a package and
apply enterprise-wide business rules to manage and account for mailing and
shipping costs. With all of the Company's services, no additional hardware is
required; a customer can access the Company's services through an existing
Internet connection and print postage or shipping labels with ordinary laser or
inkjet printers. The Company launched its Internet Postage service on a national
basis on October 22, 1999. Prior to the first quarter of 2000, the Company
reported as a development stage enterprise.
Principles of Consolidation
The consolidated financial statements include the accounts of Stamps.com
Inc. and its subsidiaries, which include iShip.com, Inc. and EncrypTix, Inc. The
Company holds approximately a 66 2/3% equity interest and a greater than 90%
voting interest in EncrypTix, Inc. at December 31, 2000. Because of the voting
control and liquidation preferences held by outside investors, the Company has
consolidated 100% of the losses of EncrypTix, Inc. in the accompanying
consolidated Financial Statements. All significant intercompany accounts and
transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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.
F-7
STAMPS.COM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table summarizes the Company's cash and short-term
investments as of December 31, 2000 (in thousands):
2000 1999
-------- --------
Cash and equivalents:
Cash ........................................... $ 3,230 $ 5,691
Commercial paper ............................... 50,857 187,948
Money market ................................... 7,303 113,974
Corporate notes ................................ 6,320 10,069
U.S. Government and agency securities........... -- 8,488
Certificates of deposit ........................ 1,826 650
-------- --------
Cash and equivalents ........................... 69,536 326,820
Short-term investments:
Corporate notes and bonds ...................... 92,209 23,108
Commercial paper ............................... 62,967 17,636
U.S. Government and agency securities........... 18,987 7,182
Certificates of deposit ........................ 230 --
-------- --------
Short-term investments ......................... 174,393 47,926
-------- --------
Cash and short-term investments .............. $243,929 $374,746
======== ========
The Company also has restricted cash of $4,010,000 as of December 31, 2000
related to letters of credit for facility leases.
Fair Value of Financial Instruments
Carrying amounts of certain of the Company's financial instruments,
including cash, cash equivalents, short-term investments, 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. From time to time,
the Company's investments held with its financial institutions may exceed
Federal Deposit Insurance Corporation insurance limits. Interest rate
fluctuations impact the carrying value of the portfolio. The Company recognized
revenue from one customer that represented approximately 20% of revenues for the
year ended December 31, 2000.
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. Expenditures for repairs and
maintenance are charged to expense as incurred.
F-8
STAMPS.COM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Property and equipment is comprised of the following at December 31, 2000 (in
thousands):
2000 1999
---------- -----------
Furniture and equipment............................. $ 4,508 $ 3,030
Computers and software.............................. 49,570 7,587
Leasehold improvements.............................. 3,544 432
---------- -----------
57,622 11,049
Accumulated depreciation and amortization........... (12,037) (1,347)
---------- -----------
$ 45,585 $ 9,702
---------- -----------
During 2000 and 1999, depreciation expense including the amortization on
equipment under capital leases, was approximately $10,690,000 and $1,270,000,
respectively.
Other Assets
Patents, trademarks and other intangibles are included in other assets in
the accompanying consolidated 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 4 to 15 years.
Estimated
Useful Life
-----------
Furniture, fixtures and office................ 5
Computers, equipment and software............. 5
Leasehold improvements........................ life of lease
Capitalized lease equipment................... 5
Patents and other intangibles................. 4-15
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 primarily of pre-payments received for
customer referrals under a partnership marketing arrangement . Commissions from
the sale of products by a third party vendor to the Company's customer base are
recognized as revenue when earned and collection is probable.
Computation of Net Loss per Share
Loss per share is computed by dividing the net earnings available to common
stockholders for the period by the weighted average number of common shares
outstanding during the period. Diluted losses per share is computed by dividing
the net losses 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 are excluded from the diluted
earnings per share calculation as their effect is anti-dilutive.
F-9
STAMPS.COM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table sets forth the computation of basic and diluted loss
per share (in thousands, except per share amounts):
Period from
January 9, 1998
(inception) to
Fiscal Year Ended December 31, December, 31
------------------------------ ---------------
2000 1999 1998
------------- ------------ ---------------
Net loss.................................................... $ (212,949) $ (56,487) $ (4,196)
Weighted average common shares used to compute basic net loss
per share................................................ 46,888 21,824 4,956
Effect of dilutive securities............................... -- -- --
------------- ------------ ---------------
Weighted average common shares used to compute dilutive net
loss per share........................................... 46,888 21,824 4,956
------------- ------------ ---------------
Basic and diluted net loss per share........................ $ (4.54) $ (2.59) $ (0.85)
------------- ------------ ---------------
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 SFAS No. 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" 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-10
STAMPS.COM INC. AND SUBSIDIARIES
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
In March 2000, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 44 (FIN 44), "Accounting for Certain Transactions involving
Stock Compensation, an interpretation of APB Opinion No. 25." FIN 44 clarifies
the application of APB No. 25 for certain issues, including the definition of an
employee, the treatment of the acceleration of stock options and the accounting
treatment for options assumed in business combinations. FIN 44 became effective
on July 1, 2000, but is applicable for certain transactions dating back to
December 1998. The adoption of FIN 44 did not have a material impact on the
Company's financial position or results of operations.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB
No. 101). SAB No. 101 expresses the views of the SEC staff in applying generally
accepted accounting principles to certain revenue recognition issues. The
Company has adopted the provisions of SAB No. 101 in fiscal 2000, and its
adoption had no material impact on its financial position or its results of
operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS No. 133). SFAS No. 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities. SFAS No. 133 requires the recognition
of all derivatives as either assets or liabilities in the statement of financial
position and the measurement of those instruments at fair value. The Company is
required to adopt this standard in the first quarter of fiscal year 2001
pursuant to SFAS No. 137 (issued in June 1999), which delays the adoption of
SFAS No. 133 until that time. The Company expects that the adoption of SFAS No.
133 will not have a material impact on its financial position or its results of
operations.
2. Acquisition and Investment in Subsidiary
On March 7, 2000, the Company completed the acquisition of iShip.com, Inc.,
a development stage enterprise developing Internet-based shipping technology. In
connection with the acquisition, approximately 5.6 million shares of Stamps.com
common stock were issued in exchange for all outstanding iShip.com, Inc. stock.
An additional 1.6 million shares of Stamps.com common stock have been reserved
for issuance upon exercise of options and warrants assumed in the transaction.
800,000 shares of Stamps.com common stock had been deposited into an escrow
account to compensate the Company for any inaccuracy or breach of any
representation, warranty, covenant or agreement of iShip.com, Inc. as contained
in the merger agreement. The escrowed shares have been released pursuant to the
terms of the merger agreement.
The acquisition was accounted for as a purchase in accordance with the
provisions of Accounting Principles Board Opinion ("APB") No. 16. Under the
purchase method of accounting, the purchase price was allocated to the assets
acquired and liabilities assumed based on their estimated fair values at the
date of acquisition. The Company recorded intangible assets of $222.4 million
and deferred compensation of $24.7 million, which will
F-11
STAMPS.COM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
be amortized over periods ranging from three to four years, except for
in-process research and development which was written off immediately after the
acquisition. Results of operations for iShip.com, Inc. have been included with
those of the Company for periods subsequent to the acquisition date.
The purchase price was allocated as follows (in thousands):
Goodwill........................................ $209,188
Deferred compensation........................... 24,662
Purchased technology............................ 11,200
In-process research and development............. 2,000
Tangible assets acquired........................ 8,931
Liabilities assumed............................. (7,232)
------------
Purchase price.................................. $248,749
============
Presented below is unaudited selected pro forma financial information,
presenting the results of operations of the Company as if the acquisition had
taken place on January 1 (in thousands, except per share amounts):
Years Ended December 31,
-------------------------------
2000 1999
-------------- --------------
(unaudited)
Proforma revenues.............................. $ 15,234 $ 358
Proforma net loss.............................. $ (215,326) $ (64,728)
Proforma basic and diluted net loss per share.. $ (3.93) $ (2.18)
Proforma weighted average shares used in
per share calculation - basic and diluted..... 54,802 29,738
The unaudited pro forma information is not necessarily indicative of the
actual results of operations had the acquisition occurred at the beginning of
the periods indicated, nor should it be indicative of operations for any future
date or period.
Change in Subsidiary Ownership
During the first half of 2000, the Company sold approximately 42% of
EncrypTix, Inc., until then a wholly owned subsidiary, in a private financing of
approximately $34.8 million. The financing was completed in April 2000.
The Company includes EncrypTix's balances and results in its consolidated
financial statements. The minority interest reflected in the attached
consolidated balance sheet represents the investment received in the private
financing. See Note 12, "Events Subsequent to Date of Auditor's Report--
EncrypTix Ceases Operations."
3. Segment Information
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" establishes standards of reporting information regarding operating
segments in annual financial statements and requires selected
F-12
STAMPS.COM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
information for those segments to be presented in interim financial reports
issued to stockholders. The Company operates in a single segment and therefore
no additional disclosure is required.
4. Legal Proceedings
On June 16, 1999, Pitney Bowes sued the Company for alleged patent
infringement in the United States District Court for the District of Delaware.
The suit originally alleged 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. On
April 13, 2000, Pitney Bowes asked the court for permission to amend its
complaint to drop allegations of patent infringement with respect to one patent
and to add allegations of patent infringement with respect to three other
patents. On July 28, 2000 the court entered Pitney Bowes' amended complaint.
On September 18, 2000 Pitney Bowes filed another patent infringement
lawsuit against the Company in the United States District Court for the Eastern
District of Texas, alleging that the Company is infringing four patents owned by
Pitney Bowes related to shipping. The suit seeks unspecified damages and a
permanent injunction from further alleged infringement. The Company answered the
complaint on December 1, 2000, denying the allegations of patent infringement
and asserting a number of affirmative defenses.
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 suits against the Company. If Pitney Bowes
prevails in its suits against the Company, the Company may be prevented from
selling postage on the Internet. Alternatively, the Pitney Bowes suits 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. Thus, if Pitney Bowes prevails in its suits against the
Company, the Company's business could be severely harmed or fail. In addition,
the litigation could result in significant expenses and diversion of management
time and other resources. Due to the preliminary stage of these lawsuits, the
Company cannot provide an estimate of the possible costs and expenses at this
time. See "Risk Factors--Success by Pitney Bowes in its suits against us
alleging patent infringement could prevent us from offering our Internet Postage
and iShip services and severely harm our business or cause it to fail."
On or about December 29, 1999, three individual plaintiffs filed a lawsuit
against the Company 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 the Company's directors, as a defendant and to remove one of the plaintiffs
from the suit. Plaintiffs asserted claims for breach of oral contract, quantum
meruit, fraud and negligent misrepresentation. The plaintiffs alleged that they
had an oral contract with Stamp Master, who allegedly was a predecessor of the
Company, pursuant to which Stamp Master agreed to pay them "cash for cash
compensation" for their services in securing investments for Stamp Master or in
finding individuals to serve as board members. They further alleged that after
successfully placing an individual on the Company's board and after that board
member successfully obtained financing on behalf of the Company, they were
entitled to cash compensation for those efforts. The plaintiffs sought $13.3
million in compensatory damages, plus other unspecified compensatory damages,
punitive and exemplary damages and attorneys' fees and costs incurred.
On January 23, 2001, the Court granted a summary judgment motion filed by
the Company and Mr. Ananda. Accordingly, judgment has been granted in favor of
the Company and Mr. Ananda and the case has been dismissed. However, the
plaintiffs have notified the court that they intend to appeal the judgment
against them to an appellate court.
On August 23, 2000, DraftWorldwide, Inc., which formerly served as one of
the Company's advertising and promotions agencies, filed a suit against the
Company for alleged breach of contract in the Circuit Court of Cook County,
Illinois. The suit alleged that the Company improperly terminated its contract
with DraftWorldwide and sought damages of approximately $3.9 million plus
interest and costs associated with the lawsuit. The Company denied the
allegations contained in the complaint, and filed its own counterclaim, alleging
that DraftWorldwide had breached the contract by failing to adequately perform
under the contract and had acted in bad faith in negotiating an adjustment to
the terms of the contract, as provided for in the contract. See Note 12, "Events
Subsequent to Date of Auditor's Report--Settlement of DraftWorldwide."
F-13
STAMPS.COM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
On December 13, 2000, Cybershop (a British Columbia, Canada partnership)
and its general partners filed suit against the Company in the U.S. District
Court for the Southern District of Texas, alleging that in 1998 a third party
fraudulently transferred ownership of the Internet domain name "stamps.com" away
from Cybershop and subsequently transferred it to the Company. The third party
is also a named defendant in the suit. The complaint seeks legal resolution and
recognition of Cybershop's ownership of the "stamps.com" domain name and seeks
unspecified monetary damages against the third party. On January 9, 2001, the
Company filed a motion to dismiss the suit. On February 16, 2001, Cybershop
filed an amended complaint, alleging new causes of action, including conversion,
invasion of privacy, trespass, and private nuisance, and seeking declaratory
judgment for return of the domain name registration to Cybershop. On March 5,
2001, the Company filed a motion to dismiss the amended complaint. The outcome
of the litigation is uncertain, and the Company can give no assurance that
Cybershop will not prevail. See "Risk Factors--Success by Cybershop in its suit
against us seeking damages and recognition of its ownership of the domain name
"stamps.com" could prevent us from using the domain name "stamps.com" and could
require a change of name of the Company, severely harming our business or
causing it to fail."
On or about April 6, 2000, Metro Fulfillment, Inc. filed a lawsuit against
Weigh-Tronix, Inc. for breach of contract, fraud, negligent misrepresentation,
intentional inference with contract, negligent interference, breach of implied
warranty and breach of express warranty. Metro Fulfillment, Inc. alleges that
pursuant to its agreement with Weigh-Tronix, Inc., Metro Fulfillment, Inc. was
not required to pay for postal scales that were purchased from Weigh-Tronix,
Inc. until Metro Fulfillment, Inc. had actually sold those scales to end users.
These sales were supposed to be sold through the Company's Web site. Metro
Fulfillment, Inc. further alleged that Weigh-Tronix, Inc. breached the agreement
by seeking payment before the scales were actually sold to customers in breach
of the agreement. Weigh-Tronix, Inc. in turn filed a third party complaint
against the Company and Metro Fulfillment, Inc. for breach of contract and
several common counts. The third party complaint seeks approximately $700,000.00
in compensatory damages, plus interest and attorney's fees. The Company has
filed an answer to the third party complaint denying the allegations of the
lawsuit.
The Company is not currently involved in any other material legal
proceedings, nor has it been involved in any such proceeding that has had or may
have a significant effect on the Company. The Company is not aware of any other
material legal proceedings pending against it.
5. 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 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 matured and was paid off on January 31, 2000.
F-14
STAMPS.COM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. 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, 2000 and 1999 are presented below (in thousands).
2000 1999
--------- ----------
Deferred tax assets (liabilities):
Net operating loss carryforwards................. $ 72,537 $ 19,243
Research credits................................. 2,135 527
Depreciation..................................... (368) (389)
Capitalized start-up costs....................... 2,766 2,993
Accruals......................................... 4,166 141
--------- -----------
Total deferred tax assets...................... 81,236 22,515
Valuation allowance................................. (81,236) (22,515)
--------- -----------
Net deferred tax assets........................ $ -- $ --
========= ===========
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 $180,909,924 and
$189,014,083 for federal and state income tax purposes at December 31, 2000,
respectively, and $44,469,635 and $54,815,125 for federal and state income tax
purposes at December 31, 1999, respectively, which can be carried forward to
offset future taxable income. The Company also has available a tax credit
carryforward at December 31, 2000 of $2,134,559, which can be carried forward to
offset future taxable liabilities. The Company's federal net operating loss will
begin to expire in 2018, state net operating loss will begin to expire in 2006.
The federal credits begin to expire in 2018 and the state credits will begin to
expire in 2006. 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):
2000 1999 1998
------- ------- -------
Current
Federal ..................................... $ - $ - $ -
State ....................................... $ 1 $ 1 $ 1
------- ------- -------
$ 1 $ 1 $ 1
Deferred .................................... $ - $ - $ -
------- ------- -------
Provision for income taxes................... $ 1 $ 1 $ 1
======= ======= =======
Differences between the provision for income taxes and income taxes at the
statutory federal income tax rate are as follows (in thousands):
2000 1999 1998
------- ------- -------
Income tax at statutory federal rate....... $(72,403) $(19,205) $(1,369)
State income taxes, net of federal benefit. (12,424) (2,954) (226)
Effect of tax credits...................... - (377) (150)
Effect of permanent differences............ 26,107 2,144 53
Change in valuation allowance.............. 58,721 20,393 1,693
-------- -------- -------
$ 1 $ 1 $ 1
======== ======== =======
F-15
STAMPS.COM INC. AND SUBSIDIARIES
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):
2000 1999 1998
-------- -------- --------
Income tax at statutory federal rate ........ $(72,403) $(19,205) $ (1,369)
State income taxes, net of federal benefit... (11,764) (2,954) (226)
Effect of tax credits ....................... -- (377) (150)
Effect of permanent differences ............. 3,963 2,144 53
Change in valuation allowance ............... 80,205 20,393 1,693
-------- -------- --------
$ 1 $ 1 $ 1
======== ======== ========
7. Commitments
Capital and Operating Leases
The Company leases certain equipment under capital lease arrangements
expiring on various dates through 2004 (per schedule below). Included in
property and equipment are the following assets held under capital lease at
December 31 (in thousands):
2000 1999
------- -------
Computer equipment ................................. $ 7,072 $ 1,297
Accumulated amortization ........................... (1,501) (303)
------- -------
$ 5,571 $ 994
======= =======
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, 2000 (in thousands):
Capital Operating
------------- ------------
Years ending December 31:
2001................................................................. $ 5,300 $ 5,509
2002................................................................. 3,773 5,621
2003................................................................. 1,438 5,575
2004................................................................. 407 3,655
2005 and beyond...................................................... -- 9,988
------------- ------------
10,918 30,348
Less amount representing interest.................................... (1,804)
Present value of net minimum lease payments ($3,828 payable currently).. $ 9,114
Total rent expense for the years ended December 31, 2000, 1999 and 1998
were $3,577,000, $751,000 and $109,000, respectively.
The Company intends to sublet building spaces vacated as a result of the
reduction in workforce and is currently looking for tenants. Management
estimates that tenants will be secured for unoccupied facilities that will
reduce operating lease expenses by $1,750,000, $1,125,000, $900,000 and $275,000
for years 2001 to 2004, respectively.
F-16
STAMPS.COM INC. AND SUBSIDIARIES
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. This partnership was an
expansion of the agreement with America Online, Inc. made in December 1998.
Under the 1999 agreement, the Company was to be provided with a specific number
of advertising impressions across several America Online, Inc. brands featuring
it as the exclusive provider of Internet postage services. Stamps.com software
was also to be included in America Online, Inc. branded CD-ROMs for
distribution. In consideration, the Company had 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 was paid in 2000.
See Note 12, "Events Subsequent to Date of Auditor's Report--Termination of
America Online, Inc. Agreement."
Under the contract, the Company received Internet impressions, distribution
of the Company's software on America Online, Inc. CD's and downloads of the
Company's software on America Online, Inc. partnership web sites. Expense
related to impressions was recognized as the impressions were provided under the
contract. Expense related to CD's and downloads was recognized as the CD's and
downloads were provided.
In connection with the America Online, Inc. 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 America Online, Inc. as a result of the transactions is 327,500.
America Online, Inc. presently holds unexercised warrants to purchase 163,750
shares at $33.588 per share from the original October issuance.
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.
8. Restructuring
In October 2000, the Company's management approved and implemented a
restructuring plan as part of a move to streamline operations, reduce
infrastructure and overhead and eliminate excess and duplicative facilities. As
a result, the Company reduced its total number of employees by 240 from
locations and departments across the Company. The following table sets forth the
reductions by department:
Department Employee Reduction
- ------------------------------------------ -----------------------
Research and development.................. 98
Small business............................ 18
Enterprise................................ 28
System operations and customer support.... 54
Administrative............................ 42
-----------------------
Total............................... 240
In addition to the reduction in its number of employees, the Company's
restructuring plan included costs associated with the termination of its
marketing and distribution agreement with America Online, Inc. (for which the
company ceased making contract payments during the fourth quarter of 2000 and
reached a termination settlement in the first quarter of 2001), losses on the
disposition and discontinuation of certain fixed assets, and the estimated rent
and expenses for unoccupied facilities between the reduction in force date and
the estimated date of occupancy by a sublet tenant.
The total amount of the restructuring charge was approximately $11.5
million and is composed of the following (amounts in thousands):
Employee severance costs............................................ $ 3,093
Contract exit fees.................................................. 6,154
Fixed asset disposals............................................... 1,233
Facility lease expenses............................................. 923
Other............................................................... 72
-------
Total............................................................ $11,475
=======
The calculation of the restructuring costs only includes those costs for
which the Company will be unable to recognize any future benefit. In addition,
the calculation of the restructuring costs requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements. Actual results could differ from management's assumptions and those
differences may be material to the consolidated financial statements.
9. 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
F-17
STAMPS.COM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 the Company 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 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 is being 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.
In February 2000, Mr. Payne (former Chairman of the Board, Chief Executive
Officer and director) purchased 187,000 shares of the Company's common stock on
the open market for an aggregate purchase price of approximately $6.0 million.
The shares were purchased on margin by Mr. Payne and the margin account was
secured by a pledge of 1,467,500 shares of the Company's common stock held by
Mr. Payne, of which approximately 593,750 shares are subject to repurchase by
the Company. As of October 31, 2000, Mr. Payne's total indebtedness under the
margin account was approximately $6.7 million, which amount consists of the
purchase price of the 187,000 shares, accrued interest on the purchase price and
other fees and indebtedness incurred by Mr. Payne, less the proceeds from his
sale of the Company's common stock during the third quarter.
In April 2000, the Company agreed to guarantee Mr. Payne's margin account
in the event the value of the shares pledged is insufficient collateral to
secure the indebtedness outstanding under the margin account. The guarantee is
in the form of a single-purpose line of credit extended to Mr. Payne which will
have a balance due to the Company to the extent the value of the pledged shares
is insufficient collateral to secure indebtedness outstanding under the margin
account. This line of credit is secured by all of Mr. Payne's assets.
In addition, the Company has entered into a loan repayment agreement with
Mr. Payne and the brokerage firm where he maintains his margin account. Under
the terms of that agreement, the Company agrees to guarantee Mr. Payne's margin
account. The agreement further provides that, without previous notice to or
consent from Mr. Payne, the Company may require the sale of any or all shares of
Stamps.com stock held by Mr. Payne in order to satisfy any balances due under
the terms of Mr. Payne's margin account. More specifically, the Company may
require such sales in the event the closing price of Stamps.com on Nasdaq is
below $6 per share for three consecutive trading days or if the closing price of
Stamps.com on Nasdaq is greater than $30 per share on any
F-18
STAMPS.COM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
trading day. The loan repayment agreement also provides that the brokerage firm
may not extend Mr. Payne any additional credit, except to allow for the accrual
of interest against the outstanding balance of the margin account.
Mr. Payne agreed to sell a minimum of 100,000 shares of common stock during
each fiscal quarter (beginning the third fiscal quarter of 2000) in order to pay
down the indebtedness outstanding under the margin account. Pursuant to this
agreement, on August 29, 2000, Mr. Payne sold 7,500 shares at a price of $4.50
per share and 92,500 shares at a price of $4.3125 per share, which resulted in
aggregate repayment of indebtedness in the amount of approximately $430,000.
In November 2000, Mr. Payne executed a promissory note in favor of the
Company in the amount of $6.6 million. The payment of the note was secured by a
pledge of all shares of the Company's common stock and all shares of EncrypTix,
Inc. held by Mr. Payne. The entire principal balance and all accrued and unpaid
interest is due and payable on June 30, 2001, subject to certain acceleration
provisions that are triggered upon, among other things, a change of control or
the delisting of the Company's common stock by NASDAQ.
The company has established a reserve of $3,346,000 related to the note
receivable from Mr. Payne. The reserve is calculated as the difference between
the note's carrying value, $6,527,000, and the underlying value of the stock on
December 31, 2000, $3,181,000 (2 25/32 per share).
10. Stockholders' Equity
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 in the accompanying balance sheets.
Redeemable Preferred Stock
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 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 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 1999, the Company
exchanged shares with a fair value of $117,000 for full recourse notes
receivable of the same amount. These notes receivable bear interest at 9% per
annum and are payable in February 2003.
11. 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
F-19
STAMPS.COM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 the Company's 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 and stockholders 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. The total number of shares currently authorized for issuance under
the 1999 Plan is 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 automatic increase on January 1, 2000 was
1,229,551 shares based on 40,985,054 shares outstanding on the last day of
December 1999. The automatic increase on January 1, 2001 was 1,489,627 based
upon 49,654,227 shares outstanding on the last day of 2000.
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
2000 and 1999, the Company issued options to purchase 9,026,000 and 4,876,954
shares of common stock, respectively, at prices which included approximately
$24,662,000 and $11,995,000 of a compensation element in 2000 and 1999,
respectively. The total of deferred compensation is being recognized as expense
over the vesting periods of the related options and has been presented as a
reduction of stockholders' equity in the accompanying balance sheets. The
current year amortization of deferred compensation expense of $10,832,000 is
included as a general and administrative expense.
A summary of stock option activity is as follows (in thousands, except per
share amounts):
Options Outstanding
-------------------------------- Weighted
Options Average
Available for Number of Exercise
Grant Options Price
--------------- --------------- ------------
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
Granted.............................................. (9,026) 9,026 12.43
Forfeited............................................ 4,528 (4,528) 13.09
Exercised............................................ (2,255) 0.59
Increase in available options........................ 2,230 -- --
Issued in iShip transaction.......................... 8,446 721 6.98
--------------- --------------- ------------
Balance at December 31, 2000...................... 9,032 9,809 $ 9.17
F-20
STAMPS.COM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following tables summarize information concerning outstanding and
exercisable options at December 31, 2000 (in thousands, except number of years
and per share amounts):
Options Outstanding Options Exercisable
------------------------------------------------- -----------------------------
Weighted Weighted
Weighted Average Average Average
Remaining Exercise Exercise
Number Contractual Life Price per Number Price per
Range of Exercise Prices Outstanding (in Years) Share Exercisable Share
- ----------------------------------- ------------- ---------------- ------------- ------------- ------------
$0.05-$2.99........................ 3,789 8.9 $ 1.80 1,464 $ 0.45
$3.00-$5.60........................ 967 8.6 $ 4.08 474 $ 3.57
$5.61-$39.50....................... 4,920 9.3 $ 14.66 655 $ 19.78
$39.51-$81.00...................... 133 9.0 $ 50.49 39 $ 51.02
------------- ---------------- ------------- ------------- ------------
Total........................... 9,809 2,632
------------- -------------
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 forma numbers are as follows for December 31 (in thousands, except
per share amounts):
2000 1999 1998
-------------- --------------- ----------------
Net income--as reported............................................ $ (212,949) $ (56,487) $ (4,196)
Net income--pro forma.............................................. $ (215,401) $ (58,542) $ (4,247)
Basic and diluted net income per common share-as reported......... $ (4.54) $ (2.59) $ (0.85)
Basic and diluted net income per common share--pro forma........... $ (4.59) $ (2.68) $ (0.86)
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:
2000 1999
----------- ----------
Expected dividend yield............................ -- --
Risk-free interest rate............................ 5.50% 5.50%
Expected volatility................................ 142% 50%
Expected life (in years)........................... 9 4
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.
F-21
STAMPS.COM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Employee Stock Purchase Plan
In June 1999, the Company's Board of Directors adopted an Employee Stock
Purchase Plan ("ESPP" or "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 the Company's 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. The
increase on January 1, 2001 was 496,542 based upon 49,654,227 shares outstanding
on December 31, 2000. In no event will any annual increase exceed 521,571
shares.
During 2000, 137,772 shares of Common Stock were issued under the ESPP.
During 1999, no shares were issued under the ESPP.
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. The Company expensed $200,000 and $67,000 in 2000 and
1999, respectively, related to this plan.
12. Events Subsequent to Date of Auditor's Report (Unaudited)
Reduction in Work Force
In February 2001, in an effort to more rapidly decrease its operating
losses and enhance its ability to achieve profitability sooner, the Company
reduced its total number of employees by approximately 50% to 150 employees,
which included full time, part time and contract employees. The Company also
announced that it would implement other cost-cutting programs, including a
significant reduction in and redeployment of its sales and marketing expenses to
those programs that have demonstrated higher returns on investment. Finally, the
Company combined its Enterprise and E-Commerce Business Units to reduce
duplication of costs and effort. The Company expects to take a charge of
approximately $4.0 million related to the reduction in workforce in the first
quarter of 2001.
Relationship with Mail Boxes Etc. USA, Inc.
As of December 31, 2000, management was continuing to pursue the
development of its enterprise shipping services that were derived wholly from
the March 2000 acquisition of iShip.com, Inc. However, on March 2, 2001, United
Parcel Service and Mail Boxes Etc. USA, Inc. jointly announced that United
Parcel Service would acquire Mail Boxes Etc. USA, Inc. Mail Boxes Etc. USA, Inc.
represented a significant future source of revenue and market leverage for the
Company's enterprise shipping services. Mail Boxes Etc. USA, Inc. was also a
significant customer of United Parcel Service. United Parcel Service has
informed the Company that it is unlikely to have Mail Boxes Etc. USA, Inc.
continue to use the Company's online shipping services in the future.
F-22
STAMPS.COM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
In light of the March 2, 2001 events, we may be required to record an
appropriate reduction to the remaining goodwill in the first quarter of 2001.
EncrypTix Ceases Operations
On November 16, 1999, the Company announced the formation of a subsidiary,
EncrypTix, Inc., to develop secure printing opportunities in the events, travel
and financial services industries. In February 2000, the Company invested $1.0
million and granted EncrypTix a license to its technology in those three
specific fields of use. EncrypTix raised approximately $35 million in private
financing. On March 12, 2001, EncrypTix ceased operations and effected a general
assignment of its assets for the benefit of its creditors. EncrypTix took this
action due to the inability to secure additional funding. The Company does not
expect to be impacted by any of EncrypTix's resulting liabilities. Additionally,
the Company terminated its license agreement with EncrypTix and maintains
limited licenses to various EncrypTix intellectual property.
Settlement of DraftWorldwide
On August 23, 2000, DraftWorldwide, Inc., which formerly served as one of
the Company's advertising and promotions agencies, filed a suit against the
Company for alleged breach of contract in the Circuit Court of Cook County,
Illinois. The suit alleged that the Company improperly terminated its contract
with DraftWorldwide and sought damages of approximately $3.9 million plus
interest and costs associated with the lawsuit. The Company denied the
allegations contained in the complaint, and filed its own counterclaim, alleging
that DraftWorldwide had breached the contract by failing to adequately perform
under the contract and had acted in bad faith in negotiating an adjustment to
the terms of the contract, as provided for in the contract. The parties recently
reached a mutually acceptable resolution of the suit which will result in both
parties' dismissal, with prejudice, of their respective claims against each
other in the very near future.
Termination of America Online, Inc. Agreement
In October 1999, the Company entered into a three-year marketing and
distribution agreement with America Online, Inc. This partnership was an
expansion of the agreement with America Online, Inc. made in December 1998.
Under the 1999 agreement, the Company was to be provided with a specific number
of advertising impressions across several America Online, Inc. brands featuring
it as the exclusive provider of Internet postage services. Stamps.com software
was also to be included in America Online, Inc. branded CD-ROMs for
distribution. In consideration, the Company had 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 was paid in 2000.
In February 2001, however, the Company terminated the agreement with America
Online, Inc., and was released from paying the remaining balance of $27
million under the agreement.
Metro Fulfillment, Inc. Lawsuit
On February 28, 2001, Metro Fulfillment, Inc. filed a lawsuit against the
Company stemming from services allegedly performed by Metro under a Fulfillment
Services Agreement. The complaint alleges claims for breach of contract, common
counts and negligent misrepresentation. The complaint seeks damages of
approximately $1.3 million. The Company is currently reviewing the complaint and
anticipates filing an answer denying the allegations in the complaint.
F-23
STAMPS.COM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
13. Quarterly Information (unaudited)
Quarter ended
-----------------------------------------------
March June September December
----------- ----------- ----------- -----------
(in thousands, except per share data)
-----------------------------------------------
Fiscal Year 2000:
Revenues .................................................... $ 2,036 $ 3,674 $ 4,201 $ 5,323
Loss from operations ........................................ (41,697) (56,605) (60,307) (72,877)
Net loss .................................................... (36,904) (52,331) (55,289) (68,425)
Basic and diluted net loss per share ........................ $ (0.86) $ (1.09) $ (1.15) $ (1.41)
Weighted average shares outstanding used in basic and diluted
per-share calculation .................................... 43,021 47,956 48,259 48,441
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
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
F-24
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 30th day of March,
2001.
STAMPS.COM INC.
By: /s/ BRUCE COLEMAN
---------------------------
Bruce Coleman
Chief Executive Officer
POWER OF ATTORNEY
We, the undersigned officers and directors of Stamps.com, Inc., do
hereby constitute and appoint Bruce Coleman and Kenneth McBride, and each of
them, our true and lawful attorneys-in-fact and agents, each with full power of
substitution and resubstitution, for him or her and in his or her name, place
and stead, in any and all capacities, to sign any and all amendments to this
Report, and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, 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 each of said
attorneys-in-fact and agents, 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, as
amended, this Report has been signed below by the following persons in the
capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
/s/ BRUCE COLEMAN Chief Executive Officer March 28, 2001
- ----------------------------------------- (Principal Executive Officer)
Bruce Coleman
/s/ KEN MCBRIDE Chief Financial Officer March 28, 2001
- ----------------------------------------- (Principal Financial Officer and
Ken McBride Principal Accounting Officer)
- ----------------------------------------- Director, Chairman of the Board , 2001
Marvin Runyon
/s/ MOHAN P. ANANDA
- ----------------------------------------- Director March 28, 2001
Mohan P. Ananda
/s/ JEFFREY J. BROWN
- ----------------------------------------- Director March 28, 2001
Jeffrey J. Brown
/s/ THOMAS N. CLANCY
- ----------------------------------------- Director March 28, 2001
Thomas N. Clancy
/s/ JOHN A. DUFFY
- ----------------------------------------- Director March 28, 2001
John A. Duffy
Signature Title Date
--------- ----- ----
/s/ G. BRADFORD JONES
- ----------------------------------------- Director March 28, 2001
G. Bradford Jones
/s/ LOREN E. SMITH
- ----------------------------------------- Director March 28, 2001
Loren E. Smith
/s/ STEPHEN M. TEGLOVIC
- ----------------------------------------- Director March 28, 2001
Stephen M. Teglovic
/s/ CAROLYN M. TICKNOR
- ----------------------------------------- Director March 28, 2001
Carolyn M. Ticknor
INDEX TO EXHIBITS
Exhibit
Number Description
------ -----------
1.1 Form of Underwriting Agreement.(2)
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 Amended and Restated Certificate of Incorporation of the
Company.(2)
3.2 Bylaws of the Company.(2)
4.1 Specimen common stock certificate.(2)
4.2 Form of Common Stock Purchase Warrant between the Company and
Cydcor Limited.(15)
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.(2)
10.13 Master Lease Agreement between the Company and FirstCorp, dated
June 5, 1998.(2)
Exhibit
Number Description
------ -----------
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)
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 America Online, Inc., 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.(7)
Exhibit
Number Description
------ -----------
10.34+ Interactive Marketing and Distribution Agreement, dated October
15, 1999, between America Online, Inc. and the Company.(3)
10.35 Common Stock and Warrant Purchase Agreement, dated October 20,
1999, between America Online, Inc. and the Company.(3)
10.36 Common Stock Purchase Warrant, dated October 29, 1999, between
America Online, Inc. and the Company.(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.(11)
10.40 Common Stock Purchase Warrant, dated August 20, 1999, between the
Company and Imperial Bank (Assumed by the Company on March 7, 2000
in connection with the iShip.com, Inc. acquisition).(12)
10.41 Letter dated March 22, 2000 regarding the Company's Assumption of
the Imperial Bank Warrant.(12)
10.42 Common Stock Purchase Warrant, dated April 29, 1999, between the
Company and Mail Boxes Etc. USA, Inc. (Assumed, Amended and
Restated on March 7, 2000 in connection with the iShip.com, Inc.
acquisition).(12)
10.43 Lease Agreement dated as of May 7, 2000 between Sterling Realty
Organization Co. and iShip.com, Inc.(12)
10.44+ License Agreement dated as of February 9, 2000 by and between the
Company and EncrypTix, Inc.(12)
10.45 Amended and Restated Loan Repayment Agreement dated as of August
10, 2000 by and among the Company, Salomon Smith Barney Inc. and
John M. Payne.(13)
10.46 Revolving Note Secured by Stock Pledge Agreement dated as of April
12, 2000 between the Company and John M. Payne.(13)
10.47 Stock Pledge Agreement dated as of April 12, 2000 between the
Company and John M. Payne.(13)
10.48+ Manifest System Services and Co-Branding Agreement dated as of
April 27, 1999 by and between iShip.com, Inc. and Mail Boxes Etc.
USA, Inc.(15)
10.49+ Amendment No. 1 dated as of March 7, 2000 to the April 27, 1999
Manifest System Services and Co-Branding Agreement by and between
iShip.com, Inc. and Mail Boxes Etc. USA, Inc.(15)
10.50 Common Stock Warrant Issuance Agreement dated as of August 1, 2000
between the Company and Cydcor Limited.(15)
10.51 Separation Letter Agreement dated as of December 20, 2000 by and
between the Company and John M. Payne.(16)
Exhibit
Number Description
------ -----------
10.52 Consulting Services Agreement dated as of December 20, 2000 by and
between the Company and John M. Payne.(16)
10.53 Confidential Information and Invention Assignment Agreement dated
as of December 20, 2000 by and between the Company and John M.
Payne.(16)
10.54 Security Agreement dated as of November 30, 2000 by and between
the Company and John M. Payne.(16)
10.55 Note Secured by Security Agreement dated as of November 30, 2000
by and between the Company and John M. Payne.(16)
10.56++ Termination Agreement dated as of February 23, 2001 by and between
America Online, Inc. and the Company.(18)
10.57++ Market Agreement, dated as of May 15, 2000, by and between the
Company and Cydcor Limited.(18)
10.58++ Addendum No. 1 dated as of August 1, 2000 to the May 15, 2000
Market Agreement by and between the Company and Cydcor
Limited.(18)
10.59 Amendment dated February 13, 2001 to the December 20, 2000
Separation Letter Agreement by and between the Company and John M.
Payne.(18)
10.60 Letter Agreement regarding Resignation dated September 22, 2000 by
and between the Company and Loren Smith.(18)
10.61 Letter Agreement regarding Resignation dated October 26, 2000 by
and between the Company and John La Valle.(18)
10.62 Employment Offer Letter dated October 23, 1999 by and between the
Company and Bruce Coleman.(18)
21.1 Subsidiaries of the Company.(3)
23.1 Consent of Arthur Andersen LLP.(18)
24.1 Power of Attorney.(Included on signature pages hereto)
99.1 Form of Notice of Grant of Stock Option.(5)
99.2 Form of Stock Option Agreement.(5)
99.3 Form of Addendum to Stock Option Agreement--Involuntary
Termination Following Corporate Transaction/Change in Control.(5)
99.4 Form of Addendum to Stock Option Agreement--Limited Stock
Appreciation Right.(5)
99.5 Form of Stock Issuance Agreement.(5)
Exhibit
Number Description
------ -----------
99.6 Form of Addendum to Stock Issuance Agreement--Involuntary
Termination Following Corporate Transaction/Change in Control.(5)
99.7 Form Automatic Stock Option Agreement.(5)
99.8 Form Notice of Grant of Non-Employee Director--Automatic Stock
Option (Initial).(5)
99.9 Form Notice of Grant of Non-Employee Director--Automatic Stock
Option (Annual).(5)
99.10 Form of Enrollment/Change Form for Employee Stock Purchase
Plan.(5)
99.11 Form of Stock Purchase Agreement for Employee Stock Purchase
Plan.(5)
99.12 Press Release, dated July 21, 1999, announcing recent
developments.(6)
99.13 Press Release, dated July 12, 1999, announcing the appointments of
Carolyn Ticknor as a Board Director and Christopher Hylen as a
Senior Vice President of Marketing.(7)
99.14 Press Release, dated August 9, 1999, announcing US Postal Service
approval of the Company's Internet Postage service for commercial
release.(7)
99.15 Press Release, dated October 25, 1999, announcing the Company's
agreement to acquire iShip.com, Inc.(1)
99.16 Action by Written Consent of the Shareholders of iShip.com,
Inc.(4)
99.17 Proxy Card for Acquisition of iShip.com, Inc.(4)
99.18 Tax Representation Letter of the Company Regarding the Acquisition
of iShip.com, Inc.(4)
99.19 Tax Representation Letter of iShip.com, Inc. Regarding its
Acquisition by the Company.(4)
99.20 Press Release, dated March 8, 2000, announcing the completion of
the Company's acquisition of iShip.com, Inc.(8)
99.21 Press Release, dated March 22, 2000, announcing the appointments
of John A. Duffy and Stephen M. Teglovic to the Company's Board of
Directors.(9)
99.22 iShip.com, Inc. Amended and Restated 1997 Stock Plan.(10)
99.23 Form of Option Assumption Agreement (iShip.com, Inc. Option
Shares).(10)
99.24 Press Release, dated October 9, 2000, announcing the resignation
of Loren Smith as President and Chief Operating Officer, the
resignation of John LaValle as Chief Financial Officer and the
resignation of Candelario Andalon as Comptroller.(14)
99.25 Press Release, dated October 12, 2000, announcing the resignation
of John M. Payne as Chief Executive Officer and Chairman of the
Board, the resignation of Tom Bruggere as a Board director, the
appointment of Kenneth McBride as acting Chief Financial Officer
and the appointment of Marvin Runyon as Chairman of the Board.(14)
99.26 Press Release, dated October 23, 2000, announcing the Company's
workforce reduction and cost-cutting measures.(15)
99.27 Press Release, dated October 31, 2000, announcing the appointment
of Bruce Coleman as interim Chief Executive Officer.(15)
99.28 Press Release, dated October 31, 2000, announcing the Company's
cost-cutting measures.(15)
99.29 Press Release, dated December 27, 2000, announcing the resignation
of John M. Payne as a Board director of the Company and of
EncrypTix, Inc., and the appointments of Jeffrey Brown and Bruce
Coleman as Board directors of EncrypTix, Inc.(16)
99.30 Press Release, dated March 12, 2001, announcing the cessation of
EncrypTix, Inc.'s operations and the effectuation of a general
assignment for the benefit of its creditors.(17)
99.31++ Mutual General Release, dated March 7, 2001, by and between the
Company and DraftWorldwide, Inc., and Joint Stipulation of
Dismissal.(18)
__________________
(1) Incorporated herein by reference to the Company's Form 8-K filed with the
Securities and Exchange Commission on October 29, 1999 (File No.
000-26427).
(2) Incorporated herein by reference to the Company's Registration Statement on
Form S-1, originally filed with the Securities and Exchange Commission on
April 26, 1999, as subsequently amended (File No. 333-77025).
(3) Incorporated herein by reference to the Company's Registration Statement on
Form S-1, originally filed with the Securities and Exchange Commission on
November 2, 1999, as subsequently amended (File No. 333-90115).
(4) Incorporated herein by reference to the Company's Registration Statement on
Form S-4, originally filed with the Securities and Exchange Commission on
November 19, 1999, as subsequently amended (File No. 333-91377).
(5) Incorporated herein by reference to the Company's Registration Statement on
Form S-8 filed with the Securities and Exchange Commission on June 28,
1999.
(6) Incorporated herein by reference to the Company's Form 8-K filed with the
Securities and Exchange Commission on July 26, 1999 (File No. 000-26427).
(7) Incorporated herein by reference to the Company's Form 10-Q filed with the
Securities and Exchange Commission on August 9, 1999.
(8) Incorporated herein by reference to the Company's Form 8-K filed with the
Securities and Exchange Commission on March 9, 2000 (File No. 000-26427).
(9) Incorporated herein by reference to the Company's Form 8-K filed with the
Securities and Exchange Commission on March 22, 2000 (File No. 000-26427).
(10) Incorporated herein by reference to the Company's Registration Statement on
Form S-8 filed with the Securities and Exchange Commission on March 30,
2000.
(11) Incorporated herein by reference to the Company's Annual Report on Form
10-K, originally filed with the Securities and Exchange Commission on March
30, 2000, as subsequently amended (File No. 000-26427).
(12) Incorporated herein by reference to the Company's Form 10-Q filed with the
Securities and Exchange Commission on May 15, 2000.
(13) Incorporated herein by reference to the Company's Form 10-Q filed with the
Securities and Exchange Commission on August 14, 2000.
(14) Incorporated herein by reference to the Company's Form 8-K filed with the
Securities and Exchange Commission on October 13, 2000 (File No.
000-26427).
(15) Incorporated herein by reference to the Company's Form 10-Q filed with the
Securities and Exchange Commission on November 14, 2000.
(16) Incorporated herein by reference to the Company's Form 8-K filed with the
Commission on December 29, 2000 (File No. 000-26427).
(17) Incorporated herein by reference to the Company's Form 8-K filed with the
Securities and Exchange Commission on March 12, 2001 (File No. 000-26427).
(18) Filed with the Securities and Exchange Commission with this Annual Report
on Form 10-K.
+ Confidential treatment requested and received as to certain portions.
++ Confidential treatment has been requested for certain confidential portions
of this exhibit pursuant to Rule 24b-2 under the Securities Exchange Act of
1934, as amended. In accordance with Rule 24b-2, these confidential
portions have been omitted from this exhibit and filed separately with the
Securities and Exchange Commission.